AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1996
REGISTRATION NO. 333-11335
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CASTLE DENTAL CENTERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 8021
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
76-0486898
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
JACK H. CASTLE, JR.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
1360 POST OAK BOULEVARD
SUITE 1300
HOUSTON, TEXAS 77056
(713) 513-1400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND AGENT FOR SERVICE)
------------------------
COPIES TO:
WILLIAM D. GUTERMUTH WILLIAM J. GRANT, JR.
BRACEWELL & PATTERSON, L.L.P. WILLKIE FARR & GALLAGHER
SOUTH TOWER PENNZOIL PLACE ONE CITICORP CENTER
711 LOUISIANA STREET, SUITE 2900 153 EAST 53RD STREET
HOUSTON, TEXAS 77002-2781 NEW YORK, NEW YORK 10022-4677
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
CASTLE DENTAL CENTERS, INC.
Cross-Reference Sheet between items in Part I of Registration Statement of Form
S-1
and location in the Prospectus pursuant to Item 501(b) of Regulation S-K.
FORM S-1 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
- ---------------------------------------- --------------------------------------
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus................. Cover Page of Registration Statement;
Cross Reference Sheet; Outside Front
Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus................ Inside Front and Outside Back Cover
Pages; Additional Information
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges............................ Outside Front Cover Page; Prospectus
Summary; Risk Factors; Business;
Selected Historical and Pro Forma
Financial Data
4. Use of Proceeds.................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price.... Outside Front Cover Page; Underwriting
6. Dilution........................... Dilution
7. Selling Security Holders........... Principal and Selling Stockholders
8. Plan of Distribution............... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered......................... Prospectus Summary; Risk Factors;
Description of Capital Stock
10. Interests of Named Experts and
Counsel............................ Legal Matters; Experts
11. Information with Respect to the
Registrant......................... Outside Front Cover Page; Prospectus
Summary; Risk Factors; Selected
Historical and Pro Forma Financial
Data; Management's Discussion and
Analysis of Financial X Condition
and Results of Operations; Business;
Management; Certain Transactions;
Principal and Selling Stockholders;
Description of Capital Stock;
Dilution; Financial Statements
12. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities.................... Not Applicable
<PAGE>
******************************************************************************
* *
* 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 OCTOBER 21, 1996
PROSPECTUS
5,500,000 SHARES
[CASTLE DENTAL CENTERS LOGO]
COMMON STOCK
------------------
Of the 5,500,000 shares of Common Stock offered hereby, 5,000,000 shares
are being offered by Castle Dental Centers, Inc. (the "Company"), and 500,000
shares are being offered by the Selling Stockholder named under "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from
the sale of the shares of Common Stock by the Selling Stockholder.
Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price for the Common Stock will be $10.00 per share. See "Underwriting" for
information relating to the factors considered in determining the initial public
offering price. The Common Stock has been approved for listing on the Nasdaq
Stock Market's National Market under the symbol "CASL."
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH UNDER
"RISK FACTORS" BEGINNING ON PAGE 8.
------------------
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.
================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- --------------------------------------------------------------------------------
Per Share $ $ $ $
- --------------------------------------------------------------------------------
Total(3) $ $ $ $
================================================================================
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of this offering estimated at $1,000,000 payable
by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 825,000 shares of Common Stock on the same terms set
forth above solely to cover over-allotments, if any. If the Underwriters
exercise such option in full, the total Price to Public, Underwriting
Discounts and Commission, Proceeds to Company and Proceeds to the Selling
Stockholder will be $ , $ , $ and
$ , respectively. See "Underwriting."
------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1996 at the office of Smith Barney Inc., 333 West 34th Street,
New York, New York 10001.
------------------
SMITH BARNEY INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATIONT
SOUTHCOAST CAPITAL
CORPORATION
, 1996
<PAGE>
CASTLE DENTAL CENTERS, INC.
[Graphics -- Map of the United States showing locations of the Company's
headquarters and regional office locations. Locations identified include actual
locations as of the date of the prospectus as well as locations to be acquired
in pending transactions.]
CASTLE DENTAL CENTER(TM) AND CASTLE DENTAL CENTERS(TM) ARE REGISTERED
TRADEMARKS OF CASTLE DENTAL CENTERS, INC.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" FOR
INFORMATION THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE INVESTORS.
THE COMPANY
Castle Dental Centers, Inc. (the "Company") develops and operates
integrated dental networks through affiliations with general, orthodontic and
multi-specialty dental practices in the United States. The Company currently
conducts operations in the states of Texas, Florida and Tennessee and has
entered into definitive agreements to acquire certain assets of and manage
dental practices headquartered in Long Island, New York, serving the New York
metropolitan area, and Little Rock, Arkansas, with offices in Arkansas, Oklahoma
and Louisiana. The Company also has entered into a letter of intent to acquire
certain assets of and manage a dental practice located in Austin, Texas which
the Company believes will complement its existing operations in Austin, Texas.
The Company establishes integrated dental networks through affiliations with
dental practices providing quality care in selected markets across the United
States with a view to achieving broad geographic coverage within those markets.
The Company seeks to achieve operating efficiencies by consolidating and
integrating affiliated practices into regional networks, realizing economies of
scale in such areas as marketing, administration and purchasing and enhancing
the revenues of its affiliated dental practices by increasing both patient
visits and the range of specialty services offered. As of October 15, 1996, the
Company provided management services to 35 dental centers with approximately 85
affiliated dentists, orthodontists and other dental specialists. Upon
consummation of the New York, Arkansas and Austin, Texas transactions, the
Company will manage 60 dental centers with approximately 225 affiliated
dentists, orthodontists and other dental specialists.
The Company was formed in 1981 by Jack H. Castle, D.D.S. and Jack H.
Castle, Jr., as a single location, multi-specialty dental practice in Houston,
Texas. From 1982 through 1996, the Company expanded to a total of nine locations
with 35 dentists in the Houston metropolitan area. During this period the
Company developed, implemented and refined the integrated dental network
approach which it intends to utilize as a basis for its national expansion.
The Company's objective is to make each of its dental networks the leading
group dental care provider in each market it serves. The Company applies
traditional retail principles of business and marketing techniques to the
practice of dentistry, including locating practices in high-profile locations,
offering more affordable fees and payment plans, expanding the range of services
offered, increasing market share through aggressive advertising and offering
extended office hours. By using the Castle Dental Centers' approach to managing
affiliated dental practices, the Company believes it will enable affiliated
dentists, orthodontists and other dental specialists to focus on delivering
quality patient care and to realize significantly greater productivity than
traditional individual and small-group dental practices.
The Company believes that the provision of a full range of dental services
through an integrated network is attractive to managed care payors and intends
to continue to pursue managed care contracts. The Company currently maintains an
aggregate of ten capitated contracts and preferred provider arrangements
covering approximately 21,000 members, and, upon consummation of the Pending
Acquisitions, the Company will have an aggregate of 64 capitated contracts and
preferred provider arrangements covering approximately 70,000 members. The
Company believes that the continued development of its networks will assist it
in negotiating national and regional capitated arrangements with managed care
payors.
The Company intends to utilize the practice management principles employed
in its Houston operations to establish a consistent national identity for its
business. Moreover, the Company believes that its experience and expertise in
managing multi-specialty dental group practices, as well as the development of
name recognition associated with the name "Castle Dental Centers," will
provide its affiliated dental
3
<PAGE>
practices with a competitive advantage in attracting and retaining patients and
realizing practice efficiencies.
Dental care services in the United States are generally delivered through a
fragmented system of local providers, primarily sole practitioners, or small
groups of dentists, orthodontists or other dental specialists, practicing at a
single location with a limited number of professional assistants and business
office personnel. However, dental, orthodontic and other specialty practices
have followed the trend of the health care industry generally and are
increasingly forming larger group practices in which a separate professional
management team handles personnel, management, billing, marketing and other
business functions. The Company believes that this trend will continue. The
annual aggregate domestic market for dental services is estimated to be
approximately $46.5 billion for 1995, representing approximately 4.2% of total
health care expenditures in the United States, and is projected to reach $79.1
billion by 2005. The dental services market has grown at a compound annual
growth rate of approximately 8.0% from 1980 to 1995, and is projected to grow at
a compound annual growth rate of approximately 6.0% through the year 2005.
There presently are nine Castle Dental Centers operating in the Houston,
Texas area and four additional centers in Houston in various stages of
development. In May 1996, the Company acquired the assets of and entered into
long-term management agreements with 1st Dental Care, P.A., a dental practice
with 12 locations in the Tampa/Clearwater, Florida area, and Mid-South Dental
Centers, P.C., a dental practice with six dental centers in various locations in
Tennessee. In August 1996, the Company increased its dental practices under
management in Texas by acquiring the assets of Horizon Dental Centers, a dental
practice with four dental centers in Fort Worth, Texas and four dental centers
in Austin, Texas (collectively with the acquisition of 1st Dental Care and
Mid-South Dental Centers, the "Completed Acquisitions"). In August 1996, the
Company entered into a definitive agreement to acquire certain assets of and
enter into a long-term management agreement with American Dental Centers, a
dental practice based in Long Island, New York with 12 dental centers in the New
York metropolitan area (the "New York Acquisition"). In August 1996, the
Company also entered into a definitive agreement to acquire certain assets of
and enter into a long-term management agreement with United DentalCare, a dental
practice based in Little Rock, Arkansas that operates nine dental centers in
Arkansas, Oklahoma and Louisiana (the "Arkansas Acquisition"). In September
1996, the Company entered into a letter of intent to acquire certain assets of
and enter into a long-term management agreement with Southwest Dental
Associates, a dental practice based in Austin, Texas that operates four dental
centers in the Austin, Texas metropolitan area (the "Austin Acquisition"). The
New York Acquisition, the Arkansas Acquisition and the Austin Acquisition are
referred to collectively as the "Pending Acquisitions," and together with the
Completed Acquisitions, the "Acquisition Transactions." The New York
Acquisition is expected to close contemporaneously with, and is mutually
conditioned on, the closing of this offering, and the Arkansas Acquisition and
the Austin Acquisition are expected to close within 30 days of the closing of
this offering.
The consideration for the Completed Acquisitions consisted of approximately
$9.3 million in cash, $4.5 million in Seller Notes and 612,243 shares of the
Company's Common Stock. The consideration for the Pending Acquisitions consists
of approximately $27.3 million in cash and 840,000 shares of the Company's
Common Stock, assuming an initial public offering price of $10.00. The Company
will also assume approximately $955,000 of long-term debt in connection with the
Pending Acquisitions. Under the terms of each of the definitive agreements for
the Arkansas Acquisition and the letter of intent for the Austin Acquisition,
additional cash consideration will be paid if the acquired practice achieves
specified operating results subsequent to the completion of the transaction.
The Company's strategy is to develop integrated networks for the provision
of dental services through practice affiliations that provide quality,
cost-effective dental care in target markets. Key elements of this strategy are
to (i) provide high-quality, comprehensive, one-stop family dental health care;
(ii) actively pursue acquisitions and DE NOVO development in target markets;
(iii) apply traditional retail principles of business to dental care; and (iv)
market its networks to managed care entities.
4
<PAGE>
THE OFFERING
Common Stock offered by:
The Company........................ 5,000,000 Shares(1)(2)
The Selling Stockholder............ 500,000 Shares(1)
Common Stock to be outstanding after the
offering.............................. 11,696,980 Shares(1)(3)
Use of Proceeds......................... To fund acquisitions and development
programs, repay indebtedness, prepay
deferred compensation obligations
and increase available working
capital. See "Use of Proceeds."
Nasdaq National Market symbol............ CASL
- ------------
(1) Does not include up to 825,000 shares that may be sold by the Company
pursuant to the Underwriters' over-allotment option. See "Underwriting."
(2) At an assumed public offering price of $10.00 per share, the net proceeds to
the Company from this offering are estimated to be approximately $45.5
million (approximately $53.2 million if the Underwriters' over-allotment
option is exercised in full), after deducting the underwriting discounts and
commissions and estimated offering expenses.
(3) Gives effect to (a) the conversion of 1,244,737 shares of Series A
Convertible Preferred Stock into 1,244,737 shares of Common Stock, which
will be effected simultaneously with and is conditioned upon this offering,
and (b) the issuance of 840,000 shares of Common Stock in connection with
the Pending Acquisitions at an assumed initial public offering price of
$10.00, and excludes an aggregate of up to 983,415 shares issuable on (x)
the exercise of options to purchase an aggregate of 730,500 shares of Common
Stock which the Company has granted or expects to grant at or shortly after
the closing of this offering under the Company's Omnibus Stock and Incentive
Plan (the "Plan") and the Non-Employee Directors Stock Option Plan (the
"Directors' Plan"); (y) the exercise of a warrant held by GulfStar
Investments, Ltd. to purchase 113,158 shares of Common Stock (the "GulfStar
Warrant") and (z) the conversion of two Seller Notes (as hereinafter
defined) into 139,757 shares of Common Stock. Also assumes that the 75,000
shares of Common Stock held in escrow in connection with the Horizon Dental
Centers acquisition are released to the record holder thereof.
5
<PAGE>
SUMMARY COMBINED AND PRO FORMA FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Net patient revenues.................... $ 9,637 $ 13,978 $ 15,053 $ 17,083 $ 18,257 $ 9,082 $ 10,707
Expenses:
Dentists' salaries.................... 1,596 2,223 2,684 2,853 3,345 1,611 1,869
Clinical salaries..................... 1,102 946 1,529 1,811 1,879 884 1,534
Dental supplies and laboratory fees... 860 1,403 1,565 1,907 2,185 1,086 1,352
Rental and lease expense.............. 477 411 504 681 836 381 486
Advertising and marketing............. 1,005 580 729 1,062 959 420 533
Depreciation and amortization......... 143 193 245 309 336 167 334
Other operating expenses.............. 1,428 1,915 1,871 2,205 2,260 1,275 1,175
General and administrative............ 3,232 5,085 4,947 5,319 9,109 2,920 2,415
--------- --------- --------- --------- --------- --------- ---------
Total expenses.................... 9,843 12,756 14,074 16,147 20,909 8,744 9,698
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)................. (206) 1,222 979 936 (2,652) 338 1,009
Interest expense........................ 135 182 130 112 87 5 1,066
Other expense (income)(3)............... -- -- -- -- -- -- (107)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes....... (341) 1,040 849 824 (2,739) 333 50
Provision (benefit) for income taxes.... -- -- 40 43 (325) -- 19
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)(4).................... $ (341) $ 1,040 $ 809 $ 781 $ (2,414) $ 333 $ 31
========= ========= ========= ========= ========= ========= =========
Net income (loss) per share............. $ (.06) $ .19 $ .15 $ .14 $ (.39) $ .06 $ .01
========= ========= ========= ========= ========= ========= =========
Weighted average outstanding
shares(5)............................. 5,515 5,515 5,515 5,515 6,115 5,515 6,169
========= ========= ========= ========= ========= ========= =========
</TABLE>
PRO FORMA(1)(2)
-----------------------
SIX
YEAR MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
------------ --------
1995 1996
------------ --------
STATEMENT OF OPERATIONS DATA:
Net patient revenues.................... $ 57,771 $30,971
Expenses:
Dentists' salaries.................... 11,414 5,811
Clinical salaries..................... 13,354 7,586
Dental supplies and laboratory fees... 6,958 3,378
Rental and lease expense.............. 3,249 1,529
Advertising and marketing............. 1,988 1,097
Depreciation and amortization......... 2,715 1,411
Other operating expenses.............. 4,624 2,441
General and administrative............ 8,691 4,184
------------ --------
Total expenses.................... 52,993 27,437
------------ --------
Operating income (loss)................. 4,778 3,534
Interest expense........................ 665 632
Other expense (income)(3)............... 95 (109)
------------ --------
Income (loss) before income taxes....... 4,018 3,011
Provision (benefit) for income taxes.... 1,568 1,174
------------ --------
Net income (loss)(4).................... $ 2,450 $ 1,837
============ ========
Net income (loss) per share............. $ .21 $ .16
============ ========
Weighted average outstanding
shares(5)............................. 11,633 11,633
============ ========
JUNE 30, 1996
------------------------
PRO FORMA AS
ACTUAL ADJUSTED(6)
--------- ------------
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 2,095 $ 851
Working capital......................... 816 2,223
Total assets............................ 22,358 64,996
Long-term debt and capital lease
obligations, less current portion..... 15,558 5,276
Redeemable preferred stock(7)........... 2,928 --
Total stockholders' equity (net capital
deficiency)........................... (4,117) 53,681
- ------------
(1) Gives effect to (i) the sale of 5,000,000 shares of Common Stock offered by
the Company hereby (at an assumed initial public offering price of $10.00
per share) and the application of the net proceeds therefrom as described
under "Use of Proceeds," (ii) the Acquisition Transactions and (iii) the
Reorganization (as hereinafter defined), as if each of such transactions had
occurred as of January 1, 1995. See "Unaudited Pro Forma Combined Financial
Information."
(2) The pro forma statements of operations do not reflect a $1,895,000
extraordinary loss on retirement of the Company's 12% Senior Subordinated
Notes ("Senior Subordinated Notes"), net of income tax effect of
$1,211,000, which will be recognized in the period this offering is
completed.
(3) Represents primarily gain or loss on sale of assets and interest income.
(4) Prior to the Reorganization, significant operations of the Company were
conducted through a subchapter S corporation and accordingly were not
subject to federal and state income taxes (see Notes 1 and 6 to the
Company's Audited Combined Financial Statements). If all of the Company's
operations had been subject to income taxes, net income (loss) would have
been ($1,698,000) and $210,000 for the year ended December 31, 1995 and for
the six months ended June 30, 1995, respectively. Subsequent to December 31,
1995, the Company's
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
6
<PAGE>
operations are subject to income taxes and such taxes have been reflected in
the historical consolidated statement of operations data for the six-month
periods ended June 30, 1996. See "Unaudited Pro Forma Combined Financial
Information."
(5) Shares used in calculating net income per share include the weighted average
outstanding shares plus the number of shares (at an assumed public offering
price of $10.00 per share) for the year ended December 31, 1995 and the six
months ended June 30, 1996, the proceeds of which would be necessary to
repay the portion of the Company's debt that funded the $6,000,000 payment
to Jack H. Castle, D.D.S. in connection with the Reorganization. See
"Unaudited Pro Forma Combined Financial Information" and "Certain
Transactions." Historical weighted average shares outstanding and net
income (loss) per share were 5,515,000 and $(.44), respectively, for the
year ended December 31, 1995 and 5,569,000 and $.01, respectively, for the
six months ended June 30, 1996.
(6) Gives effect to (i) the sale of 5,000,000 shares of Common Stock offered by
the Company hereby (at an assumed initial public offering price of $10.00
per share) and the application of the net proceeds therefrom as described
under "Use of Proceeds," (ii) the conversion of the Series A Convertible
Preferred Stock into 1,244,737 shares of Common Stock, and (iii) the
Acquisition Transactions entered into or pending subsequent to June 30,
1996, as if each of such transactions had occurred as of June 30, 1996.
(7) Represents 1,244,737 shares of Series A Convertible Preferred Stock.
THE COMPANY WAS ORGANIZED IN DECEMBER 1995 TO SUCCEED TO THE BUSINESS OF
FAMILY DENTAL SERVICES OF TEXAS, INC., A TEXAS CORPORATION ("FAMILY DENTAL")
WHOLLY-OWNED BY MEMBERS OF AND ENTITIES CONTROLLED BY MEMBERS OF THE FAMILY OF
JACK H. CASTLE, D.D.S. (THE "CASTLE FAMILY"). SEE "PRINCIPAL AND SELLING
STOCKHOLDERS." UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" REFERS TO
CASTLE DENTAL CENTERS, INC., ITS PREDECESSOR, FAMILY DENTAL, AND ITS
WHOLLY-OWNED SUBSIDIARIES, AND THE TERMS "AFFILIATED DENTAL PRACTICES" AND
"AFFILIATED PRACTICES" REFER TO DENTAL PRACTICES TO WHICH THE COMPANY PROVIDES
MANAGEMENT SERVICES PURSUANT TO A MANAGEMENT SERVICES AGREEMENT. UNLESS
OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT
THE UNDERWRITERS' OVER-ALLOTMENT OPTION HAS NOT BEEN EXERCISED.
7
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the factors listed below in
evaluating an investment in the shares of Common Stock offered hereby.
ACQUISITION STRATEGY AND LIMITATION ON GROWTH
The Company's strategy is to develop comprehensive dental networks through
practice affiliations. Key elements of this strategy are the acquisition of the
assets of dental practices and the introduction of specialty dental services in
target market areas, the entry into management services relationships with such
groups and the utilization of the acquired practices as a base from which to
expand in the target markets. Identifying candidates to become affiliated
practices and proposing, negotiating and implementing economically feasible
affiliations with such groups can be a lengthy, complex and costly process.
There can be no assurance that the Company will successfully establish practice
affiliations with additional dental practices. In addition, the Company's
ability to expand is dependent on factors such as its ability to attract
additional dentists to affiliated dental practices, to adapt or adjust the
Company's structure to comply with present or future state legal requirements
affecting the Company's contractual arrangements with dental, orthodontic or
other specialty practice groups, and to obtain regulatory approval and comply
with regulatory and licensing requirements applicable to dentists and facilities
operated and services offered by dentists. Moreover, the Company's ability to
expand may be limited by state licensing requirements which do not normally
provide for reciprocity among states with respect to licensure of dentists.
Unless otherwise required by law, the Company does not intend to seek
stockholder approval for future acquisitions, and the stockholders of the
Company will be dependent upon management's judgment with respect to such
transactions. There can be no assurance that the Company will be able to achieve
planned growth, that the assets of dental practices will continue to be
available for acquisition by the Company, that the Company will be able to
realize expected operating and economic efficiencies from recent and pending
acquisitions, or that the addition of such practice groups will be profitable.
See "-- Integration of Affiliated Dental Practices and Management Information
Systems," "Business -- Dental Network Development" and
"Business -- Operations."
RISKS RELATING TO PENDING ACQUISITIONS
NEW YORK ACQUISITION
The Company has entered into a definitive agreement with respect to the New
York Acquisition and the closing of the New York Acquisition is a condition to
the closing of this offering. The New York Acquisition represents a significant
acquisition for the Company, both in terms of purchase price and revenues. The
American Dental Centers practice is heavily dependent on reimbursement
arrangements with certain labor organizations and welfare funds, which generally
have terms of one to two years and provide for payment on a capitated basis, and
relationships with other payor groups, including traditional insurance and
preferred provider arrangements. American Dental Centers is a party to over 50
such capitated contracts and preferred provider arrangements which account for
over 70% of its total revenues. Most of these capitation contracts are
terminable by either party with 60 to 90 days' notice. Certain features of the
capitation contracts could be interpreted by regulatory authorities as
constituting the transaction of insurance business and could result in
regulatory enforcement actions against the Company. In such event, the Company
could be required either to seek licensure as an insurance company or change the
form of the business relationships with the parties to such contracts. There can
be no assurance that after the closing of the New York Acquisition the Company
will be able to continue American Dental Centers' existing arrangements with
such labor organizations, welfare funds and other payor groups. The loss of one
or more of the largest of such reimbursement arrangements could have a material
adverse effect on the profitability of the Company.
Jules V. Lane D.D.S., the founder of American Dental Centers, is also the
owner of American Medical and Life Insurance Company ("AMLI"), which markets
preferred provider programs of which American Dental Centers is a significant
provider. AMLI's preferred provider program, managed care program and
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other insurance related business is not being acquired by the Company. Dr. Lane
will join the Company's Board of Directors and enter into a three-year
employment agreement with the Company pursuant to which Dr. Lane will remain
active in the management of and strategic planning for American Dental Centers.
At the closing of the New York Acquisition, the Company will enter into certain
contractual arrangements with AMLI which will provide that in markets in the
State of New York served by the dental practices managed by the Company (i) AMLI
and the Company will each include information regarding the programs and
services of the other in their respective marketing materials, (ii) AMLI will
maintain preferred provider relationships with dental practices managed by the
Company and offer such dental practices as preferred providers to AMLI
policyholders and other covered parties and (iii) AMLI and the Company will
share certain facilities and personnel. Each party has a right of first refusal
to extend such arrangements to states other than New York. Because Dr. Lane will
be a Director of the Company and the owner of AMLI, there is a potential for
conflict of interest on the part of Dr. Lane with respect to matters involving
AMLI and the Company. Dr. Lane will not participate in the negotiation of such
matters on behalf of the Company or vote on such matters as a Director of the
Company.
Because of the size of the New York Acquisition, the percentage of American
Dental Centers' revenue which is derived from capitated and preferred provider
arrangements, the possibility of loss of one or more of the largest of such
reimbursement arrangements and the Company's lack of prior experience in the New
York metropolitan area, the New York Acquisition represents significant risks to
the Company. The Company will rely on Dr. Lane to maintain the Company's revenue
base in the New York metropolitan area. There can be no assurance that the
Company will be able to integrate the New York Acquisition into its existing
operations or that it will be able to maintain or expand its revenue base in the
New York metropolitan area. See " -- Acquisition Strategy and Limitation on
Growth" and " -- Integration of Affiliated Dental Practices and Management
Information Systems."
ARKANSAS ACQUISITION AND AUSTIN ACQUISITION
The Company has entered into a definitive agreement with respect to the
Arkansas Acquisition and a letter of intent with respect to the Austin
Acquisition. Although both the Arkansas Acquisition and the Austin Acquisition
are expected to close within 30 days of the closing of this offering, there can
be no assurance that either of these transactions will be consummated, and the
consummation of these transactions is not a condition to the closing of this
offering. See "Unaudited Pro Forma Combined Financial Information." If
consummated, there can be no assurance that these acquisitions will be
successfully integrated into the Company's existing operations. See
" -- Acquisition Strategy and Limitation on Growth" and " -- Integration of
Affiliated Dental Practices and Management Information Systems."
GOVERNMENT REGULATION
GENERAL
The dental industry is regulated extensively at both the state and federal
levels. Regulatory oversight includes, but is not limited to, considerations of
fee-splitting, corporate practice of dentistry and state insurance regulation.
See "Business -- Government Regulation."
FEE-SPLITTING; CORPORATE PRACTICE OF DENTISTRY
The laws of many states prohibit dentists from splitting fees with
non-dentists and prohibit non-dental entities such as the Company from engaging
in the practice of dentistry or employing dentists to practice dentistry. The
specific restrictions against the corporate practice of dentistry, as well as
the interpretation of those restrictions by state regulatory authorities, vary
from state to state. The restrictions are generally designed to prohibit a
non-dental entity from controlling the professional assets of a dental practice
(such as patient records and payor contracts), employing dentists to practice
dentistry (or, in certain states, employing dental hygienists or dental
assistants), controlling the content of a dentist's advertising or professional
practice or sharing professional fees with non-dental entities. The laws of many
states also prohibit dental practitioners from paying any portion of fees
received for dental services in consideration for
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the referral of a patient. In addition, many states impose limits on the tasks
that may be delegated by dentists to dental assistants.
State dental boards do not generally interpret these prohibitions as
preventing a non-dental entity from owning non-professional assets used by a
dentist in a dental practice or providing management services to a dentist
provided that the following conditions are met: a licensed dentist has complete
control and custody over the professional assets; the non-dental entity does not
employ or control the dentists (or, in some states, dental hygienists or dental
assistants); all dental services are provided by a licensed dentist; licensed
dentists have control over the manner in which dental care is provided and all
decisions affecting the provision of dental care. State laws generally require
that the amount of a management fee be reflective of the fair market value of
the services provided by the management company and in certain states require
that any management fee be a flat fee or cost-plus fee based on the cost of
services performed by the Company. In general, the state dental practice acts do
not address or provide any restrictions concerning the manner in which companies
account for revenues from a dental practice subject to the above-noted
restrictions relating to control over the professional activities of the dental
practice, ownership of the professional assets of a dental practice and payments
for management services.
The Company does not control the practice of dentistry or employ dentists
to practice dentistry. Moreover, in states in which it is prohibited, the
Company does not employ dental hygienists or dental assistants. The Company
provides management services to its affiliated practices, and believes that the
management fees the Company charges for those services are consistent with the
laws and regulations of the jurisdictions in which it operates. Therefore, the
Company believes it would not be regarded as "owner," "operator" or
"manager" of its affiliated dental practices within the meaning of those terms
under the state dental practice acts and believes that its operations comply
with the above-described laws to which it is subject. There can be no assurance,
however, that a review of the Company's business relationships by courts or
other regulatory authorities will not result in determinations that could
prohibit or otherwise adversely affect the operations of the Company or that the
regulatory environment will not change, requiring the Company to reorganize or
restrict its existing or future operations. The laws regarding fee-splitting and
the corporate practice of dentistry and their interpretation 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 business or its
relationship with affiliated dental practices will not be successfully
challenged or that the enforceability of the provisions of any management
services agreement will not be limited. 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 dental practices in a manner which
may restrict the Company's operations or how providers may be paid in those
states or may prevent the Company from acquiring the non-dental assets of such
practices or managing dental practices in those states. Similarly, there can be
no assurance that the laws and regulations of the states in which the Company
presently maintains operations will not change or be interpreted in the future
either to restrict or adversely affect the Company's existing or future
relationships with dental practitioners in those states.
STATE INSURANCE REGULATION
In addition, there are certain regulatory risks associated with the
Company's role in negotiating and administering managed care contracts. The
application of state insurance laws to other than various types of fee for
service arrangements is an unsettled area of law and are subject to
interpretation by regulators with broad discretion. As the Company or its
affiliated practices contract with third-party payors, including self-insured
plans, for certain non-fee for service basis arrangements, the Company may
become subject to state insurance laws. Specifically, in some states, state
insurance regulators may determine that the Company or the affiliated dental
practices are engaged in the business of insurance because some of the managed
care contracts to which the Company is a party contain capitation features. The
Company is reviewing, and where appropriate modifying, the terms of certain of
its capitation contracts to reduce the likelihood that they could be
characterized as insurance contracts. In the event that the Company or the
affiliated practices are determined to be engaged in the business of insurance,
the Company could be required either to seek
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licensure as an insurance company or to change the form of its relationships
with third-party payors and the Company's revenues may be adversely affected.
HEALTH CARE REFORM PROPOSALS
The United States Congress has considered various types of health care
reform, including comprehensive revisions to the current health care system. It
is uncertain what legislative proposals will be adopted in the future, if any,
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 dental
practitioners affiliated with dental practices managed by the Company, and lower
profitability for affiliated practices. See "Business -- Government
Regulation."
RELIANCE ON AFFILIATED DENTAL PRACTICES
The Company receives fees for management services provided to its
affiliated dental practices under management services agreements. However, the
Company is an independent manager only and does not employ dentists,
orthodontists or other specialists to practice dentistry or in any way control
the practices of the dentists, orthodontists or other specialists employed by
the affiliated dental practices. In many cases, a significant portion of the
Company's management services revenue is dependent on revenue generated by the
affiliated dental practices. In other cases, the Company's management fee is
based on its costs and expenses of providing mangagement services. While the
laws of some states permit the Company to participate in the negotiations by
affiliated dental practices of managed care contracts, preferred provider
arrangements and other negotiated price agreements, the affiliated dental
practices are the contracting parties for all such relationships, and the
Company is dependent on its affiliated dental practices for the success of such
relationships. Accordingly, the profitability of such payor relationships as
well as the performance of dentists, orthodontists or other specialists employed
by such dental practices affects the Company's profitability. Should the
Company's affiliated dental practices experience difficulty in hiring or
retaining qualified dentists, orthodontists or other specialists, or should the
revenues of affiliated dental practices decrease materially, it could have a
material adverse effect on the financial performance of the Company.
INTEGRATION OF AFFILIATED DENTAL PRACTICES AND MANAGEMENT INFORMATION SYSTEMS
Although the Company has been in operation since 1981, prior to May 1996,
the Company's operations were conducted entirely in the Houston, Texas area, and
the Company has limited experience in managing affiliated dental practices
outside of the Houston, Texas area. The entry of the Company into new geographic
markets by acquisition will require the Company to maintain and establish payor
and client relationships which may be different in nature than those which the
Company has historically had and the Company will need to attract and retain
competent and experienced management personnel in each market it enters. The
Company may also be dependent on former owners and management to maintain its
payor and customer relationships. In addition, the expansion into new markets
requires the implementation of new or expanded reporting and tracking systems,
management information systems and other operating systems. There can be no
assurance that the Company will be able to expand its organizational structure,
maintain or establish such relationships or attract the management and other
personnel necessary to permit it to integrate into its existing operations
affiliated dental practices located outside of the Houston, Texas area.
In connection with its expansion into new market areas, the Company will be
required to interface its financial information system with existing practice
management systems at the affiliated dental practices, which may be different
from those used by the Company. Any significant delay or increase in expense
associated with the conversion and integration of management information systems
used by affiliated dental practices could have a material adverse effect on the
successful integration of affiliated dental practices. See " -- Acquisition
Strategy and Limitation on Growth."
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NEED FOR ADDITIONAL FINANCING
The Company's acquisition and expansion programs will require substantial
capital resources. Capital is needed not only for the acquisition of the assets
of affiliated dental practices, but also for the effective integration,
operation and expansion of the affiliated practices. The affiliated practices
may require capital for renovation and expansion and for the addition of dental
equipment and technology. The Company believes that its existing cash resources
together with the net proceeds from this offering, cash flow from operations and
borrowings available under the Bank Credit Facility (as hereinafter defined)
will be sufficient to meet the Company's anticipated acquisition, expansion and
working capital needs for the next 18 months. Thereafter, however, the Company
may be required either to raise additional capital or curtail its expansion
plans. The Company may obtain such financing through additional borrowings or
the issuance of additional equity or debt securities, either of which could have
an adverse effect on the value of the shares of Common Stock offered by this
Prospectus. Although the Company currently believes that it will be able to
secure additional financing, there can be no assurance that the Company will be
able to raise additional capital when needed on satisfactory terms or at all.
Any limitation on the Company's ability to obtain additional financing or
complete a public offering could have a material adverse effect on the Company.
COMPETITION
The Company is under competitive pressures for the acquisition of the
assets of, and the provision of management services to, additional dental
practices. Management is aware of several companies with established operating
histories and greater resources than the Company which are pursuing the
acquisition of general and specialty dental practices and the management of such
practices. Additionally, affiliated dental practices compete locally with sole
practitioners and group practices of dental, orthodontic and other specialty
services in the Company's markets. There can be no assurance that the Company or
its affiliated dental practices will be able to compete effectively with such
competitors, that additional competitors will not enter the market or that such
competition will not make it more difficult to acquire and provide management
services to dental practices on terms beneficial to the Company. See
"Business -- Competition."
RISKS RELATED TO GOODWILL
As of June 30, 1996, the Company's total pro forma adjusted assets were
approximately $65.0 million, of which approximately $50.2 million, or 77%, was
goodwill, net of accumulated amortization. Goodwill is the excess of the
purchase price over the fair market value of the net assets of acquired
businesses (which net assets include any separately identifiable intangible
assets). There can be no assurance that the value of the goodwill will ever be
realized by the Company. Goodwill is being amortized on a straight-line basis
over a 40-year period.
All of the goodwill on the Company's pro forma adjusted balance sheet as of
June 30, 1996 is related to the Acquisition Transactions with $33.5 million
being attributable to the Pending Acquisitions. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The Company
evaluates each acquisition and establishes an appropriate amortization period
based on the underlying facts and circumstances. Subsequent to each acquisition,
the Company continuously reevaluates such facts and circumstances to determine
if the related goodwill continues to be realizable and if the amortization
period continues to be appropriate.
Amortization of the goodwill on the Company's pro forma adjusted balance
sheet as of June 30, 1996 will produce an annual amortization expense of
approximately $1.3 million. Of this amount, the Pending Acquisitions are
expected to produce annual amortization expense of approximately $838,000.
Purchases of additional businesses which result in the recognition of additional
goodwill would cause amortization expense to increase further. Although the net
unamortized balance of goodwill on the Company's pro forma balance sheet as of
June 30, 1996 was not considered to be impaired, any future determination that a
significant impairment has occurred would require the write-off of the impaired
portion of unamortized goodwill, which would have a material adverse effect on
the Company's results of operations. See "Unaudited Pro Forma Combined
Financial Information."
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RISKS ASSOCIATED WITH MANAGED CARE CONTRACTS; CAPITATED FEE REVENUE
The Company believes that its success will be dependent, in part, on its
ability to negotiate, on behalf of the affiliated practices, contracts with
health maintenance organizations ("HMOs"), insurance companies, self insurance
plans and other private third-party payors pursuant to which services will be
provided on some type of fee-for-service or capitated basis by some or all of
its affiliated practices. Under certain capitated contracts, the health care
provider accepts a predetermined amount per patient per month as its sole
payment in exchange for providing certain necessary covered services to
enrollees. Such contracts shift much of the risk of providing health care from
the payor to the provider. To the extent that the Company's affiliated dental
practices enter into these types of arrangements, they are exposed to the risk
that the cost of providing dental care required by such contracts exceeds the
amount that the affiliated dental practice receives for providing such dental
care. Most of these contracts are terminable by either party on 60 to 90 days
notice. Under certain other capitated contracts, the predetermined amount may be
subject to periodic adjustment to limit the risk that may be shifted from the
payor to the provider. For the 12 months ended December 31, 1995 and the six
months ended June 30, 1996, the Company derived approximately 13% and 15% of
total pro forma adjusted net patient revenues, respectively, from such capitated
contracts. To the extent the Company's affiliated dental practices enter into
additional managed care contracts, the Company may expect greater predictability
of revenues but greater unpredictability of expenses due to the fluctuating
costs of the services provided. There can be no assurance that the Company will
be able to negotiate on behalf of the affiliated practices satisfactory
arrangements on a capitated basis, regardless of the amount of risk-sharing. In
addition, to the extent that patients or enrollees covered by certain of such
contracts require more frequent or extensive care than is anticipated, operating
margins may be reduced, or the revenues derived from such agreements may be
insufficient to cover the costs of the services provided. As a result,
affiliated practices may incur additional costs which would reduce or eliminate
any earnings under these contracts.
Following the New York Acquisition, the Company will have a significant
presence in the New York metropolitan area. For the year ended December 31,
1995, in excess of 70% of the annual net patient revenues of American Dental
Centers was derived from capitated contracts or preferred provider arrangements,
and the nine largest relationships of this type accounted for approximately 54%
of the net patient revenues of American Dental Centers. The majority of these
arrangements are terminable by either party at the end of each year or on 30 to
90 days prior notice, and certain of the preferred provider relationships are
terminable by either party at any time. The unreplaced loss of one or more of
the largest capitated care or preferred provider arrangements by American Dental
Centers could have a material adverse effect on the Company's business and
prospects.
DEPENDENCE UPON SENIOR EXECUTIVES
The Company is dependent upon the continued services of its executive
officers, especially its Chairman and Chief Executive Officer, Jack H. Castle,
Jr. Additionally, following the New York Acquisition, the Company will be
dependent upon the continued services of Jules V. Lane D.D.S., the owner of
American Dental Centers, to facilitate the integration of American Dental
Centers with the Company. The loss of the services of Jack H. Castle, Jr., Jules
V. Lane D.D.S. or any of the Company's other senior executive officers could
have a material adverse effect on the Company's business and prospects. Certain
of the Company's senior executive officers, including Jack H. Castle, Jr., do
not have an employment agreement and are not otherwise subject to a covenant not
to compete or other agreement which would restrict their ability to compete
against the Company should their employment by the Company be terminated for any
reason. See "Management."
POTENTIAL LIABILITY AND INSURANCE
Due to the nature of its business, the Company from time to time becomes
involved as a defendant in medical malpractice lawsuits brought against
affiliated dental practices or dentists employed by such practices. In addition,
the Company could be involved in litigation in which it is alleged that the
Company has been negligent in performing its duties under management services
agreements. The Company
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maintains professional and general liability insurance in amounts deemed
appropriate by management based upon its assessment of historical claims and the
nature and risks of its business. There can be no assurance, however, that an
existing or future claim or claims will not exceed the limits of available
insurance coverage, that any insurer will remain solvent and able to meet its
obligations to provide coverage for any such claim or claims or that such
coverage will continue to be available or available with sufficient limits and
at a reasonable cost to insure adequately and economically the Company's
operations in the future. A judgment against the Company in excess of such
coverage could have a material adverse effect on the Company.
CONTROL BY THE CASTLE FAMILY
Following the closing of this offering, members of the Castle Family will
beneficially own approximately 29.9% (28.0%, if the Underwriters' over-allotment
option is exercised in full) of the outstanding shares of Common Stock. As a
result, following the closing of this offering, if the Castle Family were to
vote as a group, the Castle Family could exert a significant influence over the
outcome of corporate actions requiring stockholder approval and the election of
the Company's Board of Directors. In addition, this ownership may have the
effect of discouraging unsolicited offers to acquire the Company. See
"Principal and Selling Stockholders."
BENEFITS TO INSIDERS
In connection with the Reorganization, the Company incurred $13.5 million
of indebtedness and paid $6.0 million to Jack H. Castle, D.D.S., a director of
the Company, to acquire a dental practice owned by Dr. Castle. In the same
transaction, the Company entered into a Deferred Compensation Agreement with Dr.
Castle pursuant to which the Company agreed to pay Dr. Castle a total of
$2,630,000 in 20 quarterly installments. See "Certain Transactions."
Approximately $2.4 million of the proceeds of this offering will be used to
prepay all amounts owed by the Company to Dr. Castle under the Deferred
Compensation Agreement. Loretta Castle, the wife of Dr. Castle and the mother of
Jack H. Castle, Jr., a director of the Company, is selling 500,000 shares of
Common Stock owned by her in this offering.
Approximately $20.0 million of the proceeds of this offering will be used
to fund the cash portion of the purchase price of the New York Acquisition.
Jules V. Lane D.D.S., who will become a Director of the Company on the closing
of the New York Acquisition, is the owner of American Dental Centers. See
"Business -- Pending Acquisition" and "Management -- Executive Compensation
and Employment Arrangements."
In addition, approximately $7.5 million of the proceeds will be used to
repay the Company's 12% Senior Subordinated Notes due 2002 held by the Pecks
Investors. Mr. Cresci, a Director of the Company, is a Managing Partner of Pecks
Management Partners Ltd., the investment advisor to the Pecks Investors. See
"Certain Transactions."
NO PRIOR MARKET FOR COMMON STOCK: POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or if a trading market does develop, that it will continue after this
offering. The initial public offering price of the Common Stock will be
determined through negotiations between the Company and the Underwriters. See
"Underwriting" for a description of the factors to be considered in
determining the initial public offering price. The market price of the Common
Stock could be subject to significant fluctuations in response to variations in
financial results or announcements of material events by the Company or its
competitors. Regulatory changes, developments in the health care industry or
changes in general conditions in the economy or the financial markets could also
adversely affect the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock of the Company could be adversely
affected by the sale of substantial amounts of the Common Stock in the public
market following this offering.
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After giving effect to the shares of Common Stock offered hereby, the
closing of the Pending Acquisitions and the conversion of the Series A
Convertible Preferred Stock upon the closing of this offering, the Company will
have outstanding 11,696,980 shares of Common Stock. Of these shares, the
5,500,000 shares (6,325,000 shares if the Underwriters' over-allotment option is
exercised in full) of Common Stock sold in this offering will be freely tradable
without restriction or limitation under the Securities Act of 1933, as amended
(the "Securities Act"), except to the extent such shares are subject to the
agreement with the Underwriters described below, and except for any shares
purchased by "affiliates," as that term is defined under the Securities Act,
of the Company. The remaining 6,196,980 shares are "restricted securities"
within the meaning of Rule 144 adopted under the Securities Act ("Rule 144").
The restricted shares were issued and sold by the Company in private
transactions in reliance upon exemptions from registration under the Securities
Act.
The Company, its directors and executive officers and all of the
stockholders of the Company have agreed that, for a period of 180 days after the
date of this Prospectus, they will not, without the prior written consent of
Smith Barney Inc., offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for any shares of Common Stock, except in the case of the Company,
in certain limited circumstances, including issuing up to 2,000,000 shares of
Common Stock in connection with acquisitions to parties that agree to be bound
by the same restrictions on offers and sales.
The Company anticipates that prior to the consummation of this offering,
the Company will have outstanding under the Plan options to purchase an
aggregate of approximately 380,500 shares of Common Stock, and at or shortly
following consummation of this offering the Company anticipates that it will
issue options to purchase up to 350,000 shares of its Common Stock under the
Plan and the Directors' Plan. The Company intends to register the shares
issuable upon exercise of options granted under the Plan and the Directors' Plan
and, upon such registration, such shares will be eligible for resale in the
public market without restriction, except for Directors and other affiliates of
the Company who will be subject to volume limitations under Rule 144. Following
the consummation of this offering, the Company will also continue to have
outstanding the GulfStar Warrant, which is presently exercisable for 113,158
shares of Common Stock at $5.50 per share, and two Seller Notes, presently
convertible into 139,757 shares of Common Stock at a conversion price of $6.75
per share, all of which shares will be eligible for resale subject to the
volume, holding period and certain other limitations of Rule 144 upon their
exercise. See "Shares Eligible for Future Sale" and "Management -- Stock
Option Plans."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and
By-laws and of Delaware law could, together or separately, discourage potential
acquisition proposals, delay or prevent a change in control of the Company and
limit the price that certain investors might be willing to pay in the future for
shares of the Common Stock. The Company's Certificate of Incorporation provides
for "blank check" preferred stock which may be issued without stockholder
approval and certain provisions of the Company By-laws restrict the right of the
stockholders to call a special meeting of stockholders, to nominate directors,
to submit proposals to be considered at stockholders' meetings and to adopt
amendments to the By-laws. The Company also is subject to Section 203 of the
Delaware General Corporation Law which, subject to certain exceptions, prohibits
a Delaware corporation from engaging in any of a broad range of business
combinations with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder. See
"Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
shares of Common Stock in the amount of $9.77 per share. See "Dilution." In
the event the Company issues additional Common Stock in the future, including
shares that may be issued in connection with future acquisitions, purchasers of
Common Stock in
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this offering may experience further dilution in the net tangible book value per
share of the Common Stock of the Company.
THE COMPANY
Castle Dental Centers, Inc. was formed as a Delaware corporation in
December 1995 to succeed to the business of Family Dental, a Texas corporation,
which was wholly-owned by the Castle Family. The Company is a holding company
and conducts its business through a number of wholly-owned subsidiaries. The
Company's executive offices are located at 1360 Post Oak Boulevard, Suite 1300,
Houston, Texas 77056, and its telephone number is (713) 513-1400.
USE OF PROCEEDS
The net proceeds from the sale of the 5,000,000 shares of Common Stock
offered by the Company hereby are estimated to be approximately $45.5 million
(approximately $53.2 million if the Underwriters' over-allotment option is
exercised in full) after deducting the underwriting discounts and commissions
and estimated offering expenses based on an assumed initial public offering
price of $10.00 per share. The Company will not receive any proceeds from Common
Stock sold by the Selling Stockholder.
The Company has entered into definitive purchase agreements relating to the
New York Acquisition and the Arkansas Acquisition. Approximately $20.0 million
of the net proceeds of this offering will be used to fund the cash portion of
the purchase price of the New York Acquisition, $2.6 million of the net proceeds
of this offering will be used to fund the cash portion of the purchase price of
the Arkansas Acquisition, and $4.6 million will be used to fund the cash portion
of the purchase price of the Austin Acquisition.
The Company also intends to use approximately $7.5 million of the net
proceeds to repay the Company's 12% Senior Subordinated Notes due in 2002 (the
"Senior Subordinated Notes"). The Senior Subordinated Notes were issued by the
Company in December 1995 to provide funds for the Reorganization and the
acquisition of affiliated dental practices. In connection with the
Reorganization, the Company paid $6.0 million to Jack H. Castle, D.D.S. to
acquire a dental practice owned by Dr. Castle.
The Company intends to use approximately $6.1 million of the net proceeds
to repay a portion of the total indebtedness outstanding under the Amended and
Restated Credit Agreement (the "Bank Credit Facility") between the Company and
NationsBank of Texas, N.A. ("NationsBank") which was incurred to finance
certain of the Company's acquisitions. The Bank Credit Facility provides for a
term loan, revolving credit facility and advancing term loan which expire or
mature, as applicable, on June 15, 2001, June 30, 1997 and June 30, 2001,
respectively, and bear interest at variable rates which are based upon (a)
either (i) NationsBank's base rate or (ii) the London interbank offering rates
("LIBOR") plus (b) a margin which varies according to (i) the ratio of the
Company's funded debt to EBITDA, each as defined in the Bank Credit Facility,
(ii) the type of loan (i.e. base rate or LIBOR loan) and (iii) whether the loan
is a term loan, revolving credit loan or advancing term loan. As of June 30,
1996, the interest rate on the Bank Credit Facility was 8.94%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 2 to the Company's
Audited Financial Statements included elsewhere in this Prospectus for a
description of the interest rate and other terms of the Bank Credit Facility.
Approximately $4.5 million of the net proceeds will be used to retire
seller financed subordinated debt issued by the Company to acquire affiliated
dental practices ("Seller Notes"). The Seller Notes mature at various times
from May 2001 to August 2001, and are accelerated at the closing of this
offering. Three of these Seller Notes, in the aggregate principal amount of
approximately $3.54 million, bear interest at 10% per annum. The remaining two
Seller Notes, in the aggregate principal amount of approximately $960,000, bear
interest at the rate of 6.36% per annum. An aggregate of $943,363 of the Seller
Notes is convertible at the option of the holder into shares of the Company's
Common Stock at a conversion price of $6.75 per share, subject to antidilution
adjustments and automatic annual increase in conversion price.
16
<PAGE>
Approximately $2.4 million of the proceeds will be used to prepay all
amounts owed by the Company to Jack H. Castle, D.D.S. pursuant to a Deferred
Compensation Agreement with Dr. Castle, effective as of December 18, 1995, which
agreement provides for quarterly payments in the amount of $131,500 to be made
to Dr. Castle until December 31, 2000 in respect of compensation not paid to Dr.
Castle prior to the acquisition of Jack H. Castle, D.D.S., Inc. The Deferred
Compensation Agreement with Dr. Castle was entered into in connection with the
acquisition by the Company of the non-dental assets of Jack H. Castle, D.D.S.,
Inc. in December 1995, of which Dr. Castle was the sole owner.
The Company plans to use the balance of the net proceeds for acquisitions,
market development, working capital and general corporate purposes. The Company
is currently in discussions with several potential acquisition candidates, but
except as otherwise described herein has not entered into any binding agreements
with respect to any acquisitions. Pending such uses, the net proceeds will be
invested in short-term, fixed income obligations of investment grade.
DIVIDEND POLICY
The Company has never paid cash dividends and does not anticipate paying
cash dividends in the foreseeable future. It is the present intention of the
Board of Directors to reinvest all earnings in the business of the Company to
support the future growth of its operations. The Bank Credit Facility currently
prohibits the payment of cash dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DILUTION
The net tangible book value of the Company at June 30, 1996, was a deficit
of approximately $15.9 million, or $3.73 per share of Common Stock. Net tangible
book value per share represents the amount of the Company's stockholders'
equity, less intangible assets, divided by the number of shares of Common Stock
issued and outstanding. Net tangible book value dilution per share represents
the difference between the amount per share paid by purchasers of shares of
Common Stock in this offering and the pro forma net tangible book value per
share of Common Stock immediately after completion of this offering. Shares of
Common Stock sold in this offering by the Selling Stockholder are included in
the calculation of shares of Common Stock outstanding, but the proceeds from the
sale of those shares do not increase the Company's stockholders' equity. After
giving effect to the sale of 5,000,000 shares of Common Stock offered by the
Company hereby (at an assumed initial public offering price of $10.00 per
share), the application of the estimated net proceeds therefrom as described
under "Use of Proceeds," and the consummation of the Pending Transactions, the
pro forma net tangible book value of the Company as of June 30, 1996 would have
been $2.7 million or $0.23 per share. This represents an immediate increase in
pro forma net tangible book value of $3.96 per share to stockholders as of June
30, 1996, and an immediate dilution in pro forma net tangible book value of
$9.77 per share to purchasers of Common Stock in this offering. The following
table illustrates the dilution per share:
Assumed initial public offering price
per share............................ $ 10.00
---------
Net deficit book value per share
as of June 30, 1996............ $ (3.73)
Increase in net tangible book
value per share attributable to
this offering(1)............... 3.96
---------
Pro forma net tangible book value per
share after this offering.......... 0.23
---------
Dilution per share to new
investors(2)....................... $ 9.77
=========
- ------------
(1) After deduction of underwriting discounts and commissions and estimated
offering expenses.
(2) Determined by subtracting the pro forma net tangible book value per share
after this offering from the amount of cash paid by a new investor for a
share of Common Stock.
17
<PAGE>
The following table shows, on a pro forma basis as of June 30, 1996, the
difference between existing stockholders (including shares issued in connection
with Pending Acquisitions and upon conversion of the Series A Convertible
Preferred Stock) and new investors with respect to the number of shares
purchased from the Company, the aggregate cash consideration paid (based, in the
case of new investors, on an assumed public offering price of $10.00 per share)
and the average price per share paid to the Company.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ------- -------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 6,696,680 57.3% $ 9,886,000 16.5% $ 1.48
New investors........................ 5,000,000 42.7% 50,000,000 83.5% $ 10.00
------------ ------- -------------- ------- ---------
Total................................ 11,696,980 100.0% 59,886,000 100.0%
============ ======= ============== =======
</TABLE>
The foregoing tables assume no exercise of outstanding options or warrants.
As of the date of this Prospectus, there are 380,500 shares of Common Stock
issuable upon the exercise of stock options granted to certain officers and key
employees of the Company and other eligible participants under the Plan, and at
the closing of this offering there will be 150,000 shares of Common Stock
issuable upon the exercise of options granted to Directors under the Directors'
Plan. The exercise prices of such options range from $5.00 to the initial public
offering price per share. Additionally, the Company has outstanding two Seller
Notes convertible into an aggregate of 139,737 shares of Common Stock at a
conversion price of $6.75 per share, and a warrant to purchase 113,158 shares of
Common Stock at an exercise price of $5.50 per share, all of which are subject
to adjustment on the occurrence of certain events.
18
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
June 30, 1996, (ii) the pro forma capitalization as of June 30, 1996, giving
effect to the Completed Acquisitions as if such transactions had occurred as of
such date, and, (iii) the pro forma capitalization as of June 30, 1996, giving
effect to the Acquisition Transactions entered into or pending subsequent to
June 30, 1996 as if such transactions had occurred as of such date, as adjusted
to give effect to the sale of the shares of Common Stock offered by the Company
hereby (at an assumed initial public offering price of $10.00 per share), the
application of the net proceeds therefrom as described under "Use of Proceeds"
and the issuance of 1,244,737 shares of Common Stock upon conversion of the
Series A Convertible Preferred Stock, as if each of such events had occurred as
of June 30, 1996.
JUNE 30, 1996
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)
Current portion of long-term debt and
capital lease obligations.......... $ 3,186 $ 3,286 $ 3,032
========= ========= ===========
Long-term debt and capital lease
obligations, less current
portion............................ $ 15,558 $21,435(1) $ 5,276
Redeemable Preferred Stock; $.001 par
value; 1,244,737 authorized, issued
and outstanding actual; no shares
issued and outstanding pro forma as
adjusted(2)........................ 2,928 2,928 --
Stockholders' equity (net capital
deficiency):
Common Stock, $.001 par value;
20,000,000 shares authorized;
4,275,243 shares issued and
outstanding actual, 4,612,243
shares issued and outstanding
pro forma, and 11,696,980 shares
issued and outstanding pro forma
as adjusted(3).................. 4 4 10
Additional paid-in capital......... 1,689 4,554 61,376
Accumulated deficit................ (5,810) (5,810) (7,705)
--------- --------- -----------
Total stockholders' equity (net
capital deficiency)........... (4,117) (1,252) 53,681
--------- --------- -----------
Total capitalization....... $ 14,369 $23,111 $58,957
========= ========= ===========
- ------------
(1) Pro Forma amount includes $2,877,000 unamortized discount on long-term debt
that will be repaid upon consummation of this offering. The unamortized
discount will be included in an extraordinary loss in the period in which
the debt is repaid.
(2) Represents the Series A Convertible Preferred Stock of the Company which
will be converted into 1,244,737 shares of Common Stock upon consummation of
this offering. See " Description of Capital Stock."
(3) Excludes an aggregate of up to 983,415 shares issuable on (i) the exercise
of options to purchase an aggregate of 730,500 shares of Common Stock which
the Company has granted or expects to grant at or shortly after the closing
of this offering under the Company's Omnibus Stock and Incentive Plan and
the Directors' Plan; and (ii) the exercise of the GulfStar Warrant and (iii)
up to 139,757 shares presently issuable on the conversion of two Seller
Notes. Also assumes that the 75,000 shares of Common Stock held in escrow in
connection with the Horizon Dental Centers acquisition are released to the
record holder thereof.
19
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected historical financial data of the Company should be read in
conjunction with the related financial statements, notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus. The selected historical
financial data set forth below as of December 31, 1994 and 1995 and for each of
the periods ended December 31, 1993, 1994 and 1995 have been derived from the
audited combined financial statements of the Company for such periods included
elsewhere herein. The selected historical financial data set forth below as of
June 30, 1996 and for the six months ended June 30, 1995 and 1996 have been
derived from the Company's unaudited condensed consolidated financial statements
included elsewhere herein, which were prepared on the same basis as the audited
combined financial statements and which, in the opinion of management, include
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the information set forth below. The selected historical
financial data as of December 31, 1991, 1992 and 1993 and for the years ended
December 31, 1991 and 1992 have been derived from the Company's financial
records, which were prepared on the same basis as the audited combined financial
statements and which, in the opinion of management, include all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the information set forth below. The selected pro forma combined financial data
set forth below as of June 30, 1996 and for the year ended December 31, 1995 and
for the six months ended June 30, 1996 have been derived from the unaudited pro
forma combined financial statements of the Company. The pro forma statement of
operations data give effect to (i) the sale of 5,000,000 shares of Common Stock
offered by the Company hereby (at an assumed initial public offering price of
$10.00) and the application of net proceeds therefrom as described under "Use
of Proceeds," (ii) the Acquisition Transactions and (iii) the Reorganization,
as if each of such transactions had occurred as of January 1, 1995. The pro
forma balance sheet data give effect to (i) the sale of 5,000,000 shares of
Common Stock offered by the Company hereby (at an assumed initial public
offering price of $10.00) and the application of net proceeds therefrom as
described under "Use of Proceeds," (ii) the conversion of the Series A
Convertible Preferred Stock into 1,244,737 shares of Common Stock, and (iii) the
Acquisition Transactions entered into or pending subsequent to June 30, 1996, as
if each of such transactions had occurred as of June 30, 1996. The selected pro
forma financial data are not necessarily indicative of the actual results of
operations or financial position that would have been achieved had such
transactions and this offering been completed at the dates specified, nor are
the statements necessarily indicative of the Company's future results of
operations or financial position. See "Unaudited Pro Forma Combined Financial
Information."
<TABLE>
<CAPTION>
PRO
FORMA(1)(2)
------------
HISTORICAL
--------------------------------------------------------------------------- YEAR
SIX MONTHS ENDED ENDED
YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31,
----------------------------------------------------- -------------------- ------------
1991 1992 1993 1994 1995 1995 1996 1995
--------- --------- --------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net patient revenues.................... $ 9,637 $ 13,978 $ 15,053 $ 17,083 $ 18,257 $ 9,082 $ 10,707 $ 57,771
Expenses:
Dentists' salaries.................... 1,596 2,223 2,684 2,853 3,345 1,611 1,869 11,414
Clinical salaries..................... 1,102 946 1,529 1,811 1,879 884 1,534 13,354
Dental supplies and laboratory fees... 860 1,403 1,565 1,907 2,185 1,086 1,352 6,958
Rental and lease expense.............. 477 411 504 681 836 381 486 3,249
Advertising and marketing............. 1,005 580 729 1,062 959 420 533 1,988
Depreciation and amortization......... 143 193 245 309 336 167 334 2,715
Other operating expenses.............. 1,428 1,915 1,871 2,205 2,260 1,275 1,175 4,624
General and administrative............ 3,232 5,085 4,947 5,319 9,109 2,920 2,415 8,691
--------- --------- --------- --------- --------- --------- --------- ------------
Total expenses.................... 9,843 12,756 14,074 16,147 20,909 8,744 9,698 52,993
--------- --------- --------- --------- --------- --------- --------- ------------
Operating income (loss)................. (206) 1,222 979 936 (2,652) 338 1,009 4,778
Interest expense........................ 135 182 130 112 87 5 1,066 665
Other expense (income)(3)............... -- -- -- -- -- -- (107) 95
--------- --------- --------- --------- --------- --------- --------- ------------
Income (loss) before income taxes....... (341) 1,040 849 824 (2,739) 333 50 4,018
Provision (benefit) for income taxes.... -- -- 40 43 (325) -- 19 1,568
--------- --------- --------- --------- --------- --------- --------- ------------
Net income (loss)(4).................... $ (341) $ 1,040 $ 809 $ 781 $ (2,414) $ 333 $ 31 $ 2,450
========= ========= ========= ========= ========= ========= ========= ============
Net income (loss) per share(5).......... $ (.06) $ .19 $ .15 $ .14 $ (.39) $ .06 $ .01 $ .21
========= ========= ========= ========= ========= ========= ========= ============
Weighted average outstanding
shares(5)............................. 5,515 5,515 5,515 5,515 6,115 5,515 6,169 11,633
========= ========= ========= ========= ========= ========= ========= ============
</TABLE>
PRO FORMA(1)(2)
SIX
MONTHS
ENDED
JUNE 30,
--------
1996
--------
STATEMENT OF OPERATIONS DATA:
Net patient revenues.................... $30,971
Expenses:
Dentists' salaries.................... 5,811
Clinical salaries..................... 7,586
Dental supplies and laboratory fees... 3,378
Rental and lease expense.............. 1,529
Advertising and marketing............. 1,097
Depreciation and amortization......... 1,411
Other operating expenses.............. 2,441
General and administrative............ 4,184
--------
Total expenses.................... 27,437
--------
Operating income (loss)................. 3,534
Interest expense........................ 632
Other expense (income)(3)............... (109 )
--------
Income (loss) before income taxes....... 3,011
Provision (benefit) for income taxes.... 1,174
--------
Net income (loss)(4).................... $ 1,837
========
Net income (loss) per share(5).......... $ .16
========
Weighted average outstanding
shares(5)............................. 11,633
========
(TABLE CONTINUED ON FOLLOWING PAGE)
20
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1996
DECEMBER 31, -----------------------
----------------------------------------------------- PRO FORMA AS
1991 1992 1993 1994 1995 ACTUAL ADJUSTED(6)
--------- --------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 150 $ 292 $ 34 $ 22 $ 6,439 $ 2,095 $ 851
Working capital......................... 653 2,247 773 1,212 6,208 816 2,223
Total assets............................ 3,012 5,087 4,130 4,711 12,677 22,358 64,996
Long-term debt and capital lease
obligations, less current portion..... 1,052 785 496 162 9,512 15,558 5,276
Redeemable Preferred Stock(7)........... -- -- -- -- 2,928 2,928 --
Total stockholders' equity (net capital
deficiency)........................... 622 2,631 1,796 2,577 (5,743) (4,117) 53,681
</TABLE>
- ------------
(1) Gives effect to (i) the sale of the 5,000,000 shares of Common Stock offered
by the Company hereby (at an assumed initial public offering price of $10.00
per share) and the application of the net proceeds therefrom as described
under "Use of Proceeds," (ii) the Acquisition Transactions, and (iii) the
Reorganization, as if each of such transactions had occurred as of January
1, 1995. See "Unaudited Pro Forma Combined Financial Information."
(2) The pro forma statements of operations do not reflect a $1,895,000
extraordinary loss on retirement of the Senior Subordinated Notes, net of
income tax effect of $1,211,000, which will be recognized in the period this
offering is completed.
(3) Represents primarily gain or loss on sale of assets and interest income.
(4) Prior to the Reorganization, significant operations of the Company were
conducted through a subchapter S corporation and accordingly were not
subject to federal and state income taxes (see Notes 1 and 6 to the
Company's Audited Combined Financial Statements). If all of the Company's
operations had been subject to income taxes, net income (loss) would have
been ($1,698,000) and $210,000 for the year ended December 31, 1995 and for
the six months ended June 30, 1995, respectively. Subsequent to December 31,
1995, the Company's operations are subject to income taxes and such taxes
have been reflected in the historical consolidated statement of operations
data for the six-month periods ended June 30, 1996. See "Unaudited Pro
Forma Combined Financial Information."
(5) Shares used in calculating net income per share include the weighted average
outstanding shares plus the number of shares (at an assumed public offering
price of $10.00 per share) for the year ended December 31, 1995 and the six
months ended June 30, 1996, the proceeds of which would be necessary to
repay the portion of the Company's debt that funded the $6,000,000 payment
to Jack H. Castle, D.D.S. in connection with the Reorganization. See
"Unaudited Pro Forma Combined Financial Information" and "Certain
Transactions." Historical weighted average shares outstanding and net
income (loss) per share were 5,515,000 and $(.44), respectively, for the
year ended December 31, 1995 and 5,569,000 and $.01, respectively, for the
six months ended June 30, 1996.
(6) Gives effect to (i) the sale of 5,000,000 shares of Common Stock offered by
the Company hereby (at an assumed initial public offering price of $10.00
per share) and the application of the net proceeds therefrom as described
under "Use of Proceeds," (ii) the conversion of the Series A Convertible
Preferred Stock into 1,244,737 shares of Common Stock, and (iii) the
Acquisition Transactions entered into or pending subsequent to June 30,
1996, as if each of such transactions had occurred as of June 30, 1996.
(7) Represents 1,244,737 shares of Series A Convertible Preferred Stock.
21
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Balance Sheet as of June 30,
1996 and the Unaudited Pro Forma Combined Statements of Operations for the year
ended December 31, 1995 and the six months ended June 30, 1996 have been
prepared to reflect adjustments to the Company's historical financial position
and results of operations to give effect to the transactions described below.
The Unaudited Pro Forma Combined Balance Sheet reflects such transactions as if
they had occurred as of June 30, 1996, and the Unaudited Pro Forma Combined
Statements of Operations for the year ended December 31, 1995 and the six months
ended June 30, 1996 reflect such transactions as if they had occurred as of
January 1, 1995.
Effective December 31, 1995, as part of a reorganization and
recapitalization plan (collectively with the financing arrangements discussed in
the following paragraph, the "Reorganization"), the Company merged with and
succeeded to the business of Family Dental. Family Dental was formed in 1981 to
provide management services to Jack H. Castle, D.D.S., Inc., a professional
corporation, which operated a dental practice in Houston, Texas. In December
1995, the Company acquired all the outstanding stock and certain assets of Jack
H. Castle, D.D.S., Inc. and entered into an agreement to provide practice
management services to a newly-established professional corporation, Jack H.
Castle, D.D.S., P.C., which succeeded to the dental practice of the professional
corporation acquired by the Company. See Notes 1, 2 and 9 to the Company's
Audited Combined Financial Statements and "Certain Transactions."
In connection with the Reorganization, the Company entered into a
Securities Purchase Agreement (the "Securities Purchase Agreement") with three
investors represented by Pecks Management Partners Ltd. (the "Pecks
Investors") pursuant to which the Company issued 1,244,737 shares of Series A
Convertible Preferred Stock and the Senior Subordinated Notes. At the same time,
the Company entered into the Bank Credit Facility with NationsBank, which
provided for a term loan of $6.0 million and a revolving credit facility of $3.0
million. In May 1996 the Company amended the Bank Credit Facility to, among
other things, increase the amount available under the term loan to $16.0
million. See Notes 2, 4 and 10 to the Company's Combined Financial Statements.
In May 1996, the Company acquired the assets and assumed certain
liabilities of 1st Dental Care headquartered in Clearwater, Florida and
Mid-South Dental Centers headquartered in Nashville, Tennessee, and entered into
management services agreements with each of those groups. In August 1996, the
Company increased its dental practices under management in Texas by acquiring
the assets and assuming certain liabilities of Horizon Dental Centers, a group
dental practice with four offices in Fort Worth, Texas and four offices in
Austin, Texas. Additionally, the Company has entered into definitive agreements
with respect to the New York Acquisition and the Arkansas Acquisition and a
letter of intent with respect to the Austin Acquisition. The New York
Acquisition is expected to close contemporaneously with, and is mutually
conditioned upon, the closing of this offering, and the Arkansas and Austin
Acquisitions are expected to close within 30 days of the closing of this
offering.
The Unaudited Pro Forma Combined Balance Sheet as of June 30, 1996 gives
effect to (i) the sale of 5,000,000 shares of Common Stock offered by the
Company hereby (at an assumed initial public offering price of $10.00 per share)
and the application of the net proceeds therefrom, as described in "Use of
Proceeds," (ii) the conversion of the Series A Convertible Preferred Stock into
1,244,737 shares of Common Stock, and (iii) the Acquisition Transactions entered
into or pending subsequent to June 30, 1996, as if each of such transactions had
occurred as of June 30, 1996. The Unaudited Pro Forma Combined Statements of
Operations for the year ended December 31, 1995 and the six months ended June
30, 1996, give effect to (i) the sale of 5,000,000 shares of Common Stock
offered by the Company hereby (at an assumed initial public offering price of
$10.00 per share) and the application of net proceeds therefrom as described in
"Use of Proceeds," (ii) the Acquisition Transactions and (iii) the
Reorganization, as if each of such transactions had occurred as of January 1,
1995.
The pro forma combined financial statements have been prepared by the
Company based on the historical financial statements of the Company and the
dental practices acquired or to be acquired in the Acquisition Transactions, the
financial statements of which are included elsewhere in this Prospectus. These
pro forma combined financial statements are presented for illustrative purposes
only and are not necessarily indicative of the results that would have been
obtained if the transactions had occurred on the dates indicated or that may be
realized in the future. The pro forma information should be read in conjunction
with the Company's Audited Combined Financial Statements and the Unaudited
Condensed Consolidated Interim Financial Statements and the Notes thereto and
the historical financial statements of the dental practices acquired or to be
acquired in the Acquisition Transactions and the notes thereto included
elsewhere in this Prospectus.
22
<PAGE>
CASTLE DENTAL CENTERS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ------------------------------------ HISTORICAL -----------
---------------------- COMPLETED ------------ PENDING
COMPLETED ACQUISITION OFFERING PENDING ACQUISITIONS
COMPANY ACQUISITION ADJUSTMENTS ADJUSTMENTS ACQUISITIONS ADJUSTMENTS
(A) (B) (B) COMBINED (C) (D) (D)
------- ------------ ----------- -------- ----------- ------------ -----------
(IN THOUSANDS)
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.......... $2,095 $ 208 $ (333) $ 1,970 $ 25,913 $4,118 $ (3,900)
(27,250)
Short-term investments............. -- -- -- -- -- 27 --
Patient receivables, net........... 4,442 168 -- 4,610 -- 1,087 --
Other current assets............... 296 4 -- 300 1,211 176 --
------- ------------ ----------- -------- ----------- ------------ -----------
Total current assets........ 6,833 380 (333) 6,880 27,124 5,408 (31,150)
------- ------------ ----------- -------- ----------- ------------ -----------
Property and equipment, net.......... 3,488 24 100 3,612 -- 1,508 450
Intangible assets, net............... 11,820 -- 5,794 17,614 (290) 135 33,488
Note receivable -- shareholder....... -- 600 (600) -- -- -- --
Deferred income taxes................ 217 -- -- 217 -- -- --
------- ------------ ----------- -------- ----------- ------------ -----------
Total assets..................... $22,358 $1,004 $ 4,961 $28,323 $ 26,834 $7,051 $ 2,788
======= ============ =========== ======== =========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt
and capital leases............... $3,186 $ 509 $ (409) $ 3,286 $ (608) $ 391 $ (37)
Accounts payable and accrued
liabilities...................... 2,831 6 (6) 2,831 (527) 1,915 (1,212)
------- ------------ ----------- -------- ----------- ------------ -----------
Total current liabilities... 6,017 515 (415) 6,117 (1,135) 2,306 (1,249)
------- ------------ ----------- -------- ----------- ------------ -----------
Long-term debt and capital lease
obligations, less current
portion............................ 15,558 403 2,597 18,558 (13,664) 564 (182)
Other long-term liabilities.......... 1,972 -- -- 1,972 (1,972) -- --
Redeemable preferred stock........... 2,928 -- -- 2,928 (2,928)(F) -- --
Stockholders' equity (deficit):
Common stock....................... 4 10 (10) 4 6 22 (22)
Additional paid-in capital......... 1,689 -- 2,865 4,554 45,494 11 8,389
2,928(F)
Retained earnings (accumulated
deficit)......................... (5,810 ) 76 (76) (5,810 ) (1,895) 4,148 (4,148)
------- ------------ ----------- -------- ----------- ------------ -----------
Total stockholders' equity
(deficit)................. (4,117 ) 86 2,779 (1,252 ) 46,533 4,181 4,219
------- ------------ ----------- -------- ----------- ------------ -----------
Total liabilities and stockholders'
equity (deficit)................... $22,358 $1,004 $ 4,961 $28,323 $ 26,834 $7,051 $ 2,788
======= ============ =========== ======== =========== ============ ===========
</TABLE>
PRO FORMA
AS ADJUSTED
(E)
-----------
ASSETS
Current Assets:
Cash and cash equivalents.......... $ 851
Short-term investments............. 27
Patient receivables, net........... 5,697
Other current assets............... 1,687
-----------
Total current assets........ 8,262
-----------
Property and equipment, net.......... 5,570
Intangible assets, net............... 50,947
Note receivable -- shareholder....... --
Deferred income taxes................ 217
-----------
Total assets..................... $64,996
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt
and capital leases............... $ 3,032
Accounts payable and accrued
liabilities...................... 3,007
-----------
Total current liabilities... 6,039
-----------
Long-term debt and capital lease
obligations, less current
portion............................ 5,276
Other long-term liabilities.......... --
Redeemable preferred stock........... --
Stockholders' equity (deficit):
Common stock....................... 10
Additional paid-in capital......... 61,376
Retained earnings (accumulated
deficit)......................... (7,705)
-----------
Total stockholders' equity
(deficit)................. 53,681
-----------
Total liabilities and stockholders'
equity (deficit)................... $64,996
===========
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(A) Represents the June 30, 1996 historical consolidated balance sheet of the
Company, which includes 1st Dental Care and Mid-South Dental Centers,
acquired in May 1996.
(B) Represents the June 30, 1996 historical combined balance sheet of Horizon
Dental Centers, which was acquired in August 1996, and the purchase
adjustments thereto.
The estimated fair value of the assets acquired in the Horizon Dental
Centers acquisition is summarized, as follows:
IN THOUSANDS
------------
Patient receivables, net................ $ 168
Other current assets.................... 4
Property and equipment.................. 124
Excess of cost over fair value of net
assets acquired....................... 5,794
------------
$6,090
============
The acquisition price for the Horizon Dental Centers acquisition was funded
as follows:
IN THOUSANDS
------------
Cash.................................... $ 125
Fair market value of 337,000 shares of
Common Stock.......................... 2,865
Current portion of long-term debt and
capital leases........................ 100
Long-term debt.......................... 3,000
------------
$6,090
============
The value of the Common Stock issued was based upon management's estimate
of the fair market value thereof as of the date of the purchase agreement
relating to the Horizon Dental Centers acquisition ($8.50 per share). The
long-term debt consists of (i) $1.0 million in Seller Notes, payable in
quarterly installments plus interest at 10% through December 2001, and (ii)
$2.1 million in additional debt incurred under the Bank Credit Facility
(see Note 10 to the Company's combined financial statements). The excess of
cost over the fair value of the net assets acquired will be amortized over
the term of the management services agreement entered into in connection
with the acquisition, which is 40 years.
(C) Represents the issuance of 5,000,000 shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $10.00 per
share and the use of proceeds therefrom as follows:
IN THOUSANDS
------------
Gross proceeds of the offering.......... $ 50,000
Underwriting discounts and
commissions........................... (3,500)
Expenses related to the offering........ (1,000)
------------
Net proceeds....................... 45,500(1)
Repayment of long-term debt, including
current portion....................... (17,088)(2)
Prepayment of amounts due under the
Deferred Compensation Agreement
(current portion $527, long-term
portion $1,972)....................... (2,499)
------------
Net increase in cash and cash
equivalents...................... $ 25,913
============
The Company plans to use the net increase in cash and cash equivalents for
acquisitions, market development, working capital and general corporate
purposes. Pending those uses, the net increase in cash and cash equivalents
will be invested in short-term, fixed-income obligations of investment
grade.
(FOOTNOTES ON FOLLOWING PAGE)
24
<PAGE>
(1) The Common Stock to be issued will affect pro forma equity, as
follows:
IN THOUSANDS
------------
Common stock........................ $ 6
Additional paid-in capital.......... 45,494
------------
$ 45,500
============
(2) The repayment of long-term debt will affect pro forma assets and
liabilities, as follows:
IN THOUSANDS
------------
Other current assets................ $ 1,211(a)
Other assets........................ (290)(b)
Current portion of long-term debt... 608
Long-term debt, net of unamortized
discount of $2,877................. 13,664
Retained earnings................... 1,895(c)
------------
Cash paid................... $ 17,088
============
- ------------
(a) To reflect taxes receivable relating to the extraordinary loss
on retirement of the Senior Subordinated Notes.
(b) To write off deferred financing costs related to the retirement
of the Senior Subordinated Notes.
(c) To reflect the reduction in retained earnings for the
extraordinary loss on retirement of the Senior Subordinated
Notes, net of income tax effect of $1,211,000.
(D) Represents the June 30, 1996 historical combined balance sheets of the
group dental practices to be acquired in the Pending Acquisitions, and the
purchase adjustments thereto.
The estimated fair value of the assets to be acquired in the Pending
Acquisitions is summarized below:
IN THOUSANDS
------------
Cash.................................... $ 218
Short-term investments.................. 27
Patient receivables, net................ 1,087
Other current assets.................... 176
Property and equipment.................. 1,958
Excess of cost over fair value of net
assets acquired....................... 33,623
Current portion of long-term debt and
capital leases assumed................ (354)
Accounts payable and accrued liabilities
assumed............................... (703)
Long-term debt and capital lease
obligations assumed................... (382)
------------
$ 35,650
============
The aggregate acquisition price for the Pending Acquisitions will be funded
as follows:
IN THOUSANDS
------------
Cash.................................... $ 27,250
Fair market value of 840,000 shares of
Common Stock.......................... 8,400
------------
$ 35,650
============
The value of the Common Stock to be issued is based upon an assumed initial
public offering price of $10.00 per share. The excess of cost over the fair
value of the net assets acquired will be amortized over the terms of the
management services agreements entered into in connection with the
acquisitions, which is 40 years.
Pursuant to the terms of the Arkansas Acquisition agreement, additional
consideration may be payable if operating income exceeds a certain level
for the twelve-month period ended December 31, 1996. The additional
consideration will be an amount equal to $6,000 for each $1,000 of
operating income in excess of the defined level. The consideration, if any,
will be payable 50% in cash and 50% in Company Common Stock.
25
<PAGE>
The letter of intent entered into in connection with the Austin Acquisition
provides that additional consideration may be payable if earnings before
interest, taxes, depreciation and amortization ("EBITDA") exceed a
certain level for the twelve-month period ended December 31, 1997. The
additional consideration will be an amount equal to six times the amount of
EBITDA in excess of the defined level. The consideration, if any, is
payable in cash and shall not exceed $500,000.
Any additional consideration payable under the terms of the agreements will
be recorded as excess of cost over fair value of net assets acquired when
paid.
(E) The Arkansas and Austin Acquisitions are expected to close within 30 days
of the closing of this offering; however, there can be no assurance that
the acquisitions will be consummated. Without giving effect to the
acquisitions, the Company's pro forma as adjusted balance sheet data would
be as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------------------
EXCLUDING
EXCLUDING EXCLUDING AUSTIN AND
AUSTIN ARKANSAS ARKANSAS
ACQUISITION ACQUISITION ACQUISITIONS
----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.......... $ 5,441 $ 3,451 $ 8,041
Working capital.................... 6,741 5,137 9,655
Total assets....................... 63,196 62,452 60,652
Long-term debt and capital lease
obligations, less current
portion.......................... 5,148 5,022 4,894
Total stockholders' equity......... 52,131 51,831 50,281
</TABLE>
(F) Represents conversion of the Series A Convertible Preferred Stock into
1,244,737 shares of Common Stock.
26
<PAGE>
CASTLE DENTAL CENTERS, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ---------------------------------------- HISTORICAL
---------------------- COMPLETED -------------
COMPLETED ACQUISITIONS & OFFERING PENDING
COMPANY ACQUISITIONS REORGANIZATION ADJUSTMENTS ACQUISITIONS
(A) (B) ADJUSTMENTS COMBINED (C) (D)
------- ------------ --------------- -------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net patient revenues.................... $18,257 $ 17,330 $-- $35,587 $-- $22,184
Expenses:
Dentists' salaries.................. 3,345 2,141 1,048(F) 6,534 -- 4,880
Professional fees and clinic
expenses.......................... -- 3,012 (3,012)(G) -- -- --
Clinical salaries................... 1,879 4,149 753(G) 6,781 -- 6,573
Dental supplies and laboratory
fees.............................. 2,185 1,375 904(G) 4,464 -- 2,494
Management fees..................... -- 1,249 (1,249)(H) -- -- --
Rental and lease expense............ 836 1,214 140(I) 2,190 -- 1,059
Advertising and marketing........... 959 503 34(J) 1,496 -- 492
Depreciation and amortization....... 336 385 548(K) 1,269 -- 518
Other operating expenses............ 2,260 660 -- 2,920 -- 1,704
General and administrative.......... 9,109 2,001 (4,534)(L) 6,576 -- 4,268
------- ------------ --------------- -------- ----------- -------------
Total expenses................. 20,909 16,689 (5,368) 32,230 -- 21,988
------- ------------ --------------- -------- ----------- -------------
Operating income (loss)................. (2,652 ) 641 5,368 3,357 -- 196
Interest expense........................ 87 215 2,185(M) 2,487 (1,866) (O) 68
Other expense (income).................. -- 95 -- 95 -- --
------- ------------ --------------- -------- ----------- -------------
Income (loss) before income taxes....... (2,739 ) 331 3,183 775 1,866 128
Provision (benefit) for income taxes.... (325 ) -- 627(Q) 302 728(Q) --
------- ------------ --------------- -------- ----------- -------------
Net income (loss)....................... $(2,414) $ 331 $ 2,556 $ 473 $ 1,138 $ 128
======= ============ =============== ======== =========== =============
Net income (loss) per share............. $ (.39 )(R) $ .07
======= ========
Weighted average outstanding shares..... 6,115 (R) 6,506
======= ========
</TABLE>
PRO FORMA
---------------------------
PENDING
ACQUISITIONS AS ADJUSTED
ADJUSTMENTS (E)
------------- -----------
Net patient revenues.................... $-- $57,771
Expenses:
Dentists' salaries.................. -- 11,414
Professional fees and clinic
expenses.......................... -- --
Clinical salaries................... -- 13,354
Dental supplies and laboratory
fees.............................. -- 6,958
Management fees..................... -- --
Rental and lease expense............ -- 3,249
Advertising and marketing........... -- 1,988
Depreciation and amortization....... 928(K) 2,715
Other operating expenses............ -- 4,624
General and administrative.......... (2,153)(L) 8,691
------------- -----------
Total expenses................. (1,225) 52,993
------------- -----------
Operating income (loss)................. 1,225 4,778
Interest expense........................ (24) 665
Other expense (income).................. -- 95
------------- -----------
Income (loss) before income taxes....... 1,249 4,018
Provision (benefit) for income taxes.... 538(Q) 1,568
------------- -----------
Net income (loss)....................... $ 711 $ 2,450
============= ===========
Net income (loss) per share............. $ .21
===========
Weighted average outstanding shares..... 11,633
===========
27
<PAGE>
CASTLE DENTAL CENTERS, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ------------------------------------------ HISTORICAL
----------------------- COMPLETED -------------
COMPLETED ACQUISITIONS & OFFERING PENDING
COMPANY ACQUISITIONS REORGANIZATION ADJUSTMENTS ACQUISITIONS
(A) (B) ADJUSTMENTS COMBINED (C) (D)
------- ------------- --------------- --------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net patient revenues.................... $10,707 $ 7,663 $-- $18,370 $ -- $12,601
Expenses:
Dentists' salaries.................. 1,869 832 578(F) 3,279 -- 2,602
Professional fees and clinic
expenses.......................... -- 1,506 (1,506)(G) -- -- --
Clinical salaries................... 1,534 1,696 376(G) 3,606 -- 3,980
Dental supplies and laboratory
fees.............................. 1,352 453 452(G) 2,257 -- 1,121
Management fees..................... -- 490 (490)(H) -- -- --
Rental and lease expense............ 486 512 --(I) 998 -- 531
Advertising and marketing........... 533 272 22(J) 827 -- 270
Depreciation and amortization....... 334 129 230(K) 693 (44)(N) 297
Other operating expenses............ 1,175 367 -- 1,542 -- 899
General and administrative.......... 2,415 867 87(L) 3,369 -- 1,966
------- ------------- --------------- --------- ------------ -------------
Total expenses................. 9,698 7,124 (251) 16,571 (44) 11,666
------- ------------- --------------- --------- ------------ -------------
Operating income (loss)................. 1,009 539 251 1,799 44 935
Interest expense........................ 1,066 108 396(M) 1,570 (961) (O) 33
Other expense (income).................. (107 ) -- -- (107) -- (2)
------- ------------- --------------- --------- ------------ -------------
Income (loss) before income taxes....... 50 431 (145) 336 1,005 904
Provision (benefit) for income taxes.... 19 -- 112(Q) 131 392(Q) --
------- ------------- --------------- --------- ------------ -------------
Net income (loss)....................... $ 31 $ 431 $ (257) $ 205 $ 613 $ 904
======= ============= =============== ========= ============ =============
Net income (loss) per share............. $ .01 (R) $ .03
======= =========
Weighted average outstanding shares..... 6,169 (R) 6,506
======= =========
</TABLE>
PRO FORMA
---------------------------
PENDING
ACQUISITIONS AS ADJUSTED
ADJUSTMENTS (E)
------------- -----------
Net patient revenues.................... $-- $30,971
Expenses:
Dentists' salaries.................. (70)(P) 5,811
Professional fees and clinic
expenses.......................... -- --
Clinical salaries................... -- 7,586
Dental supplies and laboratory
fees.............................. -- 3,378
Management fees..................... -- --
Rental and lease expense............ -- 1,529
Advertising and marketing........... -- 1,097
Depreciation and amortization....... 465(K) 1,411
Other operating expenses............ -- 2,441
General and administrative.......... (1,151)(L) 4,184
------------- -----------
Total expenses................. (756) 27,437
------------- -----------
Operating income (loss)................. 756 3,534
Interest expense........................ (10) 632
Other expense (income).................. -- (109)
------------- -----------
Income (loss) before income taxes....... 766 3,011
Provision (benefit) for income taxes.... 651(Q) 1,174
------------- -----------
Net income (loss)....................... $ 115 $ 1,837
============= ===========
Net income (loss) per share............. $ .16
===========
Weighted average outstanding shares..... 11,633
===========
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(A) Represents the historical Consolidated Statements of Operations data of the
Company, which includes the operations of 1st Dental Care and Mid-South
Dental Centers, acquired in May 1996, from the dates of acquisition.
(B) Represents the combined historical statements of operations data of the
affiliated dental practices acquired in the Completed Acquisitions for the
year ended December 31, 1995 and the six months ended June 30, 1996 or the
period from January 1, 1996 through the acquisition date, as appropriate.
The historical statements of operations represent continuing operations
and do not include a $112,000 extraordinary gain recognized by 1st Dental
Care for the year ended December 31, 1995.
(C) Offering adjustments represent those adjustments resulting from this
offering that will affect the historical statements of operations on a
continuing basis. The pro forma statements of operations do not reflect
the $1,895,000 extraordinary loss on retirement of the Senior Subordinated
Notes, net of income tax effect of $1,211,000, that will be recognized in
the period this offering is completed.
(D) Represents the combined historical statements of operations data of the
Pending Acquisitions for the year ended December 31, 1995 and the six
months ended June 30, 1996.
(E) The Arkansas and Austin Acquisitions are expected to close within 30 days
of the closing of this offering. However, there can be no assurance that
these acquisitions will be consummated. Without giving effect to these
acquisitions, the pro forma statement of operations data would be as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------
EXCLUDING
EXCLUDING EXCLUDING AUSTIN AND
AUSTIN ARKANSAS ARKANSAS
ACQUISITION ACQUISITION ACQUISITIONS
----------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net patient revenues............... $54,026 $54,623 $ 50,878
Net income......................... 2,516 2,521 2,586
Net income per share............... $ .22 $ .22 $ .23
SIX MONTHS ENDED JUNE 30, 1996
------------------------------------------
EXCLUDING
EXCLUDING EXCLUDING AUSTIN AND
AUSTIN ARKANSAS ARKANSAS
ACQUISITION ACQUISITION ACQUISITIONS
----------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net patient revenues............... $28,753 $28,961 $ 26,743
Net income......................... 1,820 1,668 1,651
Net income per share............... $ .16 $ .15 $ .15
</TABLE>
(F) Represents (i) adjustments to historical compensation paid to the owner of
an acquired dental practice in excess of amounts due under the terms of an
employment agreement entered into in connection with the acquisition of
such dental practice, and (ii) allocation of professional fees and clinic
expenses of an acquired dental practice as described in note G, as
follows:
COMPLETED ACQUISITIONS
-------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
(IN THOUSANDS)
Reduction in owner's
compensation..................... $ (307) $ (100)
Allocation of professional fees.... 1,355 678
-------- -------
$ 1,048 $ 578
======== =======
29
<PAGE>
(G) Represents the allocation of historical professional fees and clinic
expenses for an acquired dental practice, based on historical percentages
of the Company, for the following income statement captions:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
INCOME STATEMENT CAPTIONS ALLOCATION DECEMBER 31, 1995 JUNE 30, 1996
- ---------------------------------------- ---------- ----------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Dentists' salaries................. 45% $ 1,355 $ 678
Clinical salaries.................. 25% 753 376
Dental supplies and laboratory
fees............................. 30% 904 452
-------- --------
$ 3,012 $1,506
======== ========
</TABLE>
(H) Represents the elimination of management fees paid to the owner of an
acquired dental practice that will not be incurred pursuant to the terms of
the acquisition agreement. See notes I, J, K and L for increased expenses
related to the management fees.
(I) Represents additional rents that will be incurred by the Company that were
formerly paid by the owner of an acquired dental practice. The increase
will be partially offset by a reduction in rents that were formerly paid
to the owner of another acquired dental practice prior to its acquisition
by the Company.
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
(IN THOUSANDS)
Reduction for excess rent
payments......................... $ (64) $ (39)
Additional rent expense to be
incurred by the Company.......... 204 39
------ ------
$ 140 $ --
====== ======
(J) Represents increased expenses for advertising and marketing services that
will be incurred by the Company. Such services were historically provided
by the owner of an acquired dental practice prior to its acquisition by
the Company.
(K) Represents (i) an increase in amortization of goodwill associated with the
Acquisition Transactions, and (ii) adjustments to depreciation based upon
the purchase price allocation to property and equipment. The excess of cost
over the fair value of the net assets acquired will be amortized over the
term of the management services agreements entered into in connection with
the acquisitions, which is 40 years.
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
(IN THOUSANDS)
Amortization of goodwill........... $ 1,263 $ 604
Depreciation adjustment............ 213 91
----------------- -------
$ 1,476 $ 695
================= =======
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
(IN THOUSANDS)
Completed Acquisitions............. $ 548 $ 230
Pending Acquisitions............... 928 465
----------------- -------
Total......................... $ 1,476 $ 695
================= =======
30
<PAGE>
(L) Represents adjustments to compensation and other overhead expenses in
accordance with amounts due under the terms of employment and management
service agreements entered into in connection with the Acquisition
Transactions and the Reorganization.
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
(IN THOUSANDS)
Accrual of deferred compensation in
prior periods.................... $(2,630) $--
Adjust owners compensation of the
Company and acquired dental
practices pursuant to the terms
of the related employment
agreements....................... (4,091) (1,077)
Adjust other costs, pursuant to the
terms of the acquisition
agreements....................... 34 13
----------------- ----------------
$(6,687) $ (1,064)
================= ================
Completed Acquisitions............. $(4,534) $ 87
Pending Acquisitions............... (2,153) (1,151)
----------------- ----------------
$(6,687) $ (1,064)
================= ================
(M) Represents adjustments to interest expense for additional debt issued in
connection with the Completed Acquisitions and the Reorganization. The
interest expense was computed based upon actual interest rates on the
Senior Subordinated Notes and Seller Notes and the actual variable interest
rate at the time the Company entered into the agreement on debt outstanding
under the Bank Credit Facility. Such adjustments were partially offset by a
reduction in interest expense on debt either paid or not assumed in
connection with the Completed Acquisitions. The reduction was based on
actual interest expense recorded on the respective debt. Interest on the
various components was as follows:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
(IN THOUSANDS)
Seller Notes (6.34% - 10%)......... $ 448 $ 187
Bank Credit Facility (8.5625%)..... 1,014 287
Senior Subordinated
Notes -- (12%)................... 871 --
Interest on acquisition debt paid
or not assumed................... (148) (78)
----------------- -------
$ 2,185 $ 396
================= =======
(N) Represents the elimination of amortization associated with deferred
financing costs related to debt that will be repaid upon consummation of
this offering. As a majority of the deferred financing costs were incurred
in December 1995 as part of the Reorganization, there was no amortization
related to these costs recorded during 1995.
(O) Represents reductions to interest expense related to debt that will be
repaid from the net proceeds of this offering. The adjustments are based
upon actual amounts expensed or otherwise reflected in the pro forma
adjustments. Interest on the various components was as follows:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
(IN THOUSANDS)
Seller Notes (6.34% - 10%)......... $ (448) $ (224)
Senior Subordinated Notes (12%).... (900) (450)
Bank Credit Facility (8.5625%)..... (518) (87)
----------------- -------
$(1,866) $ (961)
================= =======
31
<PAGE>
(P) Represents a reduction in historical compensation paid to the owner of a
dental practice to be acquired in excess of amounts due under the terms of
an employment agreement to be entered into in connection with the
acquisition of such dental practice.
(Q) Represents adjustments to accrue income taxes on earnings untaxed at the
corporate level and to reflect tax effects of adjustments described above
based on an effective tax rate of 39%.
(R) Shares used in calculating net income per share include the weighted
average shares outstanding plus the number of shares (at an assumed public
offering price of $10.00 per share), the proceeds of which would be
necessary to repay the portion of the Company's debt that funded the
$6,000,000 payment to Jack H. Castle, D.D.S. in connection with the
Reorganization. Historical weighted average shares outstanding and net
income (loss) per share were 5,515,000 and $(.44), respectively, for the
year ended December 31, 1995 and 5,569,000 and $.01, respectively, for the
six months ended June 30, 1996.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
Audited Combined Financial Statements, Unaudited Condensed Consolidated Interim
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
OVERVIEW
From its inception in 1981 until 1990, the Company opened three dental
centers in Houston, Texas. Beginning in 1991, the Company began an expansion
program, opening five new dental centers by the end of 1995. At the end of 1995,
the Company managed eight dental centers with 37 affiliated dentists in the
Houston metropolitan area, with net patient revenues of $18.3 million. Each of
the Company's centers in Houston was developed DE NOVO, by identifying a
desirable location, entering into a lease agreement, and building out the leased
space to the Company's specifications. The Company staffs DE NOVO dental centers
with a combination of experienced Company personnel and new employees. The
Company opened its ninth dental center in April 1996.
Beginning in the first quarter of 1996, the Company began to identify group
dental practices outside of Houston, Texas as potential acquisition candidates
with a view to expanding the Company's operations into new markets. Since May
1996, the Company has completed the acquisition of three affiliated dental
practices and has entered into two definitive agreements and a letter of intent
to acquire a total of three others. As a result of the recent rapid expansion of
the business through acquisitions and the Company's limited period of
affiliation with these practices, the Company believes that period-to-period
comparisons set forth below may not necessarily be meaningful nor representative
of future results. For additional information regarding the pro forma financial
effect of the Company's acquisitions, see "Unaudited Pro Forma Combined
Financial Information."
Certain of the affiliated dental practices derive a significant portion of
their revenues from managed care contracts, preferred provider arrangements and
other negotiated price agreements. While the laws of some states permit the
Company to participate in the negotiations by affiliated dental practices of
managed care contracts, preferred provider arrangements and other negotiated
price agreements, the affiliated dental practices are the contracting parties
for all such relationships, and the Company is dependent on its affiliated
dental practices for the success of such relationships. See "Risk
Factors -- Risks Associated with Managed Care Contracts; Capitated Fee Revenue"
and "Reliance on Affiliated Dental Practices," and "Business_-- Dental
Network Development -- Management Services Agreement."
ACQUISITION AND AFFILIATION SUMMARY
Since May 1, 1996, the Company has acquired certain assets of and entered
into long-term management agreements with 1st Dental Care, Mid-South Dental
Centers and Horizon Dental Centers, three affiliated dental practices that have
expanded its market presence into the Tampa/Clearwater area in Florida, the
Nashville and Chattanooga areas in Tennessee, and the Austin and Fort Worth
areas in Texas, respectively. In addition, the Company has entered into
definitive agreements with respect to the New York Acquisition and the Arkansas
Acquisition, and has entered into a letter of intent with respect to the Austin
Acquisition. The New York Acquisition is expected to occur contemporaneously
with, and is mutually conditioned on, the closing of this offering, and the
Arkansas Acquisition and the Austin Acquisition are expected to close within 30
days thereafter.
The acquisition of affiliated dental practices in Florida, Tennessee and
Texas added 26 dental centers with 53 affiliated dentists to the Company for an
aggregate consideration of approximately $9.3 million in cash, $4.5 million in
Seller Notes and 612,243 shares of the Company's Common Stock. An aggregate of
$943,363 of the Seller Notes is convertible into Common Stock at a conversion
price of $6.75 per share, subject to antidilution adjustments and automatic
annual increase in conversion price. An aggregate of 75,000 shares of Common
Stock is being held in escrow in connection with the acquisition of Horizon
Dental Centers, which shares will be released if certain earnings milestones are
met. The purchase price for the New York Acquisition is $20.0 million in cash
and $5.0 million in shares of Common Stock valued at the initial public offering
price, the purchase price for the Arkansas Acquisition is $2.6 million in cash
and
33
<PAGE>
185,000 shares of Common Stock, and the purchase price for the Austin
Acquisition is $4.8 million in cash and $1.6 million in shares of Common Stock,
valued at the initial public offering price. The Company will also assume debt
obligations of $553,000 in connection with the Arkansas Acquisition and $183,000
in connection with the Austin Acquisition. Under the terms of the definitive
agreement for the Arkansas Acquisition and the letter of intent for the Austin
Acquisition, additional cash consideration will be paid if the acquired practice
achieves specified operating results subsequent to the completion of the
transaction. Upon completion of the New York Acquisition, the Arkansas
Acquisition and the Austin Acquisition, the Company will manage 60 dental
centers with approximately 225 affiliated dentists in seven states.
The Company currently is in discussions with a number of dentists and
owners of group dental practices concerning the potential for future affiliation
with the Company. There can be no assurance that these discussions will result
in new practice affiliations in the near future or at all.
RESULTS OF OPERATIONS
The following table sets forth the percentages of revenue represented by
certain items reflected in the Company's Statements of Operations. The
information that follows represents the historical results of the Company and
does not include results of any of the acquisitions that the Company has
completed since May 1996, nor the Pending Acquisitions discussed herein. The
information that follows should be read in conjunction with the Audited Combined
Financial Statements of the Company and notes thereto, as well as the Unaudited
Pro Forma Combined Financial Information, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net patient revenues................. 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Dentists' salaries................. 17.8 16.7 18.3 17.7 17.5
Clinical salaries.................. 10.2 10.6 10.3 9.7 14.3
Dental supplies and laboratory
fees............................ 10.4 11.2 12.0 12.0 12.6
Rental and lease expense........... 3.3 4.0 4.6 4.2 4.5
Advertising and marketing.......... 4.8 6.2 5.3 4.6 5.0
Depreciation and amortization...... 1.6 1.8 1.8 1.8 3.1
Other operating expenses........... 12.4 12.9 12.4 14.0 11.0
General and administrative......... 32.9 31.1 49.9 32.2 22.6
--------- --------- --------- --------- ---------
93.4 94.5 114.6 96.2 90.6
--------- --------- --------- --------- ---------
Operating income (loss).............. 6.6 5.5 (14.6) 3.8 9.4
Interest expense..................... 0.9 0.7 0.5 0.1 10.0
Other expense (income)............... -- -- -- -- (1.0)
--------- --------- --------- --------- ---------
Income (loss) before income taxes.... 5.7 4.8 (15.1) 3.7 0.4
Provision (benefit) for income
taxes.............................. 0.3 0.3 (1.8) -- 0.2%
--------- --------- --------- --------- ---------
Net income (loss).................... 5.4% 4.5% (13.3)% 3.7% 0.2%
========= ========= ========= ========= =========
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
The Company acquired the assets of and entered into management agreements
with two group dental practices in May 1996, the results of which are included
in the Company's operating results from the dates of acquisition. Changes in
results of operations from the first six months of 1995 to the first six months
of 1996 were caused primarily by affiliations with these two group dental
practices. For periods prior to 1996, the Company's operations were conducted
entirely in Houston, Texas.
NET PATIENT REVENUES -- Net patient revenues increased from $9.1 million
for the six months ended June 30, 1995 to $10.7 million for the six months ended
June 30, 1996, an increase of $1.6 million or 17.9%. Approximately $1.4 million
of the increase was attributable to the acquisition of 1st Dental Care,
34
<PAGE>
headquartered in Clearwater, Florida, and Mid-South Dental Centers,
headquartered in Nashville, Tennessee, that the Company completed on May 19 and
May 31, 1996, respectively, with the remaining $200,000 primarily attributable
to the opening of the Company's ninth dental center in Houston in April 1996.
DENTISTS' SALARIES -- Dentists' salaries, which include salaries and
productivity-based compensation paid to affiliated dentists, increased from $1.6
million for the six months ended June 30, 1995 to $1.9 million for the six
months ended June 30, 1996, an increase of $258,000 or 16%. The increase
resulted primarily from the addition of dentists' compensation at the 18 dental
offices acquired in Florida and Tennessee. Expressed as a percentage of net
patient revenues, dentists' salaries decreased from 17.7% to 17.5% for the six
months ended June 30, 1995 and 1996, as the growth in net patient revenues was
greater relatively than the increase in dentists' salaries. See
"Business -- Dental Network Development -- Dentist Employment Agreements."
CLINICAL SALARIES -- Salaries and wages paid to clinical staffs increased
from $884,000 for the six months ended June 30, 1995 to $1.5 million for the six
months ended June 30, 1996, an increase of $651,000 or 73.6%. The addition of
the clinical staff salaries in Florida and Tennessee accounted for $452,000 of
the increase, with the remaining $200,000 attributable to increased staff levels
in anticipation of the opening of the ninth dental center in Houston in April
1996. Expressed as a percentage of net patient revenues, clinical salaries
increased from 9.7% to 14.3% for the six months ended June 30, 1995 and 1996,
respectively.
DENTAL SUPPLIES AND LABORATORY FEES -- Dental supplies and laboratory fees
increased from $1.1 million for the six months ended June 30, 1995 to $1.4
million for the six months ended June 30, 1996, an increase of $266,000 or
24.5%. Dental supplies and laboratory fees at the Florida and Tennessee
operations accounted for $130,000 of the increase from the first six months of
1995 to the first six months of 1996. The use of higher cost materials to enable
general dentists to perform certain specialized procedures and the stocking of
the Company's newly-opened dental center in Houston accounted for most of the
remaining increase. Expressed as a percentage of net patient revenues, dental
supplies and laboratory fees increased from 12.0% to 12.6% for the six months
ended June 30, 1995 and 1996, respectively.
RENTAL AND LEASE EXPENSE -- Rental and lease expense increased from
$381,000 for the six months ended June 30, 1995 to $486,000 for the six months
ended June 30, 1996, an increase of $105,000 or 27.5%. Rental expense in Florida
and Tennessee of $77,000 in the period since the acquisitions were completed in
May 1996 accounted for most of the increase. Expressed as a percentage of net
patient revenues, rental and lease expense increased from 4.2% to 4.5% for the
six months ended June 30, 1995 and 1996, respectively.
ADVERTISING AND MARKETING -- Advertising and marketing expense increased
from $420,000 for the six months ended June 30, 1995 to $533,000 for the six
months ended June 30, 1996, an increase of $112,000 or 26.8%. Higher
expenditures for television advertising and a direct mail advertising campaign
conducted in conjunction with the opening of a new dental center in Houston in
April accounted for most of the $71,000 increase in advertising expense, with
the Florida and Tennessee acquisitions adding $41,000. Expressed as a percentage
of net patient revenues, advertising and marketing expense increased from 4.6%
to 5.0% for the six months ended June 30, 1995 and 1996, respectively.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization increased
from $167,000 for the six months ended June 30, 1995 to $334,000 for the six
months ended June 30, 1996, an increase of $167,000 or 100%. Higher depreciation
expense resulted from capital expenditures in late 1995 at the Company's new
corporate office and the relocation of one of the Company's dental centers. In
addition, the acquisition of the Florida and Tennessee operations added
depreciation expense of $35,000 and goodwill amortization of $29,000 in the 1996
period.
OTHER OPERATING EXPENSES -- Other operating expenses decreased from $1.3
million for the six months ended June 30, 1995 to $1.2 million for the six
months ended June 30, 1996, a decrease of $100,000, or 7.8%. Other operating
expenses include certain expenses related to the operation of the Company's
dental centers and bad debt expense incurred in the financing of patient
receivables at the affiliated dental practices. Lower bad debt expense resulting
from improved credit and collection procedures accounted for the reduction,
partially offset by the addition of $64,000 of other operating expenses at
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<PAGE>
the Company's newly acquired dental centers in Florida and Tennessee. Expressed
as a percentage of net patient revenues, other operating expenses decreased from
14.0% to 11.0% for the six months ended June 30, 1995 and 1996, respectively.
GENERAL AND ADMINISTRATIVE -- General and administrative expense decreased
from $2.9 million for the six months ended June 30, 1995 to $2.4 million for the
six months ended June 30, 1996, a decrease of $506,000 or 17.3%. Reduced
compensation paid to the Company's owners accounted for most of the decrease in
general and administrative expense. This was partially offset by the addition of
$187,000 in general and administrative expense incurred at the Florida and
Tennessee group dental practices in the 1996 period. Expressed as a percentage
of net patient revenues, general and administrative expense decreased from 32.2%
to 22.6% for the six months ended June 30, 1995 and 1996, respectively.
INTEREST EXPENSE -- Net interest expense increased from $5,000 for the six
months ended June 30, 1995 to $1.1 million for the six months ended June 30,
1996. In the period from December 1995 through May 1996, the Company borrowed
approximately $17.5 million in order to fund the Reorganization and the
acquisition of affiliated dental practices in Florida and Tennessee, resulting
in increased net interest expense in the first half of 1996. In addition, the
amortization of the discount on the Senior Subordinated Notes was $261,000 in
the six-month period ended June 30, 1996.
INCOME TAXES -- Prior to 1996, the Company did not accrue significant
corporate income taxes because a major portion of the Company's operations was
conducted through a Subchapter S corporation, which resulted in no corporate
income taxes being assessed against the profits of that company. Subsequent to
the Reorganization in December 1995, all of the Company's operations became
subject to corporate income taxes. For the six months ended June 30, 1996, the
provision for income taxes was $19,000 based on an estimated tax rate of 39.0%.
Income taxes accrued for prior periods related solely to the dental practice
management operations.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET PATIENT REVENUES -- Net patient revenues increased from $17.1 million
for the year ended December 31, 1994 to $18.3 million for the year ended
December 31, 1995, an increase of $1.2 million or 6.9%. This increase was
primarily attributable to the opening of the Company's eighth dental center in
October 1994.
DENTISTS' SALARIES -- Dentists' salaries increased from $2.9 million for
the year ended December 31, 1994 to $3.3 million for the year ended December 31,
1995, an increase of $492,000 or 17.2%. The hiring of additional dentists to
staff the Company's eighth dental center and an increase in patient services
resulted in the increase in dentists' salaries. Expressed as a percentage of net
patient revenues, dentists' salaries increased from 16.7% to 18.3% for the years
ended December 31, 1994 and 1995, respectively.
CLINICAL SALARIES -- Clinical salaries increased from $1.8 million for the
year ended December 31, 1994 to $1.9 million for the year ended December 31,
1995, an increase of $68,000 or 3.8%. The increase resulted from the addition of
the eighth dental center in October 1994. Expressed as a percentage of net
patient revenues, clinical salaries decreased from 10.6% to 10.3% for the years
ended December 31, 1994 and 1995, respectively, as a result of more efficient
scheduling and the increase in net patient revenues from the eighth dental
center.
DENTAL SUPPLIES AND LABORATORY FEES -- Dental supplies and laboratory fees
increased from $1.9 million for the year ended December 31, 1994 to $2.2 million
for the year ended December 31, 1995, an increase of approximately $278,000 or
14.6%. The increased level of patient services and costs associated with the
opening of the Company's eighth center accounted for most of the increase.
Expressed as a percentage of net patient revenues, dental supplies and
laboratory expense increased from 11.2% to 12.0% for the years ended December
31, 1994 and 1995, respectively.
RENTAL AND LEASE EXPENSE -- Rental and lease expense increased from
$681,000 for the year ended December 31, 1994 to $836,000 for the year ended
December 31, 1995, an increase of $155,000 or 22.8%. The increase resulted from
the opening of the eighth dental center in late 1994, the opening of the
Company's new corporate office in April 1995, and the moving of one of the
Company's dental centers to a larger facility, which resulted in a duplication
of lease payments at the old facility through the end of 1995.
36
<PAGE>
Expressed as a percentage of net patient revenues, rental and lease expense
increased from 4.0% to 4.6% for the years ended December 31, 1994 and 1995,
respectively.
ADVERTISING AND MARKETING -- Advertising and marketing expense decreased
from $1.1 million for the year ended December 31, 1994 to $959,000 for the year
ended December 31, 1995, a decrease of $103,000, or 9.7%. Reduced expenditures
for television advertising and the absence of direct mail costs incurred in
connection with opening of the eighth center in the fourth quarter of 1994
resulted in lower 1995 spending. Expressed as a percentage of net patient
revenues, advertising and marketing expense decreased from 6.2% to 5.3% for the
years ended December 31, 1994 and 1995 respectively.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization expense
increased from $309,000 for the year ended December 31, 1994 to $336,000 for the
year ended December 31, 1995, an increase of 27,000 or 8.7%. Capital
expenditures incurred in the opening of the Company's eighth dental center in
the fourth quarter of 1994 and the moving of the corporate office to a new
location resulted in higher depreciation and amortization expense in 1995.
OTHER OPERATING EXPENSES -- Other operating expenses increased from $2.2
million for the year ended December 31, 1994 to $2.3 million for the year ended
December 31, 1995, an increase of $55,000, or 2.5%. Expressed as a percentage of
net patient revenues, other operating expense decreased from 12.9% to 12.4% for
the years ended December 31, 1994 and 1995, respectively.
GENERAL AND ADMINISTRATIVE -- General and administrative expense increased
from $5.3 million for the year ended December 31, 1994 to $9.1 million for the
year ended December 31, 1995, an increase of $3.8 million or 71.3%. The increase
resulted primarily from higher compensation paid to the Company's owners,
including $2.6 million under the Deferred Compensation Agreement entered into in
connection with the Reorganization. The Company also incurred higher costs
related to the corporate office opened in mid-1995 and higher administrative
personnel costs. Expressed as a percentage of net patient revenues, general and
administrative expense increased from 31.1% to 49.9% for the years ended
December 31, 1994 and 1995, respectively.
INCOME TAXES -- In 1995 and 1994, significant operations of the Company
were conducted through a subchapter S corporation, which resulted in no
corporate income taxes being assessed against the profits of that company.
Subsequent to the Reorganization in December 1995, all of the Company's
operations became subject to corporate income taxes. The Company recognized a
benefit for income taxes of $325,000 in the year ended December 31, 1995,
reflecting primarily the charge for deferred compensation offset by a deferred
tax liability of $728,000 realized upon the loss of subchapter S status for
income tax purposes. This compared to a provision for income taxes of $43,000
for the prior year.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
NET PATIENT REVENUES -- Net patient revenues increased from $15.1 million
for the year ended December 31, 1993 to $17.1 million for the year ended
December 31, 1994, an increase of $2.0 million, or 13.5%. The addition of the
Company's sixth and seventh dental centers in May and August 1993, respectively,
and the opening of the eighth dental center in October 1994 accounted for the
increase in net patient revenues.
DENTISTS' SALARIES -- Dentists' salaries increased from $2.7 million for
the year ended December 31, 1993 to $2.9 million for the year ended December 31,
1994, an increase of $169,000, or 6.3%. The opening of the new dental centers
accounted for most of the increase. Expressed as a percentage of net patient
revenues, however, dentists' salaries decreased from 17.8% to 16.7% for the
years ended December 31, 1993 and 1994, respectively, as the growth in net
patient revenues exceeded the increase in dentists' compensation.
CLINICAL SALARIES -- Clinical salaries increased from $1.5 million for the
year ended December 31, 1993 to $1.8 million for the year ended December 31,
1994, an increase of $282,000, or 18.4%. Increased staffing necessary to open
new centers and higher personnel costs accounted for the increase. Expressed as
a percentage of net patient revenues, clinical salaries increased from 10.2% to
10.6% for the years ended December 31, 1993 and 1994, respectively.
37
<PAGE>
DENTAL SUPPLIES AND LABORATORY FEES -- Dental supplies and laboratory fees
increased from $1.6 million for the year ended December 31, 1993 to $1.9 million
for the year ended December 31, 1994, an increase of approximately $342,000 or
21.9%. The increased level of net patient revenues and costs associated with the
new dental centers opened in 1993 and 1994 accounted for the increase. Expressed
as a percentage of net patient revenues, dental supplies and laboratory fees
increased from 10.4% to 11.2% for the years ended December 31, 1993 and 1994,
respectively.
RENTAL AND LEASE EXPENSE -- Rental and lease expense increased from
$504,000 for the year ended December 31, 1993 to $681,000 for the year ended
December 31, 1994, an increase of $177,000 or 35.1%. The increase resulted from
the opening of the new dental centers in 1993 and 1994. Expressed as a
percentage of net patient revenues, rental and lease expense increased from 3.3%
to 4.0% for the years ended December 31, 1993 and 1994, respectively.
ADVERTISING AND MARKETING -- Advertising and marketing expense increased
from $729,000 for the year ended December 31, 1993 to $1,062,000 for the year
ended December 31, 1994, an increase of $333,000, or 45.7%. Production costs
associated with a new television advertising campaign and increased television
advertising frequency accounted for the increase. Expressed as a percentage of
net patient revenues, advertising and marketing expense increased from 4.8% to
6.2% for the years ended December 31, 1993 and 1994, respectively.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization increased
from $245,000 for the year ended December 31, 1993 to $309,000 for the year
ended December 31, 1994, an increase of $64,000, or 26.1%. Capital expenditures
for leasehold improvements and dental equipment to open the Company's sixth,
seventh and eighth dental centers in 1993 and 1994 accounted for higher
depreciation expenses in 1994. Expressed as a percentage of net patient
revenues, depreciation and amortization increased from 1.6% to 1.8% for the
years ended December 31, 1993 and 1994, respectively.
GENERAL AND ADMINISTRATIVE -- General and administrative expense increased
from $4.9 million for the year ended December 31, 1993 to $5.3 million for the
year ended December 31, 1994, an increase of $372,000 or 7.5%. The hiring of
additional personnel necessary to support the new dental centers added in 1993
and 1994 accounted for most of the increase. Expressed as a percentage of net
patient revenues, however, general and administrative expense decreased from
32.9% to 31.1% for the years ended December 31, 1993 and 1994, respectively, as
the growth in net patient revenues exceeded the increase in general and
administrative expense.
INCOME TAXES -- In 1993 and 1994, significant operations of the Company
were conducted through a subchapter S corporation, which resulted in no
corporate income taxes being assessed against the profits of that company. As a
result, the provision for income taxes was approximately $40,000 in each year,
approximately $260,000 less than the provision would have been if all of the
Company's income had been subject to income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Prior to December 1995, the Company financed its operations and expansion
primarily through the use of internally generated funds, capital lease
obligations and bank borrowings. In December 1995, as part of the
Reorganization, the Company entered into the Securities Purchase Agreement with
the Pecks Investors and a Bank Credit Facility with NationsBank. A total of
$13.5 million was raised in these transactions, of which $6.0 million was used
to acquire the stock of Jack H. Castle, D.D.S., Inc. as part of the
Reorganization. The balance of the proceeds, net of expenses, was dedicated to
fund the Company's development and acquisition programs and to provide working
capital. As of June 30, 1996, the Company had available net working capital of
$816,000 which included $2.1 million in cash and cash equivalents.
The Bank Credit Facility with NationsBank initially included a $6 million
term loan and a $3 million revolving line of credit. Principal payments of
$300,000 are payable quarterly, commencing June 15, 1996 through March 15, 2001.
On May 31, 1996, the Bank Credit Facility was amended and restated to increase
the term loan facility to $16.0 million. The additional $10 million advancing
term loan is to be utilized to fund acquisitions. Additional advances under the
term loan are repayable in quarterly installments commencing on September 15,
1996. The term loans bear interest at variable rates which are based upon (a)
either (i) NationsBank's base rate or (ii) LIBOR plus (b) a margin which varies
according to (1) the ratio of
38
<PAGE>
the Company's funded debt to EBITDA, each as defined in the Bank Credit
Facility, (2) the type of loan (i.e. base rate or LIBOR loan) and (3) whether
the loan is a term loan, revolving credit loan or advancing term loan. As of
June 30, 1996, the Company had borrowed $3,950,000 of this facility to fund the
Florida and Tennessee acquisitions. In August 1996, the Company borrowed an
additional $2.1 million under the advancing term loan to fund the acquisition of
Horizon Dental Centers. The $3.0 million revolving line of credit is available
to be used for working capital requirements and acquisitions. It bears interest
at the same rate as the term loan and expires June 30, 1997. A commitment fee is
payable quarterly at rates ranging from 0.25% to 0.5% of the unused amounts for
such quarter. As of October 15, 1996, there was $1.8 million available under the
revolving line of credit. The Bank Credit Facility is collateralized by
substantially all of the Company's assets and is personally guaranteed by Jack
H. Castle, Jr. The Company intends to repay approximately $6.2 million of the
advancing term loan from the proceeds of this offering, and will have
approximately $5.4 million remaining outstanding under the term loan.
On December 19, 1995, the Company issued $7.5 million in Senior
Subordinated Notes to the Pecks Investors. Interest is payable quarterly in
arrears with principal payable in two installments of $3.75 million each on
December 18, 2001 and 2002. In conjunction with the placement of the Senior
Subordinated Notes, the Company issued 1,244,737 shares of Series A Convertible
Preferred Stock to the Pecks Investors. The Series A Convertible Preferred Stock
is mandatorily redeemable at the holders' option upon a change of control in the
Company's ownership, or after December 18, 2001, if no secondary market exists
for the Series A Convertible Preferred Stock. The Series A Convertible Preferred
Stock is convertible into 1,244,737 shares of Common Stock, subject to
antidilution adjustments. The holders of Series A Convertible Preferred Stock
have advised the Company that they intend to convert the Series A Convertible
Preferred Stock into Common Stock, simultaneously with, and conditioned on, the
completion of this offering. The value of the Series A Convertible Preferred
Stock, $3.1 million, has been recorded as a discount to the Senior Subordinated
Notes and is being amortized over the life of the Senior Subordinated Notes.
Upon repayment of the Senior Subordinated Notes and conversion of the Series A
Convertible Preferred Stock at the closing of this offering, the Company will
recognize an extraordinary loss of $1.9 million on the retirement of the Senior
Subordinated Notes, net of income tax effect of $1.2 million.
The Bank Credit Facility and the Securities Purchase Agreement contain
affirmative and negative covenants that require the Company to maintain certain
financial ratios, limit the amount of additional indebtedness, limit the
creation or existence of liens and set certain restrictions on acquisitions,
mergers and sales of assets. The covenants in the Securities Purchase Agreement
expire on the repayment of the Senior Subordinated Notes.
In the aggregate, for the Completed Acquisitions, the Company paid
consideration consisting of $9.3 million in cash, $4.5 million in Seller Notes
and 433,163 shares of Common Stock. An aggregate of $943,363 of the Seller Notes
is convertible into Common Stock at a conversion price of $6.75 per share,
subject to antidilution adjustments and automatic annual increase in conversion
price. The Company also assumed debt of approximately $600,000 consisting mostly
of capital lease obligations. The cash portion of the Pending Acquisitions will
be funded with the proceeds of this offering and will consist of approximately
$27.3 million. The Company will also assume long-term debt obligations of
$736,000 in connection with the Arkansas Acquisition and the Austin Acquisition.
The Company intends to acquire the assets of additional dental practices
and to fund this growth, in part, with existing cash, cash flow from operations,
proceeds from this offering, seller financing and borrowings under the Bank
Credit Facility. The Company is presently negotiating with NationsBank to
increase the total amount available under the Bank Credit Facility to $25
million following completion of this offering, which would result in the Company
having borrowing availability of approximately $19.6 million. The Company
believes it will be able to fund its acquisition, expansion and working capital
needs for the next 18 months through use of its existing cash resources, cash
flow from operations, proceeds from this offering and the Bank Credit Facility.
Thereafter, the Company may raise capital through the issuance of additional
debt or the issuance of securities in public or private transactions to fund
future expansions. There can be no assurance that NationsBank will agree to
increase the amount available under the Bank Credit Facility or that acceptable
financing for future acquisitions or expansion of existing dental networks can
be obtained. See "Unaudited Pro Forma Combined Financial Information" for
additional information concerning the effects on the financial condition of the
Company of the net proceeds of this offering.
39
<PAGE>
BUSINESS
OVERVIEW
The Company develops and operates integrated dental networks through
affiliations with general, orthodontic and multi-specialty dental practices in
the United States. The Company currently conducts operations in the states of
Texas, Florida and Tennessee and has entered into definitive agreements to
acquire certain assets of and manage dental practices headquartered in Long
Island, New York, serving the New York metropolitan area, and Little Rock,
Arkansas, with offices in Arkansas, Oklahoma and Louisiana, and a letter of
intent to acquire certain assets of and manage a dental practice located in
Austin, Texas which the Company believes will complement its existing operations
in Austin, Texas. The Company establishes integrated dental networks through
affiliations with dental practices providing quality care in selected markets
across the United States with a view to achieving broad geographic coverage
within those markets. The Company seeks to achieve operating efficiencies by
consolidating and integrating affiliated practices into regional networks,
realizing economies of scale in such areas as marketing, administration and
purchasing and enhancing the revenues of its affiliated dental practices by
increasing both patient visits and the range of specialty services offered. As
of October 15, 1996, the Company provided management services to 35 dental
centers with approximately 85 affiliated dentists, orthodontists and other
dental specialists. Upon consummation of the Pending Acquisitions, the Company
will manage 60 dental centers with approximately 225 affiliated dentists,
orthodontists and other dental specialists.
The Company was formed in 1981 by Jack H. Castle, D.D.S. and Jack H.
Castle, Jr., as a single location, multi-specialty dental practice in Houston,
Texas. From 1982 through October 15, 1996, the Company expanded to a total of
nine locations with 35 dentists in the Houston metropolitan area. During this
period the Company developed, implemented and refined the integrated dental
network approach which it intends to utilize as a basis for its national
expansion.
The Company's objective is to make each of its dental networks the leading
group dental care provider in each market it serves. Since its formation, the
Company has applied traditional retail principles of business and marketing
techniques to the practice of dentistry, including locating practices in
high-profile locations, offering more affordable fees and payment plans,
expanding the range of services offered, increasing market share through
aggressive advertising and offering extended office hours. By using the Castle
Dental Centers' approach to managing affiliated dental practices, the Company
believes it will enable affiliated dentists, orthodontists and other dental
specialists to focus on delivering quality patient care and to realize
significantly greater productivity than traditional individual and small-group
dental practices.
The Company believes that the provision of a full range of dental services
through an integrated network is attractive to managed care payors and intends
to continue to pursue managed care contracts. The Company currently maintains an
aggregate of ten capitated contracts and preferred provider arrangements
covering approximately 21,000 members and, upon consummation of the New York
Acquisition, the Company will have an aggregate of 60 capitated contracts and
preferred provider arrangements covering approximately 58,000 members. The
Company believes that the continued development of its networks will assist it
in negotiating national and regional capitated arrangements with managed care
payors or other arrangements.
The Company intends to utilize the practice management principles employed
in its Houston operations to establish a consistent national identity for its
business. Moreover, the Company believes that its experience and expertise in
managing multi-specialty dental group practices, as well as the development of
name recognition associated with the name "Castle Dental Centers," will
provide its affiliated dental practices with a competitive advantage in
attracting and retaining patients and realizing practice efficiencies.
There presently are nine Castle Dental Centers operating in the Houston,
Texas area and four additional centers in Houston in various stages of
development. In May 1996, the Company acquired the assets of and entered into
long-term management agreements with 1st Dental Care, P.A., a dental practice
with 12 locations in the Tampa/Clearwater, Florida area, and Mid-South Dental
Centers, P.C., a dental
40
<PAGE>
practice with six dental centers in various locations in Tennessee. In August
1996, the Company increased its dental practices under management in Texas by
acquiring the assets of Horizon Dental Centers, a dental practice with four
dental centers in Fort Worth, Texas and four dental centers in Austin, Texas.
The Company has entered into definitive agreements to acquire certain
assets of and enter into long-term management agreements with American Dental
Centers, a dental practice based in Long Island, New York with 12 dental centers
in the New York metropolitan area, and United DentalCare, a dental practice
based in Little Rock, Arkansas that operates nine dental centers in Arkansas,
Oklahoma and Louisiana, and a letter of intent to acquire certain assets of and
enter into a long-term management agreement with Southwest Dental Associates, a
dental practice based in Austin, Texas that operates four dental centers in the
Austin, Texas metropolitan area. The New York Acquisition is expected to close
contemporaneously with, and is mutually conditioned on, the closing of this
offering, and the Arkansas Acquisition and the Austin Acquisition are expected
to close within 30 days of the closing of this offering.
INDUSTRY BACKGROUND
Dental care services in the United States are generally delivered through a
fragmented system of local providers, primarily sole practitioners, or small
groups of dentists, orthodontists or other dental specialists, practicing at a
single location with a limited number of professional assistants and business
office personnel. According to the American Dental Association 1995 Survey of
Dental Practice ("ADA Survey"), there were approximately 150,800 actively
practicing dental professionals in the U.S., of which approximately 8,900 were
practicing orthodontists. Nearly 81% of the nation's private practitioners work
either as sole practitioners or in a practice with one other dentist. The
balance of these dentists practice in about 4,700 groups of three or more
dentists. However, dental, orthodontic and other specialty practices have
followed the trend of the health care industry generally and are increasingly
forming larger group practices.
The annual aggregate domestic market for dental services is estimated to be
approximately $46.5 billion for 1995, representing approximately 4.2% of total
health care expenditures in the United States, and is projected to reach $79.1
billion by 2005. Within the total market for dental services in the United
States, there are, in addition to general dentistry, a number of specialties,
including orthodontics (the straightening of teeth and remedy of occlusion),
periodontics (gum care), endodontics (root canal therapy), oral surgery (tooth
extraction) and pedodontics (care of children's teeth). The dental services
market has grown at a compound annual growth rate of approximately 8.0% from
1980 to 1995, and is projected to grow at a compound annual growth rate of
approximately 6.0% through the year 2005. In contrast to other health care
expenditures, dental services are primarily paid for by the patient. According
to the U.S. Department of Health and Human Services, in 1995, consumer
out-of-pocket expenditures accounted for 53% of the payment for dental services,
compared to 19% for other medical services.
The Company believes that the growth in the dental industry has largely
been driven by four factors: (i) an increase in the availability and types of
dental insurance; (ii) an increasing demand for dental services from an aging
population; (iii) the evolution of technology which makes dental care less
traumatic; and (iv) an increased focus on preventive and cosmetic dentistry.
Concerns over the accelerating cost of health care have resulted in the
increasing importance of managed care in the dental industry. Managed care
typically involves a third party (frequently the payor) assuming responsibility
for ensuring that health care is provided in a high-quality, cost-effective
manner. According to industry sources, approximately 18.6% of the estimated
118.5 million people covered by dental benefits in 1995 was enrolled in managed
care programs. It is estimated that managed care's penetration of this group
will increase to 35% of the 131 million people expected to be covered by dental
benefits in the year 2000. Enrollment in managed dental care plans, according to
the National Association of Dental Plans, is estimated to have grown from 7.8
million patients in 1990 to 22.8 million patients in 1995.
The Company believes that the provision of dental, orthodontic and other
specialty care will follow the pattern set by other segments of the health care
industry, moving away from the sole practitioner model to a
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group practice environment in which a separate professional management team
handles personnel, management, billing, marketing and other business functions.
The trends which are leading dentists to affiliate with dental practice
management companies include: (i) the increasingly capital intensive nature of
acquiring and maintaining state-of-the-art dental equipment, laboratory and
clinical facilities; (ii) the growing need to develop and maintain specialized
management information and billing systems to meet the increasing demands of
payors; and (iii) the increasingly more complicated, competitive and regulated
business environment for dentists.
BUSINESS STRATEGY
The Company's strategy is to develop integrated networks for the provision
of dental services through practice affiliations that provide quality,
cost-effective dental care in target markets. Key elements of this strategy are
to:
PROVIDE HIGH-QUALITY, COMPREHENSIVE, ONE-STOP FAMILY DENTAL HEALTH
CARE. The prototypical Castle Dental Center provides general dentistry
as well as a full range of dental specialities (including orthodontics,
pedodontics, periodontics, endodontics, oral surgery and implantology),
thereby allowing the majority of specialty referrals to remain in-house
within the Company's network of facilities. By bringing together
multi-specialty dental services within a single practice, the Company is
able to realize operating efficiencies and economies of scale and to
promote increased productivity, higher utilization of professionals and
facilities, and the sharing of dental specialists among multiple
locations. The Company's practice model also incorporates quality
assurance and quality control programs, including the establishment of
committees and policy boards to oversee the clinical aspects of the
provision of dental services, peer review and continuing education and
technique enhancement. The Company believes that its multi-specialty
strategy significantly differentiates it from both individual and
multi-center practices that typically offer only general dentistry,
orthodontics or other single specialty dental services.
DEVELOP COMPREHENSIVE DENTAL NETWORKS IN TARGET MARKETS. The Company
intends to build its networks through acquisition of existing practices
and DE NOVO development of additional practices within target markets.
The Company seeks to consolidate and integrate its affiliated practices
to establish regional dental care networks. The Company believes this
network system will enable it to reduce the operating costs of its
affiliated practices by centralizing certain functions such as
telemarketing and advertising, billing and collections, payroll and
accounting and by negotiating regional and national contracts for
supplies, equipment, services and insurance. Once practice affiliations
are established in a market, the Company seeks to assist the affiliated
practices in expanding its range of services to make available specialty
dental services not previously offered.
APPLY TRADITIONAL RETAIL PRINCIPLES OF BUSINESS TO DENTAL CARE. The
Company believes it can enhance revenues and profitability by applying
traditional retail principles of business to the provision of dental
services in its target markets. These principles include professionally
produced broadcast and print advertisements targeting specific
audiences, and extended hours of operation which are convenient for
patients, including weekend and evening hours. As part of its retail-
oriented strategy, the Company will seek to establish or, where
appropriate, relocate each Castle Dental Center in a convenient location
in or near a high-profile neighborhood retail area and utilize
innovative sales and marketing programs designed to achieve strong name
recognition and increase patient visits. In addition, the Company
stresses the breadth and affordability of its services and works closely
with patients to establish treatment schedules and affordable payment
plans tailored to the patients' needs.
MARKET ITS NETWORKS TO MANAGED CARE ENTITIES. The Company believes that
managed care will play an increasing role in the provision of dental
services and therefore intends to market the services of its dental
practice networks to the managed care community. The Company believes
that contracting with managed care entities will facilitate entry into
new markets and the
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expansion of existing networks by providing a source of patients to
dentists with whom the Company is seeking to affiliate. In addition,
such contracts, including capitated contracts, enable the Company to
leverage its infrastructure and marketing efforts by increasing patient
visits.
DENTAL NETWORK DEVELOPMENT
The Company seeks to build its dental networks through acquisition of
existing dental practices and the DE NOVO development of dental practices in
high-profile retail environments.
ACQUISITION CRITERIA
The Company's acquisition strategy is to identify successful group dental
practices in its target markets, acquire certain assets of the identified
practices, enter into long-term management services agreements, and utilize
these core practices as a base from which to expand within the target markets.
Prior to entering any market, the Company considers such factors as population,
demographics, market potential, competitive environment, supply of available
dentists, dental regulatory environment, patient-provider ratios, advertising
costs and the economic condition of the local market. Core acquisition
candidates are successful group dental practices that the Company believes are
leaders in their regional markets. Subsequent acquisitions target practices that
strategically complement the core practices within a market. In considering
acquisitions, the Company evaluates qualitative issues such as the dental
professionals' qualifications, experience and reputation in the local
marketplace and their operating histories, as well as the ability to demonstrate
potential for revenue growth and continued profitability. The Company has
identified a substantial number of individual and group dental practices that
meet its acquisition criteria.
COMPLETED ACQUISITIONS
The following table describes acquisitions completed as of October 15,
1996;
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
AFFILIATED DENTAL PRACTICE PRINCIPAL LOCATIONS CENTERS DENTISTS*
- ---------------------------------------- ------------------------------ --------- ---------
<S> <C> <C> <C>
1st Dental Care, P.A.................... Clearwater/Tampa, Florida 12 16
Mid-South Dental Nashville, Tennessee 6 17
Centers, P.C.......................... Chattanooga, Tennessee
Horizon Dental Centers.................. Austin and Fort Worth, Texas 8 20
</TABLE>
- ------------
* Includes full-time and part-time dentists.
The aggregate consideration paid by the Company for the Completed
Acquisitions described above consists of approximately $9.3 million in cash,
$4.5 million in Seller Notes and 612,243 shares of the Company's Common Stock.
An aggregate of $943,363 of the Seller Notes is convertible into Common Stock at
a conversion price of $6.75 per share, subject to antidilution adjustments and
automatic annual increase in conversion price. An aggregate of 75,000 shares of
Common Stock is being held in escrow in connection with the acquisition of
Horizon Dental Centers, which shares will be released if certain earnings
milestones are met.
The contractual arrangements pursuant to which the Completed Acquisitions
were made include representations and warranties from the sellers regarding the
assets being acquired, and employment agreements containing noncompetition
provisions with the former owners of such practices. The Common Stock issued in
such transactions has certain contractual registration rights which may be
exercised in future offerings of Common Stock by the Company. See "Description
of Capital Stock -- Registration Rights."
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PENDING ACQUISITIONS
The following table describes acquisitions pending as of October 15, 1996.
The consummation of the New York Acquisition is a condition to the closing of
this offering. The consummation of the Arkansas Acquisition or the Austin
Acquisition is not a condition to the closing of this offering.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
AFFILIATED DENTAL PRACTICE PRINCIPAL LOCATIONS CENTERS DENTISTS*
- ---------------------------------------- ------------------------------ --------- ---------
<S> <C> <C> <C>
American Dental Centers................. New York, New York 12 119
United DentalCare....................... Little Rock, Arkansas 9 11
Southwest Dental Associates, L.C........ Austin, Texas 6 16
</TABLE>
- ------------
* Includes full-time and part-time dentists.
The New York Acquisition will close contemporaneously with and is mutually
conditioned on the closing of this offering. American Dental Centers has offices
throughout the New York metropolitan area and is a party to an aggregate of over
50 capitated contracts and preferred provider arrangements which account for
over 70% of its total revenues. The purchase price for the New York Acquisition
is $20.0 million in cash and $5.0 million in Common Stock valued at the initial
public offering price. On the consummation of the Company's acquisition of
American Dental Centers, Jules V. Lane D.D.S., the founder of American Dental
Centers, will join the Company's Board of Directors and will enter into a three-
year employment agreement with the Company pursuant to which Dr. Lane will
remain active in the management of and strategic planning for American Dental
Centers.
Dr. Lane is also the owner of AMLI which markets preferred provider
programs, of which American Dental Centers is a significant provider. At the
closing of the New York Acquisition, the Company will enter into certain
contractual arrangements with AMLI which will provide that in markets in the
State of New York served by the dental practices managed by the Company (i) AMLI
and the Company will each include information regarding the programs and
services of the other in their respective marketing materials, (ii) AMLI will
maintain preferred provider relationships with dental practices managed by the
Company and offer such dental practices as preferred providers to AMLI
policyholders and other covered parties and (iii) AMLI and the Company will
share certain facilities and personnel. Each party has a right of first refusal
to extend such arrangements to states other than New York.
The Company has entered into a definitive agreement with respect to the
Arkansas Acquisition and a letter of intent with respect to the Austin
Acquisition. Both the Arkansas Acquisition and the Austin Acquisition are
expected to close within 30 days of the closing of this offering but neither is
a condition to the closing of this offering. The purchase price for the Arkansas
Acquisition is $2.6 million in cash and 185,000 shares of Common Stock and the
purchase price for the Austin Acquisition is $4.8 million in cash and $1.6
million in Common Stock, valued at the initial public offering price. In each of
the Arkansas Acquisition and the Austin Acquisition, additional cash
consideration will be paid if the acquired practice achieves specified operating
results subsequent to the completion of the transaction.
The contractual arrangements pursuant to which the Pending Acquisitions
will be made include representations and warranties from the sellers regarding
the assets being acquired and employment or consulting agreements containing
noncompetition provisions with the former owners of such practices. The Common
Stock to be issued in the Pending Acquisitions will have certain contractual
registration rights which may be exercised in future offerings of Common Stock
by the Company. See "Description of Capital Stock -- Registration Rights."
AFFILIATION AND INTEGRATION OF DENTAL CENTERS
In affiliating with dental practices, the Company typically: (i) acquires
certain assets of the practice, and, in certain situations, laboratory or other
ancillary facilities that are either owned by or affiliated with such practice;
(ii) enters into a long-term management services agreement with such dental
practice pursuant to which the Company provides comprehensive management
services to the affiliated practice; (iii)
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requires that the affiliated dentists enter into employment agreements
containing non-compete and liquidated damages provisions; and (iv) assumes the
principal administrative, financial, marketing and general management functions
of the affiliated practice, including employment of most administrative
personnel. As soon as practicable following the acquisition of an affiliated
dental practice, when market conditions permit, the Company initiates the
process of converting the affiliated practice into a Castle Dental Center. This
process, the implementation and timing of which will vary from market to market,
typically includes the addition of specialty dental services not previously
offered by the center, implementation of retail business concepts applied by the
Company in its Houston operation, and, where appropriate, the relocation of the
center to a more desirable location.
In certain markets, the Company intends to grow through DE NOVO development
to expand in market areas that are either under-served or are otherwise
attractive market opportunities and in which there is no suitable acquisition
candidate. The Company will use its experience in building and staffing DE NOVO
dental centers in Houston, Texas for the implementation of this expansion
strategy.
MANAGEMENT SERVICES AGREEMENT
The Company has entered into a Management Services Agreement with each of
its affiliated dental practices pursuant to which the Company becomes the
exclusive manager and administrator of all non-dental services relating to the
operation of the practice. As compensation for its services under the typical
Management Services Agreement and subject to applicable law, the Company is
reimbursed for the expenses incurred by it on behalf of the managed practices
and is paid a monthly management fee. The Company anticipates that it will enter
into similar Management Services Agreements with each new affiliated dental
practice.
The amount of the management fee charged by the Company to an affiliated
dental practice is intended to reflect and is based on the fair value of the
management services rendered by the Company to the affiliated dental practice.
Typically, the Management Services Agreements provide for a management fee based
on either a percentage of the adjusted gross revenues of the affiliated dental
practice, or on a cost-plus calculation based on the cost of the services
performed by the Company on behalf of the affiliated dental practice. In
addition, in some instances the Company will receive a performance fee, based on
criteria agreed to by the Company and the affiliated dental practice. The amount
of the management fee is reviewed by the Company and the affiliated dental
practice not less frequently than annually in order to determine whether such
fee should be adjusted, up or down, to continue to reflect the fair value of the
management services rendered by the Company.
The obligations of the Company under the typical Management Services
Agreement include assuming financial and other responsibility, either on its own
or with the input and participation of the policy board of the affiliated
practice, for the following (subject to limitations imposed by applicable state
law): facilities, equipment and supplies; advertising, marketing and sales;
training and development; operations management; provision of support services;
risk management and utilization review; application and maintenance of
applicable local licenses and permits; negotiation of contracts between the
affiliated dental practice and third parties, including third-party payors,
alternative delivery systems and purchasers of group health care services;
establishing and maintaining billing and collection policies and procedures;
fiscal matters, such as annual budgeting, maintaining financial and accounting
records, and arranging for the preparation of tax returns; and maintaining
insurance. The Company does not assume any authority, responsibility,
supervision or control over the provision of dental services to patients or for
diagnosis, treatment, procedure or other health care services, or the
administration of any drugs used in connection with any dental practice.
The typical Management Services Agreement is for an initial term of 40
years, and is automatically renewed for successive five-year terms unless
terminated at least 90 days before the end of the initial term or any renewal
term. Additionally, the typical Management Services Agreement may be terminated
by the Company or the affiliated dental practice in the event of the bankruptcy
or default in the performance of the material duties of the nonterminating
party.
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DENTIST EMPLOYMENT AGREEMENTS
As a part of the process of converting an affiliated dental practice into a
Castle Dental Center, each affiliated dental practice has entered into a Dentist
Employment Agreement with each of its full-time dentists, orthodontists and
other dental specialists. The Company anticipates that this practice will
continue when market conditions permit. Although the form of contract varies
somewhat among practices and among dentists with different specialties, the
typical contract for a full-time dentist provides for a defined compensation
arrangement, including performance-based compensation and, where market
conditions and appplicable law permit, a covenant not to compete. Each full-time
dentist, whether or not a party to a Dentist Employment Agreement, is required
to maintain professional liability insurance, and mandated coverage limits are
generally at least $1.0 million per claim and $1.0 million in aggregate. In
addition, many affiliated dental practices employ part-time dentists. Not all
part-time dentists have employment agreements, but all part-time dentists are
required to carry professional liability insurance in specified amounts. Certain
full- and part-time dentists retained by the Company, particularly in the New
York market, are independent contractors and have entered into independent
contractor agreements.
OPERATIONS
CENTER DESIGN AND LOCATION
The affiliated dental practices are generally located in retail
environments. Many of the affiliated practices include semi-private general
dentistry treatment rooms, private treatment rooms and orthodontic bays.
Currently, affiliated dental practices include up to 21 treatment rooms and
range in size from approximately 2,000 square feet to approximately 6,000 square
feet.
Where an acquired practice is not able, due to limitations of floor space,
zoning or other reasons, to accommodate new services or specialists, the Company
seeks to relocate such affiliated practice to a high profile retail location as
soon as practicable. Since its formation, the Company has adapted its locations
in Houston, Texas to accommodate the full range of dental specialities. The
Company believes the application of its method of designing and locating dental
centers will facilitate the expansion of services offered by the acquired
practices.
STAFFING AND SCHEDULING
The Company believes that making its facilities available at times which
are convenient to its patients is an important element of its strategy. As a
result, the affiliated dental practices maintain extended hours of operation,
with many affiliated practices opening as early as 7:00 a.m. and closing as late
as 9:00 p.m. on weekdays and 5:00 p.m. on Saturdays. The affiliated practices
are staffed with dentists and dental assistants every day they are open, with
orthodontists and other specialists rotating among two or three centers in order
to utilize their time optimally. Each patient typically sees the same dentist or
specialist on all visits to the center. Each affiliated dental practice is also
regularly staffed with an office manager, front office staff, dental assistants
and other support staff.
The Houston dental centers are, and the prototypical dental centers, where
appropriate, will be staffed with treatment counselors who are responsible for
the non-clinical aspects of the patient's relationship with the practice. The
treatment counselor's function is (i) to put the patient at ease by acting as a
liaison between the dentist and patient and working with the patient to develop
a treatment schedule with payments tailored to the patient's needs within the
Company's established credit policies; and (ii) to maximize the dentist's time
spent with patients.
FEES AND PAYMENT PLANS
The Company believes that fees charged by its affiliated practices are
typically lower than usual and customary fees within their respective markets.
The affiliated practices generally provide a wide range of payment options,
including cash, checks, credit cards, third party insurance and various forms of
credit. In general, most general dentistry and specialty services, other than
orthodontics, are paid for by the patient, or billed to the patient's insurance
carrier, on the date the service is rendered. In some instances, the Company
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<PAGE>
will extend credit in accordance with its established credit policies. The
Company believes that its lower fees and ability to assist patients in obtaining
financing provides it with a competitive advantage compared to sole
practitioners and small group practices.
The Company's typical orthodontic payment plan consists of no initial down
payment and equal monthly payments during the term of treatment of approximately
$89 per month. After consultation with the treatment counselor at the initial
visit, the patient signs a contract outlining the terms of the treatment,
including the anticipated length of treatment and the total fees. The number of
required monthly payments is fixed at the beginning of the case and corresponds
to the anticipated number of monthly treatments. Patients are billed in advance
by the Company on a monthly basis.
SALES AND MARKETING
The Company intends to utilize the practice management principles employed
in its Houston operations to establish a consistent national identity for its
business and to utilize the "Castle Dental Centers" name and logo. When
acquired practices already have high existing name recognition within their
local markets, the Company may seek to capitalize on it and implement the Castle
model while maintaining the existing practice name. The Company applies
traditional retail principles of business to the provision of dental care. These
principles include network development, extended hours of operation, location
optimization, signage, customized treatment schedules, affordable fees and
payment plans. The Company has used both print advertising and professionally
produced broadcast advertising. It maintains a significant advertising budget
and aggressively markets the name "Castle Dental Centers" and the services it
offers to potential patients in Houston, Texas. The Company intends to use the
same aggressive marketing in its regional markets.
The Company has also established a regional telemarketing system in
Houston, Texas to field calls generated by advertising, to confirm upcoming
scheduled patient visits, to encourage patients to return for follow-up visits
and regularly scheduled six-month periodic exams. Where feasible, the Company
intends to establish additional telemarketing systems in other regional markets.
The telemarketers can enter all relevant information into the Company's
management information system for patients making appointments for an initial
visit, including pre-screening patients for insurance and other credit
information.
QUALITY ASSURANCE
Affiliated dental practices are solely responsible for all aspects of the
practice of dentistry. The Company has responsibility for the business and
administrative aspects of the practices and exercises no control over the
provision of dental services. To facilitate the execution of these separate
responsibilities and the communication between the Company and its affiliated
dental practices, the Company has established a National Operations Management
Committee, a National Dental Service Management Committee and generally
establishes policy boards in each market it enters. The respective committees
are the primary vehicles through which the Company and its affiliated dental
practices communicate, develop long-term strategic objectives and make
recommendations regarding significant capital expenditures, budgets and
acquisitions.
The Company's management structure is designed to bring to its affiliated
dental practices improvements in their recruiting and professional training. The
Company expects that the increased visibility of the Company, its national
presence, the ability to offer career paths previously unavailable to dentists
and the ability to recruit for multiple markets on a national level will give it
an advantage in recruiting and retaining dentists. In addition, the Company
believes that the ability to offer dentists in private practice the chance to
practice in an environment where they do not assume capital risks and
administrative burdens normally associated with private practice will make
joining the Company an attractive choice for private practitioners desiring to
simplify their professional lives.
The Company has named one of its most experienced affiliated dentists as
National Dental Director. This person will be responsible for the monitoring and
improvement of quality standards, the peer review process and the development of
a common materials guideline. In addition, the National Dental Director
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will coordinate development of relations with dental schools and the development
of a cross-practice training program for enhancing techniques used in the
practice of dentistry.
The Company assists affiliated dental practices in their efforts to improve
the delivery of quality dental care. The National Dental Service Management
Committee, which is comprised of the Company's leading affiliated dentists, has
been formed to identify and communicate to affiliated dentists the best
practices and protocols in dental practice areas, oversee peer review, materials
selection, continuing education, technique enhancement and specialty care.
Most affiliated dental practices have policy boards comprised of
representatives of both the Company and the affiliated dental practice. The
policy boards are responsible for developing and implementing management and
administrative policies for the overall operation of the affiliated dental
practice. Specifically, the policy board has the authority to review and approve
capital improvements and expansion, marketing and advertising, collection
policies, provider and payor relationships, strategic planning and capital
expenditures. However, in recognition of the laws and regulations applicable to
the licensure and practice of dentistry, the policy board does not make clinical
decisions, recommendations or other decisions that are required to be made by a
licensed dentist.
MANAGED CARE
Concerns over the accelerating cost of dental care have resulted in the
increasing role of managed care in the Company's strategy. As markets evolve
from traditional fee-for-service dental care to managed care, dental care
providers confront competitive pressure to provide high-quality dental care in a
cost-effective manner. Employer groups have begun to bargain collectively in an
effort to reduce the cost of dental care and to bring about greater
accountability of providers with respect to accessibility, choice of provider,
quality of care and other indicators of consumer satisfaction.
The Company believes that managed care will play an increasing role in the
provision of dental services and therefore intends to market the services of its
networks to the managed care community. A component of the Company's strategy is
to seek long-term relationships with insurance companies with a view to reducing
the Company's risk of expanding into new markets served by the insurance
companies, and permits the Company to leverage its growth by including patients
covered by managed care contracts. Moreover, the Company believes that its
managed care relationships will enhance the Company's utilization rates at
existing locations. While the laws of some states permit the Company to
participate in the negotiation by affiliated dental practices of managed care
contracts, preferred provider arrangements and other negotiated price
agreements, the affiliated dental practices are the contracting parties for all
such relationships, and the Company is dependent on its affiliated dental
practices for the success of such relationships. See "Risk Factors -- Risks
Associated with Managed Care Contracts; Capitated Fee Revenue" and
"-- Reliance on Affiliated Dental Practices."
SERVICES
The Company provides management expertise, marketing, information systems,
capital resources and acquisition services to its affiliated dental practices.
As a result, the Company is involved in the financial and administrative
management of the affiliated dental practices, including legal, financial
reporting, cash management, human resources and insurance assistance. The
Company's goals in providing such services are (i) to allow the dentists
associated with affiliated dental practices to dedicate their time and efforts
more fully to patient care and professional practice activities; (ii) to improve
the performance of affiliated dental practices in these administrative and sales
activities; and (iii) to enhance the financial return to the Company.
Aside from the centralization of functions mentioned above, the affiliated
dental practices are encouraged to administer their practices in accordance with
the needs of their specific patient populations. The practice of dentistry at
each affiliated dental practice is under the exclusive control of the dentists
who practice at such location.
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The majority of the practices whose non-dental assets are available to the
Company for acquisition are general dentistry practices. General dentistry
includes diagnostics, treatment planning, preventive care, removal of infection,
fillings, crowns, bridges, partials, dentures, and extractions, all of which are
currently being provided by the affiliated dental practices. Within its network,
the Company provides a wide range of specialty services. The Company seeks to
expand the services offered by affiliated practices beyond general dentistry to
include other dental specialty services and improve efficiency by improving
appointment availability, increasing practice visibility and assisting the
practices in adding complementary services. These complementary services include
orthodontics, periodontics (the diagnosis, treatment and prevention of infection
of the gums and supporting bone around the teeth), endodontics (the diagnosis,
treatment and prevention of infection of the oral tissues), oral surgery and
implantology (the placement of abutments (implants) in the jaw bones to support
tooth replacement). By adding these complementary services to the practice, the
affiliated dental practices will retain the majority of specialty service
referrals in-house, thereby increasing patient revenues.
MANAGEMENT INFORMATION SYSTEMS
The Company and its affiliated dental practices presently utilize various
dental practice management software systems to monitor and control patient
treatment, scheduling, invoicing of patients and insurance companies,
productivity of clinical staffs and other practice related activities. The
Company has identified the practice management software system that it currently
employs in its Houston operations as its preferred system and intends, where
appropriate, to use the Houston system as a common practice management system
for use by its affiliated practices. The Company is presently implementing a
client-server based information management system designed to enable the Company
to compare financial performance of affiliated dental practices, to track and
control costs, and to facilitate the accounting and financial reporting process
between the affiliated dental practices and corporate headquarters. The Company
intends to use its financial information system in conjunction with existing
practice management systems at the affiliated dental practices.
GOVERNMENT REGULATION
GENERAL
The practice of dentistry is highly regulated, and there can be no
assurance that the regulatory environment in which the affiliated dental
practices and the Company operate will not change significantly in the future.
In general, regulation of health care related companies also is increasing.
Every state imposes licensing and other requirements on individual dentists
and dental facilities and services. In addition, federal and state laws regulate
health maintenance organizations and other managed care organizations for which
dentists may be providers. In connection with its operations in existing markets
and expansion into new markets, the Company may become subject to compliance
with additional laws, regulations and interpretations or enforcements thereof.
The ability of the Company to operate profitably will depend in part upon the
Company and its affiliated dental practices obtaining and maintaining all
necessary licenses, certifications and other approvals and operating in
compliance with applicable health care regulations.
Dental practices must meet federal, state and local regulatory standards in
the areas of safety and health. Historically, those standards have not had any
material adverse effect on the operations of the dental practices managed by the
Company. Based on its familiarity with the operations of the dental practices
managed by the Company, management believes that it and the practices it manages
are in compliance in all material respects with all applicable federal, state
and local laws and regulations relating to safety and health.
MEDICARE AND MEDICAID FRAUD AND ABUSE
Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce, (i) the referral of a
person for services, (ii) the furnishing or arranging for the furnishing of
items or services or (iii) the purchase, lease or order or arranging or
recommending
49
<PAGE>
purchasing, leasing or ordering of any item or service, in each case,
reimbursable under Medicare or Medicaid. Because dental services are covered
under various government programs, including Medicaid, the law applies to
dentists and the provision of dental services. Pursuant to this anti-kickback
law, the federal government announced a policy of increased scrutiny of joint
ventures and other transactions among health care providers in an effort to
reduce potential fraud and abuse related to Medicare and Medicaid costs. Many
states have similar anti-kickback laws, and in many cases these laws apply to
all types of patients, not just Medicare and Medicaid beneficiaries. The
applicability of these federal and state laws to many business transactions in
the health care industry, including those intended by the Company, has not yet
been subject to judicial interpretation.
Significant prohibitions against physician self-referrals, including those
by dentists, for services covered by Medicare and Medicaid programs were
enacted, subject to certain exceptions, by Congress in the Omnibus Budget
Reconciliation Act of 1993. These prohibitions, commonly known as "Stark II,"
amended prior physician and dentist self-referral legislation known as "Stark
I" (which applied only to clinical laboratory referrals) by dramatically
enlarging the list of services and investment interests to which the referral
prohibitions apply. Effective January 1, 1995 and subject to certain exceptions,
Stark II prohibits a physician or dentist or a member of his immediate family
from referring Medicare or Medicaid patients to any entity providing
"designated health services" in which the physician or dentist has an
ownership or investment interest, or with which the physician or dentist has
entered into a compensation arrangement, including the physician's or dentist's
own group practice unless such practice satisfies the "group practice"
exception. The designated health services include the provision of clinical
laboratory services, radiology and other diagnostic services (including
ultrasound services), radiation therapy services, physical and occupational
therapy services, durable medical equipment, parenteral and enteral nutrients,
certain equipment and supplies, prosthetics, orthotics, outpatient prescription
drugs, home health services and inpatient and outpatient hospital services. A
number of states also have laws that prohibit referrals for certain services
such as x-rays by dentists if the dentist has certain enumerated financial
relationships with the entity receiving the referral, unless an exception
applies.
Noncompliance with, or violation of, the federal anti-kickback legislation
or Stark II can result in exclusion for Medicare and Medicaid programs and civil
and criminal penalties. Similar penalties are provided for violation of state
anti-kickback and self-referral laws. To the extent that the Company or any
affiliated dental practice is deemed to be subject to these federal or similar
state laws, the Company believes its intended activities will comply in all
material respects with such statutes and regulations.
STATE LEGISLATION
In addition to the anti-kickback laws and anti-referral laws noted above,
the laws of many states prohibit dentists from splitting fees with non-dentists
and prohibit non-dental entities such as the Company from engaging in the
practice of dentistry and from employing dentists to practice dentistry. The
specific restrictions against the corporate practice of dentistry, as well as
the interpretation of those restrictions by state regulatory authorities, vary
from state to state. However, the restrictions are generally designed to
prohibit a non-dental entity from controlling the professional assets of a
dental practice (such as patient records and payor contracts), employing
dentists to practice dentistry (or, in certain states, employing dental
hygienists or dental assistants), controlling the content of a dentist's
advertising or professional practice or sharing professional fees with
non-dental entities. The laws of many states also prohibit dental practitioners
from paying any portion of fees received for dental servies in consideration for
the referral of a patient. In addition, many states impose limits on the tasks
that may be delegated by dentists to dental assistants.
State dental boards do not generally interpret these prohibitions as
preventing a non-dental entity from owning non-professional assets used by a
dentist in a dental practice or providing management services to a dentist
provided that the following conditions are met: a licensed dentist has complete
control and custody over the professional assets; the non-dental entity does not
employ or control the dentists (or, in some states, dental hygienists or dental
assistants); all dental services are provided by a licensed dentist; licensed
dentists have control over the manner in which dental care is provided and all
decisions affecting the provision of dental care. State laws generally require
that the amount of a management fee be reflective of the fair market value of
the services provided by the management company and in certain states require
that any
50
<PAGE>
management fee be a flat fee or cost-plus fee based on the cost of services
performed by the Company. In general, the state dental practice acts do not
address or provide any restrictions concerning the manner in which companies
account for revenues from a dental practice subject to the above-noted
restrictions relating to control over the professional activities of the dental
practice, ownership of the professional assets of a dental practice and payments
for management services.
The Company does not control the practice of dentistry or employ dentists
to practice dentistry. Moreover, in states in which it is prohibited the Company
does not employ dental hygienists or dental assistants. The Company provides
management services to its affiliates practices, and the management fees the
Company charges for those services are consistent with the laws and regulations
of the jurisdictions in which it operates. Therefore, the Company believes it
would not be regarded as "owner," "operator" or "manager" of its
affiliated dental practices within the meaning of those terms under the state
dental practice acts.
In addition, there are certain regulatory risks associated with the
Company's role in negotiating and administering managed care contracts. The
application of state insurance laws to arrangements other than various types of
fee for service arrangements is an unsettled area of law and are subject to
interpretation by regulators with broad discretion. As the Company or its
affiliated practices contract with third-party payors, including self-insured
plans, for certain non-fee for service basis arrangements, the Company may
become subject to state insurance laws. Specifically, in some states, state
insurance regulators may determine that the Company or the affiliated dental
practices are engaged in the business of insurance, because some of the managed
care contracts to which the Company is a party contain capitation features. The
Company is reviewing, and where appropriate modifying, the terms of certain of
its capitation contracts to reduce the likelihood that they could be
characterized as insurance contracts. In the event that the Company or the
affiliated practices are determined to be engaged in the business of insurance,
the Company could be required either to seek licensure as an insurance company
or to change the form of its relationships with third-party payors, and the
Company's revenues may be adversely affected.
REGULATORY COMPLIANCE
The Company regularly monitors developments in laws and regulations
relating to dentistry. The Company may be required to modify its agreements,
operations and marketing from time to time in response to changes in the
business, statutory and regulatory environment. The Company plans 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 have a material adverse
effect on operations or profitability.
COMPETITION
The dental care industry is highly fragmented, comprised principally of
sole practitioners and group practices of dental and orthodontic services. The
dental practice management industry is subject to continuing changes in the
provision of services and the selection and compensation of providers. The
Company is aware of several groups attempting to acquire or manage dental
practices. Certain of the Company's competitors are larger and better
capitalized, may provide a wider variety of services, may have greater
experience in providing dental care management services and may have longer
established relationships with buyers of such services.
In certain markets, the demand for dental care professional personnel
presently exceeds the supply of qualified personnel. As a result, the Company
experiences competitive pressures for the recruitment and retention of qualified
dentists to deliver their services. The Company's future success depends in part
on its ability to continue to recruit and retain qualified dentists to serve as
employees or independent contractors of the affiliated dental practices. There
can be no assurance that the Company will be able to recruit or retain a
sufficient number of competent dentists to continue to expand its operations.
EMPLOYEES
As of October 15, 1996, the Company employed approximately 432
administrative and dental office personnel on a full-time or part-time basis,
and the affiliated dental practices employed approximately 73 general dentists
and 15 specialists on a full-time or part-time basis. Following consummation of
the Pending
51
<PAGE>
Acquisitions, the Company expects that approximately 350 additional people will
be employed on a full-time or part-time basis by the Company and approximately
150 people will be employed on a full-time or part-time basis by the affiliated
dental practices. In addition, as a component of its acquisition strategy, the
Company frequently enters into employment or consulting agreements with the
dentists from whom it acquires affiliated practices. The Company believes that
its relations with its employees are good. The Company believes that it may need
to hire additional personnel to accommodate the demands prompted by the
provision of services to each of the affiliated practices under the management
services agreements, as well as to pursue its growth strategies.
FACILITIES
The Company leases approximately 12,000 square feet of space for executive,
administrative, sales and marketing and operations offices in Houston, Texas.
The Company's initial lease term expires May 2000, which may be extended at the
Company's option for an additional 60 months.
All of the Company's existing centers are leased. Nine of the centers,
including seven of the American Dental Centers locations, are owned by
affiliates of the companies from whom the Company acquired affiliated dental
practices. All such facilities leased by the Company are leased on a not less
favorable to the Company than fair market value basis.
The Company intends to lease centers or arrange with third parties to
build-to-suit dental centers for lease by the Company. Certain leases provide
for fixed minimum rentals and provide for additional rental payments for common
area maintenance, insurance and taxes. The leases carry varying terms expiring
between 1996 and 2006 excluding options to renew.
The majority of all centers are located in retail locations. The Company
believes that its leased facilities are well maintained, in good condition and
adequate for its current needs. Furthermore, the Company believes that suitable
additional or replacement space will be available when required.
CORPORATE LIABILITY AND INSURANCE
The provision of dental services entails an inherent risk of professional
malpractice and other similar claims. Although the Company does not influence or
control the practice of dentistry by dentists or have responsibility for
compliance with certain regulatory and other requirements directly applicable to
dentists and dental groups, the contractual relationship between the Company and
the affiliated dental practices may subject the Company to some medical
malpractice actions under various theories, including successor liability. There
can be no assurance that claims, suits or complaints relating to services and
products provided by managed practices will not be asserted against the Company
in the future. The availability and cost of professional liability insurance has
been affected by various factors, many of which are beyond the control of the
Company. The cost of such insurance to the Company and its affiliated dental
practices may have an adverse effect on the Company's operations.
The Company requires each affiliated dental practice to maintain
comprehensive general liability and professional liability coverage covering the
practice and each dentist retained or employed by the affiliated dental
practice, which normally provide for comprehensive general liability coverage of
$1,000,000 for each occurrence and $2,000,000 annual aggregate, and professional
liability coverage of not less than $500,000 for each occurrence and $1,500,000
annual aggregate.
The Company maintains other insurance coverages including general
liability, property, business interruption and workers' compensation, which
management considers to be adequate for the size of the Company and the nature
of its business.
LITIGATION
The Company and the affiliated dental practices are parties to various
lawsuits from time to time in the ordinary course of their respective
businesses. Management does not believe that any of the claims currently
outstanding would have a material adverse effect on the Company's business if
determined adversely to the Company or an affiliated dental practice, as the
case may be.
52
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
Directors, executive officers and significant employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- ---- ---------------------------------------------------------------
<S> <C> <C>
Jack H. Castle, Jr...................... 41 Chairman, Chief Executive Officer and Director
Seth L. Miller.......................... 38 President and Chief Operating Officer
John M. Slack........................... 48 Vice President, Chief Financial Officer and Secretary
Judith A. Dolifka....................... 37 Controller
Stephen L. Clayton, D.D.S............... 42 National Dental Director
G. Powell Bilyeu, D.D.S................. 65 Regional Director of Patient Care
Lester B. Greenberg, D.D.S.............. 62 Regional Director of Patient Care
Jules V. Lane D.D.S.*................... 66 Regional Director of Patient Care and Director
Jack H. Castle, D.D.S................... 74 Director
Robert J. Cresci........................ 52 Director
Bannus B. Hudson........................ 50 Director
G. Kent Kahle........................... 45 Director
Emmett E. Moore**....................... 55 Director
Elizabeth A. Tilney..................... 39 Director
Louis A. Waters**....................... 58 Director
</TABLE>
- ------------
* Dr. Lane has agreed to become a Director of the Company upon the closing of
the New York Acquisition.
** Mr. Moore and Mr. Waters have agreed to become Directors of the Company upon
the closing of the offering.
The following is a biographical summary of the experience of the Directors
and executive officers:
JACK H. CASTLE, JR. was a co-founder of the Company in 1981 and has served
as President and Chief Executive Officer since 1990. He became the Company's
Chairman in August 1996. Mr. Castle received a B.A. from Rollins College and a
Masters of Business Administration from Wake Forest University. Mr. Castle is
the son of Jack H. Castle, D.D.S.
SETH L. MILLER joined the Company in April 1996 as Executive Vice President
and Chief Operating Officer. He became President and Chief Operating Officer in
August 1996. From 1991 until 1995 he was employed by The United States Shoe
Corporation. In 1994 and 1995, he served as the Chief Financial Officer of the
Sight & Save division of LensCrafters, a subsidiary of The United States Shoe
Corporation. From 1989 until 1991, Mr. Miller was Vice President -- Marketing &
Operations of a multi-location Blockbuster Video franchise. Mr. Miller has a
Masters of Business Administration from Harvard Business School and a B.A. in
Economics from Tufts University.
JOHN M. SLACK joined the Company in December 1995 as Vice President and
Chief Financial Officer. From November 1994 through November 1995, he served as
Vice President and Chief Financial Officer of Team, Inc. an American Stock
Exchange environmental services company. From 1985 through 1994, Mr. Slack was
Vice President, Chief Financial Officer of Serv-Tech, Inc., a public company
traded on the Nasdaq Stock Market's National Market. Mr. Slack received a B.S.
in international economics from Georgetown University in 1969.
JUDITH A. DOLIFKA joined the Company in May 1996 as Controller. From April
1990 to April 1996 she was the Assistant Controller and Manager of Financial
Reporting for Serv-Tech, Inc. From 1982 until 1990 Ms. Dolifka worked in public
accounting most recently as an audit manager with Coopers & Lybrand, L.L.P. Ms.
Dolifka received a B.B.A. in accounting from Ball State University and is a
Certified Public Accountant in the State of Texas.
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<PAGE>
STEPHEN L. CLAYTON, D.D.S. has been the clinical director of the Company
since February 1988 and has served as National Dental Director of the Company
since July 1996. From 1980 to 1988, Dr. Clayton engaged in private practice in
Texas and Oklahoma. Dr. Clayton received his Doctor of Dental Surgery from the
University of Texas Dental Branch at San Antonio in 1980. Dr. Clayton is a
member of the Greater Houston Dental Society, Texas Dental Association, American
Dental Association and the Academy of General Dentistry.
G. POWELL BILYEU, D.D.S. has been a Regional Director of Patient Care of
the Company since May 1996, following the Company's acquisition of Mid-South
Dental Centers, P.C. Dr. Bilyeu founded Mid-South Dental Centers, P.C. in 1978
and served as president and owner until 1996. Dr. Bilyeu graduated from the
University of Tennessee College of Dentistry in 1962.
LESTER B. GREENBERG, D.D.S. has been a Regional Director of Patient Care of
the Company since May 1996, following the Company's acquisition of 1st Dental
Care. From 1980 to 1996, Dr. Greenberg was the founder, Chief Executive Officer
and owner of 1st Dental Care, a Florida dental practice. Dr. Greenberg received
a Doctor of Dental Surgery from the University of Tennessee College of Dentistry
in 1957.
JULES V. LANE D.D.S., the founder and owner of American Dental Centers, has
also agreed to serve as a Director of the Company upon the closing of the New
York Acquisition. He is also the founder and owner of J. V. Lane Professional
Corporation, a New York professional corporation, and American Medical and Life
Insurance Company, a New York based insurance company. Dr. Lane served as an
Assistant Clinical Professor at the Albert Einstein College of Medicine for over
twenty years and was an Attending Visiting Surgeon at the Bronx Municipal
Hospital Center. Dr. Lane received a Doctorate of Dental Surgery from the New
York University College of Dentistry in 1952 and completed a post graduate
internship at Columbia Presbyterian Hospital.
JACK H. CASTLE, D.D.S. has served as a Director of the Company since 1981
and as Chairman of the Company from 1981 until August 1996. He is also the sole
owner of Jack H. Castle, D.D.S., P.C., a dental practice managed by the Company.
Prior to co-founding the Company, Dr. Castle operated a single location dental
practice. Dr. Castle graduated from the University of Houston in 1943 and
received a Doctorate of Dental Surgery from the University of Texas Health
Science Center in Houston in 1945. He served in the United States Navy from 1947
to 1949. Dr. Castle is the father of Jack H. Castle, Jr.
ROBERT J. CRESCI has been a Director of the Company since December 1995.
Mr. Cresci has been a Managing Partner of Pecks Management Partners Ltd., an
investment management firm, since September 1990. Mr. Cresci graduated from The
United States Military Academy at West Point and received a Masters of Business
Administration from Columbia University Graduate School of Business. Mr. Cresci
currently serves on the boards of Bridgeport Machines, Inc., Serv-Tech, Inc.,
EIS International, Inc., Sepracor, Inc., Vestro Natural Foods, Inc., Olympic
Financial, Ltd., GeoWaste, Inc., Hitox, Inc., Natures Elements, Inc., Garnet
Resources Corporation, HarCor Energy, Inc., Meris Laboratories, Inc. and several
private companies.
BANNUS B. HUDSON has been a Director of the Company since August 1996. Mr.
Hudson has been President and Chief Executive Officer of Equity Enterprises,
Inc., a consulting firm, since 1995. From 1985 to 1995, Mr. Hudson held various
positions with The United States Shoe Corporation, most recently as President
and Chief Executive Officer. Mr. Hudson was President and Chief Executive
Officer of Lenscrafters from 1987 to 1990. From 1968 to 1985, Mr. Hudson held
various positions with The Procter and Gamble Company. Mr. Hudson has a B.S. in
Mechanical Engineering from University of Kansas. He currently serves on the
boards of Ohio National Financial Services, Structural Dynamics Research
Corporation, FRCH Design Worldwide and USBiomaterials.
G. KENT KAHLE has been a Director of the Company since December 1995. He
has been a Managing Director of The GulfStar Group, Inc., an investment banking
firm, since 1990. From 1982 to 1990 Mr. Kahle held various positions with Rotan
Mosle, Inc. most recently as Senior Vice President and Director. Mr. Kahle has a
Masters of Business Administration from The Wharton School of the University of
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<PAGE>
Pennsylvania and an A.B. from Brown University. He currently serves on the
boards of Total Safety, Inc. and Chase Telecommunications, Inc.
EMMETT E. MOORE has agreed to serve as a Director of the Company upon the
closing of this offering. Mr. Moore has been the Chairman of the Board and Chief
Executive Officer of Physicians Resource Group, Inc., a publicly-traded company
("PRG"), since September 1995, and served as the President and a director of
PRG since April 1995. From August 1983 to December 1994, Mr. Moore served in
various capacities with Medical Care America, Inc. ("Medical Care"), a
publicly-traded company that owned and operated outpatient surgery centers and
was acquired in September 1994 by Columbia/HCA Healthcare Corporation. Mr. Moore
received B.B.S., J.D. and M.P.A. degrees from the University of Texas, and is a
certified public accountant. Mr. Moore also serves on the board of AmeriGyn,
Inc., a private company.
ELIZABETH A. TILNEY has been a Director of the Company since August 1996.
Ms. Tilney has been Senior Vice President, Corporate Marketing and Resources, of
Enron Corp. since March 1996, where she is responsible for human resources,
corporate marketing and investor relations. From 1987 to 1996, Ms. Tilney was
with Russell Reynolds Associates, an executive search firm, and was most
recently an Executive Director. Ms. Tilney was an account manager associated
with Ogilvy & Mather Advertising in New York and Houston from 1983 to 1987. Ms.
Tilney has a Masters of Business Administration from The Amos Tuck School of
Business Administration of Dartmouth College and a B.A. from the University of
Virginia.
LOUIS A. WATERS has agreed to serve as a Director of the Company upon the
closing of this offering. Mr. Waters co-founded Browning-Ferris Industries, Inc.
("BFI") in 1969 and has served in various capacities with BFI since that time.
Mr. Waters is currently Chairman of the Finance Committee of BFI and has been
the Chairman of the Board and Chief Executive Officer of BFI International, Inc.
since early 1992. Mr. Waters received a B.A. and B.S. in mechanical engineering
from Rice University and an M.B.A. from Harvard Business School.
All Directors of the Company currently hold office for one-year terms until
the next annual meeting of stockholders of the Company and until their
successors are elected and qualified. Mr. Cresci was elected to the Board of
Directors pursuant to the terms of the Securityholders Agreement (as hereinafter
defined) pursuant to which the Pecks Investors have the right to have one
designee nominated to the Board of Directors for so long as 20% of the Series A
Convertible Preferred Stock or 20% of the Common Stock issuable on conversion of
the Series A Convertible Preferred Stock is held by the Pecks Investors. See
" -- Securityholders Agreement."
Pursuant to the asset purchase agreement entered into in connection with
the New York Acquisition; the Company has agreed to use its best efforts to
nominate and elect Dr. Lane to the Board of Directors of the Company for the
longer of three years or the period of time that Dr. Lane remains an employee of
the Company on substantially the same terms and conditions as his initial
employment relationship.
Officers are appointed by and serve at the discretion of the Board of
Directors. The officers will devote substantially all of their business time to
the business and affairs of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently has the following committees:
AUDIT COMMITTEE. The members of the Audit Committee of the Company's Board
of Directors are Messrs. Cresci, Kahle and Hudson, all of whom are independent
directors. The Audit Committee makes recommendations concerning the engagement
of independent public accountants, reviews with the independent public
accountants the plans for and results of the audit, approves professional
services provided by the independent public accountants, reviews the
independence of the independent public accountants, considers the range of audit
and non-audit fees, reviews the non-audit services performed by the independent
accountants and reviews the adequacy of the Company's internal accounting
controls.
COMPENSATION COMMITTEE. The members of the Compensation Committee of the
Company's Board of Directors are Mr. Cresci, Mr. Kahle and Ms. Tilney. The
Compensation Committee establishes a general compensation policy for the Company
and approves increases both in directors' fees and in salaries paid to
55
<PAGE>
officers and senior employees of the Company. The Compensation Committee
administers all of the Company's employee benefit plans. The Compensation
Committee determines, subject to the provisions of the Company's plans, the
directors, officers and employees of the Company eligible to participate in any
of the plans, the extent of such participation and terms and conditions under
which benefits may be vested, received or exercised. The members of the
Compensation Committee are "disinterested" within the meaning of Rule 16b-3
promulgated under the Securities Exchange Act of 1934.
COMPENSATION OF DIRECTORS
Following the closing of the offering, each member of the Board of
Directors who is not an employee of the Company will receive annual compensation
of $6,000 for serving on the Board of Directors, plus a fee of $1,000 for each
Board of Directors meeting attended in person and $500 for each telephonic Board
of Directors meeting in which the Director participates. All directors receive
reimbursement of reasonable expense incurred in attending Board and committee
meetings and otherwise carrying out their duties. Following the closing of the
offering, each non-employee Director will be granted options pursuant to the
Directors' Plan. See " -- Stock Option Plans -- Directors' Stock Option Plan."
In connection with the Reorganization, the Company entered into a Deferred
Compensation Agreement with Jack H. Castle, D.D.S. pursuant to which the Company
agreed to pay Dr. Castle an aggregate of $2,630,000 payable in 20 quarterly
installments beginning March 1996. Proceeds of this offering will be used to
discharge the Company's remaining obligations under the Deferred Compensation
Agreement. See "Use of Proceeds." In connection with the purchase of the stock
of Jack H. Castle, D.D.S., Inc., the Company also entered into a Management
Services Agreement with Jack H. Castle, D.D.S., P.C., a professional corporation
of which Dr. Castle is the sole owner. Pursuant to the Management Services
Agreement, Dr. Castle receives an annual payment of $100,000 for services
performed in connection therewith. See "Certain Transactions."
EXECUTIVE COMPENSATION AND EMPLOYMENT ARRANGEMENTS
None of the Company's senior executive officers other than Dr. Lane has or
will have an employment agreement or is or will otherwise be subject to a
covenant not to compete or other agreement which would restrict his ability to
compete against the Company should his employment by the Company be terminated
for any reason.
On the closing of the New York Acquisition, the Company will enter into a
three-year employment agreement with Dr. Lane pursuant to which Dr. Lane will
agree to participate in the development and implementation of the strategic plan
of the Company for specified markets in the New York area, the analysis of
markets selected by the Company, the identification of acquisition candidates,
the acquisition of dental practices and the development of new offices. Dr. Lane
will receive an annual salary of $200,000 during the term of his employment
agreement. In the employment agreement, Dr. Lane will agree not to compete with
the Company for a period of not less than two years following the termination of
his employment with the Company. The Company also has agreed to use its best
efforts to nominate and elect Dr. Lane to the Board of Directors of the Company
for the longer of three years or the period of time that Dr. Lane remains an
employee of the Company on substantially the same terms and conditions as
contemplated by his employment agreement. See "Certain Transactions."
For 1996, Jack H. Castle, Jr. receives a base salary of $300,000 plus a
guaranteed bonus of $200,000. Seth L. Miller, President and Chief Operating
Officer, joined the Company in April 1996 and receives a base annual salary of
$175,000. John M. Slack, Vice President and Chief Financial Officer, joined the
Company in December 1995, and receives a base annual salary of $120,000. Dr.
Castle receives an annual payment of $100,000 for the performance of certain
services pursuant to the Management Services Agreement between the Company and
Jack H. Castle, D.D.S., P.C. See "Certain Transactions." Messrs. Miller and
Slack have also been granted stock options under the Company's Omnibus Stock and
Incentive Plan. See "-- Stock Option Plans."
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<PAGE>
SUMMARY COMPENSATION. The following table sets forth the total
compensation paid or accrued by the Company for services rendered during the
years ended December 31, 1993, 1994 and 1995, to the Company's Chief Executive
Officer and other officers whose total 1995 salary and bonus exceeded $100,000
during such year.
ANNUAL
COMPENSATION(1)
--------------------
FISCAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION(2)
- ------------------------------------- ------- ---------- ---------------
Jack H. Castle, Jr................... 1995 $ 401,639 $ 219,132
President and Chief 1994 $ 428,956 $ 174,074
Executive Officer 1993 $ 135,808 $ 321,259
Jack H. Castle, D.D.S................ 1995 $ 327,693 $ 1,795,681
President of Jack H. Castle, 1994 $ 300,033 $ 1,245,532
D.D.S., P.C.(3) 1993 $ 282,017 $ 1,280,928
- ------------
(1) The columns for "Bonus," "Long-Term Compensation" and "Other Annual
Compensation" have been omitted because there is no compensation required
to be reported in such columns. The aggregate amount of perquisites and
other personal benefits provided to each officer listed above is less than
10% of the total annual salary and bonus of such officer.
(2) Prior to the Reorganization, significant operations of the Company were
conducted through a subchapter S Corporation. Other compensation primarily
represents distributions of profits from such corporation, as well as
amounts paid by it and the Company's predecessor for expenses of Jack H.
Castle, Jr. and Jack H. Castle, D.D.S.
(3) Compensation paid to Dr. Castle includes amounts paid by Jack H. Castle,
D.D.S., Inc., a professional corporation to which the Company provided
management services prior to its acquisition by the Company as part of the
Reorganization effected in December 1995. See "Unaudited Pro Forma Combined
Financial Information" and "Certain Transactions."
OPTION GRANTS. The Company did not issue any stock options during 1995.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors did not have a Compensation Committee during 1995.
As a result, the Board of Directors, then consisting of Jack H. Castle, Jr.,
Jack H. Castle, D.D.S. and Loretta Castle, made all decisions concerning
executive officer compensation. Loretta Castle is the mother of Jack H. Castle,
Jr. and the wife of Jack H. Castle, D.D.S.
In December 1995, the Company acquired all of the stock of Jack H. Castle,
D.D.S., Inc., a professional corporation of which Dr. Castle, a Director of the
Company, was the sole owner. In connection with that transaction, the Company
paid Dr. Castle $6,000,000 in cash and entered into a Deferred Compensation
Agreement with Dr. Castle pursuant to which the Company has agreed to pay Dr.
Castle $2,630,000 in 20 quarterly installments beginning March 1996. Proceeds of
this offering will be used to discharge the Company's obligations under the
Deferred Compensation Agreement. See "Use of Proceeds." In connection with the
purchase of the stock of Jack H. Castle, D.D.S., Inc., the Company also entered
into a Management Services Agreement with Jack H. Castle, D.D.S., P.C., a
professional corporation of which Dr. Castle is the sole owner. Pursuant to the
Management Services Agreement, Dr. Castle receives an annual payment of $100,000
for services performed in connection therewith.
The Company is party to a lease agreement with Goforth, Inc., a company
owned by Jack H. Castle, Jr., the Company's Chairman and Chief Executive
Officer. The lease agreement relates to the Castle Dental Center located at 2101
West Loop South in Houston, Texas, a 6,781 square foot free-standing building.
The Company has agreed to pay Goforth, Inc. a minimum guaranteed rental of
$12,000 per month through January 2001 and $13,200 per month from January 2001
through January 2006. The Company has also agreed to pay additional rent of
approximately $1,600 per month for insurance, taxes and common area maintenance.
The Company believes that this lease agreement is on terms no less favorable to
the Company than could have been obtained with an independent third party.
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Pursuant to a Registration Rights Agreement dated as of December 18, 1996,
the members of the Castle Family and other parties have been granted certain
registration rights by the Company with respect to the shares of Common Stock
owned by them. See "Description of Capital Stock of the Company_-- Registration
Rights," and "Certain Transactions."
STOCK OPTION PLANS
OMNIBUS STOCK AND INCENTIVE PLAN
In January 1996, the Board of Directors adopted, and the stockholders of
the Company approved, the Castle Dental Centers, Inc. Omnibus Stock and
Incentive Plan (the "Plan"). The purpose of the Plan is to advance the
interests of the Company, by providing for the acquisition of an equity interest
in the Company by its key employees, by providing additional incentives and
motivation toward superior performance by key employees of the Company, and by
enabling the Company to attract and retain the services of key employees on
whose judgment, interest and special effort the successful conduct of the
Company's operations is largely dependent. The aggregate amount of Common Stock
with respect to which grants under the Plan may be made may not exceed 1,000,000
shares.
The Plan provides for the grant of incentive stock options ("ISOs") as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), nonqualified stock options and shares of restricted stock
(collectively, the "Awards"). Following the consummation of this offering, the
Plan will be administered by the Compensation Committee. Prior to the formation
of the Compensation Committee, the Plan was administered by the Company's full
Board of Directors. The Compensation Committee has, subject to the terms of the
Plan, the sole authority to grant Awards under the Plan, to construe and
interpret the Plan and to make all other determinations and take any and all
actions necessary or advisable for the administration of the Plan.
All of the employees, Directors, consultants and former consultants of the
Company or its affiliates are eligible to receive Awards under the Plan. In
addition, key employees of entities managed by the Company may receive Awards.
Only key employees of the Company are eligible to receive ISOs. Options will be
exercisable during the period specified in each option agreement and will
generally be exercisable in installments pursuant to a vesting schedule to be
designated by the Compensation Committee. No option will remain exercisable
later than ten years after the date of grant (or five years from the date of
grant in the case of ISOs granted to holders of more than 10% of the Common
Stock). Restricted stock granted under the Plan will have such terms, conditions
and restrictions as the Compensation Committee shall determine.
The exercise price for ISOs granted under the Plan may be no less than the
fair market value of the Common Stock on the date of grant (or 110% in the case
of ISOs granted to employees owning more than 10% of the Common Stock). The
exercise price for nonqualified options granted under the Plan will be at the
discretion of the Compensation Committee.
The Company currently has granted Awards to purchase a total of
approximately 380,500 shares of Common Stock under the Plan at prices per share
ranging from $5.00 to $6.75, including stock options granted to Seth L. Miller
of 50,000 shares and to John M. Slack of 40,000 shares. At or shortly after this
offering, the Company anticipates that it will grant options to purchase
approximately 200,000 additional shares of Common Stock under the Plan at the
initial public offering price. Generally, the outstanding options are, and
options to be granted will be, exercisable one year from the date of grant as to
20% of the underlying shares, and as to an additional 20% on each of the next
four anniversaries of the date of option grant.
DIRECTORS' STOCK OPTION PLAN
In August 1996, the Board of Directors adopted the Directors' Plan. The
purpose of the Directors' Plan is to encourage ownership of Common Stock by
eligible non-employee Directors of the Company and to provide increased
incentive for such directors to render services and to exert maximum effort for
the business success of the Company. In addition, the Company believes that the
Directors' Plan will further
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strengthen the identification of directors with the stockholders. The aggregate
amount of Common Stock with respect to which grants under the Directors' Plan
may be made may not exceed 300,000 shares.
The Directors' Plan provides for the automatic grant of 25,000 nonqualified
stock options (the "Options") to non-employee Directors at the time they
become Directors. The Directors' Plan will be administered by the Compensation
Committee, which has, subject to the terms of the Directors' Plan, the sole
authority to grant Options under the Directors' Plan, to construe and interpret
the Directors' Plan and to make all other determinations and take any and all
actions necessary or advisable for the administration of the Directors' Plan.
All non-employee Directors are eligible to receive Options under the
Directors' Plan. Options will be exercisable during a ten-year period from the
date of grant of the Options and will vest based upon the number of full years
of service a non-employee Director serves on the Board of Directors as follows:
20% after one full year of service, 40% after two full years of service, 60%
after three full years of service, 80% after four full years of service and 100%
after five full years of service. No option will remain exercisable later than
ten years after the date of grant.
The exercise price for Options granted under the Directors' Plan may be no
less than the fair market value of the Common Stock on the date of grant.
The Company anticipates that prior to or upon the consummation of this
offering it will have outstanding Options to purchase a total of approximately
150,000 shares of Common Stock under the Directors' Plan at the initial public
offering price.
SECURITYHOLDERS AGREEMENT
On December 18, 1995, the Company, the Pecks Investors and the Castle
Family entered into the Securityholders Agreement (the "Securityholders
Agreement") pursuant to which (i) the Castle Family agreed not to sell or
otherwise transfer shares of Common Stock to any third party without first
offering the Pecks Investors the opportunity to participate in such sale or
transfer on a pro rata basis and on the same price and terms as those applicable
to the initiating seller and (ii) the Pecks Investors have the right to have one
designee nominated to the Board of Directors for so long as 20% of the Series A
Convertible Preferred Stock or 20% of the Common Stock issuable on conversion of
the Series A Convertible Preferred Stock is held by the Pecks Investors. The
right of the Pecks Investors to have a designee nominated to the Board of
Directors is also provided for in the Securities Purchase Agreement. The
provisions regarding Board of Director representation contained in the
Securityholders Agreement and the Securities Purchase Agreement will remain in
effect after this offering.
401(K) PLAN
The Company's 401(k) Profit Sharing Plan (the "401(k) Plan") was adopted
by the Company effective August 1, 1996. All employees of the Company are
eligible to participate in the 401(k) Plan upon the completion of six months of
service. Participants may elect to defer receipt of compensation and have such
deferred amounts contributed to the 401(k) Plan up to a maximum of 20% of
compensation, with a minimum of 1% of compensation. The Company may match
contributions made by participants under the 401(k) Plan each year in an amount
determined by the Company on a year-to-year basis and makes profit sharing
contributions to the 401(k) Plan which are allocated to each participant's
account based on the qualifying participant's compensation in relation to the
total compensation of all qualifying participants. Participants are fully vested
with respect to their contributions, while the Company's contributions are
subject to vesting on the following basis: zero for fewer than two years of
employment and 20% per year cumulatively for the third through seventh years of
employment. Participants may borrow from their accounts under the 401(k) Plan.
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CERTAIN TRANSACTIONS
Mr. Kahle, a Director of the Company, is a Managing Director of The
GulfStar Group, Inc., which has provided investment banking and advisory
services to the Company. In 1995, the Company paid $540,000 in investment
banking fees to The GulfStar Group, and issued the GulfStar Warrant for 113,158
shares of Common Stock to GulfStar Investments, Ltd. The Company has paid The
GulfStar Group, Inc. for investment banking and financial advisory services
provided to the Company in an amount equal to one percent of the total
consideration for each of the Company's acquisitions which has been consummated.
Through August 22, 1996, The GulfStar Group received approximately $195,000 in
investment banking and financial advisory fees from the Company. The Directors
of the Company other than Mr. Kahle approve the payments made to The GulfStar
Group, Inc. by the Company.
Mr. Cresci, a Director of the Company, is a Managing Partner of Pecks
Management Partners Ltd., the investment advisor to the Pecks Investors, which
hold in the aggregate 1,244,737 shares of Series A Convertible Preferred Stock
and the Senior Subordinated Notes. Pursuant to the provisions of the Securities
Purchase Agreement, for so long as certain ownership thresholds with respect to
Series A Convertible Preferred Stock or Common Stock following conversion of
Series A Convertible Preferred Stock are maintained, such investors have the
contractual right to nominate one member of the Company's Board of Directors.
See "Management -- Directors and Executive Officers." At the closing of this
offering, all of the shares of Series A Convertible Preferred Stock will be
converted into Common Stock and the Senior Subordinated Notes will be paid. See
"Use of Proceeds."
In December 1995, the Company acquired all of the stock of Jack H. Castle,
D.D.S., Inc., a professional corporation of which Dr. Castle, a Director of the
Company, was the sole owner. In connection with that transaction, the Company
paid Dr. Castle $6,000,000 in cash and entered into a Deferred Compensation
Agreement with Dr. Castle pursuant to which the Company has agreed to pay Dr.
Castle $2,630,000 in 20 quarterly installments beginning March 1996. Proceeds of
this offering will be used to discharge the Company's obligations under the
Deferred Compensation Agreement. See "Use of Proceeds." In connection with the
purchase of the stock of Jack H. Castle, D.D.S., Inc., the Company also entered
into a Management Services Agreement with Jack H. Castle, D.D.S., P.C., a
professional corporation of which Dr. Castle is the sole owner. Pursuant to the
Management Services Agreement, Dr. Castle receives an annual payment of $100,000
for services performed in connection therewith.
The Company has entered into a definitive agreement to acquire certain
assets of Jules V. Lane D.D.S. d/b/a American Dental Centers, J.V. Lane
Professional Corporation d/b/a American Dental Centers and Lisadent Corp.
(collectively, "American Dental Centers") for an aggregate consideration of
$20 million in cash and $5 million in shares of Common Stock valued at the
initial public offering price. On the consummation of the acquisition of
American Dental Centers, the Company has agreed to enter into a three-year
employment agreement with Dr. Lane containing noncompetition provisions pursuant
to which the Company will pay Dr. Lane an annual salary of $200,000. The Company
also has agreed to use its best efforts to nominate and elect Dr. Lane to the
Board of Directors of the Company for the longer of three years or the period of
time that Dr. Lane remains an employee of the Company on substantially the same
terms and conditions as contemplated by his employment agreement. The Company
will also enter into a registration rights agreement with Dr. Lane providing Dr.
Lane with certain piggyback registration rights with respect to the Common Stock
issued in connection with the acquisition. Additionally, at the closing of the
New York Acquisition, a professional corporation of which Dr. Lane is the sole
shareholder will enter into a Management Services Agreement with the Company.
Upon consummation of and as a condition to closing the New York Acquisition, the
Company will enter into an arrangement with Dr. Lane for the lease of certain
properties in the New York metropolitan area on which affiliated dental
practices are located. In addition, the Company will enter into an arrangement
with Dr. Lane which will provide for the Company's ongoing relationship with
AMLI.
The Company is party to a lease agreement with Goforth, Inc., a company
owned by Jack H. Castle, Jr., the Company's Chairman and Chief Executive
Officer. The lease agreement relates to the Castle Dental Center located at 2101
West Loop South in Houston, Texas, a 6,781 square foot free-standing building.
The
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Company has agreed to pay Goforth, Inc. a minimum guaranteed rental of $12,000
per month through January 2001 and $13,200 per month from January 2001 through
January 2006. The Company has also agreed to pay additional rent of
approximately $1,600 per month for insurance, taxes and common area maintenance.
The Company believes that this lease agreement is on terms no less favorable to
the Company than could have been obtained with an independent third party.
Pursuant to a Registration Rights Agreement dated as of December 18, 1996,
the Pecks Investors, GulfStar Investments, Ltd. and the members of the Castle
Family have been granted certain registration rights by the Company with respect
to the shares of Common Stock owned by them or acquired on conversion of Series
A Convertible Preferred Stock and exercise of the GulfStar Warrant. See
"Description of Capital Stock of the Company -- Registration Rights."
Pursuant to the Securityholders Agreement, the Pecks Investors are entitled
to certain rights with respect to their shares of capital stock. See
"Management -- Securityholders Agreement."
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of October 15, 1996, certain information
regarding the beneficial ownership of shares of Common Stock, before giving
effect to this offering and after giving effect to the sale of the Common Stock
offered hereby, by each person known by the Company to be the beneficial owner
of more than 5% of outstanding Common Stock, by each director or executive
officer of the Company and by all directors and executive officers as a group
and by each Selling Stockholder. Under the rules of the Securities and Exchange
Commission, a person is deemed to be a "beneficial owner" of a security if he
or she has or shares the power to vote or direct the voting of such security,
has or shares the power to dispose of or direct the disposition of such
security, or has the right to acquire the security within 60 days. Accordingly,
more than one person may be deemed to be a beneficial owner of the same
security. None of the options held by directors or executive officers are
exercisable within 60 days of October 15, 1996.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP NUMBER OF BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING SHARES AFTER THE OFFERING(1)
NAME AND ADDRESS OF ----------------------- TO BE SOLD ----------------------
BENEFICIAL OWNER SHARES PERCENT IN THE OFFERING SHARES PERCENT
- ---------------------------------------- ----------- -------- --------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Jack H. Castle, Jr.(2)(3)............... 2,456,000 41.9% -- 2,456,000 21.0%
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056
Jack H. Castle, D.D.S.(3)............... 1,742,000 29.7 -- 1,742,000 14.9
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056
Loretta Castle(3)....................... 1,742,000 29.7 500,000 1,242,000 10.6
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056
Castle Interests, Ltd.(3)............... 1,028,000 17.6 -- 1,028,000 8.8
Pecks Management Partners Ltd.(4)....... 1,244,737 21.3 -- 1,244,737 10.6
Seth L. Miller.......................... -- -- -- -- --
John M. Slack........................... -- -- -- -- --
G. Kent Kahle(5)........................ 113,158 1.9 -- 113,158 1.0
Robert J. Cresci(6)..................... 1,244,737 21.3 -- 1,244,737 10.6
Jules V. Lane D.D.S.(7)................. -- -- -- 500,000 4.3
Elizabeth A. Tilney..................... -- -- -- -- --
Bannus B. Hudson........................ -- -- -- -- --
Emmett E. Moore(8)...................... -- -- -- -- --
Louis A. Waters(8)...................... -- -- -- -- --
All directors and executive officers as
a group (11 persons)(9)............... 4,527,895 75.8% 500,000 5,027,895 42.6%
</TABLE>
- ------------
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) Includes 1,428,000 shares held by the Castle 1995 Gift Trust f/b/o Jack H.
Castle, Jr., of which Mr. Castle is Trustee.
(3) Includes 1,028,000 shares of Common Stock owned of record by Castle
Interests, Ltd., a Texas limited partnership of which Dr. Castle, Mrs.
Castle and Mr. Castle are the three general partners. The general partners
of Castle Interests, Ltd. cannot act to vote or dispose of shares of Common
Stock held by Castle Interests, Ltd. without the unanimous vote of all of
the general partners. Loretta Castle is the wife of Dr. Castle and the
mother of Jack H. Castle, Jr.
(4) 838,123, 240,649 and 165,965 of such shares are beneficially owned by
Delaware State Employees' Retirement Fund, Declaration of Trust for Defined
Benefit Plans of ICI American Holdings Inc. and
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
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Declaration of Trust for Defined Benefit Plans of Zeneca Holdings Inc.,
respectively (the "Pecks Investors"). Pecks Management Partners Ltd., as
investment manager for these beneficial owners, has sole investment and
voting power with respect to such shares. These shares are represented by
1,244,737 shares of Series A Convertible Preferred Stock which is
convertible into 1,244,737 shares of Common Stock. Mr. Cresci, a director of
the Company, is a Managing Partner of Pecks Management Partners Ltd. The
mailing address for Pecks Management Partners Ltd. is One Rockefeller Plaza,
New York, New York 10020. Pecks Management Partners Ltd. disclaims
beneficial ownership of such shares. Pecks Management Partners Ltd. has
advised the Company that it intends on behalf of the Pecks Investors to
convert all of the Series A Convertible Preferred Stock into Common Stock
simultaneously with, and conditioned on, the closing of this offering.
(5) Consists entirely of the beneficial ownership of shares of Common Stock
issuable on exercise of the GulfStar Warrant. Mr. Kahle is a Managing
Director of The GulfStar Group, Inc., an affiliate of GulfStar Investments,
Ltd., the holder of the GulfStar Warrant.
(6) Consists entirely of the beneficial ownership of shares of Common Stock
issuable on conversion of 1,244,737 shares of Series A Convertible Preferred
Stock beneficially owned by the Pecks Investors. Mr. Cresci is a Managing
Partner of Pecks Management Partners Ltd. See note 4 above.
(7) Represents shares to be issued in connection with the New York Acquisition.
Dr. Lane has agreed to serve as a Director of the Company upon the closing
of the New York Acquisition.
(8) Messrs. Moore and Waters have agreed to serve as Directors of the Company
upon the closing of this offering.
(9) Includes (i) 1,428,000 shares of Common Stock held by the Castle 1995 Gift
Trust f/b/o Jack H. Castle, Jr., (ii) 1,028,000 shares of Common Stock held
by Castle Interests, Ltd., (iii) 1,244,737 shares of Common Stock issued on
conversion of 1,244,737 shares of Series A Convertible Preferred Stock
beneficially owned by the Pecks Investors, (iv) 113,158 shares of Common
Stock issuable to GulfStar Investments, Ltd. on exercise of the GulfStar
Warrant, and (v) 500,000 shares of Common Stock to be issued to Dr. Lane in
connection with the New York Acquisition at an assumed initial public
offering price of $10.00.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 35,000,000 shares
of capital stock which includes 30,000,000 shares of Common Stock and 5,000,000
shares of Preferred Stock ("Preferred Stock"), 1,244,737 shares of which have
been designated Series A Convertible Preferred Stock all of which will be
converted into an aggregate of 1,244,737 shares of Common Stock at the closing
of this offering.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be submitted to a vote of the stockholders, and such
holders do not have cumulative voting rights. Subject to preferences that may be
applicable to any outstanding shares of Preferred Stock, holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by the Board of Directors of the Company out of funds legally
available therefor. See "Dividend Policy." All outstanding shares of Common
Stock are, and the shares to be sold in this offering when issued and paid for
will be, fully paid and nonassessable and the holders thereof will have no
preferences or conversion, exchange or preemptive rights. In the event of any
liquidation, dissolution or winding-up of the affairs of the Company, holders of
Common Stock will be entitled to share ratably in the assets of the Company
remaining after payment or provision for payment of all of the Company's debts
and obligations and liquidation payments to holders of outstanding shares of
Preferred Stock, if any.
PREFERRED STOCK
The Preferred Stock may be issued in one or more series without further
stockholder authorization, and the Board of Directors is authorized to fix and
determine the terms, limitations and relative rights and preferences of the
Preferred Stock, to establish series of Preferred Stock and to fix and determine
the variations as among series. The Preferred Stock may be subject to repurchase
or redemption by the Company. The Board of Directors, without approval of the
holders of the Common Stock, can issue Preferred Stock with voting and
conversion rights (including multiple voting rights) which could adversely
affect the rights of holders of Common Stock. In addition to having a preference
with respect to dividends or liquidation proceeds, the Preferred Stock, if
issued, may be entitled to the allocation of capital gains from the sale of the
Company's assets. The Company has designated 1,244,737 shares of Preferred Stock
as Series A Convertible Preferred Stock, all of which are issued and outstanding
and owned by the Pecks Investors. See "Principal and Selling Stockholders."
All of the shares of Series A Convertible Preferred Stock will be converted into
an aggregate of 1,244,737 shares of Common Stock at the closing of this
offering.
Although the Company has no present plans to issue any shares of Preferred
Stock following the closing of this offering, the issuance of shares of
Preferred Stock, or the issuance of rights to purchase such shares, may have the
effect of delaying, deferring or preventing a change in control of the Company
or an unsolicited acquisition proposal.
CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS
GENERAL
A number of provisions of the Company's Certificate of Incorporation (the
"Certificate") and Bylaws concern matters of corporate governance and the
rights of stockholders. Certain of these provisions, as well as the ability of
the Board of Directors to issue shares of Preferred Stock and to set the voting
rights, preferences and other terms thereof, may be deemed to have an
anti-takeover effect and may discourage takeover attempts not first approved by
the Board of Directors (including takeovers to which certain stockholders may
deem to be in their best interests). To the extent takeover attempts are
discouraged, temporary fluctuations in the market price of the Company's Common
Stock, which may result from actual or rumored takeover attempts, may be
inhibited. These provisions, together with the ability of the Board of Directors
to issue Preferred Stock without further stockholder action, also could delay or
frustrate the removal of incumbent Directors or the assumption of control by
stockholders, even if such removal or
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assumption would be beneficial to stockholders of the Company. These provisions
also could discourage or make more difficult a merger, tender offer or proxy
contest, even if a transaction or contest could be favorable to the interests of
stockholders, and could potentially depress the market price of the Common
Stock. The Board of Directors of the Company believes that these provisions are
appropriate to protect the interests of the Company and all of its stockholders.
The Board of Directors has no present plans to adopt any other measures or
devices which may be deemed to have an "anti-takeover effect."
MEETINGS OF STOCKHOLDERS
The Company's Bylaws provide that a special meeting of stockholders may be
called only by the Chief Executive Officer, by a majority of the Board of
Directors, or by a majority of the executive committee (if any). The Company's
Bylaws provide that only those matters set forth in the notice of the special
meeting may be considered or acted upon at that special meeting.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT
The Certificate provides that any action required or permitted to be taken
by the stockholders of the Company at an annual or special meeting of
stockholders must be effected at a duly called meeting and may not be taken or
effected by a written consent of stockholders in lieu thereof.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Certificate of the Company provides that Directors and officers of the
Company shall be, and at the discretion of the Board of Directors non-officer
employees and agents may be, indemnified by the Company to the fullest extent
authorized by Delaware law, as it now exists or may in the future be amended,
against all expenses and liabilities actually and reasonably incurred in
connection with service for or on behalf of the Company, and further permits the
advancing of expenses incurred in defense of claims. The Certificate also
contains a provision permitted by Delaware law that generally eliminates the
personal liability of Directors for monetary damages for breaches of their
fiduciary duty.
AMENDMENT OF THE BYLAWS
The Bylaws of the Company provide that an amendment or repeal thereof must
first be approved by the Board of Directors or by affirmative vote of the
holders of at least 66 2/3% of the total votes eligible to be cast by holders of
voting stock with respect to such amendment or repeal.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER PROPOSALS AND STOCKHOLDER NOMINATIONS
OF DIRECTORS
The Company's Bylaws establish an advance notice procedure with regard to
the nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors (the "Nomination
Procedure") and with regard to other matters to be brought by stockholders
before an annual meeting of stockholders of the Company (the "Business
Procedure").
The Nomination Procedure requires that a stockholder give prior written
notice, in proper form, of a planned nomination for the Board of Directors to
the Secretary of the Company. The requirements as to the form and timing of that
notice are specified in the Company's Bylaws. If the Chairman of the Board of
Directors determines that a person was not nominated in accordance with the
Nomination Procedure, such person will not be eligible for election as a
director.
Under the Business Procedure, a stockholder seeking to have any business
conducted at an annual meeting must give prior written notice, in proper form,
to the Secretary of the Company. The requirements as to the form and timing of
that notice are specified in the Company's Bylaws. If the Chairman of the Board
of Directors determines that the other business was not properly brought before
such meeting in accordance with the Business Procedure, such business will not
be conducted at such meeting.
Although the Company's Bylaws do not give the Board of Directors any power
to approve or disapprove stockholder nominations for the election of directors
or of any other business desired by stockholders to be conducted at an annual or
any other meeting, the Company's Bylaws (i) may have the effect of precluding a
nomination for the election of directors or precluding the conduct of business
at a
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particular annual meeting if the proper procedures are not followed or (ii) may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to obtain control of
the Company, even if the conduct of such solicitation or such attempt might be
beneficial to the Company and its stockholders.
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law which, with certain exceptions, prohibits a Delaware corporation from
engaging in any of a broad range of business combinations with any "interested
stockholder" for a period of three years following the date that such
stockholder became an interested stockholder, unless: (i) prior to such date,
the Board of Directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder, (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and officers and (b) by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer, or
(iii) on or after such date, the business combination is approved by the Board
of Directors and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. An "interested stockholder" is
defined as any person that is (a) the owner of 15% or more of the outstanding
voting stock of the corporation or (b) an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
REGISTRATION RIGHTS
The Company has granted to the Pecks Investors, the Castle Family and
GulfStar Investments Ltd. certain registration rights pursuant to a Registration
Rights Agreement dated December 18, 1995 (the "Registration Rights
Agreement"). Additionally, the Company has granted certain registration rights
in connection with its acquisitions of assets of affiliated dental practices in
which a component of the consideration for the acquisition was Common Stock. A
total of 5,856,980 shares of Common Stock presently have some form of
registration rights. After completion of this offering and upon consummation of
the Pending Acquisitions, a total of 6,196,980 shares of Common Stock, assuming
an initial public offering price of $10.00, will have some form of registration
rights. See "Principal and Selling Stockholders."
The Registration Rights Agreement grants the Pecks Investors holding at
least 50% of the Common Stock issuable on conversion of the Series A Convertible
Preferred Stock the right to request the registration of all or part of such
Common Stock. On receipt of such request, the Company is required to use its
best efforts to effect such registration. The Pecks Investors may exercise their
right to request registration twice following the consummation of this offering.
Additionally, following the consummation of this offering, the Pecks Investors
holding at least 20% of the Common Stock issuable on conversion of the Series A
Convertible Preferred Stock have the right to request an unlimited number of
registrations of all or part of their Common Stock on Form S-3 at such time as
the Company is eligible to use such form. All registrations pursuant to the
Registration Rights Agreement are undertaken at the Company's expense.
If the Company proposes to register any of its securities under the
Securities Act, either for its own account or the account of holders of Common
Stock exercising registration rights, the Company is required to give notice to
all parties to whom the Company has granted registration rights and to offer to
include any shares of Common Stock owned by such parties in such registration.
The exercise of these rights is subject to a number of conditions, including the
right of the underwriters of such offering to limit the number of shares
included in such registration. In the event the underwriters so limit the number
of shares to be included in a registration, any shares requested to be included
in such registration by the Pecks Investors,
66
<PAGE>
the Castle Family and GulfStar Investments Ltd. shall be included prior to the
inclusion of any shares of Common Stock requested to be included by any other
party.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is KeyCorp
Shareholder Services, Inc.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and consummation of the Pending
Acquisitions (assuming an initial public offering price of $10.00), and giving
effect to the conversion of the Series A Convertible Preferred Stock the Company
will have 11,696,980 shares of Common Stock outstanding. Up to 139,757 shares of
Common Stock are presently issuable on the conversion of two Seller Notes issued
by the Company. Of the outstanding shares, the 5,500,000 shares sold in this
offering (6,325,000 shares if the Underwriters exercise their over-allotment
option in full) will be freely tradable without restriction or limitation under
the Securities Act, except to the extent such shares are subject to the
agreement with the Underwriters described below, and except for any such shares
which may be acquired by an "affiliate" of the Company as that term is defined
in Rule 144 ("Affiliate"). The 6,196,980 remaining shares constitute
"restricted securities" within the meaning of Rule 144, and will only be
eligible for sale in the open market commencing on the second anniversary of the
date such shares were acquired from the Company or an Affiliate, subject to
contractual lockup provisions and applicable requirements of Rule 144 and Rule
701 ("Rule 701") described below. Some of such restricted securities, however,
are subject to registration rights which may entitle the holder thereof to
register such shares for resale under the Securities Act and to sell such shares
after the lockup period without regard for the restrictions of Rule 144. The
restricted shares were issued and sold by the Company in private transactions in
reliance upon exemptions from registration under the Securities Act. The Company
will also have outstanding the GulfStar Warrant, which is exercisable for
113,158 shares of Common Stock at $5.50 per share, and such shares will be
eligible for resale subject to the volume, holding period and certain other
limitations of Rule 144 upon their exercise or conversion, as applicable.
In general, under Rule 144, as currently in effect, if a period of at least
two years has elapsed between the later of the date on which restricted
securities were acquired from the Company and the date on which they were
acquired from an Affiliate, then the holder of such restricted securities
(including an Affiliate) is entitled to sell a number of shares within any
three-month period that does not exceed the greater of (i) one percent of the
then outstanding shares of the Common Stock or (ii) the average weekly reported
volume of trading of the Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain requirements
pertaining to the manner of such sales, notices of such sales and the
availability of current public information concerning the Company. Affiliates
may sell shares not constituting restricted securities in accordance with the
foregoing volume limitations and other requirements but without regard to the
two year holding period. Under Rule 144(k), if a period of at least three years
has elapsed between the later of the date on which restricted securities were
acquired from the Company and the date on which they were acquired from an
Affiliate, a holder of such restricted securities who is not an Affiliate at the
time of the sale and has not been an Affiliate for a least three months prior to
the sale would be entitled to sell the shares immediately without regard to the
volume limitations and other conditions described above.
The Company, its directors and executive officers and all of the
stockholders of the Company have agreed that, for a period of 180 days after the
date of this Prospectus, they will not, without the prior written consent of
Smith Barney Inc., offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for any shares of Common Stock, except in the case of the Company,
in certain limited circumstances, including issuing up to 2,000,000 shares of
Common Stock in connection with acquisitions to parties that agree to be bound
by the same restriction on offers and sales. After this offering, sales of
substantial amounts of Common Stock by existing stockholders could have an
adverse impact on the market price of the Common Stock. No
67
<PAGE>
predictions can be made as to the effect, if any, that market sales of shares by
existing stockholders or the availability of such shares for future sale will
have on the market price of shares of Common Stock prevailing from time to time.
Under the Plan and the Directors' Plan, there is an aggregate of 1,300,000
shares reserved for issuance. As of the date of this Prospectus, options to
purchase 330,500 shares have been granted pursuant to the Plan, none of which
are currently exercisable. In addition, the Company intends to issue at or
shortly following consummation of this offering options to purchase
approximately 200,000 shares of Common Stock under the Plan and 150,000 shares
of Common Stock under the Directors' Plan (none of which will be immediately
exercisable). As soon as practicable following the consummation of the offering,
the Company intends to file a registration statement under the Securities Act to
register the shares of Common Stock reserved for issuance under the Plan and the
Directors' Plan. Shares of Common Stock issued pursuant to the Plan and the
Directors' Plan after the effective date of such registration statement will be
available for sale in the open market, subject to vesting provisions related to
such shares and the Lock-up Period. If the Company does not file such a
registration statement during the Lock-up Period, holders of shares issuable
upon exercise of options will be able to rely on the exemption from registration
under Rule 701. Securities issued in reliance on Rule 701 are restricted
securities and at the expiration of the Lock-up Period, may be sold by persons
other than affiliates subject only to the manner of sale provisions of Rule 144
and by affiliates under Rule 144 without compliance with its two-year minimum
holding period.
The Securities and Exchange Commission has recently proposed reducing the
initial Rule 144 holding period to one year and the Rule 144(k) holding period
to two years. There can be no assurance as to when or whether such rule changes
will be enacted. If enacted, such modification will have a material effect on
the time when certain shares of the Common Stock become eligible for resale.
68
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company and the Selling Stockholder have agreed to
sell to such Underwriter, the respective number of shares of Common Stock set
forth opposite the name of such Underwriter below.
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------- ----------
Smith Barney Inc.....................
Donaldson, Lufkin & Jenrette
Securities Corporation.............
Southcoast Capital Corporation.......
----------
Total........................... 5,500,000
==========
The Underwriters are committed to take and pay for all of the shares of
Common Stock offered hereby (other than those covered by the over-allotment
option described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and Southcoast Capital Corporation are acting as
Representatives, propose initially to offer part of the shares of Common Stock
directly to the public at the public offering price set forth on the cover page
hereof and part to certain dealers at a price that represents a concession not
in excess of $ per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other dealers. After the initial public
offering, the public offering price and such concessions may be changed by the
Underwriters. The Representatives have informed the Company and the Selling
Stockholder that the Underwriters do not expect to confirm sales to accounts
over which they exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an additional 825,000
shares, of Common Stock at the price to the public set forth on the cover page
hereof less underwriting discounts and commissions. The Underwriters may
exercise such option to purchase additional shares solely for the purpose of
covering over-allotments, if any, incurred in connection with the sale of the
shares offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set forth opposite
each Underwriter's name in the preceding table bears to the total number of
shares listed in such table.
The Company, the Selling Stockholder and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Company, its directors and executive officers and all of the
stockholders of the Company have agreed that, for a period of 180 days after the
date of this Prospectus, they will not, without the prior written consent of
Smith Barney Inc., offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for any shares of Common Stock, except in the case of the Company,
in certain limited circumstances, including issuing up to 2,000,000 shares of
Common Stock in connection with acquisitions to parties that agree to be bound
by the same restrictions on offers and sales.
Prior to this offering, there has not been any public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock has been determined by negotiations between the Company and the
Representatives. Among the factors considered in determining the initial
69
<PAGE>
public offering price were the history of, and prospects for, the Company's
business and the industry in which it competes, an assessment of the Company's
management and the present state of the Company's development, its past and
present revenues and earnings and the trend of such revenues and earnings, the
prospects for the growth of the Company's revenues and earning, the general
condition of the securities market at the time of this offering and the market
price and earnings of similar securities of comparable companies at the time of
this offering.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed on for the
Company by Bracewell & Patterson, L.L.P., Houston, Texas. Certain legal matters
will be passed on for the Underwriters by Willkie Farr & Gallagher, New York,
New York.
EXPERTS
The combined financial statements and financial statement schedule of
Castle Dental Centers, Inc. and the financial statements of the companies
acquired by Castle Dental Centers, Inc. for the indicated periods ended December
31, 1993, 1994 and 1995, as detailed in the index beginning on page F-1 included
in this Prospectus and appearing elsewhere in this Registration Statement, have
been audited by Coopers & Lybrand, L.L.P., independent accountants, as indicated
in their report with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall encompass any and all
amendments thereto) on Form S-1 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Common Stock offered hereby. This Prospectus, which is part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain items of which are
omitted in accordance with the rules and regulations of the Commission.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is hereby made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. For further information with
respect to the Company, reference is hereby made to the Registration Statement
and such exhibits and schedules filed as a part thereof, which 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
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. The Commission maintains a web site that
contains reports, proxy and information statements regarding registrants that
file electronically with the Commission. The address of this web site is
(http://www.sec.gov). Copies of all or any portion of the Registration Statement
may be obtained from the Public Reference Section of the Commission, upon
payment of the prescribed fees.
70
<PAGE>
[GRAPHICS: PHOTOGRAPHS DEPICTING INTERIOR AND EXTERIOR OF DENTAL OFFICES
INCLUDING DENTAL OFFICE PERSONNEL AND PATIENTS.]
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK 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 THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................... 3
Risk Factors......................... 8
The Company.......................... 16
Use of Proceeds...................... 16
Dividend Policy...................... 17
Dilution............................. 17
Capitalization....................... 19
Selected Historical and Pro Forma
Financial Data..................... 20
Unaudited Pro Forma Combined
Financial Information.............. 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 33
Business............................. 40
Management........................... 53
Certain Transactions................. 60
Principal and Selling Stockholders... 62
Description of Capital Stock......... 64
Shares Eligible for Future Sale...... 67
Underwriting......................... 69
Legal Matters........................ 70
Experts.............................. 70
Additional Information............... 70
Index to Combined Financial
Statements......................... F-1
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS)
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS 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.
5,500,000 SHARES
[LOGO]
COMMON STOCK
------------
PROSPECTUS
, 1996
------------
SMITH BARNEY INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SOUTHCOAST CAPITAL
CORPORATION
================================================================================
<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS
PAGE
-----
CASTLE DENTAL CENTERS, INC
Report of Independent
Accountants .............................................. F-4
Combined Balance Sheets as of
December 31, 1994 and 1995 ............................... F-5
Combined Statements of
Operations for the years ended
December 31,1993, 1994 and
1995 ..................................................... F-6
Combined Statements of Changes
in Stockholders' Equity
(Deficit) for the years ended
December 31, 1993, 1994 and
1995 ..................................................... F-7
Combined Statements of Cash
Flows for the years ended
December 31, 1993, 1994 and
1995 ..................................................... F-8
Notes to Combined Financial
Statements ............................................... F-9
1ST DENTAL CARE
Report of Independent
Accountants .............................................. F-18
Combined Balance Sheets as of
December 31, 1994 and 1995 ............................... F-19
Combined Statements of
Operations for the years ended
December 31, 1993, 1994 and
1995 ..................................................... F-20
Combined Statements of Changes
in Stockholder's Equity
(Deficit) for the years ended
December 31, 1993, 1994 and
1995 ..................................................... F-21
Combined Statements of Cash
Flows for the years ended
December 31, 1993, 1994 and
1995 ..................................................... F-22
Notes to Combined Financial
Statements ............................................... F-23
MID-SOUTH DENTAL CENTERS
Report of Independent
Accountants .............................................. F-28
Balance Sheets as of December
31, 1994 and 1995 ........................................ F-29
Statements of Operations for the
years ended December 31, 1993,
1994 and 1995 ............................................ F-30
Statements of Changes in
Stockholder's Equity for the
years ended December 31, 1993,
1994 and 1995 ............................................ F-31
Statements of Cash Flows for the
years ended December 31, 1993,
1994 and 1995 ............................................ F-32
Notes to Financial Statements ............................. F-33
HORIZON DENTAL CENTERS
Report of Independent
Accountants .............................................. F-38
Combined Balance Sheet as of
December 31, 1995 ........................................ F-39
Combined Statements of
Operations for the years ended
December 31, 1994 and 1995 ............................... F-40
Combined Statements of Changes
in Stockholder's Equity
(Deficit) for the years ended
December 31, 1994 and 1995 ............................... F-41
Combined Statements of Cash
Flows for the years ended
December 31, 1994 and 1995 ............................... F-42
Notes to Combined Financial
Statements ............................................... F-43
F-1
<PAGE>
PAGE
-----
AMERICAN DENTAL CENTERS
Report of Independent
Accountants .............................................. F-46
Combined Balance Sheets as of
December 31, 1994 and 1995 ............................... F-47
Combined Statements of
Operations for the years ended
December 31,1993, 1994 and
1995 ..................................................... F-48
Combined Statements of Changes
in Stockholders' Equity
for the years ended December
31, 1993, 1994 and 1995 .................................. F-49
Combined Statements of Cash
Flows for the years ended
December 31, 1993, 1994 and
1995 ..................................................... F-50
Notes to Combined Financial
Statements ............................................... F-51
UNITED DENTALCARE
Report of Independent
Accountants .............................................. F-55
Balance Sheet as of December 31,
1995 ..................................................... F-56
Statements of Operations for the
years ended December 31, 1994
and 1995 ................................................. F-57
Statements of Changes in
Stockholders' Equity (Deficit)
for the years ended December
31, 1994 and 1995 ........................................ F-58
Statements of Cash Flows for the
years ended December 31, 1994
and 1995 ................................................. F-59
Notes to Financial Statements ............................. F-60
SOUTHWEST DENTAL ASSOCIATES
Report of Independent
Accountants .............................................. F-64
Balance Sheet as of December 31,
1995 ..................................................... F-65
Statement of Operations for the
year ended December 31, 1995 ............................. F-66
Statement of Changes in
Stockholders' Equity for the
year ended December 31, 1995 ............................. F-67
Statement of Cash Flows for the
year ended December 31, 1995 ............................. F-68
Notes to Financial Statements ............................. F-69
CASTLE DENTAL CENTERS, INC
Condensed Consolidated Balance
Sheets (Unaudited) as of
December 31, 1995 and June 30,
1996 ..................................................... F-73
Condensed Consolidated
Statements of Operations
(Unaudited) for the six months
ended June 30, 1995 and 1996 ............................. F-74
Consolidated Statements of Cash
Flows (Unaudited) for the six
months ended June 30, 1995 and
1996 ..................................................... F-75
Notes to Condensed Consolidated
Financial Statements
(Unaudited) .............................................. F-76
1ST DENTAL CARE
Condensed Combined Balance Sheet
(Unaudited) as of December 31,
1995 and April 30, 1996 .................................. F-80
Condensed Combined Statements of
Operations (Unaudited) for the
four months ended April 30,
1995 and 1996 ............................................ F-81
Condensed Combined Statements of
Cash Flows (Unaudited) for the
four months ended April 30,
1995 and 1996 ............................................ F-82
Notes to Condensed Combined
Financial Statements ..................................... F-83
MID-SOUTH DENTAL CENTERS
Condensed Balance Sheet
(Unaudited) as of December 31,
1995 and May 31, 1996 .................................... F-84
Condensed Statements of
Operations (Unaudited) for the
five months ended May 31, 1995
and 1996 ................................................. F-85
Condensed Statements of Cash
Flows (Unaudited) for the five
months ended May 31, 1995 and
1996 ..................................................... F-86
Notes to Condensed Financial
Statements ............................................... F-87
F-2
<PAGE>
PAGE
-----
HORIZON DENTAL CENTERS
Condensed Combined Balance
Sheets (Unaudited) as of
December 31, 1995, and June 30,
1996 ..................................................... F-88
Condensed Combined Statements of
Operations (Unaudited) for the
six months ended June 30, 1995
and 1996 ................................................. F-89
Condensed Combined Statements of
Cash Flows (Unaudited) for the
six months ended June 30, 1995
and 1996 ................................................. F-90
Notes to Condensed Combined
Financial Statements ..................................... F-91
AMERICAN DENTAL CENTERS
Condensed Combined Balance
Sheets (Unaudited) as of
December 31, 1995, and June 30,
1996 ..................................................... F-92
Condensed Combined Statements of
Operations (Unaudited) for the
six months ended
June 30, 1995 and 1996 .................................. F-93
Condensed Combined Statements of
Cash Flows (Unaudited) for the
six months ended
June 30, 1995 and 1996 .................................. F-94
Notes to Condensed Combined
Financial Statements ..................................... F-95
UNITED DENTALCARE
Condensed Balance Sheets
(Unaudited) as of December 31,
1995, and June 30, 1996 .................................. F-96
Condensed Statements of
Operations (Unaudited) for the
six months ended June 30, 1995
and 1996 ................................................. F-97
Condensed Statements of Cash
Flows (Unaudited) for the six
months ended June 30, 1995 and
1996 ..................................................... F-98
Notes to Condensed Financial
Statements ............................................... F-99
SOUTHWEST DENTAL ASSOCIATES
Condensed Balance Sheets
(Unaudited) as of December 31,
1995, and June 30, 1996 .................................. F-100
Condensed Statements of
Operations (Unaudited) for the
six months ended June 30, 1995
and 1996 ................................................. F-101
Condensed Statements of Cash
Flows (Unaudited) for the six
months ended June 30, 1995 and
1996 ..................................................... F-102
Notes to Condensed Financial
Statements ............................................... F-103
CASTLE DENTAL CENTERS, INC
Report of Independent
Accountants on Financial
Statement Schedule ....................................... S-1
II--Valuation and Qualifying
Accounts ................................................. S-2
F-3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Castle Dental Centers, Inc.:
We have audited the accompanying combined balance sheets of Castle Dental
Centers, Inc. as of December 31, 1994 and 1995, and the related combined
statements of operations, equity and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Castle Dental
Centers, Inc. as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
September 3, 1996
F-4
<PAGE>
CASTLE DENTAL CENTERS, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
--------------------
1994 1995
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents....... $ 22 $ 6,439
Patient receivables, net of
allowance for uncollectible
accounts of $2,596 and $2,437
in 1994 and 1995,
respectively................... 2,709 2,710
Unbilled patient receivables,
net of allowance for
uncollectible accounts of $113
and $228 in 1994 and 1995,
respectively................... 450 913
Other current assets............ 3 22
--------- ---------
Total current
assets................. 3,184 10,084
Property and equipment, net.......... 1,478 1,583
Other assets......................... 49 757
Deferred income taxes................ -- 253
--------- ---------
Total assets.......... $ 4,711 $ 12,677
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current portion of long-term
debt........................... $ 116 $ 900
Current portion of capital lease
obligations.................... 240 140
Accounts payable and accrued
liabilities.................... 1,562 2,836
Deferred income taxes........... 54 --
--------- ---------
Total current
liabilities............ 1,972 3,876
Long-term debt, net of current
portion............................ 44 9,462
Capital lease obligations, net of
current portion.................... 118 50
Other long-term liabilities.......... -- 2,104
Commitments and contingencies
Redeemable preferred stock, $.001 par
value, 1,244,737 shares authorized,
issued and outstanding............. -- 2,928
Stockholders' equity (deficit):
Common stock, $.001 par value,
20,000,000 shares authorized,
4,000,000 shares issued and
outstanding, reflecting the effect
of the Company's reorganization
retroactively applied.............. 4 4
Additional paid-in capital........... 1 94
Retained earnings (accumulated
deficit)........................... 2,572 (5,841)
--------- ---------
Total stockholders'
equity (deficit).... 2,577 (5,743)
--------- ---------
Total liabilities and
stockholders' equity
(deficit).............. $ 4,711 $ 12,677
========= =========
The accompanying notes are an integral part of the combined financial
statements.
F-5
<PAGE>
CASTLE DENTAL CENTERS, INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Net patient revenues................. $ 15,053 $ 17,083 $ 18,257
Expenses:
Dentists' salaries.............. 2,684 2,853 3,345
Clinical salaries............... 1,529 1,811 1,879
Dental supplies and laboratory
fees.......................... 1,565 1,907 2,185
Rental and lease expense........ 504 681 836
Advertising and marketing....... 729 1,062 959
Depreciation and amortization... 245 309 336
Other operating expenses........ 1,871 2,205 2,260
General and administrative...... 2,927 3,172 3,825
Compensation to stockholders.... 2,020 2,147 5,284
--------- --------- ---------
Total expenses............. 14,074 16,147 20,909
--------- --------- ---------
Operating income (loss).... 979 936 (2,652)
Interest expense..................... 130 112 87
--------- --------- ---------
Income (loss) before income taxes.... 849 824 (2,739)
Provision (benefit) for income
taxes.............................. 40 43 (325)
--------- --------- ---------
Net income (loss).................... $ 809 $ 781 $ (2,414)
========= ========= =========
Net income (loss) per share.......... $ .15 $ .14 $ (.44)
========= ========= =========
If all of the Company's operations
had been subject to income taxes,
net loss would have been as follows
(unaudited):
Historical loss before income
taxes......................... $ (2,739)
Benefit for income taxes........ (1,041)
---------
Net loss........................ $ (1,698)
=========
Pro forma net loss per share.... $ (.31)
=========
Weighted average number of common and
common equivalent shares
outstanding........................ 5,515 5,515 5,515
========= ========= =========
If the shares necessary to fund the
distribution to the owner in
connection with the Reorganization
were outstanding for the entire
period, net income per share and
weighted average shares outstanding
would have been as follows:
Pro forma net income per
share......................... $ (.39)
=========
Weighted average number of
common and common equivalent
shares outstanding............ 6,115
=========
The accompanying notes are an integral part of the combined financial
statements.
F-6
<PAGE>
CASTLE DENTAL CENTERS, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS STOCKHOLDERS'
-------------------- PAID-IN (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT) (DEFICIT)
----------- ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993, as
restated........................... 2,000 -- $ 2 $ 985 $ 987
Effect of December 1995
reorganization, retroactively
applied....................... 3,998,000 $ 4 (1) (3) --
Net income...................... 809 809
----------- ------ --- ------------ -------------
Balance, December 31, 1993........... 4,000,000 4 1 1,791 1,796
Net income...................... 781 781
----------- ------ --- ------------ -------------
Balance, December 31, 1994........... 4,000,000 4 1 2,572 2,577
Issuance of common stock and
distribution to owner in
connection with
reorganization................ 1,000 -- 1 (6,000) (5,999)
Cancellation of common stock in
connection with
reorganization................ (1,000) -- (1) 1 --
Issuance of warrant............. -- -- 93 -- 93
Net loss........................ -- -- -- (2,414) (2,414)
----------- ------ --- ------------ -------------
Balance, December 31, 1995........... 4,000,000 $ 4 $ 94 $ (5,841) $(5,743)
=========== ====== === ============ =============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-7
<PAGE>
CASTLE DENTAL CENTERS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Cash flows from operating activities:
Net income (loss).................. $ 809 $ 781 $ (2,414)
Adjustments:
Provision for bad debts....... 1,021 1,501 1,399
Depreciation and
amortization............... 245 309 336
Deferred income taxes
(benefit).................. 26 30 (325)
Deferred compensation......... -- -- 2,630
Changes in operating assets
and liabilities:
Patient receivables...... (1,215) (1,848) (1,285)
Unbilled patient
receivables........... (275) (286) (578)
Other current assets..... 5 45
Other assets............. (5) (8) (13)
Accounts payable and
accrued liabilities... (44) 522 748
--------- --------- ---------
Net cash provided
by operating
activities....... 567 1,046 498
--------- --------- ---------
Cash flows used in investing
activities -- capital expenditures.... (442) (308) (441)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from debt................. -- 67 10,362
Repayment of debt.................. (383) (817) (328)
Issuance of redeemable preferred
stock............................ -- -- 3,138
Distribution to shareholder........ -- -- (6,000)
Payment of debt and preferred stock
issuance costs................... -- -- (812)
--------- --------- ---------
Net cash provided
by (used in)
financing
activities....... (383) (750) 6,360
--------- --------- ---------
Net change in cash and cash
equivalents........................... (258) (12) 6,417
Cash and cash equivalents, beginning of
period................................ 292 34 22
--------- --------- ---------
Cash and cash equivalents, end of
period................................ $ 34 $ 22 $ 6,439
========= ========= =========
The accompanying notes are an integral part of the combined financial
statements.
F-8
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CORPORATE ORGANIZATION
Castle Dental Centers, Inc. is a provider of dental and orthodontic
services and products that owns and operates dental centers in the Houston,
Texas area.
The combined financial statements reflect the combined operations of Castle
Dental Centers, Inc., Jack H. Castle, D.D.S., Inc. ("JCD"), a subchapter S
corporation, and of Family Dental Services of Texas, Inc. ("FDS"), a
corporation, because these entities were under common control. JCD is a provider
of dental and orthodontic services. Prior to December 31, 1995, under the terms
of a contractual agreement, FDS provided business operations, financial,
marketing and administrative services to JCD. All significant intercompany
accounts and transactions have been eliminated in combination.
Effective December 31, 1995, FDS entered into an agreement and plan of
merger with Castle Dental Centers, Inc. both of which are collectively known as
Castle Dental Centers (the "Company"). The Company on December 31, 1995,
executed a stock purchase agreement, with the sole shareholder of JCD and
acquired the outstanding stock for $6,000,000 after which JCD ceased all dental
and orthodontic operations.
Jack H. Castle, D.D.S., P.C., ("JCP"), a professional corporation, was
incorporated in December 1995 to provide dental and orthodontic services. JCP
commenced operations in January 1996.
In connection with ICP's commencement of operations, the Company began
providing the same services to JCP as those that FDS previously provided to JCD
under similar contractual agreements.
The Company has restated previously reported financial statements to accrue
allowances for doubtful accounts, compensation payable and trade accounts
payable. These restatements increased net income by $37,000 and $362,000 for
1993 and 1994, respectively, and decreased retained earnings as of January 1,
1993 by $1,635,000. The restatement had no tax effect because the adjustments
were related to the subchapter S corporation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 net revenue and expenses during the
reporting periods. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt investments with original
maturities of three months or less when purchased to be cash equivalents. The
carrying amounts approximate fair value.
The Company maintains cash balances at various financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. The Company's accounts at these institutions may, at
times, exceed the federally insured limits. The Company has not experienced any
losses in such accounts.
REVENUE RECOGNITION
Net patient revenues represent amounts billed to patients for services
performed by affiliated dentists. Dental revenue is recognized as the services
are performed and billed. Orthodontic revenue is recognized in accordance with
the proportional performance method. Under this method, revenue is recognized as
services are incurred under the terms of contractual agreements with each
patient. Approximately 25% of
F-9
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the services are performed in the first month with the remaining services
recognized ratably over the remainder of the contract. Billings under each
contract, which average approximately 28 months, are made equally throughout the
term of the contract, with final payment at the completion of the treatment.
Accounts receivable consist primarily of receivables from patients,
insurers, government programs and other third-party payers for dental services
provided by dentists. An allowance for doubtful accounts is recorded by the
Company based on historical experience.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment, which include the amortization of assets recorded under
capital leases, are provided using the straight-line method over the estimated
useful lives of the various classes of depreciable assets, ranging from five to
ten years. Fully depreciated assets are retained in property and equipment until
they are removed from service. Fully depreciated assets as of December 31, 1994
and 1995 were $490,000. Maintenance and repairs are charged to expense whereas
renewals and major replacements are capitalized. Gains and losses from
dispositions are included in operations.
DEBT ISSUANCE COSTS
The costs related to the issuance of debt are capitalized and amortized
using the effective interest method over the lives of the related debt.
INCOME TAXES
JCD was a subchapter S entity and, accordingly, all federal tax liabilities
were the responsibility of the shareholder. The subchapter S election of JCD was
automatically terminated when the entity became a wholly-owned subsidiary of the
Company; and therefore, became a C-Corporation for federal income tax purposes.
Accordingly, a pro forma provision for income taxes is presented as if the
entities were taxed as C-corporations during the periods presented.
Income taxes, including pro forma calculations, are accounted for under the
liability method. Under this method, deferred taxes are determined based on the
differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted marginal tax rates currently in
effect. All federal deferred taxes of JCD were recognized upon becoming a
C-Corporation.
RECENT FASB PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The Company adopted SFAS No. 121 during the first quarter of
1996. Implementation of SFAS No. 121 did not have a material impact on its
financial position, results of operations or cash flows.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which establishes accounting and reporting standards for
stock-based employee compensation plans. The pronouncement is effective for the
year ended December 31, 1996, although earlier application regarding reporting
disclosure requirements is encouraged. Based on preliminary review, the Company
intends to adopt only the reporting disclosure provisions of SFAS No. 123. The
Company does not believe implementation of SFAS No. 123 will have a material
impact on its financial position, results of operations or cash flows.
F-10
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
Earnings per share is computed on the basis of the weighted average number
of shares of common stock and common stock equivalents outstanding during each
period. Shares outstanding for all periods presented have been retroactively
adjusted to reflect the reorganization discussed in Note 2. In accordance with
Staff Accounting Bulletin ("SAB") Number 83 of the Securities and Exchange
Commission, the common stock equivalents that were issued during the twelve
months preceding the planned offering at prices below the expected initial
public offering price have been included in the Company's earnings per share
computation and treated as if they had been issued at the Company's inception
even though they were antidilutive. Additionally, in accordance with SAB Number
55, pro forma earnings per share have been presented for 1995 to reflect
issuance of the number of shares that would have been necessary to fund the
$6,000,000 distribution to the Company's owner in connection with the
Reorganization (at an assumed public offering price of $10.00 per share). Fully
diluted earnings per share are not presented because such amounts would be the
same as amounts computed for primary earnings per share.
ADVERTISING
Costs incurred for advertising are expensed when incurred.
2. REORGANIZATION AND RELATED TRANSACTIONS:
In December 1995, the Company completed a reorganization (the
"Reorganization") in which it entered into the following borrowing agreements.
o $3,000,000 revolving credit agreement ("Credit Agreement") to be
used for acquisition financing and general corporate purposes. The
Credit Agreement bears interest at rates that vary based on the
lender's prime rate or the London Interbank offered rate plus
applicable margins and expires June 30, 1997. A commitment fee is
payable quarterly on the daily average unused amount ranging from .25%
to .5% of such amounts. As of December 31, 1995, there was $3,000,000
available under the line of credit.
o $6,000,000 bank term loan, (the "Term Loan"), which is
collateralized by the assets of the Company. Interest is payable
quarterly, beginning March 1996 at rates not exceeding the bank's
prime rate plus 1% (8.19% at December 31, 1995). Principal payments of
$300,000 are payable quarterly, commencing June 15, 1996 through March
15, 2001.
o $7,500,000 face amount of subordinated notes (the "Subordinated
Notes"). The Subordinated Notes are uncollateralized, bear interest
at 12% per year and are payable quarterly in arrears. Principal is
payable in two installments of $3.75 million on December 18, 2001 and
2002.
The Company issued 1,244,737 shares of Series A convertible preferred
stock, par value $.001 per share (the "Series A Stock") to the buyers of the
Subordinated Notes. Each share is convertible into one share of the Company's
common stock after giving effect to any antidilutive adjustment as appropriate.
The Series A Stock is mandatorily redeemable at the fair market value at the
date of redemption at the holder's option either upon receipt of a change of
control notice or after December 18, 2001, if no secondary market exists for
Series A Stock. The value of the Series A Stock issued ($2.52 per share) has
been recorded as a discount on the Subordinated Notes. The Company has the right
to call all the shares of the Series A Stock at $.001 per share, upon a
completed or anticipated change of control.
A portion of the proceeds were used to acquire JCD, the acquisition of
which has been recorded as a recapitalization and capital distribution to JCD's
shareholder because the Company and JCD were under common control. Additionally,
the Company issued 4,000,000 shares to the former owner of JCD and certain
related parties for no consideration. Accordingly, the Company retroactively
applied the shares issued to all historical financial statements as a stock
split.
F-11
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the purchase of the stock of JCD, the Company entered
into a Deferred Compensation Agreement with the sole shareholder of JCD, who is
also director of the Company, pursuant to which the Company has agreed to pay
the shareholder $2,630,000 in 20 quarterly installments beginning March 1996.
Payments made by the Company pursuant to the Deferred Compensation Agreement are
subordinated to the Credit Agreement, the Term Loan and the Subordinated Notes.
A warrant to purchase 113,158 shares of common stock at an exercise price
of $5.50 per share was issued to an investment advisor in connection with the
placement of the recapitalization (See Note 9). The warrant is exercisable at
any time prior to its expiration date of December 18, 2000. The value of the
warrant ($0.82 per share) has been recorded as deferred offering costs of the
Subordinated Notes.
The Company is required to repurchase all outstanding Subordinated Notes in
the event of a change in control or if no secondary market exists at December
18, 2001. The Subordinated Notes are subordinate to certain senior indebtedness
of the Company. Approximately $695,000 of debt issuance costs, including the
value of the warrant, were capitalized in relation to the issuance of the Credit
Agreement, Term Loan, and Subordinated Notes. Additionally, approximately
$210,000 of issuance cost were charged to the Series A Stock.
The Credit Agreement, Term Loan, and Subordinated Notes contain customary
restrictive covenants which include, among others, restrictions on additional
indebtedness, the payment of dividends and other distributions, and require the
Company to meet certain financial ratios.
The Company intends to complete an initial public offering during the
fourth quarter of 1996. The proceeds from the offering will be used to repay
approximately $7.5 million of the 12% Subordinated Notes and approximately $6.0
million under the term loan. Pro forma loss per share would have been $0.38 for
the period ended December 31, 1995 had the offering proceeds been used for
retirement of such debt at the beginning of 1995.
3. SELECTED BALANCE SHEET INFORMATION:
The details of certain balance sheet accounts were as follows:
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
Property and equipment:
Equipment....................... $ 1,164 $ 1,853
Leasehold improvements.......... 425 632
Furniture and fixtures.......... 98 98
Equipment under capital
leases........................ 1,259 804
--------- ---------
Total property and
equipment.......... 2,946 3,387
Less accumulated depreciation
and amortization.............. 1,468 1,804
--------- ---------
Property and
equipment, net..... $ 1,478 $ 1,583
========= =========
Accounts payable and accrued
liabilities:
Trade........................... $ 978 $ 1,645
Compensation.................... 571 575
Other........................... 13 616
--------- ---------
$ 1,562 $ 2,836
========= =========
F-12
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT AND LINE OF CREDIT:
Long-term debt consisted of the following:
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
Revolving credit loan................ $ 160 --
Term loan............................ -- $ 6,000
Subordinated Notes................... -- 7,500
--------- ---------
Total debt............ 160 13,500
Less discount on Subordinated
Notes.............................. -- 3,138
--------- ---------
Long-term debt, net of discount...... 160 10,362
Less current portion................. 116 900
--------- ---------
Long-term debt........ $ 44 $ 9,462
========= =========
The aggregate maturities of long-term debt as of December 31, 1995 for each
of the next five years subsequent to December 31, 1995 were as follows (in
thousands):
1996................................. $ 900
1997................................. 1,200
1998................................. 1,200
1999................................. 1,200
2000................................. 1,200
Thereafter........................... 7,800
---------
$ 13,500
=========
5. COMMITMENT AND CONTINGENCIES:
LEASE COMMITMENTS
Future minimum lease payments under capital leases and noncancelable
operating leases with remaining terms of one or more years consisted of the
following at December 31, 1995 (in thousands):
CAPITAL OPERATING
------- ---------
1996................................. $ 157 $ 775
1997................................. 23 809
1998................................. 23 619
1999................................. -- 565
2000................................. -- 399
Thereafter........................... -- 1,031
------- ---------
Total minimum lease obligation....... 203 $ 4,198
=========
Less amount representing interest.... 13
-------
Present value of minimum lease
obligations........................ 190
Less current portion................. 140
-------
Capital lease obligations............ $ 50
=======
F-13
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
DENTIST EMPLOYMENT AGREEMENTS AND PROFESSIONAL LIABILITY
Each affiliated dental practice has entered into a Dentist Employment
Agreement with each full time dentist, orthodontist and other dental specialist
employed by it. Although the form of contract varies somewhat among practices
and among dentists with different specialties, the typical contract provides for
a defined compensation arrangement, including performance-based compensation,
liquidated damages and a covenant not to compete. Each full-time dentist is
required to maintain professional liability insurance, and mandated coverage
limits are generally at least $1,000,000 per claim and $1,000,000 in aggregate.
In addition, many affiliated dental practices employ part-time dentists. Not all
part-time dentists have employment agreements, but all part-time dentists are
required to carry professional liability insurance in specified amounts.
6. INCOME TAXES:
Significant components of the Company's deferred tax liabilities and assets
were as follows:
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
Deferred tax liabilities:
Unbilled receivables............... $ -- $ 347
Loss of Subchapter S status in
connection with changes in
corporate form.................. 54 1,209
--------- ---------
Total deferred tax
liabilities.......... 54 1,556
Deferred tax assets:
Deferred compensation.............. -- (999)
Allowances for bad debts........... -- (828)
--------- ---------
Total deferred assets... -- (1,827)
--------- ---------
Net deferred tax liabilities
(assets)........................... 54 (271)
Less current portion................. 54 (18)
--------- ---------
Noncurrent.............. $ -- $ (253)
========= =========
F-14
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the provision for income taxes were as follows:
DECEMBER 31,
-------------------------------
1993 1994 1995
--- --- ---------
(IN THOUSANDS)
Current tax provision:
Federal............................ $ 14 $ 13 $ --
State.............................. -- -- --
--- --- ---------
Total current................... 14 13 --
--- --- ---------
Deferred tax provision (benefit):
Federal............................ (217)
State.............................. 26 30 (108)
--- --- ---------
Total deferred.................. 26 30 (325)
--- --- ---------
$ 40 $ 43 $ (325)
=== === =========
The differences between the statutory federal tax rate and the Company's
effective tax rate were as follows:
DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
Tax at U.S. statutory rate (34%)..... $ 289 $ 280 $ (931)
State income taxes, net of federal
tax................................ 26 30 (71)
Income not subject to corporate level
federal tax........................ (263) (266) (83)
Difference due to graduated tax
rates.............................. (12) (10) --
Nondeductible expenses and other..... -- 9 10
Effect of conversion to taxable
entity............................. -- -- 750
--------- --------- ---------
$ 40 $ 43 $ (325)
========= ========= =========
7. SUPPLEMENTAL CASH FLOW INFORMATION:
DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
Cash paid during the period for:
Interest........................ $ 111 $ 150 $ 87
Income taxes.................... 13 14 1
Supplemental disclosure of noncash
investing and
financing activities:
Effect of reorganization on
capital structure............. -- -- 39
Issuance of warrant............. -- -- 93
8. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:
CREDIT RISK
The Company grants customers credit in the normal course of business.
Procedures are in effect to monitor the creditworthiness of customers and
appropriate allowances are made to reduce accounts to their net realizable
values.
F-15
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies.
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and credit agreement approximate fair values due to the
short-term maturities of these instruments. The carrying amounts of the
Company's long-term borrowings as of December 31, 1994 and 1995, respectively,
approximate their fair value based on the Company's current incremental
borrowing rates for similar type of borrowing arrangements.
9. RELATED PARTY TRANSACTIONS:
The Company entered into a Management Services Agreement with JCP, a
professional corporation of which a shareholder is the sole owner. Pursuant to
the Management Services Agreement, the Company pays the shareholder $100,000
annually, based on negotiations in connection with the Reorganization (see Note
2), to take such action as is necessary to have the shares of stock of JCP held
by a person licensed to practice dentistry in Texas.
The Company is party to a lease agreement with Goforth, Inc., a company
owned by the Company's chairman and chief executive officer (the "Affiliate").
The Company has agreed to pay the Affiliate a minimum guaranteed rental of
$12,000 per month through January 2001 and $13,200 per month from January 2001
through January 2006 for rental of a dental center. The Company has also agreed
to pay additional rent of approximately $1,600 per month for insurance, taxes
and common area maintenance. The Company paid $235,000 under this agreement
during 1995.
A Director of the Company is a Managing Director of The GulfStar Group,
Inc., which provides investment banking and advisory services to the Company. In
1995, the Company paid $540,000 in investment banking fees to The GulfStar
Group, and issued a warrant for 113,158 shares of Common Stock to GulfStar
Investments, Ltd., an affiliate of The GulfStar Group, Inc. (see Note 2). The
Company pays The GulfStar Group, Inc. for the ongoing investment banking and
financial advisory services provided to the Company in an amount equal to one
percent of the total consideration for each of the Company's acquisitions that
has been consummated.
A Director of the Company is a Managing Partner of Pecks Management
Partners Ltd., an investment advisor to investors in the Company owning in the
aggregate 1,244,737 shares of the Series A Stock and $7.5 million of the
Subordinated Notes (see Note 2). Pursuant to the provisions of a Securities
Purchase Agreement dated as of December 18, 1995, for so long as certain
ownership thresholds with respect to Series A Stock or common stock following
conversion of the Series A Stock are maintained, that such investors have the
contractual right to nominate one member of the Company's Board of Directors.
10. SUBSEQUENT EVENTS:
EMPLOYEE STOCK OPTION PLAN
In January 1996, the Company adopted the Omnibus Stock and Employee Stock
Option Plan (the "Plan"). The aggregate amount of common stock with respect to
which grants under the Plan may be made may not exceed 1,000,000 shares. The
Plan provides for the grant of incentive stock options ("ISOs") as defined in
the Internal Revenue Code of 1986, as amended, nonqualified stock options and
shares of restricted stock (collectively, the "Awards").
All of the employees, directors, consultants and former consultants of the
Company or its affiliates are eligible to receive Awards under the Plan. In
addition, key employees of entities managed by the Company may receive Awards.
Only key employees of the Company are eligible to receive ISOs. Options will be
exercisable during the period specified in each option agreement and will
generally be exercisable in
F-16
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
installments pursuant to a vesting schedule. No option will remain exercisable
later than ten years after the date of grant.
The exercise price for ISOs granted under the Plan may be no less than the
fair market value of the common stock on the date of grant (or 110% in the case
of ISOs granted to employees owning more than 10% of the common stock). The
exercise price for nonqualified options granted under the Plan will be at the
discretion of the Company.
ACQUISITIONS
In May 1996, the Company acquired the assets of and entered into long term
management agreements with 1st Dental Care, P.A., a dental practice in the
Tampa/Clearwater, Florida area, and Mid-South Dental Centers, P.C., a dental
practice with dental centers in various locations in Tennessee. In August 1996,
the Company increased its dental practices under management in Texas by the
acquisition of the assets of Horizon Dental Centers, a dental practice with
dental centers in Fort Worth and Austin, Texas. The purchase prices consisted
primarily of combinations of cash, common stock and seller debt issued. The
Company has entered into definitive agreements to acquire the assets of and
enter into a long term management agreement with American Dental Centers, a
dental practice in the New York City area, and United Dental Care, a dental
practice that operates dental centers in Arkansas, Oklahoma and Louisiana.
AMENDMENT TO TERM LOAN
In May 1996, the Company amended the Term Loan, which increased the amount
available to $16 million. The additional $10 million is to be utilized to fund
acquisitions, which are subject to prior approval by the lender. As of June 30,
1996, the Company had borrowed $3,950,000 of this facility to fund the
acquisition of 1st Dental Care in Tampa/Clearwater, Florida and Mid-South Dental
Centers in Nashville, Tennessee, discussed above. In August 1996, the Company
borrowed an additional $2.1 million under the term loan to fund the acquisition
of Horizon Dental Centers in Fort Worth and Austin, Texas, discussed above.
EMPLOYEE RETIREMENT PLAN
In August 1996, the Company adopted a profit sharing plan qualified under
Section 401(k) of the Internal Revenue Code of 1986 (the "401(k) Plan"). All
employees of the Company are eligible to participate in the 401(k) Plan upon the
completion of six months of service. Participants may elect to defer receipt of
compensation and have such deferred amounts contributed to the 401(k) Plan up to
a maximum of 20% of compensation. The Company may match contributions made by
participants under the 401(k) Plan each year in an amount determined by the
Company on a year-to-year basis. Participants are fully vested with respect to
their contributions, while the Company's contributions are subject to vesting on
the following basis: zero for fewer than two years of employment and 20% per
year cumulatively for the third through seventh years of employment.
Participants may borrow from their accounts under the 401(k) Plan.
F-17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
1st Dental Care:
We have audited the accompanying combined balance sheets of 1st Dental Care
as of December 31, 1994 and 1995, and the related combined statements of
operations, changes in stockholder's equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1995. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of 1st Dental Care as
of December 31, 1994 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
June 10, 1996
F-18
<PAGE>
1ST DENTAL CARE
COMBINED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS)
DECEMBER 31,
--------------------
1994 1995
--------- ---------
ASSETS
Current assets:
Patient receivables, net of
allowance for uncollectible
accounts of
$26 and $21 in 1994 and 1995,
respectively................... $ 166 $ 130
Unbilled patient receivables,
net of allowance for
uncollectible accounts
of $12 and $19 in 1994 and
1995, respectively............. 61 107
Other current assets............ 17 25
--------- ---------
Total current assets....... 244 262
Property and equipment, net.......... 1,272 1,242
Other assets......................... 2 14
--------- ---------
Total assets............... $ 1,518 $ 1,518
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current portion of long-term
debt........................... $ 293 $ 236
Accounts payable and accrued
expenses....................... 746 747
--------- ---------
Total current
liabilities.............. 1,039 983
Deferred revenue..................... 37 28
Long-term debt....................... 593 884
Commitments and contingencies
Common stock......................... 5 5
Additional paid-in capital........... 427 427
Accumulated deficit.................. (583) (809)
--------- ---------
Stockholder's deficit...... (151) (377)
--------- ---------
Total liabilities and
stockholder's deficit.... $ 1,518 $ 1,518
========= =========
The accompanying notes are an integral part of the combined financial
statements.
F-19
<PAGE>
1ST DENTAL CARE
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Net patient revenues................. $ 5,763 $ 6,274 $ 6,465
--------- --------- ---------
Expenses:
Dentists' salaries.............. 1,048 1,243 1,221
Clinical salaries............... 1,919 2,031 2,086
Dental supplies and laboratory
fees.......................... 446 463 511
Rental and lease expense........ 326 339 373
Advertising and marketing....... 165 156 163
Depreciation and amortization... 176 199 236
Other operating expenses........ 359 417 392
General and administrative...... 954 1,126 1,040
--------- --------- ---------
Total expenses............. 5,393 5,974 6,022
--------- --------- ---------
Operating income........... 370 300 443
Loss on sale of property and
equipment.......................... -- -- 95
Interest expense..................... 48 83 106
--------- --------- ---------
Income before extraordinary item..... 322 217 242
Extraordinary gain on extinguishment
of debt.............................. -- -- 112
--------- --------- ---------
Net income........................... $ 322 $ 217 $ 354
========= ========= =========
If all of the Company's operations
had been subject to income taxes,
net income would have been as
follows (unaudited):
Historical income before income
taxes and extraordinary
gain.......................... $ 242
Provision for income taxes...... 90
---------
Net income before extraordinary
gain.......................... 152
Extraordinary gain, net of tax
effect of $41................. 71
---------
Net income...................... $ 223
=========
The accompanying notes are an integral part of the combined financial
statements.
F-20
<PAGE>
1ST DENTAL CARE
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED EQUITY
STOCK CAPITAL DEFICIT (DEFICIT)
------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1993........... $ 5 $ 427 $ (159) $ 273
Distribution to shareholders.... -- -- (599) (599)
Net income...................... -- -- 322 322
------ ---------- ----------- ---------
Balance at December 31, 1993......... 5 427 (436) (4)
Distribution to shareholders.... -- -- (364) (364)
Net income...................... -- -- 217 217
------ ---------- ----------- ---------
Balance at December 31, 1994......... 5 427 (583) (151)
Distribution to shareholders.... -- -- (580) (580)
Net income...................... -- -- 354 354
------ ---------- ----------- ---------
Balance at December 31, 1995......... $ 5 $ 427 $ (809) $ (377)
====== ========== =========== =========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-21
<PAGE>
1ST DENTAL CARE
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Cash flows from operating activities:
Net income......................... $ 322 $ 217 $ 354
Adjustments:
Provision for bad debts 18 44 8
Depreciation and
amortization.............. 176 199 236
Losses on disposition and
impairment of property and
equipment.................. -- -- 95
Extraordinary gain on
extinguishment of debt.... -- -- (112)
Changes in operating assets
and liabilities:
Patient receivables...... (62) 18 35
Unbilled patient
receivables.......... 15 10 (53)
Other current assets..... 19 (6) (8)
Other assets............. 20 (7) (6)
Accounts payable and
accrued
liabilities.......... 182 86 1
Other liabilities........ -- (24) (9)
--------- --------- ---------
Net cash provided
by operating
activities...... 690 537 541
--------- --------- ---------
Cash flows used in investing
activities -- capital expenditures.... (187) (161) (307)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from debt................. 470 300 532
Repayment of debt.................. (346) (340) (186)
Distribution to owners............. (599) (364) (580)
--------- --------- ---------
Net cash used in
financing
activities...... (475) (404) (234)
--------- --------- ---------
Net change in cash and cash
equivalents........................... 28 (28) --
Cash and cash equivalents, beginning of
period................................ -- 28 --
--------- --------- ---------
Cash and cash equivalents, end of
period................................ $ 28 $ -- $ --
========= ========= =========
The accompanying notes are an integral part of the combined financial
statements.
F-22
<PAGE>
1ST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS
1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CORPORATE ORGANIZATION
1st Dental Care (the "Company") is a provider of dental and orthodontics
services and products that owns the assets of and provides management services
to dental and orthodontic centers in northwest and west Florida. The combined
financial statements for 1995 reflect the operations of Lester B. Greenberg,
D.D.S., P.A., 1st Dental Care Inc. and M&B Dental Lab because all entities are
under common control. The combined financial statements for 1993 and 1994
reflect the combined operations of the following corporations because these
entities were under common control:
Bayonett Point Inc. Holiday Inc. Timber Pines
Boot Ranch Inc. Lakewood Inc. Town and Country
Crystal River Inc. Largo Mall Inc. First Dental Management
Carrollwood Inc. Port Richey Inc. First Dental P.A.
East Bay Inc. Sear Town M & B Dental Lab
Seven Hills
These corporations were dissolved and merged into the corporations included
in the 1995 financial statements. All significant intercompany accounts and
transactions have been eliminated in combination.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 net revenue and expenses during each
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt investments with original
maturities of three months or less when purchased to be cash equivalents. The
carrying amounts approximate fair value because of the short maturity.
The Company maintains cash balances at various financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. The Company's accounts at these institutions may, at
times, exceed the federally insured limits. The Company has not experienced any
losses in such accounts.
REVENUE RECOGNITION
Net patient revenues represent amounts billed to patients for services
performed by affiliated dentists. Dental revenue is recognized as the services
are performed and billed. Orthodontic revenue is recognized in accordance with
the proportional performance method. Under this method, revenue is recognized as
services are incurred under the terms of contractual agreements with each
patient. Approximately 25% of the services are performed in the first month with
the remaining services recognized ratably over the remainder of the contract.
Billings under each contract, which average approximately 28 months, are made
equally throughout the term of the contract, with final payment at the
completion of the treatment.
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payers for services provided
by dentists. An allowance for doubtful accounts is recorded by the Company based
on historical experience.
F-23
<PAGE>
1ST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment, which include the amortization of assets recorded under
capital leases, are provided using the straight-line method over the estimated
useful lives of the various classes of depreciable assets, ranging from five to
ten years. Fully depreciated assets are retained in property and equipment until
they are removed from service. Fully depreciated assets as of December 31, 1994
and 1995 were approximately $314,000. Maintenance and repairs are charged to
expenses whereas renewals and major replacements are capitalized. Gains and
losses from dispositions are included in operations.
DEBT ISSUANCE COSTS
The costs related to the issuance of debt are capitalized and amortized to
interest expense using the effective interest method over the life of the
related debt.
INCOME TAXES
The Companies are Subchapter S entities and, accordingly, all federal and
state tax liabilities are the responsibility of the shareholder.
Income taxes for the pro forma calculations are determined under the
liability method. Under this method, deferred taxes are based on the differences
between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted marginal tax rates currently in effect.
ADVERTISING
Advertising costs are expensed when incurred.
RECENT FASB PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" which establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The Company adopted SFAS No. 121 during the first quarter of
1996. Implementation of SFAS No. 121 did not have a material impact on its
financial position, results of operations or cash flows.
F-24
<PAGE>
1ST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SELECTED BALANCE SHEET INFORMATION:
The details of certain balance sheet accounts are as follows:
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
Property and equipment:
Equipment and vehicles.......... $ 1,225 $ 1,356
Leasehold improvements.......... 465 450
Furniture and fixtures.......... 254 210
Buildings, land and
improvements.................. 516 524
--------- ---------
Total property and
equipment............... 2,460 2,540
Less accumulated depreciation
and amortization.............. 1,188 1,298
--------- ---------
Property and equipment,
net..................... $ 1,272 $ 1,242
========= =========
Accounts payable and accrued
liabilities:
Trade........................... $ 465 $ 440
Compensation.................... 170 257
Affiliate....................... 75 23
Other........................... 36 27
--------- ---------
$ 746 $ 747
========= =========
3. LONG-TERM DEBT AND LINE OF CREDIT:
Long-term debt consisted of the following:
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
Revolving credit loan................ $ -- $ 201
Term loans........................... 886 919
--------- ---------
Total debt................. 886 1,120
Less current portion................. 293 236
--------- ---------
Total long-term debt....... $ 593 $ 884
========= =========
The aggregate maturities of long-term debt as of December 31, 1995 for each
of the next five years were as follows (in thousands):
1996................................. $ 236
1997................................. 228
1998................................. 179
1999................................. 81
2000................................. 113
Thereafter........................... 283
---------
$ 1,120
=========
In August 1995, the Company entered into a collateralized revolving credit
agreement for $400,000 to be used for the renovation of and purchase of
equipment for a new clinical facility. All advances under this credit facility
bear interest at the rate of 2.5% above the prime rate (8.25% at December 31,
1995). At
F-25
<PAGE>
1ST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995, the outstanding balance of this credit facility was $201,000.
The line of credit is payable on demand and is renewable annually with advances
amortized over a five year period. The credit agreement contains customary
restrictive covenants that include, but are not limited to, requiring the
Company to meet certain financial ratios. The Company was in compliance with all
loan covenants to which it was subject as of December 31, 1995.
At December 31, 1995, the Company had several term loans payable to various
banks for a total principal balance of $794,000. These loans are collateralized
by the assets of the Company and have fixed interest rates ranging from 7.58% to
11.00% per year. All notes are payable in monthly installments through March
2001. In addition, the Company has a term loan collateralized by the personal
assets of the shareholders with a balance of $125,000 at December 31, 1995. The
note bears interest at a fixed rate of 16% per year and is payable in monthly
installments of principal and interest of $6,400 through January 1997.
In March 1995, the Company paid a note payable to a bank. The note was in
held in receivership and extinguishment of this debt resulted in a gain of
$112,000, which has been reflected in the Company's statement of operations as
an extraordinary gain.
4. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
Future minimum lease payments under noncancelable operating leases with
remaining terms of one or more years consisted of the following at December 31,
1995 (in thousands):
OPERATING
----------
1996.................................... $ 418
1997.................................... 349
1998.................................... 248
1999.................................... 137
2000.................................... 83
Thereafter.............................. 44
----------
Total minimum obligation................ $1,279
==========
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
5. INCOME TAXES:
The differences between the statutory federal tax rate and the Company's
effective tax rate were as follows:
DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
Tax at U.S. statutory rate (34%)........ $ 109 $ 74 $ 120
State income taxes, net of federal
tax................................... 6 4 11
Income not subject to corporate level
federal tax........................... (115) (78) (131)
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
F-26
<PAGE>
1ST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. SUPPLEMENTAL CASH FLOW INFORMATION:
DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
Cash paid during the period for:
Interest........................... $ 48 $ 83 $ 106
========= ========= =========
7. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:
CREDIT RISK
The Company grants patients credit in the normal course of business. The
credit risk with respect to these patient receivables is generally considered
minimal because procedures are in effect to monitor the creditworthiness of
patients and appropriate allowances are made to reduce accounts to their net
realizable values.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies.
The carrying amounts of cash and cash equivalents, receivables and accounts
payable approximate fair values due to the short-term maturities of these
instruments. The carrying amounts of the Company's fixed rate long-term
borrowings as of December 31, 1994 and 1995, respectively, approximate their
fair value.
The carrying value of the Company's revolving credit agreement approximates
fair value because the rate on such agreement is variable, based on current
market.
8. SUBSEQUENT EVENTS:
On March 31, 1996, the Company closed a facility due to ongoing operating
losses. It is not management's intent to reopen this facility. The Company wrote
off certain assets associated with this facility in 1995. For the period ended
December 31, 1995, the Company recognized a loss of $41,000.
The assets of the Company were acquired by Castle Dental Centers of Florida
in May 1996.
9. RELATED PARTY TRANSACTIONS:
The Company purchases dental supplies from an affiliated company
wholly-owned by the company's stockholder. For the years ended 1993 and 1994,
the Company purchased $120,000 of dental supplies from this affiliate and none
in fiscal year ended 1995.
F-27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
Mid-South Dental Centers P.C.:
We have audited the accompanying balance sheets of Mid-South Dental Centers
as of December 31, 1994 and 1995, and the related combined statements of
operations, changes in stockholder's equity and cash flows for each of the three
years in the period ended December 31, 1995. These combined financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mid-South Dental Centers as
of December 31, 1994 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
June 10, 1996
F-28
<PAGE>
MID-SOUTH DENTAL CENTERS
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
--------------------
1994 1995
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents....... $ 52 $ 166
Patient receivables, net of
allowance for uncollectible
accounts of $28
and $108 in 1994 and 1995,
respectively................... 247 281
Unbilled patient receivables,
net of allowance for
uncollectible accounts
of $9 and $12 in 1994 and
1995, respectively............. 50 66
Notes receivable shareholder.... 84 --
Other current assets............ 14 12
--------- ---------
Total current
assets................. 447 525
Property and equipment, net.......... 504 510
Other assets......................... 20 14
--------- ---------
Total assets.......... $ 971 $ 1,049
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term
debt........................... $ 50 $ 99
Current portion of capital lease
obligations.................... 118 98
Accounts payable and accrued
expenses....................... 240 209
--------- ---------
Total current
liabilities............ 408 406
Long-term debt, net of current
portion............................ 254 399
Capital lease obligations, net of
current portion.................... 123 112
Commitments and contingencies
Common stock, $1 par value, 1,000
shares authorized, 1,000 shares
issued
and outstanding.................... 1 1
Additional paid-in capital........... 4 4
Retained earnings.................... 181 127
--------- ---------
Stockholder's
equity.............. 186 132
--------- ---------
Total liabilities and
stockholder's
equity.............. $ 971 $ 1,049
========= =========
The accompanying notes are an integral part of the financial statements.
F-29
<PAGE>
MID-SOUTH DENTAL CENTERS
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Net patient revenues................. $ 4,290 $ 4,871 $ 5,435
--------- --------- ---------
Expenses:
Dentists' salaries................. 710 844 920
Clinical salaries.................. 1,606 1,818 2,063
Dental supplies and laboratory
fees............................ 520 642 732
Rental and lease expense........... 283 293 321
Advertising and marketing.......... 149 163 178
Depreciation and amortization...... 124 121 149
Other operating expenses........... 147 147 210
General and administrative......... 317 367 394
Compensation to stockholder........ 270 312 457
--------- --------- ---------
Total expenses................ 4,126 4,707 5,424
--------- --------- ---------
Operating income.............. 164 164 11
Interest expense..................... 20 32 65
--------- --------- ---------
Net income (loss).................... $ 144 $ 132 $ (54)
========= ========= =========
If all of the Company's operations
had been subject to income
taxes, net loss would have been as
follows (unaudited):
Historical loss before income
taxes........................... $ (54)
Benefit for income taxes........... (20)
---------
Pro forma net loss................. $ (34)
=========
The accompanying notes are an integral part of the financial statements.
F-30
<PAGE>
MID-SOUTH DENTAL CENTERS
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID-IN RETAINED TOTAL
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993........... 1,000 $ 1 $ 4 $ 1 $ 6
Net income......................... -- -- -- 144 144
--
------ ------ -------- ------
Balance at December 31, 1993......... 1,000 1 4 145 150
Distribution to shareholder........ -- -- -- (96) (96 )
Net income......................... -- -- -- 132 132
--
------ ------ -------- ------
Balance at December 31, 1994......... 1,000 1 4 181 186
Net loss........................... -- -- -- (54) (54 )
--
------ ------ -------- ------
Balance at December 31, 1995......... 1,000 $ 1 $ 4 $ 127 $ 132
====== ====== == ======== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-31
<PAGE>
MID-SOUTH DENTAL CENTERS
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Cash flows from operating activities:
Net income (loss).................. $ 144 $ 132 $ (54)
Adjustments:
Provision for bad debts....... 12 36 86
Depreciation and
amortization.............. 124 121 149
Changes in operating assets
and liabilities:
Patient receivables...... (56) (103) (117)
Unbilled patient
receivables.......... (59) (19)
Other current assets..... 13 (14) 2
Other assets............. 2 (1) 7
Accounts payable and
accrued
liabilities.......... (16) (42) (31)
--------- --------- ---------
Net cash provided
by operating
activities...... 223 70 23
--------- --------- ---------
Cash flows used in investing
activities -- capital expenditures.... (31) (30) (56)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from debt................. -- 313 256
Repayment of debt.................. (126) (44) (83)
Repayment of capital leases........ (66) (77) (110)
Distributions to stockholder....... -- (96) --
Notes receivable stockholder....... -- (84) 84
--------- --------- ---------
Net cash provided
by (used in)
financing
activities...... (192) 12 147
--------- --------- ---------
Net change in cash and cash
equivalents........................... -- 52 114
Cash and cash equivalents at beginning
of period............................. -- -- 52
--------- --------- ---------
Cash and cash equivalents, at end of
period................................ $ -- $ 52 $ 166
========= ========= =========
The accompanying notes are an integral part of the financial statements.
F-32
<PAGE>
MID-SOUTH DENTAL CENTERS
NOTES TO FINANCIAL STATEMENTS
1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CORPORATE ORGANIZATION
Mid-South Dental Centers (the "Company") is a provider of dental and
orthodontics services and products that owns and operates dental centers in the
Nashville and Chattanooga, Tennessee areas.
The statements reflect the operations of Mid-South Dental Centers P.C.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 net revenue and expenses during each
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt investments with original
maturities of three months or less when purchased to be cash equivalents. The
carrying amounts approximate fair value because of the short maturity.
The Company maintains cash balances at various financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. The Company's accounts at these institutions may, at
times, exceed the federally insured limits. The Company has not experienced any
losses in such accounts.
REVENUE RECOGNITION
Net patient revenues represent amounts billed to patients for services
performed by affiliated dentists. Dental revenue is recognized as the services
are performed and billed. Orthodontic revenue is recognized in accordance with
the proportional performance method. Under this method, revenue is recognized as
cost of services are incurred under the terms of contractual agreements with
each patient. Approximately 25% of services are performed in the first month
with the remaining services recognized ratably over the remainder of the
contract. Billings under each contract, which average approximately 28 months,
are made equally throughout the term of the contract, with final payment at the
completion of the treatment.
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payers for services provided
by dentists. An allowance for doubtful accounts is recorded by the Company based
on historical experience.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment, which include the amortization of assets recorded under
capital leases, are provided using the straight-line method over the estimated
useful lives of the various classes of depreciable assets, ranging from five to
ten years. Fully depreciated assets are retained in property and equipment until
they are removed from service. Fully depreciated assets as of December 31, 1994
and 1995 were approximately $376,000. Maintenance and repairs are charged to
expenses whereas renewals and major replacements are capitalized. Gains and
losses from dispositions are included in operations.
DEBT ISSUANCE COSTS
The costs related to the issuance of debt are capitalized and amortized
using the effective interest method over the lives of the related debt.
F-33
<PAGE>
MID-SOUTH DENTAL CENTERS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company is a Subchapter S entity and, accordingly, all federal and
state tax liabilities are the responsibility of the shareholder.
Income taxes, including pro forma calculations, are determined under the
liability method. Under this method, deferred taxes are based on the differences
between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted marginal tax rates currently in effect.
ADVERTISING
Costs incurred for advertising are expensed when incurred.
RECENT FASB PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" which establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The Company adopted SFAS No. 121 during the first quarter of
1996. Implementation of this standard did not have a material effect on the
Company's financial position, results of operations or cash flows.
2. SELECTED BALANCE SHEET INFORMATION:
The details of certain balance sheet accounts are as follows:
DECEMBER 31
--------------------
1994 1995
--------- ---------
Property and equipment:
Equipment....................... $ 892 $ 1,026
Leasehold improvements.......... 301 313
Furniture and fixtures.......... 93 101
--------- ---------
Total property and
equipment.................. 1,286 1,440
Less accumulated depreciation
and amortization................ 782 930
--------- ---------
Net property and
equipment.................. $ 504 $ 510
========= =========
DECEMBER 31
--------------------
1994 1995
--------- ---------
Accounts payable and accrued
liabilities:
Trade........................... $ 178 $ 134
Accrued liabilities............. 62 75
--------- ---------
$ 240 $ 209
========= =========
F-34
<PAGE>
MID-SOUTH DENTAL CENTERS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. LONG-TERM DEBT:
Long-term debt consisted of the following:
DECEMBER 31
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
Term loans........................... $ 304 $ 498
Less current portion................. 50 99
--------- ---------
Total long-term debt....... $ 254 $ 399
========= =========
The aggregate maturities of long-term debt as of December 31, 1995 for each
of the next five years were as follows (in thousands):
1996.................................... $ 99
1997.................................... 112
1998.................................... 112
1999.................................... 123
2000.................................... 52
---------
$ 498
=========
In December 1994, the Company entered into a term loan payable for
$300,000. Principal and interest are payable in monthly installments of $6,000
(including interest) through November 1999, at which time all unpaid principal
together with accrued but unpaid interest shall be due and payable in full. The
note accrues interest at a rate of 9.2% per year and is collateralized by
certain equipment of the Company.
In December of 1995, the Company entered into a term loan for approximately
$78,000 collateralized by certain equipment of the Company. The note accrues
interest at a rate of 8.2% per year with principal and interest payments due
monthly through November 2000.
Also in December 1995, the Company entered into a term loan for
approximately $157,000 collateralized by the personal guaranty of the owner of
the Company. The note accrues interest at a rate of 9.7% per year with principal
and interest payments of $3,000 due monthly through November 2000.
F-35
<PAGE>
MID-SOUTH DENTAL CENTERS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
The Company leases a portion of its property and equipment under capital
and operating leases. Future minimum lease payments under capital leases and
noncancelable operating leases with remaining terms of one or more years
consisted of the following at December 31, 1995 (in thousands):
CAPITAL OPERATING
-------- ----------
1996.................................... $ 109 $ 252
1997.................................... 72 232
1998.................................... 25 226
1999.................................... 25 211
2000.................................... 9 164
Thereafter.............................. -- 330
-------- ----------
Total minimum lease obligations......... 240 $1,415
==========
Less amount representing interest....... 30
--------
Present value of minimum lease
obligations........................... 210
Less current portion............... 98
--------
Long-term capital lease obligations..... $ 112
========
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
5. INCOME TAXES:
The differences between the federal tax rate and the Company's effective
tax rate at December 31 were as follows:
1993 1994 1995
--------- --------- ---------
Tax at U.S. statutory rate (34%)........ $ 49 $ 45 $ (18)
State income taxes, net of federal
tax................................... 4 4 (2)
Income not subject to corporate level
federal tax........................... (53) (49) 20
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
6. SUPPLEMENTAL CASH FLOW INFORMATION:
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Cash paid during the period for
interest.............................. $ 20 $ 32 $ 65
Noncash transactions -- capital lease
obligations........................... $ 73 $ 206 $ 100
7. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:
CREDIT RISK
The Company grants patients credit in the normal course of business. The
credit risk with respect to these patient receivables is generally considered
minimal because procedures are in effect to monitor the
F-36
<PAGE>
MID-SOUTH DENTAL CENTERS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
creditworthiness of patients and appropriate allowances are made to reduce
accounts to their net realizable values.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies.
The carrying amounts of cash and cash equivalents, receivables and accounts
payable approximate fair values due to the short-term maturities of these
instruments. The carrying amounts of the Company's fixed rate long-term
borrowings as of December 31, 1994 and 1995, respectively, approximate their
fair value.
The carrying value of the Company's revolving credit agreement approximates
fair value because the rate on such agreement is variable, based on current
market.
8. SUBSEQUENT EVENT:
The assets of the Company were acquired by Castle Dental Centers of
Tennessee in May, 1996.
9. RELATED PARTY TRANSACTIONS:
The Company leased certain assets from the owner of the Company. Lease
expense related to these assets for each of the years ended 1993, 1994, and 1995
was approximately $44,000.
F-37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
Horizon Dental Centers:
We have audited the accompanying combined balance sheet of Horizon Dental
Centers as of December 31, 1995, and the related combined statements of
operations, changes in stockholder's equity (deficit) and cash flows for each of
the two years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Horizon Dental
Centers as of December 31, 1994 and 1995, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1995,
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND
L.L.P.
Houston, Texas
August 15, 1996
F-38
<PAGE>
HORIZON DENTAL CENTERS
COMBINED BALANCE SHEET
DECEMBER 31, 1995
(IN THOUSANDS)
DECEMBER 31,
1995
------------
ASSETS
Current assets:
Cash and cash equivalents....... $ 50
Patient receivables............. 160
Other current assets............ 4
------------
Total current assets....... 214
Property and equipment, net..... 26
Receivable from affiliate....... 809
------------
Total assets............... $1,049
============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current portion of long-term
debt............................ $ 458
Accounts payable and accrued
liabilities..................... 6
------------
Total current
liabilities.................. 464
Long-term debt....................... 659
Commitments and contingencies
Common stock......................... 10
Accumulated deficit.................. (84)
------------
Total liabilities and
stockholder's deficit........ $1,049
============
The accompanying notes are an integral part of the combined financial
statements.
F-39
<PAGE>
HORIZON DENTAL CENTERS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER
31,
--------------------
1994 1995
--------- ---------
Net patient revenues................. $ 5,652 $ 5,430
--------- ---------
Expenses:
Professional fees and clinic
expenses........................ 3,006 3,012
Dental supplies and laboratory
fees............................ 124 132
Affiliate management fee........... 1,694 1,249
Rent expense....................... 615 520
Advertising and marketing.......... 264 162
General and administrative......... 106 110
Other operating expenses........... 58 58
--------- ---------
Total expenses................ 5,867 5,243
--------- ---------
Operating income (loss)....... (215) 187
--------- ---------
Interest expense..................... 37 44
--------- ---------
Net income (loss).................... $ (252) $ 143
========= =========
If all of the Company's operations
had been subject to income taxes,
net income would have been as
follows (unaudited):
Historical income before income
taxes........................... $ 143
Provision for income taxes......... 54
---------
Net income......................... $ 89
=========
The accompanying notes are an integral part of the combined financial
statements.
F-40
<PAGE>
HORIZON DENTAL CENTERS
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS)
RETAINED
EARNINGS
COMMON (ACCUMULATED
STOCK DEFICIT)
------ ------------
Balance, January 1, 1994............. $ 9 $ 25
Stock issued.................... 1 --
Net loss........................ -- (252)
------ ------------
Balance, December 31, 1994........... 10 (227)
Net income...................... -- 143
------ ------------
Balance, December 31, 1995........... $ 10 $ (84)
====== ============
The accompanying notes are an integral part of the combined financial
statements.
F-41
<PAGE>
HORIZON DENTAL CENTERS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
DECEMBER 31,
--------------------
1994 1995
--------- ---------
Cash flows from operating activities:
Net income (loss).................. $ (252) $ 143
Adjustments:
Depreciation and amortization... 2 2
Changes in operating assets and
liabilities:
Patient receivables........... (22) 10
Other current assets.......... (5) 4
Accounts payable and accrued
liabilities.................. (5) --
--------- ---------
Net cash provided by (used
in) operating
activities.............. (282) 159
--------- ---------
Cash flows used in investing
activities -- capital
expenditures....................... (20) (9)
--------- ---------
Cash flows from financing activities:
Proceeds from debt................. 577 351
Repayment of debt.................. (276) (453)
--------- ---------
Net cash provided by (used
in) financing
activities.............. 301 (102)
--------- ---------
Net change in cash and cash
equivalents........................ (1) 48
Cash and cash equivalents, beginning
of period.......................... 3 2
--------- ---------
Cash and cash equivalents, end of
period............................... $ 2 $ 50
========= =========
The accompanying notes are an integral part of the combined financial
statements.
F-42
<PAGE>
HORIZON DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CORPORATE ORGANIZATION
Horizon Dental Centers (the "Company") is a provider of dental services
and products that operates dental practices in central and north Texas. The
combined financial statements for 1994 and 1995 reflect the operations of the
following corporations because these entities were under common control:
FEDERAL INCOME
NAME OF COMPANY TAX STATUS
- ---------------------------------------- ---------------
CA Dental Services, PC.................. S Corp.
NA Dental Services, PC.................. S Corp.
SCA Dental Services, PC................. S Corp.
SA Dental Services, PC.................. S Corp.
EFW Dental Services, PC................. C Corp.
NEFW Dental Services, PC................ C Corp.
HDC Dental Services, PC................. C Corp.
MIDCITIES Services, PC.................. C Corp.
West Fort Worth Dental Services, PC..... C Corp.
Austin Periodontist Assoc., Inc......... C Corp.
All significant intercompany accounts and transactions have been eliminated
in combination.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 periods. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt investments with original
maturities of three months or less when purchased to be cash equivalents. The
carrying amounts approximate fair value because of the short maturity.
The Company maintains cash balances at various financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. The Company's accounts at these institutions may, at
times, exceed the federally insured limits. The Company has not experienced any
losses in such accounts.
REVENUE RECOGNITION
Net patient revenues represent amounts billed to patients for services
performed by affiliated dentists. Dental revenue is recognized as the services
are performed and billed. Accounts receivable consist primarily of receivables
from patients, insurers, and other third-party payers for dental services
provided by dentists. Such amounts are reduced by an allowance for uncollectible
accounts based on historical experience.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment, which include the amortization of assets recorded under
capital leases, are provided using the straight-line method over the estimated
useful lives of the various classes of depreciable assets, ranging from five to
seven years. Maintenance and repairs are charged to expense whereas renewals and
major replacements are capitalized. Gains and losses from dispositions are
included in operations.
F-43
<PAGE>
HORIZON DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
All federal and state income tax liabilities are the responsibility of the
shareholder for the Companies that are Subchapter S Corporations.
The Subchapter C Corporations utilize the liability method for income
taxes. Under this method, deferred taxes are determined based on differences
between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates currently in effect when the differences
reverse.
ADVERTISING
Advertising costs are expensed when incurred.
RECENT FASB PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The Company adopted SFAS No. 121 during the first quarter of
1996. Implementation of SFAS No. 121 did not have a material impact on its
financial position, results of operations or cash flows.
2. LONG-TERM DEBT:
Long-term debt consisted of the following:
DECEMBER 31,
1995
--------------
(IN THOUSANDS)
Notes payable........................ $1,117
Less current portion................. 458
--------------
Total long-term debt....... $ 659
==============
The aggregate maturities of long-term debt as of December 31, 1995 for each
of the next five years were as follows (in thousands):
1996................................. $ 458
1997................................. 446
1998................................. 213
---------
$ 1,117
=========
The Company has various fixed rate commercial promissory notes outstanding,
that are collateralized by assets used in the Company's operations. The assets
have been sold to Consolidated Industries Inc., an entity owned by the
stockholder. The Company recorded a receivable from this affiliate. The
promissory notes are payable in monthly installments of principal and interest
ranging from $8,000 to $9,000 and have varying maturity dates through 1998.
Interest rates on these notes vary at rates ranging from 17% to 21% per year.
The affiliate makes payments of principal and interest on this debt, the
principal payments are reflected as a reduction of the receivable and the debt.
The interest cost is borne by the affiliate and incorporated into the management
fees paid by the Company (see Note 6).
F-44
<PAGE>
HORIZON DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. COMMITMENT AND CONTINGENCIES:
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material adverse
effect on the Company's financial position, results of operations or cash flows.
4. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:
CREDIT RISK
The Company grants patients credit in the normal course of business. The
credit risk with respect to these patient receivables is generally considered
minimal because procedures are in effect to monitor the credit worthiness of
patients and appropriate allowances are made to reduce accounts to their net
realizable values.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies.
The carrying amounts of cash and cash equivalents, receivables and accounts
payable approximate fair values due to the short-term maturities of these
instruments. The carrying amounts of the Company's long-term borrowings as of
December 31, 1994 and 1995, respectively, approximate their fair value.
5. AFFILIATE MANAGEMENT AGREEMENT:
The Company has entered into a management agreement with Consolidated
Industries Inc., an entity owned by the Company's stockholder. Under the
agreement Consolidated provides services to the Company for a fixed fee. These
services include consultation and management services and the use of office
equipment and facilities. Fees paid to the affiliate were $1,694,000 and
$1,249,000 for 1994 and 1995, respectively.
6. PROFESSIONAL FEE AND CLINICAL AGREEMENT:
The Company has entered into professional and clinical agreements with
various professional corporations. The agreements are for services to be
provided to the Company for daily services of dentists, clinical support, and
daily management of each facility. Such fees incurred under these agreements
were $3,006,000 and $3,012,000 for 1994 and 1995, respectively.
7. SUBSEQUENT EVENTS:
Castle Dental Centers of Texas acquired certain assets and stock of the
entities described in Note 1 during August 1996.
F-45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Jules V. Lane, Professional Corporation, and
Lisadent Corp. and the owner of
Jules V. Lane, D.D.S.:
We have audited the accompanying combined balance sheets of American Dental
Centers as of December 31, 1994 and 1995, and the related combined statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. These combined financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of American Dental
Centers as of December 31, 1994 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND
L.L.P.
Houston, Texas
September 3, 1996
F-46
<PAGE>
AMERICAN DENTAL CENTERS
COMBINED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS)
DECEMBER 31,
--------------------
1994 1995
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents....... $ 1,049 $ 401
Investments in marketable
securities..................... 930 1,567
Accounts receivable, net of
allowance for doubtful accounts
of
$2,106 and $2,158 in 1994 and
1995, respectively............. 2,443 1,291
Inventory....................... 102 128
--------- ---------
Total current assets....... 4,524 3,387
Property and equipment, net.......... 975 706
Other assets......................... 12 12
--------- ---------
Total assets............... $ 5,511 $ 4,105
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities.................... $ 517 $ 480
--------- ---------
Total current
liabilities.............. 517 480
Commitments and contingencies
Common Stock:
Jules V. Lane, Professional
Corporation, no par, 200 shares
authorized, 100 shares issued
and outstanding................ 20 20
Lisadent, Corp. no par, 200
authorized, 200 issued and
outstanding.................... 1 1
Additional paid-in capital........... 11 11
Retained earnings.................... 4,962 3,593
--------- ---------
Stockholders' equity....... 4,994 3,625
--------- ---------
Total liabilities and
stockholders' equity..... $ 5,511 $ 4,105
========= =========
The accompanying notes are an integral part of the combined financial
statements.
F-47
<PAGE>
AMERICAN DENTAL CENTERS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Net patient revenues................. $ 16,275 $ 16,386 $ 15,291
Expenses:
Dentists' fees.................. 3,580 3,655 3,684
Clinical salaries............... 4,422 5,049 4,829
Dental supplies and laboratory
fees.......................... 1,368 1,736 1,563
Rental and lease expense........ 863 773 755
Advertising and marketing....... 55 38 179
Depreciation and amortization... 362 348 370
Other operating expenses........ 892 942 911
General and administrative...... 1,235 1,027 919
Compensation to stockholders.... 2,321 2,434 2,164
--------- --------- ---------
Total expenses............. 15,098 16,002 15,374
--------- --------- ---------
Net income (loss).................... $ 1,177 $ 384 $ (83)
========= ========= =========
If all of the Company's operations
had been subject to income taxes,
net loss would have been as follows
(unaudited):
Historical loss before income
taxes......................... $ (83)
Benefit for income taxes........ (34)
---------
Pro forma net loss.............. $ (49)
=========
The accompanying notes are an integral part of the combined financial
statements.
F-48
<PAGE>
AMERICAN DENTAL CENTERS
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED TOTAL
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993........... 300 $ 21 $ 11 $ 7,166 $ 7,198
Distributions to shareholder.... -- -- -- (2,630) (2,630)
Net income...................... -- -- -- 1,177 1,177
------ ------ --- --------- -------
Balance at December 31, 1993......... 300 21 11 5,713 5,745
Distribution to shareholder..... -- -- -- (1,135) (1,135)
Net income...................... -- -- -- 384 384
------ ------ --- --------- -------
Balance at December 31, 1994......... 300 21 11 4,962 4,994
Distributions to shareholder.... -- -- -- (1,286) (1,286)
Net loss........................ -- -- -- (83) (83)
------ ------ --- --------- -------
Balance at December 31, 1995......... 300 $ 21 $ 11 $ 3,593 $ 3,625
====== ====== === ========= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-49
<PAGE>
AMERICAN DENTAL CENTERS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Cash flows from operating activities:
Net income (loss)............... $ 1,177 $ 384 $ (83)
Adjustments:
Provision for bad debts.... 225 91 52
Depreciation and
amortization............ 362 348 370
Changes in operating assets
and liabilities:
Patient receivables... (109) 704 1,100
Inventory............. 75 42 (26)
Other assets.......... 2 1
Accounts payable and
accrued
liabilities........ (39) (206) (37)
--------- --------- ---------
Net cash
provided by
operating
activities.... 1,693 1,364 1,376
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures............ (89) (208) (101)
Purchases of investments........ (1,480) (901) (1,516)
Proceeds from maturity of
investments................... -- 1,480 879
--------- --------- ---------
Net cash
provided by
(used in)
investing
activities.... (1,569) 371 (738)
Cash flows from financing activities:
Distributions to stockholder.... (2,630) (1,135) (1,286)
Proceeds from stockholder note
receivable.................... 1,020
--------- --------- ---------
Net cash used in
financing
activities.... (1,610) (1,135) (1,286)
--------- --------- ---------
Net change in cash and cash
equivalents........................ (1,486) 600 (648)
Cash and cash equivalents at
beginning of period................ 1,935 449 1,049
--------- --------- ---------
Cash and cash equivalents, at end of
period............................. $ 449 $ 1,049 $ 401
========= ========= =========
The accompanying notes are an integral part of the combined financial
statements.
F-50
<PAGE>
AMERICAN DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CORPORATE ORGANIZATION
Jules V. Lane, Professional Corporation, doing business as American Dental
Centers (the "Company"), is a provider of dental and orthodontics services and
products in the Long Island, Westchester County and New York City, New York
areas.
The combined statements reflect the operations of Jules V. Lane,
Professional Corporation, Jules V. Lane, D.D.S., and Lisadent Corp. because all
entities are under common control. All significant intercompany accounts and
transactions have been eliminated in combination.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 net revenue and expenses during each
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt investments with original
maturities of three months or less when purchased to be cash equivalents. The
carrying amounts approximate fair value because of the short maturity.
The Company maintains cash balances at various financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. The Company's accounts at these institutions may, at
times, exceed the federally insured limits. The Company has not experienced any
losses in such accounts.
REVENUE RECOGNITION
Net patient revenues represent amounts billed to patients for services
performed by affiliated dentists. Dental revenue is recognized as the services
are performed and billed. Orthodontic revenue is recognized in accordance with
the proportional performance method. Under this method, revenue is recognized as
services are incurred under the terms of contractual agreements with each
patient. Approximately 25% of services are performed in the first month with the
remaining services recognized ratably over the remainder of the contract. The
remaining billings under each contract, which average approximately 28 months,
are made equally throughout the term of the contract, with final payment at the
completion of the treatment. The Company typically receives a 25% payment at the
time the contract is signed.
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payers for services provided
by dentists. An allowance for doubtful accounts is recorded by the Company based
on historical experience.
INVESTMENTS
The Company has adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities," which
requires that investments in debt securities and marketable equity securities be
designated as trading, held-to-maturity or available for sale. At
December 31, 1994 and 1995, investments have been categorized as available for
sale, are stated at amortized cost, which approximates fair market value, and
are classified in the balance sheets as current assets. Investments at December
31, 1994 and 1995 consisted of U.S. Treasury bills and certificates of deposit.
F-51
<PAGE>
AMERICAN DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The realized gains and losses on the sale of investments classified as
available for sale are determined using the specific identification method are
included in net income. Unrealized gains/(losses) on securities available for
sale are excluded from earnings and reported in a separate component of
stockholders' equity. There were no material gains or losses either realized or
unrealized for the years ended December 31, 1994, 1995 and 1996.
INVENTORY
Inventory consists primarily of dental and office supplies and is stated at
the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment are provided using the straight-line method over the
estimated useful lives of the various classes of depreciable assets, ranging
from seven to ten years. Fully depreciated assets are retained in property and
equipment until they are removed from service. Fully depreciated assets as of
December 31, 1994 and 1995 were approximately $1,644,000. Maintenance and
repairs are charged to expenses whereas renewals and major replacements are
capitalized. Gains and losses from dispositions are included in operations.
INCOME TAXES
Jules V. Lane, Professional Corporation, and Jules V. Lane, D.D.S. are a
Subchapter S corporation and a sole proprietorship, respectively, and,
accordingly, all federal and state tax liabilities are the responsibility of the
shareholder. Lisadent Corp., a C corporation, is responsible for its own federal
and state tax liabilities.
Income taxes, including pro forma calculations, are determined under the
liability method. Under this method, deferred taxes are based on the differences
between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted marginal tax rates currently in effect.
ADVERTISING
Advertising costs are expensed when incurred.
RECENT FASB PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" which establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The Company adopted SFAS No. 121 during the first quarter of
1996. Implementation of this standard did not have a material effect on the
Company's financial position, results of operations or cash flows.
F-52
<PAGE>
AMERICAN DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SELECTED BALANCE SHEET INFORMATION:
The details of certain balance sheet accounts are as follows:
DECEMBER 31,
--------------------
1994 1995
------ ------
Property and equipment:
Equipment ...................................... $1,244 $1,287
Leasehold improvements ......................... 2,814 2,830
Furniture and fixtures ......................... 696 739
------ ------
Total property and
equipment .............................. 4,754 4,856
Less accumulated depreciation and
amortization ................................ 3,779 4,150
------ ------
Net property and equipment ................ $ 975 $ 706
====== ======
Accounts payable and accrued
liabilities:
Trade .......................................... $ 223 $ 202
Accrued payroll and related
taxes ....................................... 294 278
------ ------
$ 517 $ 480
====== ======
3. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
The Company leases a portion of its property and equipment under operating
leases. Future minimum lease payments under operating leases with remaining
terms of one or more years consisted of the following at December 31, 1995 (in
thousands):
OPERATING
---------
1996................................. $ 404
1997................................. 214
1998................................. 46
1999................................. 50
2000................................. 54
Thereafter........................... 327
---------
Total minimum obligations............ $ 1,095
=========
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material effect on
the Company's financial position, results of operations or liquidity.
4. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:
CREDIT RISK
The Company grants patients credit in the normal course of business. The
credit risk with respect to these patient receivables is generally considered
minimal because procedures are in effect to monitor the creditworthiness of
patients and appropriate allowances are made to reduce accounts to their net
realizable values.
Approximately 55%, 57% and 54% of revenue in 1993, 1994 and 1995,
respectively, was generated from nine payors.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, investments, receivables
and accounts payable approximate fair values due to the short-term maturities of
these instruments.
F-53
<PAGE>
AMERICAN DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. RELATED PARTY TRANSACTIONS:
The Company paid $249,000, $227,000 and $163,000 in 1993, 1994, and 1995,
respectively to a third party claims administrator wholly-owned by the Company's
stockholders for health and disability insurance claims on behalf of its
employees. The Company also paid $134,000, $109,000 and $107,000 in 1993, 1994
an 1995, respectively, for operating expenses to that insurance company.
The Company paid $551,000, $598,000 and $555,000 in 1993, 1994 and 1995,
respectively, to a company owned by the Company's stockholders for rent relating
to various dental center locations.
The Company paid auto, computer and various office equipment rentals of
$69,000, $62,000 and $66,000 in 1993, 1994 and 1995, respectively, to a company
owned by relatives of the stockholders.
The Company shares certain assets, office space, administrative employees'
services and certain other costs with the various affiliated businesses. The
respective costs were allocated among those businesses based on managements'
determination. Most of such costs are general and administrative in nature. The
Company from time to time has provided and received certain services from
affiliated businesses at no charge. The value of the services received each year
for 1993, 1994 and 1995, exceeded that of services provided by approximately
$100,000 each year.
6. SUBSEQUENT EVENT:
In September 1996, the Company entered into a definitive agreement with
Castle Dental Centers of New York ("Castle") whereby Castle would acquire
certain assets and liabilities for cash and stock consideration.
F-54
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
United DentalCare:
We have audited the accompanying balance sheet of United DentalCare as of
December 31, 1995, and the related statements of operations, changes in
stockholder's equity and cash flows for each of the two years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of United DentalCare as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
July 2, 1996
F-55
<PAGE>
UNITED DENTALCARE
BALANCE SHEET
DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
1995
------------
ASSETS
Current assets:
Cash and cash equivalents....... $ 8
Patient receivables, net of
allowance for uncollectible
accounts of
$8 and $27 in 1994 and 1995,
respectively................... 97
Other current assets............ 3
------------
Total current
assets............... 108
Property and equipment, net.......... 354
------------
Total assets.......... $ 462
============
LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT)
Current liabilities:
Current portion of long-term
debt........................... $ 263
Accounts payable and accrued
expenses....................... 135
------------
Total current
liabilities.......... 398
Long-term debt....................... 79
Commitments and contingencies
Common stock, no par value, 1,000
shares authorized, 300 issued and
outstanding........................ 56
Accumulated deficit.................. (71)
Owner's equity....................... --
------------
Total liabilities and
stockholder's equity
(deficit)............ $ 462
============
The accompanying notes are an integral part of the financial statements.
F-56
<PAGE>
UNITED DENTALCARE
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER
31,
--------------------
1994 1995
--------- ---------
Net patient revenues................. $ 2,368 $ 3,148
--------- ---------
Expenses:
Dentists' salaries.............. 353 524
Clinical salaries............... 536 693
Dental supplies and laboratory
fees............................ 292 290
Rental and lease expense........ 74 196
Advertising and marketing....... 157 223
Depreciation and amortization... 50 74
Other operating expenses........ 141 183
General and administrative...... 472 948
--------- ---------
Total expenses............. 2,075 3,131
--------- ---------
Operating income........... 293 17
Interest expense..................... 30 25
--------- ---------
Net income (loss).................... $ 263 $ (8)
========= =========
If all of the Company's operations
had been subject to income taxes,
net loss would have been as follows
(unaudited):
Historical loss before taxes.... $ (8)
Benefit for income taxes........ (3)
---------
Pro forma net loss................... $ (5)
=========
The accompanying notes are an integral part of the financial statements.
F-57
<PAGE>
UNITED DENTALCARE
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
---------------- ACCUMULATED OWNER'S
SHARES AMOUNT DEFICIT EQUITY
------ ------ ----------- -------
Balance, January 1, 1994............. -- -- -- $ 18
Distribution to sole proprietor.... -- -- -- (225)
Net income......................... -- -- -- 263
------ ------ ----------- -------
Balance, December 31, 1994........... 56
Incorporation of subchapter S
corporation..................... 300 $ 56 -- (56)
Distribution to stockholder........ -- -- $ (63) --
Net loss........................... -- -- (8) --
------ ------ ----------- -------
Balance, December 31, 1995........... 300 $ 56 $ (71) $ --
====== ====== =========== =======
The accompanying notes are an integral part of the financial statements.
F-58
<PAGE>
UNITED DENTALCARE
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER
31,
--------------------
1994 1995
--------- ---------
Cash flows from operating activities:
Net income (loss).................. $ 263 $ (8)
Adjustments:
Provision for bad debts....... 8 19
Depreciation and
amortization................ 50 74
Changes in operating assets
and liabilities:
Patient receivables...... (34) (90)
Other current assets..... (3) --
Accounts payable and
accrued liabilities... 23 40
--------- ---------
Net cash provided
by operating
activities........ 307 35
--------- ---------
Cash flows used in investing
activities -- capital expenditures... (92) (144)
--------- ---------
Cash flows from financing activities:
Proceeds from debt................. 133 361
Repayment of debt.................. (108) (240)
Distributions to owner............. (225) (63)
--------- ---------
Net cash provided
by (used in)
financing
activities........ (200) 58
--------- ---------
Net change in cash and cash
equivalents........................... 15 (51)
Cash and cash equivalents, beginning of
period................................ 44 59
--------- ---------
Cash and cash equivalents, end of
period................................ $ 59 $ 8
========= =========
The accompanying notes are an integral part of the financial statements.
F-59
<PAGE>
UNITED DENTALCARE
NOTES TO FINANCIAL STATEMENTS
1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CORPORATE ORGANIZATION
United DentalCare (the "Company"), is a provider of dental services that,
owns and operates dental centers in the south central United States.
Effective January 1, 1995, the Arkansas Dental Centers were incorporated
under the name United DentalCare. Prior to that date the Company was a sole
proprietorship.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 periods. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt investments with original
maturities of three months or less when purchased to be cash equivalents. The
carrying amounts approximate fair value.
The Company maintains cash balances at various financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. The Company's accounts at these institutions may, at
times, exceed the federally insured limits. The Company has not experienced any
losses in such accounts.
REVENUE RECOGNITION
Net patient revenues represent amounts billed to patients for services
performed by affiliated dentists. Dental revenue is recognized as the services
are performed and billed. Accounts receivable consist primarily of receivables
from patients, insurers, and other third-party payers for dental services
provided by dentists. Such amounts are reduced by an allowance for bad debt
based on historical collection trends.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment, which include the amortization of assets recorded under
capital leases, are provided using the straight-line method over the estimated
useful lives of the various classes of depreciable assets, ranging from five to
forty years. Maintenance and repairs are charged to expense whereas renewals and
major replacements are capitalized. Gains and losses from dispositions are
included in operations.
INCOME TAXES
The Company was a sole proprietorship until January 1, 1995, at which point
it was incorporated and elected Subchapter S status for income tax purposes.
Therefore, all federal and state income tax liabilities are the responsibility
of the shareholder.
ADVERTISING
Advertising costs are expensed when incurred.
RECENT FASB PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", which establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for
F-60
<PAGE>
UNITED DENTALCARE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
long-lived assets and certain identifiable intangibles to be disposed of. The
Company adopted SFAS No. 121 during the first quarter of 1996. Implementation of
SFAS No. 121 did not have a material impact on its financial position, results
of operations or cash flows.
2. SELECTED BALANCE SHEET INFORMATION:
The details of certain balance sheet accounts are as follows:
DECEMBER 31,
1995
--------------
(IN THOUSANDS)
Property and equipment:
Equipment....................... $ 422
Furniture and fixtures.......... 35
Building and improvements....... 84
--------------
Total property and
equipment.................... 541
Less accumulated depreciation
and amortization............... 187
--------------
Property and equipment,
net.......................... $ 354
==============
Accounts payable and accrued
liabilities:
Trade........................... $ 74
Compensation and related
taxes.......................... 43
Related party................... 18
--------------
$ 135
==============
3. LONG-TERM DEBT:
Long-term debt consisted of the following:
DECEMBER 31,
1995
--------------
(IN THOUSANDS)
Line of credit.......................... $116
Notes payable........................... 150
Capital leases.......................... 76
--------------
Total debt.................... 342
Less current portion.................... 263
--------------
Total long-term debt.......... $ 79
==============
The aggregate maturities of long-term debt as of December 31, 1995 for each
of the next five years were as follows (in thousands):
1996.................................... $ 263
1997.................................... 34
1998.................................... 25
1999.................................... 18
2000.................................... 2
---------
$ 342
=========
The Company maintains a $150,000 revolving line of credit, which is
collateralized by substantially all the assets of the Company. The line of
credit is payable on demand and matures in June 1996. Interest is payable
quarterly at 1% plus the prime rate (8.25% at December 31, 1995).
F-61
<PAGE>
UNITED DENTALCARE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has various fixed rate commercial promissory notes outstanding,
which are collateralized by the Company's assets. The promissory notes have
varying maturity dates through 1999. Interest rates on these notes vary at rates
ranging from 5% to 12% per year.
4. COMMITMENT AND CONTINGENCIES:
LEASE COMMITMENTS
Future minimum lease payments under noncancelable operating leases with
remaining terms of one or more years consisted of the following at December 31,
1995 (in thousands):
OPERATING
----------
1996.................................... $ 99
1997.................................... 53
1998.................................... 43
1999.................................... 24
----------
Total minimum obligation................ $219
==========
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material adverse
effect on the Company's financial position, results of operations or cash flows.
5. SUPPLEMENTAL CASH FLOW INFORMATION:
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
Cash paid during the period for
interest.............................. $ 30 $ 25
Transfer of buildings and related notes
payable to sole proprietor............ -- 136
6. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:
CREDIT RISK
The Company grants patients credit in the normal course of business. The
credit risk with respect to these patient receivables is generally considered
minimal because procedures are in effect to monitor the creditworthiness of
patients and appropriate allowances are made to reduce accounts to their net
realizable values.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies.
The carrying amounts of cash and cash equivalents, receivables and accounts
payable approximate fair values due to the short-term maturities of these
instruments. The carrying amounts of the Company's long-term borrowings as of
December 31, 1994 and 1995, respectively, approximate their fair value.
The carrying value of the Company's revolving credit agreement approximates
fair value because the rate on such agreement is variable, based on current
market.
7. SUBSEQUENT EVENTS:
During 1996, the Company purchased the assets of a dental practice in
Oklahoma for total consideration of approximately $238,000.
F-62
<PAGE>
UNITED DENTALCARE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During June 1996, the Company entered into a letter of intent with Castle
Dental Centers of Arkansas ("Castle") whereby Castle would acquire certain of
its assets and liabilities for cash and stock consideration.
8. RELATED PARTY TRANSACTIONS:
The Company has set up an entity owned by its sole shareholder to act as
its advertising agency. The Company purchased advertising services of
approximately $44,000 and $139,000, respectively, for 1994 and 1995.
F-63
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Southwest Dental Associates:
We have audited the accompanying balance sheet of Southwest Dental
Associates as of December 31, 1995, and the related statements of operations,
changes in stockholders' equity and cash flows for the year ended December 31,
1995. 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 Southwest Dental Associates
as of December 31, 1995, and the results of its operations and its cash flows
for the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
Houston, Texas
September 25, 1996
F-64
<PAGE>
SOUTHWEST DENTAL ASSOCIATES
BALANCE SHEET
DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents....... $ 101
Patient receivables, net of
allowance for uncollectible
accounts of $170............... 164
Other current assets............ 30
-------
Total current
assets................. 295
Property and equipment, net.......... 334
Other assets......................... 2
-------
Total assets.......... $ 631
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt........................... $ 55
Current portion of capital lease
obligations.................... 37
Accounts payable and accrued
liabilities.................... 164
-------
Total current
liabilities............ 256
Long-term debt, net of current
portion............................ 128
Capital lease obligations, net of
current portion.................... 182
Commitments and contingencies
Common stock, $1 par value, 1,000
shares authorized, 1,000 shares
issued and outstanding............. 1
Retained earnings.................... 64
-------
Stockholders'
equity................. 65
-------
Total liabilities and
stockholders' equity... $ 631
=======
The accompanying notes are an integral part of the financial statements.
F-65
<PAGE>
SOUTHWEST DENTAL ASSOCIATES
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
Net patient revenue.................. $ 3,745
---------
Expenses:
Dentists' salaries.............. 672
Clinical salaries............... 1,051
Dental supplies and laboratory
fees........................... 641
Rental and lease expense........ 108
Advertising and marketing....... 90
Depreciation and amortization... 74
Other operating expenses........ 610
General and administrative...... 237
---------
Total expenses............. 3,483
---------
Operating profit........... 262
Interest expense..................... 43
---------
Net income........................... $ 219
=========
If all of the Company's operations
had been subject to income taxes,
net income would have been as
follows (unaudited):
Historical income before income
taxes........................... $ 219
Provision for income taxes...... 81
---------
Pro forma net income................. $ 138
=========
The accompanying notes are an integral part of the financial statements.
F-66
<PAGE>
SOUTHWEST DENTAL ASSOCIATES
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
---------------- RETAINED TOTAL
SHARES AMOUNT EARNINGS EQUITY
------ ------ --------- -------
Balance at January 1, 1995........... 1,000 $ 1 $ (24) $ (23)
Distribution to shareholders....... -- -- (131) (131)
Net income......................... -- -- 219 219
------ ------ --------- -------
Balance at December 31, 1995......... 1,000 $ 1 $ 64 65
====== ====== ========= =======
The accompanying notes are an integral part of the financial statements.
F-67
<PAGE>
SOUTHWEST DENTAL ASSOCIATES
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
Cash flows from operating activities:
Net income......................... $ 219
Adjustments:
Provision for bad debts....... 114
Depreciation and
amortization.................. 74
Changes in operating assets
and liabilities:
Patient receivables...... (224)
Other current assets..... (25)
Other assets............. (2)
Accounts payable and
accrued liabilities....... 34
---------
Net cash provided by
operating
activities............ 190
---------
Cash flows used in investing
activities -- capital expenditures.... (28)
---------
Cash flows from financing activities:
Repayment of debt.................. (46)
Repayment of capital leases........ (35)
Distributions to stockholders...... (131)
---------
Net cash used in
financing
activities............ (212)
---------
Net change in cash and cash
equivalents........................... (50)
Cash and cash equivalents at beginning
of period............................. 151
---------
Cash and cash equivalents at end of
period................................ $ 101
=========
The accompanying notes are an integral part of the financial statements.
F-68
<PAGE>
SOUTHWEST DENTAL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CORPORATE ORGANIZATION
Southwest Dental Associates (the "Company") is a provider of dental and
orthodontics services and products that owns and operates dental centers in the
Austin, Texas area.
The statements reflect the operations of Southwest Dental Associates, L.C.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 each
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt investments with original
maturities of three months or less when purchased to be cash equivalents. The
carrying amounts approximate fair value because of the short maturity.
The Company maintains cash balances at financial institutions. Accounts at
each institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company's accounts at these institutions may, at times, exceed the
federally insured limits. The Company has not experienced any losses in such
accounts.
REVENUE RECOGNITION
Net patient revenue represents amounts billed to patients for services
performed by affiliated dentists. Dental revenue is recognized as the services
are performed and billed.
Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payers for services provided
by dentists. An allowance for doubtful accounts is recorded by the Company based
on historical experience.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment, which include the amortization of assets recorded under
capital leases, are provided using the straight-line method over the estimated
useful lives of the various classes of depreciable assets, ranging from five to
ten years. Maintenance and repairs are charged to expenses whereas renewals and
major replacements are capitalized. Gains and losses from dispositions are
included in operations.
INCOME TAXES
The Company is a limited liability corporation and, accordingly, all
federal and state tax liabilities are the responsibility of the respective
shareholders.
Income taxes for the pro forma calculation are determined under the
liability method. Under this method, deferred taxes are based on the differences
between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted marginal tax rates currently in effect.
ADVERTISING
Advertising costs are expensed when incurred.
F-69
<PAGE>
SOUTHWEST DENTAL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
RECENT FASB PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", which establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The Company adopted SFAS No. 121 during the first quarter of
1996. Implementation of this standard did not have a material effect on the
Company's financial position, results of operations or cash flows.
2. SELECTED BALANCE SHEET INFORMATION:
The details of certain balance sheet accounts are as follows:
DECEMBER 31,
1995
--------------
(IN THOUSANDS)
Property and equipment:
Leasehold improvements.......... $202
Equipment....................... $ 12
Furniture and fixtures.......... 2
Equipment under capital
leases.......................... 296
--------------
Total property and
equipment.................... 512
Less accumulated depreciation
and amortization............... 178
--------------
Net property and
equipment.................... $334
==============
Accumulated amortization for equipment under capital leases as of December
31, 1995 was $100.
DECEMBER 31,
1995
--------------
(IN THOUSANDS)
Accounts payable and accrued
liabilities:
Trade.............................. $ 88
Accrued liabilities................ 76
--------------
$164
==============
3. LONG-TERM DEBT:
At December 31, 1995, long-term debt consisted of the following (in
thousands):
Uncollateralized note payable due in
monthly installment of $2 principal
and interest, interest rate of 9% per
year, maturing in 1999................ $ 92
Uncollateralized note payable due in
monthly installment of $1 principal
and interest, interest rate of 10% per
year, maturing in 1997................ 19
Note payable due in monthly installment
of $2 principal and interest, interest
rate of 9.25% per year, maturing in
1998, collateralized by certain
receivables and fixed assets of the
Company............................... 72
--------------
183
Less current portion.................... 55
--------------
$128
==============
F-70
<PAGE>
SOUTHWEST DENTAL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt as of December 31, 1995 for each
of the next five years were as follows (in thousands):
1996.................................... $ 55
1997.................................... 60
1998.................................... 47
1999.................................... 21
2000.................................... --
---------
$ 183
=========
4. COMMITMENT AND CONTINGENCIES:
LEASE COMMITMENTS
The Company leases a portion of its property and equipment under capital
and operating leases. Future minimum lease payments under capital leases and
noncancelable operating leases with remaining terms of one or more years
consisted of the following at December 31, 1995 (in thousands):
CAPITAL OPERATING
-------- ----------
1996.................................... $ 58 $ 75
1997.................................... 56 67
1998.................................... 48 59
1999.................................... 32 62
2000.................................... 30 54
Thereafter.............................. 70 185
-------- ----------
Total minimum lease obligations......... 294 $502
==========
Less amount representing interest....... 75
--------
Present value of minimum lease
obligations........................... 219
Less current portion............... 37
--------
Long-term capital lease obligations..... $182
========
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
5. INCOME TAXES:
The difference between the federal tax rate and the Company's effective tax
rate at December 31, 1995 is as follows:
Tax at U.S. statutory rate (34%)..... $ 74
State income taxes, net of federal
tax.................................. 7
Income not subject to corporate level
federal tax.......................... (81)
---------
$ --
=========
F-71
<PAGE>
SOUTHWEST DENTAL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. SUPPLEMENTAL CASH FLOW INFORMATION:
YEAR ENDED
DECEMBER 31,
1995
----------------------
(DOLLARS IN THOUSANDS)
Cash paid during the period for
interest.............................. $ 43
Noncash transactions -- capital
leases................................ 34
7. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:
CREDIT RISK
The Company grants patients credit in the normal course of business. The
credit risk with respect to these patient receivables is generally considered
minimal because procedures are in effect to monitor the credit worthiness of
patients and appropriate allowances are made to reduce accounts to their net
realizable values.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies.
The carrying amounts of cash and cash equivalents, patient receivables and
accounts payable approximate fair values due to the short-term maturities of
these instruments. The carrying amounts of the Company's fixed rate long-term
borrowings as of December 31, 1995, approximate their fair value.
8. RELATED PARTY TRANSACTIONS:
The Company leased certain assets from a relative of the stockholders.
These leases were recorded as capital leases. At December 31, 1995, the balance
of capital lease obligations was approximately $220,000.
The Company had a note payable outstanding with a relative of the
stockholders. The balance of the note payable at December 31, 1995 was
approximately $10,000.
9. SUBSEQUENT EVENT:
During September 1996, the Company entered into a definitive agreement with
Castle Dental Centers of Texas ("Castle") whereby Castle would acquire certain
assets and liabilities for cash and stock consideration.
F-72
<PAGE>
CASTLE DENTAL CENTERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, JUNE 30,
1995 1996
------------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents....... $ 6,439 $ 2,095
Patient receivables, net........ 2,710 3,101
Unbilled patient receivables,
net............................ 913 1,341
Other current assets............ 22 296
------------- ---------
Total current assets....... 10,084 6,833
Property and equipment, net.......... 1,583 3,488
Intangible assets, net............... 757 11,820
Deferred income taxes................ 253 217
------------- ---------
Total assets............... $12,677 $ 22,358
============= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term
debt and capital lease
obligations.................... $ 1,040 $ 3,186
Accounts payable and accrued
liabilities.................... 2,836 2,831
------------- ---------
Total current
liabilities............. 3,876 6,017
Long-term debt and capital lease
obligations........................ 9,512 15,558
Commitments and contingencies
Other long-term liabilities.......... 2,104 1,972
Redeemable preferred stock, $.001 par
value, 1,244,737 shares authorized,
issued and outstanding............. 2,928 2,928
Stockholders' equity:
Common stock, $.001 par value,
20,000,000 shares authorized,
4,000,000 and 4,275,243 shares
issued and outstanding............. 4 4
Additional paid in capital........... 94 1,689
Accumulated deficit.................. (5,841) (5,810)
------------- ---------
Total stockholders' equity
(deficit)............... (5,743) (4,117)
------------- ---------
Total liabilities and
stockholders' equity
(deficit)............... $12,677 $ 22,358
============= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-73
<PAGE>
CASTLE DENTAL CENTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE DATA)
Net patient revenues................. $ 9,082 $ 10,707
Operating expenses:
Dentists' salaries.............. 1,611 1,869
Clinical salaries............... 884 1,534
Dental supplies and laboratory
fees........................... 1,086 1,352
Rental and lease expense........ 381 486
Advertising and marketing....... 420 533
Depreciation.................... 167 334
Other operating expenses........ 1,275 1,175
General and administrative...... 1,749 2,115
Compensation to stockholders.... 1,171 300
--------- ---------
Total expenses............. 8,744 9,698
--------- ---------
Operating income........... 338 1,009
Interest expense..................... 5 1,066
Other income......................... -- (107)
--------- ---------
Income before income taxes........... 333 50
--------- ---------
Provision for income taxes........... -- 19
--------- ---------
Net income................. $ 333 $ 31
========= =========
Net income (loss) per share.......... $ .06 $ .01
========= =========
If all of the Company's 1995
operations had been subject to
income taxes, net income would have
been as follows (unaudited):
Historical income before income
taxes.......................... $ 333
Provision for income taxes...... 123
---------
Pro forma net income............ $ 210
=========
Pro forma net income per
share.......................... $ .04
=========
Weighted average number of common and
common equivalent shares
outstanding........................ 5,515 5,569
If the shares necessary to fund the
distribution to the owner in
connection with the Reorganization
were outstanding for the period,
net income per share and weighted
average shares outstanding would
have been as follows:
Pro forma net income per
share.......................... $ .01
=========
Weighted average number of
common and common equivalent
shares outstanding............. 6,169
=========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-74
<PAGE>
CASTLE DENTAL CENTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Net cash (used in) provided by
operating activities............... $ 239 $ (367)
Investing activities:
Capital expenditures............ (131) (194)
Business acquisitions, net of
cash acquired.................. -- (7,616)
--------- ---------
Net cash used in investing
activities......................... (131) (7,810)
Financing activities:
Payments on long-term debt and
capital lease obligations...... (225) (117)
Proceeds from debt.............. 95 3,950
--------- ---------
Net cash provided by financing
activities......................... (130) 3,833
--------- ---------
Net change in cash and cash
equivalents.............. (22) (4,344)
Cash and cash equivalents, beginning
of period.......................... 22 6,439
--------- ---------
Cash and cash equivalents, end of
period............................. $ -- $ 2,095
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-75
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION:
ORGANIZATION
Castle Dental Centers, Inc. and subsidiaries (the "Company") provide
management systems and services, non-healthcare personnel, facilities and
equipment to certain professional corporations under long-term management
service agreements. These professional corporations are collectively referred to
as the Affiliated Dental Practices.
The Company has entered into a long-term management services agreement with
each of the Affiliated Dental Practices, under which the Company provides
substantially all administrative and management services, in exchange for a
predetermined management fee. Each of these agreements is a 40-year agreement
with successive automatic five-year renewal terms between the Company and its
Affiliated Dental Practices unless terminated at least 90 days before the end of
the initial term or any renewal term.
Through the management services agreement, the Company assumes full
responsibility for the operating expenses, has the right to purchase and has
responsibility for collection of all accounts receivable and receives a
management fee for providing non-dental services. The Company has perpetual,
unilateral control over the assets and operations of the Affiliated Dental
Practices (except with respect to those relating to the practice of dentistry
and other matters requiring licensure). Notwithstanding the lack of technical
majority ownership of the stock of such entities, consolidation of the
Affiliated Dental Practices is necessary to present fairly the financial
position and results of operations of the Company because of control by means
other than ownership of stock. Control by the Company will be perpetual rather
than temporary because of (i) the length of the original terms of the
agreements, (ii) the successive extension periods provided by the agreements,
(iii) the continuing investment of capital by the Company, (iv) the employment
of the majority of the nonprofessional personnel, and (v) the nature of the
services provided to the Affiliated Dental Practices by the Company.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements as
of June 30, 1996 and for the six months ended June 30, 1995 and 1996 include the
accounts of the Company, its wholly-owned subsidiaries and the Affiliated Dental
Practices. They have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. These unaudited condensed consolidated
financial statements should be read in conjunction with the annual combined
financial statements of the Company included elsewhere, herein. In management's
opinion, such interim financial statements include all normal recurring
adjustments considered necessary for a fair presentation of such financial
statements. Interim results are not necessarily indicative of results for a full
year.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill and debt issuance costs.
Goodwill represents the excess of the purchase price over the fair value of
identifiable net assets acquired and is amortized on a straight-line basis over
the terms of the management services agreements of 40 years. At each balance
sheet date the Company assesses the recoverability of goodwill and whether a
change in circumstances has occurred subsequent to an acquisition which would
indicate whether the future useful life of an asset should be revised. The
Company employs a systematic and rational method of assessing the recoverability
of goodwill by considering various factors such as the estimated future
undiscounted cash flows associated with the acquired business, the earnings
potential of acquired business, the management fees generated under the related
management services agreement, the value of the revenue stream generated under
any related managed care contracts and the strategic value of the office
location acquired or assumed as a result of the acquisition as compared to the
carrying value of the goodwill.
F-76
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
2. EARNINGS PER SHARE:
Earnings per share is computed on the basis of the weighted average number
of shares of common stock and common stock equivalents outstanding during each
period. Shares outstanding for all periods presented have been retroactively
adjusted to reflect the reorganization discussed in the annual financial
statements. In accordance with Staff Accounting Bulletin ("SAB") Number 83 of
the Securities and Exchange Commission, the common stock equivalents that were
issued during the twelve months preceding the planned offering at prices below
the expected initial public offering price have been included in the Company's
earnings per share computation and treated as if they had been issued at the
Company's inception event though they were antidilutive. Additionally, in
accordance with SAB Number 55, pro forma earnings per share have been presented
for 1995 to reflect issuance of the number of shares that would have been
necessary to fund the $6,000,000 distribution to the Company's owner in
connection with the Reorganization (at an assumed public offering price of
$10.00 per share). Fully diluted earnings per share are not presented because
such amounts would be the same as amounts computed for primary earnings per
share.
3. ACQUISITIONS:
The Company acquired the assets of 1st Dental Care and Mid-South Dental
Centers during May 1996 for combined purchase prices of $12,748. The purchase
prices consisted primarily of combinations of cash, common stock and debt
issued. The excess of the purchase prices over the fair value of net assets
acquired is included in goodwill. In connection with these acquisitions, the
Company entered into customary employment agreements with certain employees and
former owners of the businesses acquired and entered into a long-term management
services agreement with each physician practice.
The following represents the unaudited pro forma results of operations as
if all of the above noted business combinations had occurred at the beginning of
1995:
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS,
EXCEPT
PER SHARE DATA)
Net revenues............................ $ 13,489 $ 15,686
Loss before extraordinary item.......... (102) (135)
Net loss................................ (62) (82)
Net loss per common and equivalent
share................................. $ (.01) $ (.01)
The pro forma financial data should not be construed as indicative of the
Company's results of operations or financial condition had the acquisitions been
consummated on the dates indicated and are not intended to project the Company's
results of operations or financial condition for any future period or as of any
future date.
F-77
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Long-term debt and capital lease obligations consisted of the following at
June 30, 1996 (dollars in thousands):
Subordinated notes...................... $ 7,500
Term loan............................... 9,950
Other notes payable and capital lease
obligations........................... 4,171
---------
Total debt and capital lease
obligations....................... 21,621
Less discount on Subordinated Notes..... 2,877
---------
Long-term debt, net of discount......... 18,744
Less current portion.................... 3,186
---------
Total long-term debt and capital
lease obligations................. $ 15,558
=========
On May 31, 1996, the Company entered into an Amended and Restated Credit
Agreement with NationsBank, which increased the term loan facility to $16.0
million. The additional $10 million is to be utilized to fund acquisitions,
which are subject to prior approval by NationsBank. As of June 30, 1996, the
Company had borrowed $3,950,000 of this facility to fund the acquisition of
affiliated dental practices based in Nashville, Tennessee and Tampa/Clearwater,
Florida. In August 1996, the Company borrowed an additional $2.1 million under
term loan to fund the acquisition of Horizon Dental Centers in Ft. Worth and
Austin, Texas.
The Company intends to complete an initial public offering during the
fourth quarter of 1996. The proceeds from the offering will be used to repay
approximately $7.5 million of the 12% Subordinated Notes, approximately $6.2
million under the term loan and approximately $4.2 million of seller financed
debt outstanding at June 30, 1996. Pro forma earnings per share would have been
$0.05 for the six months ended June 30, 1996 had the offering proceeds been used
for the retirement of such debt at the beginning of 1996.
5. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is subject to claims and suits arising in the ordinary course
of operations. In the opinion of management, the ultimate resolution of such
pending legal proceedings will not have a material effect on the Company's
financial position, results of operations or liquidity.
DENTIST EMPLOYMENT AGREEMENTS AND PROFESSIONAL LIABILITY
Each affiliated dental practice has entered into a dentist employment
agreement with each full time dentist, orthodontist and other dental specialist
employed by it. Although the form of contract varies somewhat among practices
and among dentists with different specialties, the typical contract provides for
a defined compensation arrangement, including performance-based compensation,
liquidated damages and a covenant not to compete. Each full time dentist is
required to maintain professional liability insurance, and mandated coverage
limits are generally at least $1,000,000 per claim and $1,000,000 in aggregate.
In addition, many affiliated dental practices employ part time dentists. Not all
part time dentists have employment agreements, but all part time dentists are
required to carry professional liability insurance in specified amounts.
6. STOCK OPTION PLANS
Through June 30, 1996, the Company had granted options for 380,500 shares
of common stock under its employee stock option plan at prices per share ranging
from $5.00 to $6.75. Generally, the outstanding
F-78
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
options are exercisable one year from the date of grant as to 20% of the
underlying shares, and as to an additional 20% on each of the next four
anniversaries of the date of option grant.
In August 1996, the Company adopted a non-employee directors' stock option
plan to encourage ownership of common stock by eligible non-employee directors
(the "Directors' Plan"). The Directors' Plan provides for the automatic grant
of 25,000 nonqualified stock options (the "Options") to non-employee directors
at the time they become directors.
All non-employee directors are eligible to receive options under the
Directors' Plan. Options will be exercisable during a ten-year period from the
date of grant of the options and will vest based upon the number of full years
of service a non-employee director serves on the Board of Directors as follows:
20% after one full year of service, 40% after two full years of service, 60%
after three full years of service, 80% after four full years of service and 100%
after five full years of service. No option will remain exercisable later than
ten years after the date of grant.
The exercise price for options granted under the Directors' Plan may be no
less than the fair market value of the common stock on the date of grant.
7. EMPLOYEE RETIREMENT PLAN
In August 1996, the Company adopted a profit sharing plan qualified under
Section 401(k) of the Internal Revenue Code of 1986 (the "401(k) Plan"). All
employees of the Company are eligible to participate in the 401(k) Plan upon the
completion of six months of service. Participants may elect to defer receipt of
compensation and have such deferred amounts contributed to the 401(k) Plan up to
a maximum of 20% of compensation. The Company may match contributions made by
participants under the 401(k) Plan each year in an amount determined by the
Company on a year-to-year basis. Participants are fully vested with respect to
their contributions, while the Company's contributions are subject to vesting on
the following basis: zero for fewer than two years of employment and 20% per
year cumulatively for the third through seventh years of employment.
Participants may borrow from their accounts under the 401(k) Plan.
8. SUBSEQUENT EVENTS:
In August 1996, the Company acquired the assets of certain dental practices
and the stock of others operated by Horizon Dental Centers ("Horizon"), a
dental practice with dental centers in Fort Worth and Austin, Texas. It
concurrently entered into a management services agreement with Horizon Dental
Centers. The Company has entered into definitive agreements to acquire the
assets of and enter into long-term management services agreements with American
Dental Centers, a dental practice based in Hicksville, New York with dental
centers in the New York City area, and United Dental Care, a dental practice
based in Little Rock, Arkansas that operates dental centers in Arkansas,
Oklahoma and Louisiana.
F-79
<PAGE>
1ST DENTAL CARE
CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, APRIL 30,
1995 1996
------------ ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Patient receivables, net of
allowance for uncollectible
accounts of $21 and $21,
respectively................... $ 130 $ 144
Unbilled patient receivables,
net of allowance for
uncollectible accounts of $12
and $19........................ 107 112
Other current assets............ 25 26
------------ ---------
Total current
assets............. 262 282
Property and equipment, net.......... 1,242 1,182
Other assets......................... 14 13
------------ ---------
Total assets.......... $1,518 $ 1,477
============ =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current portion of long-term
debt........................... $ 236 $ 225
Accounts payable and accrued
expenses....................... 747 667
------------ ---------
Total current
liabilities........ 983 892
Long-term debt....................... 884 894
Deferred revenue..................... 28 28
Commitments and contingencies........
Common stock......................... 5 5
Additional paid in capital........... 427 427
Accumulated deficit.................. (809) (769)
------------ ---------
Total liabilities and
stockholder's
deficit............ $1,518 $ 1,477
============ =========
The accompanying notes are an integral part of the condensed combined financial
statements.
F-80
<PAGE>
1ST DENTAL CARE
CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
FOUR MONTHS ENDED
APRIL 30,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS,
EXCEPT PER SHARE
DATA)
Net patient revenues................. $ 2,169 $ 2,588
Expenses:
Dentists' salaries.............. 421 437
Clinical salaries............... 654 821
Dental supplies and laboratory
fees........................... 177 191
Rental and lease expense........ 132 132
Advertising and marketing....... 62 76
Depreciation.................... 57 69
Other operating expenses........ 204 214
General and administrative...... 335 378
--------- ---------
Total expenses........ 2,042 2,318
--------- ---------
Operating income...... 127 270
Interest expense..................... 30 37
--------- ---------
Income before extraordinary gain..... 97 233
Extraordinary gain, net of tax effect
of $41............................. 112
--------- ---------
Net income........................... $ 209 $ 233
========= =========
If all of the Company's operations
had been subject to
income taxes, net income would have
been as follows (unaudited):
Historical income before income
taxes.......................... $ 233
Provision for income taxes...... 86
---------
Pro forma net income............ $ 147
=========
The accompanying notes are an integral part of the condensed combined financial
statements.
F-81
<PAGE>
1ST DENTAL CARE
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOUR MONTHS ENDED
APRIL 30,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Net cash provided by operating
activities......................... $ 12 $ 61
--------- ---------
Investing activities -- capital
expenditures....................... (43) (62)
--------- ---------
Financing activities:
Proceeds from long-term debt.... 106 74
Payments on long-term debt...... (75) (75)
--------- ---------
Net cash provided by
financing
activities......... 31 1
--------- ---------
Net change in cash and
cash equivalents... -- --
Cash and cash equivalents, beginning
of period.......................... -- --
--------- ---------
Cash and cash equivalents, end of
period............................. $ -- $ --
========= =========
The accompanying notes are an integral part of the condensed combined financial
statements.
F-82
<PAGE>
1ST DENTAL CARE
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
1st Dental Care (the "Company") is a provider of dental and orthodontic
services and products that owns the assets of and provides management services
to dental and orthodontic centers. The accompanying unaudited financial
statements for the four months ended April 30, 1995 and 1996 reflect the results
of operations for the Company through the date of acquisition and have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules and
regulations. These unaudited condensed combined financial statements should be
read in conjunction with the annual combined financial statements of the Company
included elsewhere, herein. In management's opinion, such interim financial
statements include all normal recurring adjustments considered necessary for a
fair presentation of such financial statements. Interim results are not
necessarily indicative of results for a full year.
2. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material effect on
the Company's financial position, results of operations or liquidity.
3. SALE OF COMPANY:
The assets of the Company were acquired by Castle Dental Centers of Florida
in May 1996.
F-83
<PAGE>
MID-SOUTH DENTAL CENTER, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, MAY 31,
1995 1996
------------ -------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents....... $ 166 $ 55
Patient receivables, net........ 281 272
Unbilled patient receivables,
net............................ 66 66
Other current assets............ 12 --
------------ -------
Total current assets....... 525 393
Property and equipment, net.......... 510 639
Other assets......................... 14 12
------------ -------
Total assets............... $1,049 $1,044
============ =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term
debt and capital lease
obligations.................... $ 197 $ 186
Accounts payable and accrued
liabilities.................... 209 193
------------ -------
Total current
liabilities............. 406 379
Long-term debt and capital lease
obligations........................ 511 495
Commitments and contingencies
Common stock, $1 par value 1,000
shares authorized, 1,000 shares
issued and outstanding............. 1 1
Additional paid in capital........... 4 4
Retained earnings.................... 127 165
------------ -------
Total liabilities and
stockholder's equity.... $1,049 $1,044
============ =======
The accompanying notes are an integral part of the condensed financial
statements.
F-84
<PAGE>
MID-SOUTH DENTAL CENTER, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FIVE MONTHS ENDED
MAY 31,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Net patient revenues.................... $ 2,238 $ 2,391
Expenses:
Dentists' salaries................. 380 395
Clinical salaries.................. 853 875
Dental supplies and laboratory
fees.............................. 222 215
Rental and lease expense........... 153 153
Advertising and marketing.......... 74 80
Depreciation....................... 54 60
Other operating expenses........... 92 122
General and administrative......... 189 260
Compensation to stockholder........ 229 162
--------- ---------
Total expenses................ 2,246 2,322
--------- ---------
Operating income (loss)....... (8) 69
Interest expense........................ 27 31
--------- ---------
Net income.................... $ (35) $ 38
========= =========
If all of the Company's operations had
been subject to
income taxes, net income would have
been as follows (unaudited):
Historical income before income
taxes............................. $ 38
Provision for income taxes......... 14
---------
Pro forma net income............... $ 24
=========
The accompanying notes are an integral part of the condensed financial
statements.
F-85
<PAGE>
MID-SOUTH DENTAL CENTER, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FIVE MONTHS ENDED
MAY 31,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Net cash provided by operating
activities........................... $ 193 $ 105
--------- ---------
Investing activities -- capital
expenditures....................... (104) (189)
--------- ---------
Net cash used in investing
activities................... (104) (189)
Financing activities:
Payments on long-term debt and
capital leases.................. -- (27)
Proceeds from debt.............. 2 --
--------- ---------
Net cash provided by (used
in) financing activities..... 2 (27)
--------- ---------
Net change in cash and cash
equivalents.................. 91 (111)
Cash and cash equivalents, beginning
of period............................ 52 166
--------- ---------
Cash and cash equivalents, end of
period............................... $ 143 $ 55
========= =========
The accompanying notes are an integral part of the condensed financial
statements.
F-86
<PAGE>
MID-SOUTH DENTAL CENTERS
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
ORGANIZATION
Mid-South Dental Centers (the "Company") is a provider of dental and
orthodontics services and products. The accompanying unaudited condensed
financial statements for the five months ended May 31, 1995 and 1996 reflect the
results of operations for the Company through the date of acquisition and have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. These unaudited condensed financial statements should be
read in conjunction with the annual financial statements of the Company included
elsewhere, herein. In management's opinion, such interim financial statements
include all normal recurring adjustments considered necessary for a fair
presentation of such financial statements. Interim results are not necessarily
indicative of results for a full year.
2. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material effect on
the Company's financial position, results of operations or liquidity.
3. SALE OF COMPANY:
The assets of the Company were acquired by Castle Dental Centers of
Tennessee in May 1996.
F-87
<PAGE>
HORIZON DENTAL CENTERS
CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, JUNE 30,
1995 1996
------------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 50 $ 208
Patient receivables, net........... 160 168
Prepaid expenses and other current
assets............................ 4 4
------------- ---------
Total current assets.......... 214 380
Property and equipment, net............. 26 24
Receivable from affiliate............... 809 600
------------- ---------
Total assets.................. $ 1,049 $ 1,004
============= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT)
Current liabilities:
Current portion of long-term
debt.............................. $ 458 $ 509
Accounts payable................... 6 6
------------- ---------
Total current liabilities..... 464 515
Long-term debt.......................... 659 403
Commitments and contingencies
Common stock............................ 10 10
Retained earnings (accumulated
deficit).............................. (84) 76
------------- ---------
Total liabilities and
stockholder's equity
(deficit).................. $ 1,049 $ 1,004
============= =========
The accompanying note are an integral part of the condensed combined financial
statements.
F-88
<PAGE>
HORIZON DENTAL CENTERS
CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS,
EXCEPT PER SHARE
DATA)
Net patient revenues................. $ 2,811 $ 2,684
Operating expenses:
Professional fees and clinic
expenses....................... 1,503 1,506
Dental supplies and laboratory
fees........................... 74 47
Affiliate management fee........ 803 490
Rental expense.................. 135 227
Advertising and marketing....... 82 116
Other operating expenses........ 29 31
General and administrative...... 63 67
--------- ---------
Total expenses............. 2,689 2,484
--------- ---------
Operating income........... 122 200
--------- ---------
Interest expense..................... 27 40
--------- ---------
Net income........................... $ 95 $ 160
========= =========
If all of the Company's operations
had been subject to
income taxes, net income would have
been as follows (unaudited):
Historical income before income
taxes.......................... $ 160
Provision for income taxes...... 59
---------
Pro forma net income............ $ 101
=========
The accompanying notes are an integral part of the condensed combined financial
statements.
F-89
<PAGE>
HORIZON DENTAL CENTERS
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Net cash provided by operating
activities........................... $ 97 $ 154
--------- ---------
Financing activities:
Proceeds from long-term debt.... 15 --
Payments on long-term debt...... (182) (205)
Proceeds from stockholder
receivable..................... 87 209
--------- ---------
Net cash provided by
financing activities......... (80) 4
--------- ---------
Net change in cash and cash
equivalents.......................... 17 158
--------- ---------
Cash and cash equivalents, beginning
of period............................ 2 50
--------- ---------
Cash and cash equivalents, end of
period............................... $ 19 $ 208
========= =========
The accompanying notes are an integral part of the condensed combined financial
statements.
F-90
<PAGE>
HORIZON DENTAL CENTERS
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENT
1. BASIS OF PRESENTATION:
Horizon Dental Centers (the "Company") is a provider of dental services
and products. The accompanying unaudited condensed combined financial statements
for the six months ended June 30, 1995 and 1996 have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations.
These unaudited condensed combined financial statements should be read in
conjunction with the annual combined financial statements of the Company
included elsewhere, herein. In management's opinion, such interim financial
statements include all normal recurring adjustments considered necessary for a
fair presentation of such financial statements. Interim results are not
necessarily indicative of results for a full year.
2. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material effect on
the Company's financial position, results of operations or cash flows.
3. SUBSEQUENT EVENTS:
During August 1996, Castle Dental Centers of Texas acquired certain assets
and stock of the entities described in Note 1 of the Horizon Dental Centers
combined financial statements.
F-91
<PAGE>
AMERICAN DENTAL CENTERS
CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents....... $ 401 $2,141
Investments..................... 1,567 1,540
Accounts receivable, net........ 1,291 815
Inventory....................... 128 128
------------ --------
Total current assets....... 3,387 4,624
Property and equipment, net.......... 706 763
Other assets......................... 12 12
------------ --------
Total assets............... $4,105 $5,399
============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities.................... $ 480 $1,610
------------ --------
Total current
liabilities............. 480 1,610
Commitments and contingencies
Common stock......................... 21 21
Additional paid in capital........... 11 11
Retained earnings.................... 3,593 3,757
------------ --------
Total liabilities and
stockholders' equity.... $4,105 $5,399
============ ========
The accompanying notes are an integral part of the condensed combined financial
statements.
F-92
<PAGE>
AMERICAN DENTAL CENTERS
CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Net patient revenues................. $ 8,112 $ 8,373
Expenses:
Dentists' fees.................. 1,828 1,813
Clinical salaries............... 2,834 2,967
Dental supplies and laboratory
fees........................... 719 635
Rental and lease expense........ 343 354
Advertising and marketing....... 37 86
Depreciation.................... 210 210
Other operating expenses........ 476 552
General and administrative...... 349 243
Compensation to stockholders.... 1,082 1,144
--------- ---------
Total expenses............. 7,878 8,004
--------- ---------
Net income................. $ 234 $ 369
========= =========
If all of the Company's operations
had been subject to
income taxes, net income would have
been as follows (unaudited):
Historical income before income
taxes.......................... $ 369
Provision for income taxes...... 151
---------
Pro forma net income............ $ 218
=========
The accompanying notes are an integral part of the condensed combined financial
statements.
F-93
<PAGE>
AMERICAN DENTAL CENTERS
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Net cash provided by operating
activities........................... $ 1,895 $ 2,185
--------- ---------
Cash used in investing activities:
Capital expenditures............ (298) (267)
Purchases of investments........ (1,567) (1,718)
Proceeds from maturities of
investments.................... 875 1,540
--------- ---------
Net cash used in investing
activities..................... (990) (445)
--------- ---------
Net change in cash and cash
equivalents.................... 905 1,740
Cash and cash equivalents, beginning
of period.......................... 1,049 401
--------- ---------
Cash and cash equivalents, end of
period............................. $ 1,954 $ 2,141
========= =========
The accompanying notes are an integral part of the combined financial
statements.
F-94
<PAGE>
AMERICAN DENTAL CENTERS
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
Jules V. Lane, Professional Corporation, doing business as American Dental
Centers (the "Company") is a provider of dental services and products in the
Long Island, Westchester County and New York City, New York areas. The
accompanying unaudited condensed combined financial statements as of June 30,
1996 and for the six months ended June 30, 1995 and 1996 have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations.
These unaudited condensed combined financial statements should be read in
conjunction with the annual combined financial statements of the Company
included elsewhere, herein. In management's opinion, such interim financial
statements include all normal recurring adjustments considered necessary for a
fair presentation of such financial statements. Interim results are not
necessarily indicative of results for a full year.
2. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material effect on
the Company's financial position, results of operations or liquidity.
3. SUBSEQUENT EVENT:
The Company entered into a definitive agreement with Castle Dental Centers
of New York ("Castle") whereby Castle would acquire certain assets and
liabilities for cash and stock consideration.
F-95
<PAGE>
UNITED DENTALCARE
CONDENSED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, JUNE 30,
1995 1996
------------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 8 $ 363
Patient receivables, net........... 97 108
Other current assets............... 3 18
------------- ---------
Total current assets.......... 108 489
Property and equipment, net............. 354 411
Other assets............................ -- 121
------------- ---------
Total assets.................. $ 462 $ 1,021
============= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT)
Current liabilities:
Current portion of long-term
debt.............................. $ 263 $ 299
Accounts payable and accrued
liabilities....................... 135 141
------------- ---------
Total current liabilities..... 398 440
Long-term debt and capital lease
obligations........................... 79 254
Commitments and contingencies
Common stock, no par value, 1,000 shares
authorized, 300 issued and
outstanding........................... 56 56
Retained earnings (accumulated
deficit).............................. (71) 271
------------- ---------
Total liabilities and
stockholder's equity
(deficit).................. $ 462 $ 1,021
============= =========
The accompanying notes are an integral part of the condensed financial
statements.
F-96
<PAGE>
UNITED DENTALCARE
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Net patient revenues................. $ 1,608 $ 2,010
Expenses:
Dentists' salaries.............. 254 310
Clinical salaries............... 354 412
Dental supplies and laboratory
fees........................... 153 138
Rental and lease expense........ 65 109
Advertising and marketing....... 109 104
Depreciation.................... 26 49
Other operating expenses........ 104 96
General and administrative...... 415 431
--------- ---------
Total expenses............. 1,480 1,649
--------- ---------
Operating income........... 128 361
Interest income (expense), net....... 21 (19)
--------- ---------
Net income........................... $ 107 $ 342
========= =========
If all of the Company's operations
had been subject to
income taxes, net income would have
been as follows (unaudited):
Historical income before income
taxes.......................... $ 342
Provision for income taxes...... 127
---------
Pro forma net income............ $ 215
=========
The accompanying notes are an integral part of the condensed financial
statements.
F-97
<PAGE>
UNITED DENTALCARE
CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Net cash provided by operating
activities............................ $ 93 $ 370
--------- ---------
Investing activities:
Capital expenditures............... (52) (105)
Proceeds from sale of assets....... 131 --
--------- ---------
Net cash provided by (used in)
investing activities........ 79 (105)
Financing activities:
Proceeds from long-term debt....... 20 283
Repayment of debt.................. (152) (72)
Payment of organizational costs.... -- (121)
Distributions to owner............. (46) --
--------- ---------
Net cash provided by (used in)
financing activities........ (178) 90
--------- ---------
Net change in cash and cash
equivalents........................... (6) 355
Cash and cash equivalents, beginning of
period................................ 59 8
--------- ---------
Cash and cash equivalents, end of
period................................ $ 53 $ 363
========= =========
The accompanying notes are an integral part of the condensed financial
statements.
F-98
<PAGE>
UNITED DENTALCARE
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
United DentalCare (the "Company") is a provider of dental services. The
accompanying unaudited condensed financial statements as of June 30, 1996 and
for the six months ended June 30, 1995 and 1996 have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations.
These unaudited condensed financial statements should be read in conjunction
with the annual condensed financial statements of the Company included
elsewhere, herein. In management's opinion, such interim financial statements
include all normal recurring adjustments considered necessary for a fair
presentation of such financial statements. Interim results are not necessarily
indicative of results for a full year.
2. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material effect on
the Company's financial position, results of operations or liquidity.
3. SUBSEQUENT EVENTS:
The Company has entered into definitive agreements to sell its assets to
and enter into a long-term management services agreement with Castle Dental
Centers of Arkansas.
F-99
<PAGE>
SOUTHWEST DENTAL ASSOCIATES
CONDENSED BALANCE SHEET (UNAUDITED)
DECEMBER 31, JUNE 30,
1995 1996
------------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 101 $ 46
Patient receivables, net........... 164 167
Other current assets............... 30 50
------------- ---------
Total current assets.......... 295 263
Property and equipment, net............. 334 381
Other assets............................ 2 3
------------- ---------
Total assets.................. $ 631 $ 647
============= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt
and capital lease obligations..... $ 92 $ 93
Accounts payable and accrued
liabilities....................... 164 231
------------- ---------
Total current liabilities..... 256 324
Long-term debt and capital lease
obligations........................... 310 282
Commitments and contingencies...........
Common stock, $1 par value, 1,000 shares
authorized, 1,000 shares issued and
outstanding........................... 1 1
Retained earnings....................... 64 40
------------- ---------
Total liabilities and
stockholder's equity....... $ 631 $ 647
============= =========
The accompanying notes are an integral part of the condensed financial
statements.
F-100
<PAGE>
SOUTHWEST DENTAL ASSOCIATES
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Net patient revenue.................. $ 1,802 $ 2,217
Expenses:
Dentists' salaries.............. 305 479
Clinical salaries............... 502 601
Dental supplies and laboratory
fees........................... 378 348
Rental and lease expense........ 49 68
Advertising and marketing....... 47 80
Depreciation.................... 37 38
Other operating expenses........ 378 251
General and administrative...... 61 148
--------- ---------
Total expenses............. 1,757 2,013
--------- ---------
Operating income........... 45 204
Interest expense..................... 24 12
--------- ---------
Net income........................... $ 21 $ 192
========= =========
If all of the Company's operations
had been subject to
income taxes, net income would have
been as follows (unaudited):
Historical income before income
taxes.......................... $ 192
Provision for income taxes...... 71
---------
Pro forma net income............ $ 121
=========
The accompanying notes are an integral part of the condensed financial
statements.
F-101
<PAGE>
SOUTHWEST DENTAL ASSOCIATES
CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Net cash provided (used) by operating
activities............................ $ (7) $ 273
--------- ---------
Investing activities - capital
expenditures.......................... (23) (84)
--------- ---------
Net cash used in investing
activities.................. (23) (84)
Financing activities:
Payments on long-term debt and
capital leases.................... (46) (27)
Distributions to stockholders...... (29) (217)
--------- ---------
Net cash used in financing
activities.................. (75) (244)
--------- ---------
Net cash in cash and cash
equivalents................. (105) (55)
Cash and cash equivalents, beginning of
period................................ 151 101
--------- ---------
Cash and cash equivalents, end of
period................................ $ 46 $ 46
========= =========
The accompanying notes are an integral part of the condensed financial
statements.
F-102
<PAGE>
SOUTHWEST DENTAL ASSOCIATES
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. CORPORATE ORGANIZATION AND BASIS OF PRESENTATION:
ORGANIZATION
Southwest Dental Associates (the "Company") is a provider of dental and
orthodontics services and products. The accompanying unaudited condensed
financial statements for the six months ended June 30, 1995 and 1996, reflect
the results of operations for the Company and have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. These
unaudited condensed financial statements should be read in conjunction with the
annual financial statements of the Company included elsewhere, herein. In
management's opinion, such interim financial statements include all normal
recurring adjustments considered necessary for a fair presentation of such
financial statements. Interim results are not necessarily indicative of results
for a full year.
2. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material effect on
the Company's financial position, results of operations or liquidity.
3. SUBSEQUENT EVENT:
During September 1996, the Company has entered into a definitive agreement
with Castle Dental Centers of Texas ("Castle") whereby Castle would acquire
certain assets and liabilities for cash and stock consideration.
F-103
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the securities being registered. All amounts are estimates
except for the fees payable to the Commission.
AMOUNT TO
BE PAID
----------
Commission registration fee.......... $ 21,811
----------
Printing expenses.................... $ 125,000
Legal fees and expenses.............. $ 250,000
Accounting fees and expenses......... $ 500,000
Blue sky fees and expenses........... $ 15,000
----------
Transfer Agent's and Registrar's
fees................................. $ 15,000
----------
Miscellaneous........................ $ 73,189
----------
TOTAL........................... $1,000,000
==========
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company's Certificate of Incorporation, as amended, and Bylaws
incorporate substantially the provisions of the Delaware General Corporation Law
("DGCL") providing for indemnification of directors and officers of the
Company against expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding arising by
reason of the fact that such person is or was an officer or director of the
Company or is or was serving at the request of the Company as a director,
officer or employee of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise.
As permitted by Section 102 of the DGCL, the Company's Certificate of
Incorporation, as amended, contains provisions eliminating a director's personal
liability for monetary damages to the Company and its stockholders arising from
a breach of a director's fiduciary duty except for liability (a) for any breach
of the director's duty of loyalty to the Company or its stockholders, (b) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the DGCL, or (d) for any
transaction from which the director derived an improper personal benefit.
Section 145 of the DGCL provides generally that a person sued as a
director, officer, employee or agent of a corporation may be indemnified by the
corporation for reasonable expenses, including attorneys' fees, if in the case
of other than derivative suits such person has acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation (and, in the case of a criminal proceeding, had no
reasonable cause to believe that such person's conduct was unlawful). In the
case of a derivative suit, an officer, employee or agent of the corporation
which is not protected by the Certificate of Incorporation may be indemnified by
the corporation for reasonable expenses, including attorneys' fees, if such
person has acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made in the case of a derivative suit in respect of any
claim as to which an officer, employee or agent has been adjudged to be liable
to the corporation unless that person is fairly and reasonably entitled to
indemnity for proper expenses. Indemnification is mandatory in the case of a
director, officer, employee, or agent who is successful on the merits in defense
of a suit against such person.
The Company has entered into Indemnity Agreements with its directors and
certain key officers pursuant to which the Company generally is obligated to
indemnify its directors and such officers to the full extent permitted by the
DGCL as described above.
II-1
<PAGE>
The Company intends to purchase liability insurance policies covering
directors and officers in certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On December 18, 1995, the Company issued and sold shares of its Series A
Convertible Preferred Stock to the following investors in the following amounts:
Declaration of Trust for Defined Benefit Plans of Zeneca Holdings Inc.-165,965
shares, Delaware State Employees' Retirement Fund-838,123 shares and Declaration
of Trust for Defined Benefit Plans of ICI American Holdings Inc.-240,649 shares,
each of which represented to the Company that it is an accredited investor under
Rule 501(a) of Regulation D. The Series A Preferred Stock was issued in
connection with a loan from the Pecks Investors to the Company of $7.5 million.
These sales were exempt from registration under Section 4(2) of the Securities
Act, no public offering being involved.
Also on December 18, 1995, the following individuals received Common Stock
of the Company in the following amounts pursuant to the merger of the Company
with Family Dental Services of Texas, Inc.: Jack H. Castle Jr.,
Trustee-1,428,000 shares, Castle Interests, Ltd.-1,028,000 shares, Lisa G.
Castle Donnell, Trustee-116,000 shares, Jack H. Castle-714,000 shares, Loretta
Castle-714,000 shares, each of which is an accredited investor under Rule 501(a)
of Regulation D. The consideration for the issuance of these shares of Common
Stock was the merger of the Company with Family Dental Services of Texas, Inc.
See "Unaudited Pro Forma Combined Financial Information." The foregoing
transactions were exempt from registration under Section 4(2) of the Securities
Act, no public offering being involved.
Also on December 18, 1995, the Company issued to GulfStar Investments,
Ltd., an accredited investor under Rule 501(a) of Regulation D, a Common Stock
purchase warrant for 113,158 shares of Common Stock. The consideration for the
issuance of the Common Stock purchase warrant was services performed by an
affiliate of Gulfstar Investments, Ltd. to the Company. The foregoing
transaction was exempt from registration under Section 4(2) of the Securities
Act, no public offering being involved.
On April 29, 1996, the Company issued and sold 150,000 shares of its Common
Stock to Mid-South Dental Center, P.C., which represented to the Company that it
is an accredited investor under Rule 501(a) of Regulation D. These shares of
Common Stock represent the stock portion of the purchase price of the
acquisition by the Company of certain assets of Mid-South Dental Center, P.C.
The foregoing transaction was exempt from registration under Section 4(2) of the
Securities Act, no public offering being involved.
On May 19, 1996, the Company issued and sold 145,242 shares of its Common
Stock to 1st Dental Care, Inc., which represented to the Company that it is an
accredited investor under Rule 501(a) of Regulation D, and issued to 1st Dental
Care, Inc. an aggregate of $943,363 of subordinated notes convertible into
Common Stock at a conversion price of $6.75 per share, subject to antidilution
adjustments and automatic annual increase in conversion price. These shares of
Common Stock represent the stock portion of the purchase price of the
acquisition by the Company of certain assets of 1st Dental Care, Inc. The
foregoing transaction was exempt from registration under Section 4(2) of the
Securities Act, no public offering being involved.
On August 9, 1996 in connection with the acquisition of Horizon Dental
Centers, the Company issued and sold 21,315 shares of its Common Stock to EFW
Dental Centers, P.C., 70,280 shares of its Common Stock to NEFW Dental Centers,
P.C., 65,095 shares of its Common Stock to HDC Dental Services, P.C., 71,432
shares of its Common Stock to Midcities Dental Services, P.C., 59,912 shares of
its Common Stock to West Ft. Worth Dental Services, P.C., 48,966 shares of its
Common Stock to N.A. Dental Services, P.C., each of which represented to the
Company that it is an accredited investor under Rule 501(a) of Regulation D.
These shares of Common Stock represent the stock portion of the purchase price
of the acquisition by the Company of Horizon Dental. The foregoing transactions
were exempt from registration under Section 4(2) of the Securities Act, no
public offering being involved.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
**1.1 -- Form of underwriting agreement among Castle Dental Centers, Inc. and the underwriters.
*3.1 -- Certificate of Incorporation of Castle Dental Centers, Inc., as amended.
*3.2 -- Certificate of Amendment to Certificate of Incorporation of Castle Dental Centers, Inc.
dated August 28, 1996.
*3.3 -- Bylaws of Castle Dental Centers, Inc.
*3.4 -- Amendment to Bylaws of Castle Dental Centers, Inc. dated August 16, 1996.
*4.1 -- Form of Certificate representing the Common Stock, par value $.001 per share, of Castle
Dental Centers, Inc.
*4.2 -- Securityholders Agreement dated December 18, 1995, among Castle Dental Centers, Inc., Jack
H. Castle, D.D.S., P.C., certain investors in the Company, certain stockholders of Castle
Dental Centers, Inc., and certain shareholders of Jack H. Castle, D.D.S., P.C.
*4.3 -- Amendment, Waiver and Consent dated August 20, 1996 given by Pecks Management Partners
Ltd. on behalf of Delaware State Employees' Retirement Fund and the pension plans of
ZENECA Holdings, Inc. and ICI American Holdings, Inc.
*4.4 -- Stockholders' Agreement dated May 19, 1996 among Castle Dental Centers, Inc. and certain
stockholders.
*4.5 -- Stockholders' Agreement dated May 31, 1996 by and among Castle Dental Centers, Inc. and
certain stockholders.
*4.6 -- Stockholders' Agreement dated August 9, 1996 by and among Castle Dental Centers, Inc. and
certain stockholders.
*4.7 -- Registration Rights Agreement dated December 18, 1995, among Castle Dental Centers, Inc.
and Delaware State Employees' Retirement Fund, Declaration of Trust for Defined Benefit
Plan of ICI American Holdings, Inc., Declaration of Trust for Defined Benefit Plan of
Zeneca Holdings, Inc. and certain stockholders and investors in the Company.
*4.8 -- Registration Rights Agreement dated May 19, 1996 between Castle Dental Centers, Inc. and
1st Dental Care, Inc.
*4.9 -- Registration Rights Agreement dated May 31, 1996 by and between Castle Dental Centers,
Inc. and G. Powell Bilyeu, D.D.S.
*4.10 -- Registration Rights Agreement dated August 9, 1996 by and between Castle Dental Centers,
Inc., Joseph A. Bonola, D.D.S. and Larry C. Jackson, D.D.S.
4.11 -- Form of Registration Rights Agreement by and between Castle Dental Centers, Inc. and Jules
V. Lane D.D.S.
**5 -- Opinion of Bracewell & Patterson, L.L.P. as to the validity of the Common Stock being
offered.
*10.1 -- Securities Purchase Agreement dated December 18, 1995 among Castle Dental Centers, Inc.,
Jack H. Castle, D.D.S., P.C., JHCDDS, Inc. and certain investors.
**10.2 -- Amendment to Securities Purchase Agreement among Castle Dental Centers, Inc., Jack H.
Castle, D.D.S., P.C., JHCDDS, Inc., and certain investors, dated as of August , 1996.
*10.3 -- 12% Senior Subordinated Note due December 18, 2002 between Castle Dental Centers, Inc. and
NAP & Company in the principal amount of $5,050,000.
*10.4 -- 12% Senior Subordinated Note due December 18, 2002 between Castle Dental Centers, Inc. and
Fuelship & Company in the principal amount of $1,000,000.
II-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
*10.5 -- 12% Senior Subordinated Note due December 18, 2002 between Castle Dental Centers, Inc. and
Northman & Company.
+*10.6 -- Management Services Agreement effective December 18, 1995 by and between Castle Dental
Centers, Inc. and Jack H. Castle, D.D.S., P.C.
*10.7 -- Amendment to Management Services Agreement between Castle Dental Centers, Inc. and Jack H.
Castle, D.D.S., P.C., dated as of August 15, 1996.
*10.8 -- Accounts Receivable Purchase Agreement dated December 18, 1995, between Jack H. Castle,
D.D.S., P.C. and Castle Dental Centers, Inc.
*10.9 -- Plan and Agreement of Merger of Family Dental Services of Texas, Inc. with and into Castle
Dental Centers, Inc. dated December 18, 1995.
+*10.10 -- Stock Purchase Agreement dated December 18, 1995 by and between Jack H. Castle, D.D.S. and
Castle Dental Centers, Inc.
*10.11 -- Amendment to Stock Purchase Agreement by and between Jack H. Castle, D.D.S. and Castle
Dental Centers, Inc., dated as of August 15, 1996.
*10.12 -- Deferred Compensation Agreement effective December 18, 1995 by and between Castle Dental
Centers, Inc. and Jack H. Castle, D.D.S.
*10.13 -- Indemnity Agreement dated December 18, 1995 by and between Castle Dental Centers, Inc. and
G. Kent Kahle.
*10.14 -- Indemnity Agreement dated December 18, 1995, by and between Castle Dental Centers, Inc.
and Jack H. Castle, D.D.S.
*10.15 -- Indemnity Agreement dated December 18, 1995 by and between Castle Dental Centers, Inc. and
Jack H. Castle, Jr.
*10.16 -- Indemnity Agreement dated December 18, 1995 by and between Castle Dental Centers, Inc. and
Robert J. Cresci.
*10.17 -- Indemnity Agreement dated August 16, 1996 by and between Castle Dental Centers, Inc. and
Bannus B. Hudson.
*10.18 -- Indemnity Agreement dated August 16, 1996 by and between Castle Dental Centers, Inc. and
Elizabeth A. Tilney.
+*10.19 -- Asset Purchase Agreement dated May 19, 1996 by and among Castle Dental Centers of Florida,
Inc., and 1st Dental Care, Inc., Hernando Dental Center-Lester B. Greenberg, D.D.S., P.A.,
M&B Dental Lab, Inc., Lester B. Greenberg, D.D.S. and Elisa Greenberg.
*10.20 -- 10% Note due May 19, 2001 by and between Castle Dental Centers, Inc. and 1st Dental Care,
Inc. in the principal amount of $1,787,938.
*10.21 -- 6.36% Note due May 19, 2000 by and between Castle Dental Centers, Inc. and 1st Dental
Care, Inc. in the principal amount of $656,588.
*10.22 -- 6.36% Note due May 19, 2000 by and between Castle Dental Centers, Inc. and M&B Dental Lab,
Inc. in the principal amount of $286,775.
+*10.23 -- Management Services Agreement effective May 19, 1996 by and between Castle Dental Centers
of Florida, Inc. and Castle 1st Dental Care, P.A.
*10.24 -- Amendment to Management Services Agreement between Castle Dental Centers of Florida, Inc.
and Castle 1st Dental Care, P.A., dated as of August 16, 1996.
*10.25 -- Accounts Receivable Purchase Agreement dated May 19, 1996, between Castle 1st Dental Care,
P.A. and Castle Dental Centers of Florida, Inc.
*10.26 -- Trade Name License Agreement effective May 19, 1996 by and between Castle Dental Centers
of Florida, Inc. and Castle 1st Dental Care, P.A.
*10.27 -- Trademark License Agreement effective May 19, 1996 by and between Castle Dental Centers of
Florida, Inc. and Castle 1st Dental Care, P.A.
+*10.28 -- Employment Agreement dated May 19, 1996 by and between Castle Dental Centers of Florida,
Inc. and Lester B. Greenberg, D.D.S.
II-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
+*10.29 -- Asset Purchase Agreement dated April 29, 1996 by and among Castle Dental Centers of
Tennessee, Inc. and Mid-South Dental Center, P.C. and G. Powell Bilyeu, D.D.S.
*10.30 -- 10% Note due May 30, 2001 by and between Castle Dental Centers, Inc. and Mid-South Dental
Centers, P.C. in the principal amount of $750,000.
*10.31 -- Accounts Receivable Purchase Agreement dated May 31, 1996, between Castle Mid-South Dental
Centers, P.C. and Castle Dental Centers of Tennessee, Inc.
+*10.32 -- Management Services Agreement effective May 31, 1996 by and between Castle Dental Centers
of Tennessee, Inc. and Castle Mid-South Dental Center, P.C.
*10.33 -- Amendment to Management Services Agreement between Castle Dental Centers of Tennessee,
Inc. and Castle Mid-South Dental Center, P.C., dated as of August 16, 1996.
*10.34 -- Trade Name License Agreement effective May 31, 1996 by and between Castle Dental Centers
of Tennessee, Inc. and Castle Mid-South Dental Centers, P.C.
*10.35 -- Trademark License Agreement effective May 31, 1996 by and between Castle Dental Centers of
Tennessee, Inc. and Castle Mid-South Dental Centers, P.C.
+*10.36 -- Employment Agreement dated May 31, 1996 by and between Castle Dental Centers of Tennessee,
Inc., and G. Powell Bilyeu, D.D.S.
+*10.37 -- Asset Purchase Agreement dated August 9, 1996 by and among Castle Dental Centers, Inc.;
Castle Dental Centers of Texas, Inc.; Consolidated Industries, Inc.; S.A. Dental Services,
P.C.; C.A. Dental Services, P.C.; S.C.A. Dental Services, P.C.; Austin Periodontist
Associates, Inc.; Joseph A. Bonola, D.D.S.; and Kristen Bonola.
+*10.38 -- Plan and Agreement of Reorganization dated August 9, 1996 by and among Castle Dental
Centers, Inc.; Castle Dental Centers of Texas, Inc.; N.A. Dental Services, P.C.; EFW
Dental Services, P.C.; HDC Dental Services, P.C.; Midcities Dental Services, P.C.; NEFW
Dental Services, P.C.; West Ft. Worth Dental Services, P.C.; Joseph A. Bonola, D.D.S.;
Kristen Bonola; and Larry Charles Jackson.
*10.39 -- 10% Note due July 9, 2001 between Castle Dental Centers, Inc. and Joseph Bonola in the
principal amount of $1,000,000.
*10.40 -- License Agreement effective August 9, 1996 by and between Joseph A. Bonola, D.D.S. and
Castle Dental Centers of Texas, Inc.
+*10.41 -- Employment Agreement dated August 9, 1996 by and between Jack H. Castle, D.D.S., P.C., and
Joseph A. Bonola, D.D.S.
*10.42 -- Escrow Agreement dated August 9, 1996 by and among N.A. Dental Services, P.C.; EFW Dental
Services P.C.; NEFW Dental Services, P.C.; HDC Dental Services, P.C.; Midcities Dental
Services, P.C.; West Ft. Worth Dental Services, P.C.; Joseph A. Bonola and Kristen Bonola;
Castle Dental Centers of Texas, Inc,.; and the escrow agent named therein.
+*10.43 -- Asset Purchase Agreement dated August 21, 1996 by and among Castle Dental Centers of
Arkansas, Inc., Castle Dental Centers of Oklahoma, Inc., Castle Dental Centers, Inc.,
United Dental Care Tom Harris D.D.S. & Associates and Tom Harris.
*10.44 -- Asset Purchase Agreement dated August 21, 1996 by and among Castle Dental Centers of
Louisiana, Inc., Castle Dental Centers, Inc., William T. Harris D.D.S. and Associates (a
Professional Dental corporation) and Tom Harris.
+10.45 -- Asset Purchase Agreement dated August 30, 1996 by and among Castle Dental Centers of New
York, Inc., Castle Dental Centers, Inc., Jules V. Lane D.D.S. d/b/a American Dental
Centers, J.V. Lane Professional Corporation d/b/a American Dental Centers, Lisadent Corp.
and Jules V. Lane D.D.S.
+10.46 -- Form of Management Services Agreement by & between Castle Dental Centers of New York, Inc.
and J.V. Lane Professional Corporation d/b/a American Dental Centers.
II-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
10.47 -- Form of Ancillary Agreement by and among Castle Dental Centers of New York, Inc., Castle
Dental Centers, Inc., Jules V. Lane D.D.S. d/b/a American Dental Centers, J.V. Lane
Professional Corporation d/b/a American Dental Centers, Lisadent Corp. & Jules V. Lane
D.D.S.
+10.48 -- Form of Employment Agreement by and between Castle Dental Centers of New York, Inc. and
Jules V. Lane D.D.S.
*10.49 -- Amended and Restated Credit Agreement dated May 31, 1996 between Castle Dental Centers,
Inc. and NationsBank of Texas, N.A.
*10.50 -- $3,000,000 Revolving Credit Note dated May 31, 1996 between Castle Dental Centers, Inc.
and NationsBank of Texas, N.A.
*10.51 -- $6,000,000 Term Note dated May 31, 1996 between Castle Dental Centers, Inc. and
NationsBank of Texas, N.A.
*10.52 -- $10,000,000 Advancing Term Note dated May 31, 1996 between Castle Dental Centers, Inc. and
NationsBank of Texas, N.A.
*10.53 -- Amended and Restated Security Agreement (Stocks, Bonds and Other Securities) dated May 31,
1996 between Castle Dental Centers, Inc. and NationsBank of
Texas, N.A.
*10.54 -- Amended and Restated Security Agreement (Accounts, Inventory, Equipment, Chattel Paper,
Documents, Instruments, General Intangibles and Other Property) dated May 31, 1996 between
Castle Dental Centers, Inc. and NationsBank of Texas, N.A.
*10.55 -- Amended and Restated Guaranty Agreement dated May 31, 1996 by Jack H. Castle, Jr. in favor
of NationsBank of Texas, N.A.
*10.56 -- Guaranty Agreement dated May 31, 1996 by JHCDDS, Inc. in favor of NationsBank of Texas,
N.A.
*10.57 -- Amended and Restated Security Agreement (Accounts, Inventory, Equipment, Chattel Paper,
Documents, Instruments, General Intangibles and Other Property) dated May 31, 1996 between
JHCDDS, Inc. and NationsBank of Texas, N.A.
*10.58 -- Security Agreement (Accounts, Inventory, Equipment, Chattel Paper, Documents, Instruments,
General Intangibles and Other Property) dated May 31, 1996 between Castle Dental Centers
of Florida, Inc. and NationsBank of Texas, N.A.
*10.59 -- Guaranty Agreement dated May 31, 1996 by Castle Dental Centers of Florida, Inc. in favor
of NationsBank of Texas, N.A.
*10.60 -- Security Agreement (Accounts, Inventory, Equipment, Chattel Paper, Documents, Instruments,
General Intangibles and Other Property) dated May 31, 1996 between Castle Dental Centers
of Tennessee, Inc. and NationsBank of Texas, N.A.
*10.61 -- Guaranty Agreement dated May 31, 1996 by Castle Dental Centers of Tennessee, Inc. in favor
of NationsBank of Texas, N.A.
*10.62 -- Lease dated January 1, 1996 by and between Goforth, Inc. and Family Dental Services of
Texas, Inc.
*10.63 -- Lease Agreement effective February 20, 1995 by and between Lehndorff Four Oaks Place Joint
Venture and Family Dental Services of Texas, Inc.
10.64 -- Form of Marketing Agreement by and among Castle Dental Centers of New York, Inc., Castle
Dental Centers, Inc., American Medical and Life Insurance Company and Jules V. Lane D.D.S.
10.65 -- Form of Services Agreement by and among Castle Dental Centers of New York, Inc., American
Medical and Life Insurance Company and Jules V. Lane D.D.S.
10.66 -- Form of Option Agreement by and between Jules V. Lane D.D.S. and Castle Dental Centers of
New York, Inc.
10.67 -- Option Agreement effective as of December 18, 1995 by and between Jack H. Castle, D.D.S.
and Castle Dental Centers, Inc.
II-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
10.68 -- Option Agreement effective as of May 19, 1996 by and between Lester B. Greenberg, D.D.S.
and Castle Dental Centers of Florida, Inc.
10.69 -- Incentive Stock Option Agreement dated May 31, 1996 between Castle Dental Centers, Inc.
and G. Powell Bilyeu.
10.70 -- Incentive Stock Option Agreement dated May 31, 1996 between Castle Dental Centers, Inc.
and Phillip T. Hamner.
10.71 -- Incentive Stock Option Agreement dated May 31, 1996 between Castle Dental Centers, Inc.
and David North.
*11.1 -- Computation of Earnings Per Share.
*11.2 -- Computation of Earnings Per Share under SAB No. 55.
*11.3 -- Computation of Pro Forma Earnings Per Share.
*21 -- Subsidiaries of the Registrant.
23.1 -- Consent of Coopers & Lybrand, L.L.P.
23.2 -- Consent of Jules V. Lane D.D.S.
23.3-- Consent of Emmett Moore.
23.4-- Consent of Louis A. Waters.
*27 -- Financial Data Schedule.
</TABLE>
- ------------
* Filed previously.
** To be filed by amendment.
+ Exhibit omits certain information which the Company has filed separately with
the Commission pursuant to a confidential treatment request under Rule 406
promulgated under the Securities Act of 1933, as amended.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the provisions described in Item 14, or otherwise,
the Company has been advised that in the opinion of the 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 payment by the Company of expenses incurred
or paid by a director, officer or controlling person of the Company 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 Company 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.
(b) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(c) The undersigned registrant hereby undertakes that: (i) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a 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 this registration statement as of the time it was
declared effective; (ii) for the purpose of determining any liability under the
Securities Act of 1933, 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-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, CASTLE DENTAL
CENTERS, INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT THERETO
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF HOUSTON, STATE OF TEXAS, ON OCTOBER 21, 1996.
CASTLE DENTAL CENTERS, INC.
By:/s/ JACK H. CASTLE, JR.
JACK H. CASTLE, JR.
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT OR AMENDMENT THERETO HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE INDICATED CAPACITIES ON OCTOBER 21, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------------------------------------------
<S> <C>
/s/ JACK H. CASTLE, JR. Chairman of the Board of Directors,
JACK H. CASTLE, JR. Chief Executive Officer and Director
(principal executive officer)
/s/ * Director
JACK H. CASTLE, D.D.S.
/s/ JOHN M. SLACK Vice President and Chief Financial
JOHN M. SLACK Officer
(principal financial and accounting
officer)
/s/ * Director
G. KENT KAHLE
/s/ * Director
ROBERT J. CRESCI
/s/ * Director
BANNUS B. HUDSON
/s/ * Director
ELIZABETH A. TILNEY
By:/s/JACK H. CASTLE, JR.
*JACK H. CASTLE, JR.,
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors of
Castle Dental Centers, Inc.:
Our report on the combined financial statements of Castle Dental Centers,
Inc. is included on page F-4 of this registration statement. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedule listed on S-2.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included herein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
September 3, 1996
S-1
<PAGE>
CASTLE DENTAL CENTERS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUANTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE BALANCE AT
BEGINNING CHARGED TO END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
- ------------------------------------- --------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1993:
Allowance for uncollectible
accounts--patient
receivables................... $ 1,580 $ 966 $ 664 $1,882
========= ========== ============= ==========
Year ended December 31, 1994:
Allowance for uncollectible
accounts--patient
receivables................... $ 1,882 $1,444 $ 730 $2,596
========= ========== ============= ==========
Year ended December 31, 1995:
Allowance for uncollectible
accounts--patient
receivables................... $ 2,596 $1,283 $ 1,442 $2,437
========= ========== ============= ==========
BALANCE BALANCE AT
BEGINNING CHARGED TO END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
- ------------------------------------- --------- ---------- ------------- ----------
Year ended December 31, 1993:
Allowance for uncollectible
accounts--unbilled patient
receivables................... $ 1 $ 55 $-- $ 56
========= ========== ============= ==========
Year ended December 31, 1994:
Allowance for uncollectible
accounts--unbilled patient
receivables................... $ 56 $ 57 $-- $ 113
========= ========== ============= ==========
Year ended December 31, 1995:
Allowance for uncollectible
accounts--unbilled patient
receivables................... $ 113 $ 115 $-- $ 228
========= ========== ============= ==========
</TABLE>
S-2
EXHIBIT 4.11
EXHIBIT C
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of _______________, 1996 (the
"Agreement"), by and between CASTLE DENTAL CENTERS, INC., a Delaware corporation
(the "Company"), and ____________________ (the "Holder").
1. INTRODUCTION. Contemporaneously with the execution and delivery of this
Agreement, the Holder acquired an aggregate of ________ shares of the common
stock, $.001 par value per share, of the Company (the "Common Stock"). The
Company has agreed to grant to the Holder certain registration rights with
respect to the shares of Common Stock held by the Holder as more fully set forth
herein. Prior to the date hereof, the Company entered into a Registration Rights
Agreement dated as of December 18, 1995, with purchasers of the Company's Series
A Convertible Preferred Stock and certain other parties, as may be amended from
time to time (the "Original Registration Rights Agreement"), and other
agreements regarding registration of Common Stock with other parties. Certain
terms used herein which are not otherwise defined are defined in the Original
Registration Rights Agreement.
2. REGISTRATION UNDER SECURITIES ACT.
2.1 "PIGGYBACK" REGISTRATIONS.
(a) RIGHT TO INCLUDE HOLDER SECURITIES. If the Company at any
time proposes to register any Common Stock under the Securities Act (other than
by a registration on Form S-4, Form S-8 or any successor or similar form, or in
connection with a tender offer, merger, or other acquisition in which no shares
are offered or sold to the general public), for sale for its own account, and
such Common Stock is to be distributed by or through one or more underwriters on
a firm commitment basis, it will at such time give prompt written notice to all
Holders of Holder Securities (as hereinafter defined) of its intention to do so
and of such Holders' rights under this Section 2.1. Upon the written request of
any such Holder made within 20 days after the date of any such notice given in
accordance with Section 7 hereof, the Company will use its best efforts to
effect the registration under the Securities Act of all Holder Securities which
the Company has been so
<PAGE>
requested to register by the Holders thereof, and to arrange for such
underwriters to include all the Holder Securities to be offered and sold by such
Holder among the Common Stock to be distributed by such underwriters, PROVIDED
that if, at any time after giving written notice of its intention to register
its Common Stock and prior to the effective date of the registration statement
filed in connection with such registration, the Company shall determine for any
reason not to register or to delay registration of its Common Stock, the Company
may, at its election, give written notice of such determination to each Holder
of Holder Securities and, thereupon, (i) in the case of a determination not to
register, shall be relieved of its obligation to register any Holder Securities
in connection with such registration (but not from its obligation to pay the
Registration Expenses in connection therewith), and (ii) in the case of a
determination to delay registering, shall be permitted to delay registering any
Holder Securities for the same period as the delay in registering its Common
Stock. The Holders of Holder Securities to be distributed by such underwriters
shall be parties to the underwriting agreement between the Company and such
underwriters. Any such Holder of Holder Securities shall not be required to make
any representations or warranties to or agreements with the Company or the
underwriters other than representations, warranties, or agreements typical in an
offering of this type, including those regarding such Holder, such Holder's
Holder Securities and such Holder's intended method of distribution, any other
information supplied by such Holder to the Company for use in the registration
statement and any other representation required by law. The Company will pay all
Registration Expenses in connection with each registration of Holder Securities
requested pursuant to this Section 2.1.
(b) APPORTIONMENT IN "PIGGYBACK" REGISTRATIONS. If the
managing underwriter of such underwritten offering shall inform the Company and
the Holders of the Holder Securities requesting such registration in writing of
its belief that the aggregate number of shares of Common Stock requested to be
included in such registration (including any securities of other securityholders
of the Company included in such registration pursuant to the terms of the
Original Registration Rights Agreement) exceeds the number which can be sold in
(or during the time of) such offering or that the inclusion would adversely
affect the marketing or the selling price of the Common Stock to be sold by the
Company therein, then the Company may include all securities proposed by the
Company to be sold for its own account and may decrease or eliminate the number
of Holder Securities requested to be included in such registration to the extent
necessary to reduce the number of shares of Common Stock to be included in the
registration to the level recommended by the managing underwriter. In the event
that such a reduction is necessary, the number of Holder Securities to be
included in such registration shall be reduced, on a pro rata basis among
Holders (based on the total number of shares of Common Stock owned by Holders
and other parties (but excluding for purposes of this calculation Common Stock
which constitutes Registrable Inside Shareholder Securities and Registrable
Securities) and requested to be included in such registration), prior to any
reduction in the number of Registrable Inside Shareholder Securities and
Registrable Securities to be included in such registration.
-2-
<PAGE>
2.2 REGISTRATION PROCEDURES. If and whenever the Company is required
to use its best efforts to effect the registration of any Holder Securities
under the Securities Act as provided in Section 2.1, the Company will as
expeditiously as possible:
(i) prepare and file with the Commission the requisite
registration statement to effect such registration and thereafter use its
best efforts to cause such registration statement to become effective,
PROVIDED that the Company may discontinue any registration of its
securities at any time prior to the effective date of the registration
statement relating thereto;
(ii) prepare and file with the Commission such
amendments and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to keep such
registration statement effective and to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered
by such registration statement until such time as all of such securities
have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof set forth in such
registration statement or for six months, whichever period is shorter;
(iii) furnish to each seller of Holder Securities
covered by such registration statement such number of conformed copies of
such registration statement and of each such amendment and supplement
thereto, such number of copies of the prospectus contained in such
registration statement (including each preliminary prospectus and any
summary prospectus) and any other prospectus filed under Rule 424 or Rule
430A under the Securities Act, in conformity with the requirements of the
Securities Act, and such other documents, as such seller may reasonably
request;
(iv) use its best efforts to register or qualify all
Holder Securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as each seller thereof
shall reasonably request, to keep such registration or qualification in
effect for so long as such registration statement remains in effect, and
take any other action which may be reasonably necessary to enable such
seller to consummate the disposition in such jurisdictions of the
securities owned by such seller, except that the Company shall not for any
such purpose be required to qualify generally to do business as a foreign
corporation in any jurisdiction wherein it would not but for the
requirements of this subdivision (iv) be obligated to be so qualified or
to consent to general service of process in any such jurisdiction or
subject itself to be required to pay any franchise or income taxes in any
such jurisdiction;
-3-
<PAGE>
(v) use its best efforts to cause all Holder Securities
covered by such registration statement to be registered with or approved
by such other governmental agencies or authorities as may be necessary to
enable the seller or sellers thereof to consummate the disposition of such
Holder Securities;
(vi) furnish to each seller of Holder Securities a
signed counterpart, addressed to such seller, of:
(x) an opinion of counsel for the Company, dated
the date of the closing under the underwriting agreement, reasonably
satisfactory in form and substance to such underwriter, and
(y) a "comfort" letter, dated the effective date
of such registration statement and dated the date of the closing
under the underwriting agreement, signed by the independent public
accountants who have certified the Company's financial statements
included in such registration statement, addressed to each seller,
to the extent the same can be reasonably obtained, and addressed to
the underwriters, covering substantially the same matters with
respect to such registration statement (and the prospectus included
therein) and, in the case of the accountants' letter, with respect
to events subsequent to the date of such financial statements, as
are customarily covered in accountants' letters delivered to the
underwriters in underwritten public offerings of securities and such
other financial matters as such seller or the underwriters may
reasonably request;
(vii) notify each seller of Holder Securities covered by
such registration statement, at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, upon
discovery that, or upon the happening of any event as a result of which,
the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under
which they were made, and at the request of any such seller or holder
promptly prepare to furnish to such seller or Holder a reasonable number
of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the sellers of such
securities, such prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made;
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(viii) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to
its security holders, as soon as reasonably practicable, an earnings
statement covering the period of at least 12 months, but not more than 18
months, beginning with the first full calendar month after the effective
date of such registration statement, which earnings statement shall
satisfy the provisions of Section ll(a) of the Securities Act;
(ix) provide and cause to be maintained a transfer agent
and registrar for all Holder Securities covered by such registration
statement from and after a date not later than the effective date of such
registration statement; and
(x) use its best efforts to list all Holder Securities
covered by such registration statement on any securities exchange on which
any of the Company's Common Stock is then listed.
The Company may require each proposed seller of Holder Securities as
to which any registration is being effected to promptly furnish the Company, as
a condition precedent to including such Holder's Holder Securities in any
registration, such information regarding such seller and the distribution of
such securities as the Company may from time to time reasonably request in
writing.
Each Holder of Holder Securities agrees by acquisition of such
Holder Securities that upon receipt of any notice from the Company of the
happening of any event of the kind described in subdivision (vii) of this
Section 2.2, such Holder will forthwith discontinue its disposition of Holder
Securities pursuant to the registration statement relating to such Holder
Securities until such Holder's receipt of the copies of the supplemented or
amended prospectus contemplated by subdivision (vii) of this Section 2.2 and, if
so directed by the Company, will deliver to the Company (at the Company's
expense) all copies, other than permanent file copies, then in such Holder's
possession of the prospectus relating to such Holder Securities current at the
time of receipt of such notice.
2.3 PREPARATION; REASONABLE INVESTIGATION. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company will give the Holders of Holder
Securities registered under such registration statement, their underwriters, if
any, and their respective counsel (such counsel representing Holders to be
appointed by the holders of more than 50% by number of shares of Common Stock
being registered other than shares being registered by the Company) the
opportunity to participate in the preparation of such registration statement,
each prospectus included therein or filed with the Commission, and each
amendment thereof or supplement thereto, and will give each of them such access
to its books and records and such opportunities to discuss the business of the
Company with its officers and the
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independent public accountants who have certified its financial statements as
shall be necessary, in the opinion of such Holders' and such underwriters'
respective counsel, to conduct a reasonable investigation within the meaning of
the Securities Act.
2.4 INDEMNIFICATION.
(a) INDEMNIFICATION BY THE COMPANY. In the event of any
registration of any securities of the Company under the Securities Act, the
Company will indemnify and hold harmless the seller of any Holder Securities
covered by such registration statement, its directors and officers, each other
Person, if any, who controls such seller within the meaning of the Securities
Act, against any losses, claims, damages, expenses or liabilities, joint or
several, to which such seller or any such director or officer or controlling
person may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages, expenses or liabilities (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any registration statement under which such securities were
registered under the Securities Act, any preliminary prospectus, final
prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and the Company will reimburse such seller and each such
director, officer and controlling person for any legal or any other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, liability, action or proceeding; PROVIDED, HOWEVER, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage, expense or liability arises out of or is based upon (a) an untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement, said preliminary or final prospectus or said
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
seller, specifically for use in the preparation thereof or (b) an untrue
statement or alleged untrue statement, omission or alleged omission in a
prospectus if such untrue statement or alleged untrue statement, omission or
alleged omission is corrected in an amendment or supplement to the prospectus or
in the final prospectus, which amendment, supplement or final prospectus is
delivered to such seller and such seller thereafter fails to deliver such
prospectus as so amended or supplemented prior to or concurrently with the sale
of registered Holder Securities to the person asserting such loss, claim,
damage, liability or expense. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of such seller or
any such director, officer or controlling person and shall survive the transfer
of such securities by such seller.
(b) INDEMNIFICATION BY THE HOLDERS. The Holders will, and
hereby do, indemnify and hold harmless (in the same manner and to the same
extent as set forth in subdivision
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(a) of this Section 2.4) the Company, each director of the Company, each officer
of the Company and each other Person, if any, who controls the Company within
the meaning of the Securities Act with respect to any statement or alleged
statement in or omission or alleged omission from such registration statement,
any preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, if such statement or alleged
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such Holder for
use in the preparation of such registration statement, preliminary prospectus,
final prospectus, summary prospectus, amendment or supplement. Such indemnity
shall remain in full force and effect, regardless of any investigation made by
or on behalf of the Company or any such director, officer or controlling Person
and shall survive the transfer of such securities by such Holder.
(c) NOTICE. Promptly after receipt by an indemnified party of
notice of the commencement of any action or proceeding involving a claim
referred to in the preceding subdivisions of this Section 2.4, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party, give written notice to the latter of the commencement of such action,
PROVIDED that the failure of any indemnified party to give notice as provided
herein shall not relieve the indemnifying party of its obligations under the
preceding subdivisions of this Section 2.4, except to the extent that the
indemnifying party is prejudiced by such failure to give notice. In case any
such action is brought against an indemnified party, unless in such indemnified
party's reasonable judgment a conflict of interest between such indemnified
party and indemnifying parties may exist in respect of such claim, the
indemnifying party shall be entitled to participate in and to assume the defense
thereof, jointly with any other indemnifying party similarly notified to the
extent that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof other than reasonable costs of investigation. No indemnifying
party shall, without the consent of the indemnified party, consent to entry of
any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation.
(d) INDEMNIFICATION PAYMENTS. The indemnification required by
this Section 2.4 shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred.
2.5 ADJUSTMENTS AFFECTING HOLDER SECURITIES. The Company will not
effect or permit to occur any combination or subdivision of shares which would
adversely affect the ability
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of the holders of Holder Securities to include such Holder Securities in any
registration of its securities contemplated by this Section 2 or the
marketability of such Holder Securities under any such registration.
3. DEFINITIONS. As used herein, unless the context otherwise requires, the
following terms have the following respective meanings:
COMMISSION: The Securities and Exchange Commission or any other federal agency
at the time administering the Securities Act.
COMMON STOCK: Common Stock of the Company, $.001 par value per share, and stock
of any other class with which such shares may hereafter have been exchanged or
reclassified.
EXCHANGE ACT: The Securities Exchange Act of 1934, as amended.
HOLDER SECURITIES: The Common Stock (a) issued to the Holders on the date of
this Agreement and (b) issued to the Holders on conversion of the Convertible
Note, and any securities issued or issuable with respect to such Common Stock by
way of stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization or
otherwise upon any required adjustments.
As to any particular Holder Securities, such securities shall cease to be Holder
Securities when (a) a registration statement with respect to the sale of such
securities shall have become effective under the Securities Act and such
securities shall have been disposed of in accordance with such registration
statement, (b) they shall have been distributed to the public pursuant to Rule
144 (or any successor provision) under the Securities Act, (c) they are eligible
for distribution to the public under Rule 144(k), or (d) they shall have ceased
to be outstanding.
PERSON: A corporation, an association, a partnership, a business, an individual,
a governmental or political sub-division thereof or a governmental agency.
REGISTRABLE INSIDE SHAREHOLDER SECURITIES: Shall have the meaning assigned to
such term in the Original Registration Rights Agreement.
REGISTRABLE SECURITIES: Shall have the meaning assigned to such term in the
Original Registration Rights Agreement.
REGISTRATION EXPENSES: All expenses incident to the Company's performance of or
compliance with Section 2, including, without limitation, all registration,
filing and National Association of Securities
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<PAGE>
Dealers, Inc. fees, all fees and expenses of complying with securities or blue
sky laws, all word processing, duplicating and printing expenses, messenger and
delivery expenses, the reasonable fees and disbursements of counsel for the
Company and of its independent public accountants, including the expenses of any
special audits or "comfort" letters required by or incident to such performance
and compliance, the reasonable fees and disbursements of one counsel (except in
the event of a conflict of interest, then such number of counsel as is
appropriate to resolve such conflict) retained by the holder or holders of more
than 50% by number of shares of Common Stock being registered other than shares
registered by the Company, premiums and other costs of policies of insurance
obtained by the Company against liabilities arising out of the public offering
of the Registrable Securities and the Holder Securities being registered and any
fees and disbursements of underwriters customarily paid by issuers or sellers of
securities, including reasonable fees of underwriters counsel including
qualification of securities under blue sky laws, but excluding all agency fees
and commissions, underwriting discounts and commissions and transfer taxes, if
any.
SECURITIES ACT: The Securities Act of 1933, as amended.
4. RULE 144. If the Company shall have filed a registration statement
pursuant to the requirements of Section 12 of the Exchange Act or a registration
statement pursuant to the requirements of the Securities Act, the Company will
file in a timely manner the reports required to be filed by it under the
Securities Act and the Exchange Act (or, if the Company is not required to file
such reports, will, upon the request of any Holder of Holder Securities, make
publicly available other information) and will take such further action as any
Holder of Holder Securities may reasonably request, all to the extent required
from time to time to enable such Holder to sell Holder Securities without
registration under the Securities Act within the limitation of the exemptions
provided by (a) Rule 144 under the Securities Act, as such rule may be amended
from time to time or (b) any similar rule or regulation hereafter adopted by the
Commission ("Rule 144"). Upon the request of any Holder of Holder Securities,
the Company will deliver to such Holder a written statement as to whether it has
complied with such requirements.
5. AMENDMENTS AND WAIVERS. This Agreement may be amended and the Company
may take any action herein prohibited or omit to perform any act herein required
to be performed by it, only if the Company shall have obtained the written
consent to such amendment, action or omission to act, of the holder or holders
of 662/3% or more (by number of shares) of Holder Securities. Each holder of any
Holder Securities at the time or thereafter outstanding shall be bound by any
consent authorized by this Section 5, whether or not such Holder Securities
shall have been marked to indicate such consent.
6. NOMINEES FOR BENEFICIAL OWNERS. In the event that any Holder Securities
are held by a nominee for the beneficial owner thereof, the beneficial owner
thereof may upon the giving of
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written notice to the Company, at its election, be treated as the Holder of such
Holder Securities for purposes of any request or other action by any Holder or
Holders of Holder Securities pursuant to this Agreement or any determination of
any number or percentage of shares of Holder Securities held by any Holder or
Holders of Holder Securities contemplated by this Agreement. The Company may
require assurances reasonably satisfactory to it of such owner's beneficial
ownership of such Holder Securities.
7. NOTICES. All communications provided for hereunder shall be sent by
first-class mail or overnight courier and (a) if addressed to a party other than
the Company, addressed to such party at the address set forth on the signature
page hereof, or at such other address as such party shall have furnished to the
Company in writing, or (b) if addressed to any other Holder of Holder
Securities, at the address that such Holder shall have furnished to the Company
in writing, or, until any such other holder so furnishes to the Company an
address, then to and at the address of the last holder of such Holder Securities
who has furnished an address to the Company, or (c) if addressed to the Company,
at 1360 Post Oak Boulevard, Suite 1300, Houston, Texas 77056, to the attention
of its President, or to the attention of such other officer, as the Company
shall have furnished to each Holder of Securities at the time outstanding.
8. ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and assigns. In addition, and whether or not any express assignment
shall have been made, the provisions of this Agreement which are for the benefit
of the parties hereto other than the Company shall also be for the benefit of
and enforceable by any subsequent Holder of any Holder Securities.
9. DESCRIPTIVE HEADINGS. The descriptive headings of the several sections
and paragraphs of this Agreement are inserted for reference only and shall not
limit or otherwise affect the meaning hereof.
10. GOVERNING LAW. This agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the state of Delaware.
11. COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute one and the same instrument.
12. EXTENSION OF ADDITIONAL REGISTRATION RIGHTS. The Holders acknowledge
that the Company retains the right to extend the same or similar registration
rights to other holders of its securities, and that such action by the Company
shall not constitute a breach of or a default under this Agreement. It is the
intent of the parties hereto that this Agreement be read consistently with
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the Original Registration Rights Agreement, but in the event of a conflict
therewith, the provisions of the Original Registration Rights Agreement shall
control.
13. LOCK-UP AGREEMENT. If requested in writing by the underwriters for the
initial underwritten public offering of securities of the Company, the Holders
shall agree not to sell publicly any shares of Common Stock (other than Common
Stock being registered in such offering), without the consent of such
underwriters, for a period of not more than 180 days following the effective
date of the registration statement relating to such offering.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their respective officers thereunto duly authorized as of the
date first above written.
CASTLE DENTAL CENTERS, INC.
By:
Jack H. Castle, Jr.
Chief Executive Officer
ADDRESS:
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EXHIBIT 10.45
PAGES WHERE CONFIDEENTIAL TREATMENT
HAS BEEN REQUESTED ARE STAMPED
"CONFIDENTIAL TREATMENT REQUESTED.
THE REDACTED MATERIAL HES BEEN
SEPERATELY FILED WITH THE COMISSION."
THE APPROPRIATE SECTION HAS BEEN MARKED
AT THE APPROPRIATE PLACE.
ASSET PURCHASE AGREEMENT
Dated as of August 30, 1996
By and Among
Castle Dental Centers of New York, Inc.
as Purchaser,
Castle Dental Centers, Inc.
Jules V. Lane D.D.S. d/b/a American Dental Centers,
J.V. Lane Professional Corporation d/b/a American Dental Centers,
Lisadent Corp.
as Seller
and
Jules V. Lane D.D.S.
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TABLE OF CONTENTS
ARTICLE I
DEFINITIONS............................................................1
1.1 Definitions......................................................1
ARTICLE II
THE TRANSACTION........................................................6
2.1 Purchase and Sale of Assets......................................6
2.2 Excluded Assets..................................................8
2.3 Assumption of Obligations........................................9
2.4 Nonassignable Contracts and Leases...............................9
2.5 Closing.........................................................10
2.6 Pre-Closing.....................................................10
2.7 Preparation of Schedules........................................10
ARTICLE III
PAYMENT OF PURCHASE PRICE.............................................11
3.1 Amount; Allocation; Delivery....................................11
3.2 Purchase Price Adjustment.......................................12
3.3 Apportionments..................................................12
3.4 Agency Relationship.............................................12
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
AND THE SHAREHOLDER...................................................13
4.1 Representations and Warranties of Seller and the Shareholders. 13
4.2 Existence and Good Standing.....................................13
4.3 Authorization and Validity of Agreement.........................13
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4.4 Capital Stock. ................................................14
4.5 Consents and Approvals; No Violations...........................14
4.6 Subsidiaries and Affiliates.....................................15
4.7 Financial Statements; No Material Adverse Change................15
4.8 Books and Records...............................................16
4.9 Title to Properties; Encumbrances; Condition....................16
4.10 Real Property Leases............................................16
4.11 Personal Property Leases........................................17
4.12 Material Contracts..............................................17
4.13 Permits.........................................................18
4.14 Litigation......................................................18
4.15 Taxes...........................................................18
4.16 Insurance.......................................................19
4.17 Intellectual Properties.........................................19
4.18 Compliance with Laws............................................20
4.19 Employment Relations............................................20
4.20 Employee Benefit Plans..........................................20
4.21 Environmental Laws and Regulations..............................20
4.22 Interests in Customers, Suppliers, Etc..........................21
4.23 Compensation of Employees and Independent Contractors...........21
4.24 Payors. ......................................................21
4.25 Accounts Receivable.............................................21
4.26 Solvency........................................................21
4.27 Union Contracts.................................................22
4.28 Disclosure......................................................22
4.29 Investments.....................................................23
4.30 Broker's or Finder's Fees.......................................23
4.31 Copies of Documents.............................................23
4.32 Investment Representations......................................23
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF PURCHASER AND CASTLE...............................................24
5.1 Existence and Good Standing.....................................24
5.2 Authorization and Validity of Agreement.........................25
5.3 Consents and Approvals; No Violations...........................25
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5.4 Compliance with Laws............................................26
5.5 Broker's or Finder's Fees.......................................27
5.6 Capital Stock...................................................27
5.7 Litigation......................................................27
5.8 Financial Statement; No Material Adverse Change.................27
5.9 Books and Records...............................................28
5.10 Capitalization Table............................................28
ARTICLE VI
CONDITIONS TO SELLER'S AND THE SHAREHOLDERS' OBLIGATIONS..............28
6.1 Truth of Representations and Warranties.........................28
6.2 Performance of Agreements.......................................28
6.3 No Litigation Threatened........................................29
6.4 Consideration...................................................29
6.5 Governmental Approvals..........................................29
6.6 Proceedings.....................................................29
6.7 Good Standing Certificates......................................29
6.8 Employment Agreement............................................29
6.9 Registration Rights Agreement...................................29
6.10 Lease Agreements. .............................................29
6.11 Ancillary Agreement.............................................30
6.12 Legal Opinion...................................................30
6.13 Initial Public Offering.........................................30
ARTICLE VII
CONDITIONS TO PURCHASER'S OBLIGATIONS.................................30
7.1 Truth of Representations and Warranties.........................30
7.2 Performance of Agreements.......................................30
7.3 No Material Adverse Change......................................30
7.4 Documents of Conveyance.........................................31
7.5 No Litigation Threatened........................................31
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7.6 Governmental Approvals..........................................31
7.7 Consents........................................................31
7.8 Legal Opinion...................................................31
7.9 Proceedings.....................................................31
7.10 Execution of Management Services Agreement......................32
7.11 Lease Agreement.................................................32
7.12 Agreement with American Medical and Life Insurance Company......32
7.13 Employment Agreement............................................32
7.14 Due Diligence...................................................32
7.15 Tradename and Trademark License Agreements......................32
7.16 Accounts Receivable Purchase Agreement..........................32
7.17 Option Agreement................................................33
7.18 Ancillary Agreement.............................................33
7.19 Good Standing Certificates......................................33
7.20 Releases of Liens...............................................33
7.21 Termination of S Corp Status....................................33
7.22 Execution of Lock-Up Agreement..................................33
7.23 Initial Public Offering.........................................33
ARTICLE VIII
COVENANTS OF SELLER AND THE SHAREHOLDERS..............................33
8.1 Cooperation by Seller...........................................33
8.2 Conduct of Business.............................................34
8.3 Exclusive Dealing...............................................35
8.4 Review of the Assets............................................35
8.5 Further Assurances..............................................35
ARTICLE IX
COVENANTS OF PURCHASER AND CASTLE.....................................36
9.1 Cooperation by Purchaser........................................36
9.2 Books and Records; Personnel....................................36
9.3 Further Assurances..............................................36
9.4 Castle Board of Directors.......................................37
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ARTICLE X
TERMINATION...........................................................37
10.1 Termination.....................................................37
10.2 Effect on Obligations...........................................38
ARTICLE XI
SURVIVAL AND INDEMNIFICATION..........................................38
11.1 Indemnification of the Seller and the Shareholders..............38
11.2 Indemnification of the Purchaser and Castle.....................39
11.3 Demands.........................................................39
11.4 Right to Contest and Defend.....................................40
11.5 Cooperation.....................................................40
11.6 Right to Participate............................................41
11.7 Payment of Damages..............................................41
ARTICLE XII
MISCELLANEOUS.........................................................41
12.1 Entire Agreement................................................41
12.2 Successors and Assigns..........................................41
12.3 Counterparts....................................................41
12.4 Headings........................................................42
12.5 Modification and Waiver.........................................42
12.6 No Third Party Beneficiary Rights...............................42
12.7 Sales and Transfer Taxes........................................42
12.8 Expenses........................................................42
12.9 Notice..........................................................42
12.10 Governing Law...................................................44
12.11 Confidentiality; Publicity......................................44
12.12 Consent to Jurisdiction.........................................45
12.13 Severability....................................................45
12.14 Enforcement.....................................................45
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12.15 Guaranty of Obligations.........................................45
12.16 Consent to Disclosure...........................................45
SCHEDULES
Schedule 2.2(b) Excluded Contracts
Schedule 2.2(g) Excluded Assets
Schedule 2.3 Assumed Obligations
Schedule 4.5 Consents
Schedule 4.6 Assets Used in Business Not Owned by Seller
Schedule 4.7 Material Adverse Change
Schedule 4.9 Encumbrances
Schedule 4.10 Leased Real Property
Schedule 4.11 Leased Personal Property
Schedule 4.12 Material Contracts and Proposals
Schedule 4.13 Permits
Schedule 4.14 Litigation
Schedule 4.15 Taxes
Schedule 4.16 Insurance Policies
Schedule 4.17 Intellectual Property
Schedule 4.21 Environmental Matters
Schedule 4.22 Interest in Customers
Schedule 4.23 Employee Compensation
Schedule 4.24 Payors
Schedule 4.27 Union Contracts
Schedule 5.10 Capitalization Table
EXHIBITS
Exhibit A Employment Agreement
Exhibit B [RESERVED]
Exhibit C Registration Rights Agreement
Exhibit D Management Services Agreement
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Exhibit E Ancillary Agreement
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ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT dated as of August 30, 1996 by and among Castle
Dental Centers of New York, Inc., a New York corporation ("Purchaser"), Castle
Dental Centers, Inc., a Delaware corporation ("Castle"), Jules V. Lane D.D.S.
d/b/a American Dental Centers, J.V. Lane Professional Corporation, a New York
professional corporation d/b/a American Dental Centers ("Lane PC"), Lisadent
Corp. ("Lisadent") (collectively "Seller") and Jules V. Lane D.D.S. the sole
shareholder of Lane PC and one of the shareholders of Lisadent ("Dr. Lane"), and
Linda Lane, the other shareholder of Lisadent (Dr. Lane and Linda Lane are
referred to collectively as the "Shareholders").
WITNESSETH:
WHEREAS, Seller wishes to sell, and Purchaser wishes to purchase,
substantially all of the property, assets and business of Seller, all upon the
terms and subject to the conditions set forth below.
NOW, THEREFORE, for the mutual covenants and other consideration described
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto covenant and
agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. As used herein, the following terms have the meanings set
forth below (such meanings to be equally applicable to both the singular and
plural forms of the terms defined):
"ACCOUNTS RECEIVABLE": all notes and accounts receivable of Seller
relating to the Business.
"ACCOUNTS PAYABLE": the payables of Seller to vendors and other trade
creditors as of the Closing Date, but excluding intercompany accounts.
<PAGE>
"AFFILIATE": with respect to any Person, any other Person directly or
indirectly controlling (including, but not limited to, all directors and
officers of such Person), controlled by, or under direct or indirect common
control with such Person.
"AGREEMENT": this Asset Purchase Agreement, as amended from time to time
as provided herein.
"ANCILLARY AGREEMENT": the Ancillary Agreement dated as of the Closing
Date by and among the parties hereto, substantially in the form of Exhibit E
hereto.
"AMLI": American Medical and Life Insurance Company, a New York insurance
company owned by Jules V. Lane D.D.S.
"ASSETS": as defined in Section 2.1 hereof.
"ASSIGNED CONTRACTS": as defined in Section 2.3 hereof.
"ASSUMED OBLIGATIONS": as defined in Section 2.3 hereof.
"BOOKS AND RECORDS": all books, records, books of account, files and data
(including customer and supplier lists), certificates and other documents
related to the conduct of the business or the ownership of the Assets, including
personnel records and files, except that the Books and Records shall not include
(i) any books, records, files and other data of Seller which relate exclusively
to organizational and corporate governance proceedings of Seller, or (ii) any
patient records.
"BUSINESS": the practice of dentistry, including orthodontics and
periodontics, the operation of a dental laboratory and dental supply business
and all related management activities currently conducted by Seller.
Notwithstanding anything contained herein to the contrary, the Business shall
not include AMLI, its business, assets or liabilities, or its methods of
conducting its business, including, but not limited to, its dental managed care
and indemnity business, which includes, without limitation, a dual choice
option.
"CLOSING": as defined in Section 2.5 hereof.
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"CLOSING DATE": as defined in Section 2.5 hereof.
"CODE": the Internal Revenue Code of 1986, as amended from time to time,
and the regulations promulgated and rulings issued thereunder. Section
references to the Code are to the Code as in effect at the date of this
Agreement and any subsequent provisions of the Code amendatory thereof,
supplemental thereto or substituted therefor.
"EMPLOYMENT AGREEMENT": the employment agreement executed pursuant hereto
substantially in the form of Exhibit A attached hereto.
"ENCUMBRANCES": liens, security interests, options, rights of first
refusal, easements, mortgages, charges, debentures, indentures, deeds of trust,
rights-of-way, restrictions, agreements, encroachments, licenses, leases,
permits, security agreements, or any other encumbrances and other restrictions
or limitations on use of real or personal property or irregularities in title
thereto that would have a material adverse effect.
"ENVIRONMENTAL CLAIM": any and all administrative, regulatory or judicial
actions, suits, demands, demand letters, claims, liens, notices of noncompliance
or violations, investigations or proceedings relating in any way to any
Environmental Law (for purposes of this definition, "Claims") or any permit
issued under any such Environmental Law, including without limitation (i) any
and all Claims by governmental or regulatory authorities for enforcement,
cleanup, removal, remedial or other actions of damages pursuant to any
applicable Environmental Law and (ii) any and all Claims by any third party
seeking damages, contribution, indemnification, cost recovery, compensation or
injunctive relief resulting from Hazardous Materials or arising from alleged
injury or threat of injury to health, safety or the environment.
"ENVIRONMENTAL LAW": any federal, state or local statute, law, rule,
regulation, ordinance, code, policy or rule of common law now in effect and in
each case as amended and any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent decree or judgment,
relating to Hazardous Materials, the environment or health relating to or
arising from environmental conditions, including without limitation the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended 42 U.S.C. ss. 9601 ET SEQ.; the Hazardous Materials Transportation
Act, as amended, 49 U.S.C. ss. 1801 ET SEQ.; the Resource Conservation and
Recovery Act, as amended, 42 U.S.C. ss. 6901 ET SEQ.; the Federal Water
Pollution Control Act, as amended, 33 U.S.C. ss. 1251 ET SEQ.; the Toxic
Substances Control Act, 15 U.S.C. ss. 2601 ET SEQ.; the
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Clean Air Act, 42 U.S.C. ss. 7401 ET SEQ.; the Safe Drinking Water Act, 42
U.S.C. ss. 3808 ET SEQ.; the Oil Pollution Act of 1990, 33 U.S.C. ss. 2701 ET
SEQ.; and relevant state and local laws.
"ERISA": the Employee Retirement Income Security Act of 1974, as amended
from time to time, and the regulations promulgated and rulings issued
thereunder. Section references to ERISA are to ERISA as in effect at the date of
this Agreement and any subsequent provisions of ERISA amendatory thereof,
supplemental thereto or substituted therefor.
"EXCLUDED ASSETS": as defined in Section 2.2 hereof.
"EXCLUDED CONTRACTS": as defined in Section 2.2(b) hereof.
"EXCLUDED LIABILITIES": as defined in Section 2.4 hereof.
"FINANCIAL STATEMENTS": as defined in Section 4.6 hereof.
"GAAP": generally accepted accounting principles consistently applied.
"HAZARDOUS MATERIALS": (i) any petroleum or petroleum products,
radioactive materials, asbestos in any form that is or could become friable,
urea formaldehyde foam insulation, transformers or other equipment that contain
dielectric fluid containing levels of polychlorinated biphenyls, and radon gas;
(ii) any chemicals, materials or substances defined as or included in the
definition of "hazardous substances," "hazardous wastes," "hazardous materials,"
"extremely hazardous wastes," "restricted hazardous wastes," "toxic substances,"
"toxic pollutants," "contaminants" or "pollutants," or words of similar import
under any applicable Environmental Law; and (iii) any other chemical, material
or substance, exposure to which is prohibited, limited or regulated by an
governmental authority.
"INITIAL PUBLIC OFFERING": the sale by Castle in an underwritten public
offering of its Common Stock registered under the Securities Act of 1933, as
amended, in which the proceeds to Castle (before underwriter's discounts and
selling commissions) are greater than or equal to $50,000,000, and the terms and
conditions and other attributes of which are substantially as described in the
Registration Statement.
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"INTELLECTUAL PROPERTY": domestic and foreign patents, patent
applications, registered and unregistered trademarks, service marks, trade names
and logos, registered and unregistered copyrights, computer programs, data
bases, trade secrets and proprietary information relating to the conduct of the
Business.
"PERMITS": as defined in Section 4.12 hereof.
"PERMITTED ENCUMBRANCES": as defined in Section 4.9 hereof.
"PERSON": any individual, partnership, joint venture, corporation, trust,
unincorporated organization, government or other department or agency thereof or
other entity.
"PLANS": as defined in Section 4.19 hereof.
"PRE-CLOSING PERIODS": as defined in Section 4.14(a) hereof.
"PRICE ALLOCATION": as defined in Section 3.1 hereof.
"PURCHASE PRICE": as defined in Section 3.1 hereof.
"PURCHASER": as defined in the preamble of this Agreement.
"REGISTRATION STATEMENT": Registration Statement on Form S-1 relating to
the Common Stock of Castle, filed with the Securities and Exchange Commission on
or about September 3,1996, as amended from time to time.
"RETURNS": as defined in Section 4.14(a) hereof.
"RELEASE": disposing, discharging, injecting, spilling, leaking, leaching,
dumping, emitting, escaping, emptying, seeping, placing and the like, into or
upon any land or water or air, or otherwise entering into the environment.
"SELLER" as defined in the preamble of this Agreement.
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"SELLER PROPERTY": the Business' interest as tenant in real property
leases and tenants' interest in the improvements thereon.
"SMITH BARNEY": Smith Barney Inc., the managing underwriter of Castle's
Initial Public Offering
"TAX": any net income, alternative or add-on minimum tax, advance,
corporation, gross income, gross receipts, sales, use, AD VALOREM, franchise,
profits, license, value added, withholding, payroll, employment, excise, stamp
or occupation tax, governmental fee or other like assessment or charge of any
kind whatsoever, together with any interest or any penalty imposed by any
governmental authority with respect thereto, and any liability for such amounts
as a result either of being a member of an affiliated group or of a contractual
obligation to indemnify any other entity.
"UNDERWRITING AGREEMENT": the Underwriting Agreement between the Company
and the underwriters for which Smith Barney is the representative, pertaining to
Castle's Initial Public Offering.
"UNION CONTRACTS": any verbal or written Preferred Provider Agreement,
Participating Dentist Agreement, Ancillary Services Provider Agreement, Primary
Care Dentist Agreement or similar instrument or agreement pursuant to which
Seller agrees to provide dental care services directly to members of labor
unions, or health maintenance organizations or group insurance plans or other
arrangements established for the benefit of members of labor unions.
ARTICLE II
THE TRANSACTION
2.1 PURCHASE AND SALE OF ASSETS. Subject to the terms and conditions of
this Agreement, Purchaser agrees to purchase from the Seller, and the Seller
agrees to sell, convey, transfer, assign and deliver, and cause to be sold,
conveyed, transferred, assigned and delivered, to Purchaser, on the Closing
Date, against the receipt by the Seller of the consideration specified in
Section 3.1 hereof, the Assets, free and clear of any Encumbrances except
Permitted Encumbrances. The term "Assets" shall mean all of the rights, title
and interests of Seller in and to the assets used in or relating to the conduct
of the Business on the Closing Date, tangible and intangible, wheresoever
situated and
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whether or not specifically referred to herein or in any instrument of
conveyance delivered pursuant hereto. The Assets shall include but are not
limited to the following categories of assets:
(a) all leasehold interests described in Schedule 4.10 attached
hereto;
(b) plant, machinery, equipment, operating equipment, tools,
supplies, inventories, furniture, fixtures, furnishings, vehicles and
other fixed assets owned or leased and used or held for use in the conduct
of the Business (other than the Excluded Assets);
(c) contracts, documents, instruments, insurance and indemnity
policies and general intangibles of Seller, including Seller's rights to
the name "American Dental Centers" and derivatives thereof, and goodwill
associated therewith, other than the Excluded Contracts;
(d) cash and Accounts Receivable as of the Closing Date in an
aggregate amount of $1,000,000; provided, however, that not less than
$675,000 (and at Seller's option, all) of such amount shall be in cash or
cash equivalents;
(e) all licenses, permits, registrations and authorizations,
proprietary information, methods, know-how, designs, processes,
procedures, goodwill and all rights to other Intellectual Property used in
the Business, other than professional and other similar licenses required
to be held by Lane PC to permit it to continue to provide professional
dental services and employ dentists;
(f) Books and Records relating to the Business;
(g) any rights pertaining to any counterclaims, set-offs or defenses
it may have with respect to any Assumed Obligations;
(h) all prepaid claims, prepaid taxes, prepaid insurance premiums
and other prepaid expense items (other than Excluded Assets) which shall
be credited against the cash and Accounts Receivable described in Section
2.1(d); and
(i) third-party indemnities, policies of insurance identified by
Purchaser, fidelity, surety or similar bonds and the coverages afforded
thereby relating to the Assets; and
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2.2 EXCLUDED ASSETS. The Assets shall not include any of the following
(the "Excluded Assets"):
(a) cash, cash equivalents, Accounts Receivable, deposits, advance
payments, securities, letters of credit naming Seller as account party,
certificates of deposit, notes, drafts, checks and similar instruments to
the extent such items in the aggregate exceed $1,000,000;
(b) each dentist employment contract, dentist independent contractor
agreement, managed care contract, insurance or third party reimbursement
agreement, the Union Contracts and other contracts set forth on Schedule
2.2(b) (the "Excluded Contracts");
(c) tax refunds related to the Business or the Assets received or
receivable by Seller or the Shareholders relating to taxes paid by Seller
or the Shareholders for all periods prior to the Closing Date;
(d) minute books and governance documents of the Seller;
(e) any asset requiring a valid license to practice dentistry for
its practical utilization;
(f) patient records;
(g) any Asset listed on Schedule 2.2(g); and
(h) any real property and improvements owned by a Seller.
Notwithstanding anything contained in this Agreement to the contrary, the
term "Assets" shall not include, and the term "Excluded Assets" shall be deemed
to include, (i)AMLI, its assets, its business and the way in which it conducts
its business, including but not limited to its dental managed care and indemnity
business, which includes, without limitation, a dual choice option, (ii)
any personal property owned by Dr. Lane or Linda Lane exclusively for personal
use, whether or not reflected on Schedule 2.2(f), and (iii) the owners' interest
in any real property owned directly or indirectly by any one or both of the
Shareholders or their family and any improvements thereon owned by any one or
both of the Shareholders.
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2.3 ASSUMPTION OF OBLIGATIONS. Upon the sale of the Assets by Seller,
Purchaser shall assume and agree to pay, perform and discharge, in a timely
manner and in accordance with the terms thereof, only such of the obligations of
Seller in respect of (a) the licenses, leases, permits, contracts, notes and
other debts set forth in Schedule 2.3 (the "Assigned Contracts") which are being
assigned to Purchaser hereunder and (b) Accounts Payable on the Closing Date
Balance Sheet ("Assumed Obligations"). Additionally, Purchaser and Castle have
made certain future undertakings and commitments pursuant to the Ancillary
Agreement. Notwithstanding anything contained herein to the contrary, Purchaser
does not assume, and hereby expressly disclaims responsibility for, (i) any
obligation or liability of Seller or the Shareholders not described on Schedule
2.3, (ii) any obligation with respect to federal or state taxes of Seller for
any period prior to the Closing Date; and (iii) any Taxes of Seller arising as
the result of the consummation of the transactions contemplated hereby.
Seller hereby agrees that all liabilities of Lane PC, whether known or
unknown, liquidated or unliquidated or fixed or contingent which exist as of the
Closing Date, or which arise after the Closing Date but are based on facts or
circumstances affecting Lane PC as of the Closing Date, shall be for the account
of Seller, other than the Accounts Payable assumed by Purchaser pursuant to this
Section, it being the intent of the parties that the as of the Closing Date,
Lane PC shall have no liabilities of any kind whatsoever attributable to periods
prior to the Closing Date.
2.4 NONASSIGNABLE CONTRACTS AND LEASES. In the case of any Assigned
Contracts which are not by their terms assignable or with respect to which a
consent to assignment is not obtained by the Closing Date, Seller and the
Shareholders agree to use their best efforts to obtain, or cause to be obtained,
prior to the Closing Date, any written consents necessary to convey to Purchaser
the benefit thereof. Purchaser shall cooperate with Seller and the Shareholders,
in such manner as may be reasonably requested, in connection therewith,
including without limitation, active participation in visits to and meetings,
discussions and negotiations with all Persons with the authority to grant or
withhold consent. If Seller and the Shareholders are unable to obtain such
necessary written consents for the remaining term of such Assigned Contract,
Purchaser shall act as such Seller's and the Shareholders' agent in the
performance of all obligations and liabilities under such Assigned Contract and
such Seller and the Shareholders shall act as Purchaser's agents in the receipt
of any benefits, rights or interests which inure to such Seller or the
Shareholders under such Assigned Contract.
2.5 CLOSING. Subject to the satisfaction of the conditions to closing set
forth herein, the closing (the "Closing") of the transactions contemplated
hereby shall be held at the offices of
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Kaufmann, Feiner, Yamin, Gildin & Robbins, LLP, on or before the closing of the
Initial Public Offering. Such time and date are referred to herein as the
"Closing Date."
2.6 PRE-CLOSING. At such time as Castle files a request with the
Securities and Exchange Commission that the Registration Statement be declared
effective, the parties hereto shall deliver to each other a written certificate
confirming that all of the conditions to the obligations of such party to
perform its obligations under this Agreement and the transactions contemplated
hereby have been met or waived, with the exception of the timely closing of the
Initial Public Offering, timely delivery of the consideration described in
Section 3.1, and the timely delivery of opinions of counsel. Such certificate
shall also state that each party has delivered to its respective counsel all
instruments required to be executed by such party, along with irrevocable
written instructions to such counsel to deliver such instruments at such time as
the unmet conditions to closing described above have been met or waived in
writing by the party to whom performance is required; provided, however, that
the Closing must occur on or before December 31, 1996.
2.7 PREPARATION OF SCHEDULES. The parties hereto acknowledge that every
reasonable effort has been made to prepare and attach to this Agreement
Schedules that contain all of the information required to be disclosed therein
(i) prior to the execution of this Agreement. The parties hereto further
acknowledge that (ii) due to the accelerated timetable of this transaction, and
(iii) the length of time that is expected to elapse between the date of this
Agreement and the Closing Date, it is anticipated that changes to the Schedules
may be required. At such time as a party hereto becomes aware of a required
change to a Schedule, to make it correct and complete in all material respects,
that party shall give all other parties prompt written notice thereof, along
with a revised Schedule indicating the revision.
If any party receiving a revised Schedule considers, in the exercise of
its reasonable judgment, the revised information contained in such Schedule to
materially and adversely affect the transactions contemplated hereby, the party
receiving the Schedule shall give all other parties hereto
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CONFIDENTIAL TREATMENT REQUESTED.
THE REDACTED MATERIAL HES BEEN
SEPERATELY FILED WITH THE COMISSION.
notice thereof within 15 days of the receipt of such revised Schedule specifying
the material and adverse effect. Any objections must be made and resolved prior
to the Closing. The submitting party shall have five days thereafter within
which to remedy the situation giving rise to the material adverse effect on the
transactions contemplated hereby and deliver a revised Schedule which does not
contain information materially and adversely affecting the transactions
contemplated hereby. If the party delivering the Schedule is, in the reasonable
judgment of the party receiving the Schedule, unable to remedy the situation and
deliver an acceptable revised Schedule within such five day period, the
recipient of the Schedule may terminate this Agreement by written notice thereof
to all other parties in accordance with the provisions of Article X hereto.
ARTICLE III
PAYMENT OF PURCHASE PRICE
3.1 AMOUNT; ALLOCATION; DELIVERY. At the Closing, Purchaser shall pay to
Seller the following (the "Purchase Price"):
(a) $REDACTED in cash on the Closing Date, which shall be paid by
wire transfer of immediately available funds to an account or accounts of
Seller identified by Seller; and
(b) the number of shares of Common Stock, $.001 par value, of Castle
determined by dividing 5,000,000 by the price per share of Castle Common
Stock in the Initial Public Offering, issued in the name of Jules V. Lane
D.D.S.
On the Closing Date, Purchaser and Seller shall agree to allocate the
Purchase Price in accordance with Section 1060 of the Code among the Assets (the
"Price Allocation"). The parties hereby undertake and agree to file timely any
information that may be required to be filed pursuant to regulations promulgated
under Section 1060(b) of the Code. The parties further agree that they will
report the federal, state, municipal, foreign and local and other tax
consequences of the purchase and sale hereunder in a manner consistent with the
Price Allocation, as so adjusted, and that they will not take any position
inconsistent therewith. The Price Allocation provided for herein shall include
an allocation of goodwill of not less than $REDACTED.
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3.2 PURCHASE PRICE ADJUSTMENT. Purchaser and Seller agree that the monthly
average accounts payable attributable to the Business for the preceding 12
months is $210,000 ("Average Accounts Payable"). To the extent that the accounts
payable of Seller assumed by Purchaser as of the Closing Date is 35% or more
greater or lesser than the Average Accounts Payable, the amount of such excess
or shortfall shall be added to or deducted from, respectively, the amount of
cash and Accounts Receivable included in the Assets and described in Section
2.1(d).
3.3 APPORTIONMENTS. The following items shall be apportioned as of 11:59
p.m., on the day preceding the Closing Date: (a) personal property taxes, sewer
rents and charges and other state, county, metropolitan and municipal taxes and
assessments and charges affecting the Assets; (b) rents and other payments under
any of the Assigned Contracts; (c) charges for water, electricity, gas, oil,
steam and all other utilities (except to the extent disposed of by final billing
to Seller); and (d) such other items as are customarily apportioned in
connection with the sale or lease assignment of similar property, all such items
prior to such time being for the account of Seller and all such times after such
time being the account of Purchaser. Any adjustments required by the
apportionments described herein shall be made as a part of the Purchase Price
Adjustment described in Section 3.2.
3.4 AGENCY RELATIONSHIP. In the event that, following the Closing Date,
Seller or the Shareholders receive any funds, documents or instruments which
constitute or are delivered in respect of Assets transferred to Purchaser
pursuant to this Agreement, Seller and the Shareholders agree to hold such
funds, documents or instruments in trust for Purchaser and as Purchaser's agent
therefor. Without limiting the generality of the foregoing, Purchaser agrees to
collect and hold such funds in trust for the account of Seller and as Seller's
agent the Accounts Receivable included in the Excluded Assets, and to use its
best efforts to collect such Accounts Receivable in a responsible manner and
without disruption to the relationship with the account party. Except with
respect to those Accounts Receivable about which a dispute exists with the
account party, amounts collected on Accounts Receivable will be credited first
against the oldest outstanding invoice, and then against succeeding invoices in
decreasing order of age. The Seller and the Shareholders and the Purchaser each
shall make a weekly accounting and payment to the other of all amounts received
for the account of the other, and each party hereto shall have the right to
review the records of the other on delivery of reasonable notice.
3.5 SALES TAX. In addition to, and apart from the Purchase Price,
Purchaser and the Sellers acknowledge and agree that the sales tax charged by
the State of New York attributable to the purchase of the Assets shall be paid
by the Purchaser and collected and remitted to the proper taxing authorities by
the Seller. Seller agrees to remit all such funds collected as sales tax
promptly to the appropriate taxing authority and to provide Purchaser with
reasonable written evidence that all such taxes have been paid.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
AND THE SHAREHOLDERS
4.1 REPRESENTATIONS AND WARRANTIES OF SELLER AND THE SHAREHOLDERS. As an
inducement to the Purchaser to enter into and perform this Agreement, Seller and
the Shareholders, jointly and severally, hereby represent and warrant to
Purchaser as follows:
4.2 EXISTENCE AND GOOD STANDING. Each of Lane PC and Lisadent is a
corporation duly organized and validly existing under the laws of the State of
New York. Each of Lane PC and Lisadent has the full corporate power and
authority to own, lease and operate its property and to carry on the Business as
now being conducted and to own or lease the Assets owned or leased by it. Each
of Lane PC and Lisadent is duly qualified or licensed to do business in each
jurisdiction in which the character or location of the properties owned or
leased by it or the nature of the business conducted by it makes such
qualification necessary and the absence of which would have a material adverse
effect.
4.3 AUTHORIZATION AND VALIDITY OF AGREEMENT. Each of Lane PC and Lisadent
has full corporate power and authority, and the Shareholders have full power and
authority to execute and deliver this Agreement, to perform their respective
obligations hereunder and to consummate the transactions contemplated hereby.
The execution, delivery and performance of this Agreement by each of Lane PC and
Lisadent and the consummation by it of the transactions contemplated hereby,
have been duly authorized and approved by the Board of Directors and the
Shareholders of each of Lane PC and Lisadent, and no other action on the part of
Lane PC or Lisadent or the Shareholders is necessary to authorize the execution,
delivery and performance of this Agreement by each of Lane PC and Lisadent and
the consummation of the transactions contemplated hereby. This Agreement (but
excluding the Exhibits) has been duly executed and delivered by Seller and the
Shareholders and is a valid and binding obligation of Seller and the
Shareholders enforceable against each in
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accordance with their respective terms, except to the extent that the
enforceability thereof may be subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles. On the Closing
Date, the Employment Agreement, the Registration Rights Agreement, the
Management Services Agreement and the Ancillary Agreement, substantially in the
forms attached hereto as Exhibits A, C, D and E, respectively, will have been
duly executed and delivered by Seller and the Shareholders and will, subject to
compliance with the regulatory requirements of the State of New York with
respect to dental matters, constitute valid and binding obligations of Seller
and the Shareholders enforceable against each in accordance with their
respective terms, except to the extent that the enforceability thereof may be
subject to applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws affecting the enforcement of creditors' rights generally and by
general equitable principles. Seller shall not be deemed to be in breach of this
Agreement in the event the regulatory authorities of the State of New York
regulating dental matters object to the transactions contemplated by this
Agreement and/or initiate enforcement proceedings against Dr. Lane's dental
license as a result of the transactions contemplated by this Agreement.
4.4 CAPITAL STOCK.
(a) The authorized capital stock of Lane PC consists solely of
200 shares of common stock of which 100 shares have been issued, and are
outstanding, all of which are owned by Dr. Lane. All of the shares of common
stock of Lane PC have been duly and validly authorized and issued, and are fully
paid and nonassessable and free of any liens or encumbrances, other than those
imposed by statute.
(b) The authorized capital stock of Lisadent consists solely
of 200 shares of common stock of which 200 shares have been issued, and are
outstanding, all of which are owned by the Shareholders. All of the shares of
common stock of Lisadent have been duly and validly authorized and issued, and
are fully paid and nonassessable and free of any liens or encumbrances.
4.5 CONSENTS AND APPROVALS; NO VIOLATIONS. Except as set forth on Schedule
4.5, the execution, delivery and performance of this Agreement by Seller and the
Shareholders and the consummation by Seller and the Shareholders of the
transactions contemplated hereby will not, with or without the giving of notice
or the lapse of time or both: (a) violate, conflict with, or result in a breach
or default under any provision of the organizational documents of Lane PC or
Lisadent; (b)
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to the best knowledge of the Seller and Shareholders after due inquiry, violate
any statute, ordinance, rule, regulation, order, judgment or decree of any court
or of any governmental or regulatory body, agency or authority applicable to
Seller or the Shareholders or by which any of Seller's properties or assets may
be bound; (c) to the best of the Sellers' and Shareholders' knowledge after due
inquiry, require any filing by Seller or the Shareholders with, or require
Seller or the Shareholders to obtain any permit, consent or approval of, or
require Seller or the Shareholders to give any notice to, any governmental or
regulatory body, agency or authority other than as set forth in Schedule 4.5
attached hereto; or (d) to the best of the Sellers' and Shareholders' knowledge
after due inquiry, result in a violation or breach by Seller or the Shareholders
of, conflict with, constitute (with or without due notice or lapse of time or
both) a default by Seller or the Shareholders (or give rise to any right of
termination, cancellation, payment or acceleration) under or result in the
creation of any Encumbrance upon any of the properties or assets of Seller or
the Shareholders under any of the terms, conditions, or provisions of any note,
bond, mortgage, indenture, license, franchise, permit, agreement, lease
franchise agreement or other instrument or obligation to which Seller or the
Shareholders is a party, or by which Seller or any of its properties or assets
may be bound; provided, however, that no representation or warranty is made or
given regarding regulatory compliance with the rules and regulations of the
State of New York governing the practice of dentistry from and after the Closing
Date.
4.6 SUBSIDIARIES AND AFFILIATES. Neither Lane PC nor Lisadent has any
subsidiaries. Except as set forth on Schedule 4.6 or Schedule 2.2(g), all of the
Assets used in the Business are owned by Seller, and on consummation of the
transactions contemplated hereby Purchaser will have acquired all of the Assets
used in the Business.
4.7 FINANCIAL STATEMENTS; NO MATERIAL ADVERSE CHANGE. Attached as Schedule
4.7 are the audited combined balance sheet of Seller as of December 31, 1995
(the "Balance Sheet Date"), the audited combined statement of operations and
audited combined statement of cash flows for the year ended December 31, 1995,
and the unaudited combined balance sheet as of June 30, 1996 and the unaudited
combined statement of operations for the six month period ended June 30,1996,
which June 30, 1996 balance sheet and statement of operations are subject to the
same intercompany adjustments as referred to in the audited balance sheet,
including footnotes, as of December 31, 1995 (the "Financial Statements"). The
audited Financial Statements fairly present in all material respects the
financial position of Seller at the date thereof and the results of operations
of Seller and its cash flows for the period indicated. The unaudited Financial
Statements were prepared in accordance with Note 1 of the Notes to Condensed
Combined Financial Statements of American Dental Centers as of June 30, 1996.
Except as set forth in Schedule 4.7 attached hereto, since the Balance Sheet
Date there has been no material adverse change in the assets or liabilities, or
in the business or condition, financial or otherwise, or in the results of
operations of Seller.
Other than as (i) disclosed on the Financial Statements, (ii) incurred
since the Balance Sheet Date in the ordinary course of business or (iii)
disclosed on Schedule 4.7 or another Schedule hereto, to the knowledge of the
Seller, there is no material direct or indirect indebtedness, liability, claim,
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deficiency, obligation or responsibility, fixed or contingent, liquidated or
unliquidated, accrued, absolute or otherwise.
4.8 BOOKS AND RECORDS. The Seller has previously made available to
Purchaser true, correct and complete copies of its articles of incorporation and
bylaws, and all amendments to each. The minute books of Seller, as previously
made available to Purchaser and its representatives, contain accurate records in
all material respects of the meetings of, the Shareholders and Board of
Directors of Seller.
4.9 TITLE TO PROPERTIES; ENCUMBRANCES; CONDITION. Except as set forth in
Schedule 4.9, and except for properties and assets reflected in the Financial
Statements or acquired since the Balance Sheet Date which have been sold or
otherwise disposed of in the ordinary course of business, Seller has good and
valid title to the Assets, in each case subject to no Encumbrances except for
(i) Encumbrances for current taxes, assessments or governmental charges or
levies on property not yet due or delinquent, (ii) Encumbrances created by
Purchaser, (iii) Encumbrances relating to Assumed Obligations and (iv)
landlord's rights to improvements under certain real property leases (liens of
the type described in clauses (i), (ii) (iii) and (iv) above are hereinafter
sometimes referred to as "Permitted Encumbrances"). Seller has heretofore
furnished Purchaser with a fixed asset ledger which sets forth all fixed assets
owned by Seller as of the Balance Sheet Date. Seller and the Shareholders are
not aware of any defects in such assets that would have a material adverse
effect on the ability of Purchaser to use such assets in the Business, ordinary
wear and tear excepted.
4.10 REAL PROPERTY LEASES. Schedule 4.10 identifies all leases of real
property used by the Seller in the Business, and includes the name of the record
title holder thereof. To the best of Seller's knowledge, all of the buildings,
structures and appurtenances situated on the real property leased by Seller are
in good operating condition, and in a state of good maintenance and repair,
subject to ordinary wear and tear. The leased real property has adequate rights
of ingress and egress for operation of the Business as presently conducted. No
condemnation or similar proceeding is pending or, to the best knowledge of
Seller and the Shareholders, threatened, which would preclude or impair the use
of any such property, except where such proceeding would not have a material
adverse effect. Schedule 4.10 also contains a list of all real property to be
leased by Purchaser following the Closing Date, the amount of rental associated
with each property, and the method of calculating increases in rental rates.
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4.11 PERSONAL PROPERTY LEASES. To the best of the Sellers' and
Shareholders' knowledge after due inquiry, Schedule 4.11 contains an accurate
and complete list of all personal property leases to which Seller is a party (as
lessee or lessor) and a description of all such leases to which Seller is a
party as lessee. Each lease set forth in Schedule 4.11 is in full force and
effect, and no event has occurred that with the giving of notice, the passage of
time or both would constitute a default thereunder.
4.12 MATERIAL CONTRACTS. To the best of the Sellers' and Shareholders'
knowledge after due inquiry, except as set forth in Schedule 4.12, the Assigned
Contracts do not include (a) any agreement, contract or commitment relating to
the employment or other retention of any person by Seller, (b) any agreement,
indenture or other instrument which contains restrictions with respect to
payment of profits, dividends or any other distributions, (c) any agreement,
contract or commitment relating to capital expenditures in excess of $5,000
(other than replacements in the ordinary course of business), (d) any loan or
advance to, or investment in, any Person or any agreement, contract or
commitment relating to the making of any such loan, advance or investment, (e)
any guarantee or other contingent liability in respect of any indebtedness or
obligation of any Person, (f) any management service, consulting independent
contractor or any other similar type contract, (g) any agreement, contract or
commitment limiting the freedom of Seller to engage in any line of business or
to compete with any Person, (h) any agreement, contract or commitment which
involves $5,000 or more and is not cancelable without penalty within 30 days, or
(i) any other agreement, contract or commitment the compliance with which would
have a material adverse effect. Also set forth in Schedule 4.12 is a list of all
proposals submitted by Seller to any third party that, if accepted by such third
party, would require disclosure on Schedule 4.12. Except where it would not have
a material adverse effect, each contract or agreement set forth in Schedule 4.12
is in full force and effect and there exists no default or event of default or
event, occurrence, condition or act (including the purchase of the Assets
hereunder) which, with the giving of notice, the lapse of time or the happening
of any other event or condition, would become a default or event of default
thereunder.
4.13 PERMITS. Schedule 4.13 attached hereto lists all of the governmental
and other third party permits (including occupancy permits), licenses, consents
and authorizations ("Permits") required, to the knowledge of Seller and the
Shareholders, in connection with the use, operation or ownership of the Assets,
occupancy under lease of real property and the conduct of the Business as
currently conducted. Seller holds all of the Permits listed on Schedule 4.13,
and none is presently subject to revocation or challenge.
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4.14 LITIGATION. Except as set forth in Schedule 4.14, to the best of
Sellers' and Shareholders' knowledge after due inquiry, there is no action,
suit, proceeding at law or in equity, arbitration or administrative or other
proceeding by or before (or any investigation by) any governmental or other
instrumentality or agency, pending, or threatened, against or affecting the
properties, rights or goodwill of Seller, the Shareholders, or employees of
Seller, and Seller and the Shareholders do not know of any valid basis for any
such action, proceeding or investigation. To the best of Sellers' and
Shareholders' knowledge after due inquiry, there are no such suits, actions,
claims, proceedings or investigations pending or threatened, seeking to prevent
or challenge the transactions contemplated by this Agreement. Purchaser will
assume no liability whatsoever with respect to any matter described on Schedule
4.14. Schedule 4.14 also describes any actions, suits, disciplinary proceedings
and investigations undertaken by the Dental Board of the State of New York, or
other body regulating the activities of dentists, against Jules V. Lane D.D.S.
in the last ten years.
4.15 TAXES. (a) All returns and reports for Taxes for all taxable years or
periods that end on or before the Closing Date and, with respect to any taxable
year or period beginning before and ending after the Closing Date the portion of
such taxable year or period ending on and including the Closing Date
("Pre-Closing Periods"), which are required to be filed by or with respect to
Seller (collectively, the "Returns") have been or will be filed when due in a
timely fashion and such Returns as filed are or will be accurate in all material
respects; provided, however that Purchaser's remedy for a breach hereof shall be
payment thereof by Seller or Shareholder.
(b) Except as provided in Schedule 4.15 there is no material action,
suit, proceeding, investigation, audit, or claim now pending or, to the
knowledge of Seller or the Shareholders, threatened by any authority regarding
any Taxes relating to Seller for any Pre-Closing Period.
(c) There are no liens or security interests on any of the assets of
Seller that arose in connection with any failure (or alleged failure) to pay any
Taxes.
(d) Except as provided in Schedule 4.15, there are no agreements for
the extension or waiver of the time for assessment of any Taxes relating to
Seller for any Pre-Closing Period and Seller has not been requested to enter
into any such agreement or waiver.
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(e) All Taxes relating to Seller which Seller is required by law to
withhold or collect have been duly withheld or collected, and have been timely
paid over to the proper authorities to the extent due and payable.
(f) Seller is not now nor has ever been a party to any Tax
allocation or sharing agreement that could result in any liability to Purchaser.
4.16 INSURANCE. To the best of Sellers' and the Shareholders' knowledge
after due inquiry, set forth in Schedule 4.16 is a complete list of insurance
policies that Seller maintains with respect to its Business and properties that
are included in the Assets or on its employees. Except as set forth on Schedule
4.16, such policies are in full force and effect and are free from any right of
termination on the part of the insurance carriers. In the judgment of Seller,
such policies, with respect to their amounts and types of coverage, are adequate
to insure against risks to which Seller and its property and assets are normally
exposed in the operation of the Business, subject to customary deductibles and
policy limits.
4.17 INTELLECTUAL PROPERTIES. To the best of Sellers' and the
Shareholders' knowledge after due inquiry, Schedule 4.17 sets forth all material
Intellectual Property used in the Business, including the tradename "American
Dental Centers", and the owner of such Intellectual Property. The operation of
the Business as conducted by Seller as of the Closing Date requires no rights
under Intellectual Property other than rights under Intellectual Property listed
on Schedule 4.17 and rights granted to Seller pursuant to agreements listed on
Schedule 4.17. Except as otherwise set forth in Schedule 4.17, Seller owns all
right, title and interest in the Intellectual Property listed in Schedule 4.17.
No litigation is pending or, to the knowledge of Seller or the Shareholder,
threatened wherein Seller is accused of infringing or otherwise violating the
Intellectual Property rights of another, or of breaching a contract conveying
rights under Intellectual Property.
4.18 COMPLIANCE WITH LAWS. To the best of Sellers' and the Shareholders'
knowledge after due inquiry, Seller is in compliance in all material respects
with all applicable laws, regulations, orders, judgments and decrees applicable
to the Business.
4.19 EMPLOYMENT RELATIONS. Except as set forth on Schedule 4.14, (a)
Seller has not knowingly engaged in any unfair labor practice; (b) to the
knowledge of Seller and the Shareholders, no representation question exists
respecting the employees of Seller; (c) Seller has not been notified of any
grievance that might have a material adverse effect and no arbitration
proceeding arising out of or under any collective bargaining agreement is
pending; and (d) no collective bargaining agreement is currently being
negotiated by Seller.
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4.20 EMPLOYEE BENEFIT PLANS. Purchaser has examined true and complete
copies of all employee benefit plans, policies, programs and arrangements and
all related contracts, agreements and other descriptions thereof with respect to
the employee benefits provided to the employees of the Business prior to the
Closing Date (the "Plans"). Each of the Plans has, to the knowledge of Seller
and the Shareholders, been maintained in compliance with its terms and the
requirements of all applicable laws. None of the Plans are subject to Title IV
of ERISA or the minimum funding obligations of Section 412 of the Code, and
Seller and any entity required to be aggregated therewith pursuant to Section
414(b) or (c) of the Code have no liability under Title IV of ERISA or under
Section 412(f) or 412(n) of the Code.
4.21 ENVIRONMENTAL LAWS AND REGULATIONS. Except as set forth in
Schedule 4.21, and except where it would not have a material adverse effect (a)
to the knowledge of Seller and the Shareholders, Hazardous Materials have not
been generated, used, treated or stored on, or transported to or from, any
Seller Property by Seller, its authorized agents or its independent contractors
(including suppliers) or any property adjoining any Seller Property, (b) to the
knowledge of Seller and Shareholders, Hazardous Materials have not been released
or disposed of by Seller, its authorized agents or its independent contractors
(including suppliers) on any Seller Property or any property adjoining any
Seller Property except such Releases which do not violate any Environmental
Laws, (c) Seller is, to its and the Shareholders' knowledge, in compliance with
all applicable Environmental Laws and the requirements of any Permits issued
under such Environmental Laws with respect to any Seller Property, (d) there are
no pending or, to the knowledge of Seller and the Shareholders, threatened
Environmental Claims against Seller or any Seller Property, (e) there are no
facts or circumstances, conditions, pre-existing conditions or occurrences on
any Seller Property known to Seller or the Shareholders that could reasonably be
anticipated (A) to form the basis of an Environmental Claim against Seller or
any Seller Property, or (B) to cause such Seller Property to be subject to any
restrictions on the ownership, occupancy use or transferability of such Seller
Property under any Environmental Law, (f) to the knowledge of Seller and
Shareholders there are not now and there never have been any underground storage
tanks located on any Seller Property, and (g) Seller has not in the ordinary
course of business transported or stored Hazardous Materials.
4.22 INTERESTS IN CUSTOMERS, SUPPLIERS, ETC. Except as set forth on
Schedule 4.22, except for relationships with Affiliates, Seller does not
possess, directly or indirectly, any financial interest
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in, and no Shareholder serves as a director, officer or employee of, any
corporation, firm, association or business organization which is a supplier,
customer, lessor, lessee, or competitor of Seller.
4.23 COMPENSATION OF EMPLOYEES AND INDEPENDENT CONTRACTORS. Set forth in
Schedule 4.23 is an accurate and complete list showing the names of all persons
other than Jules and Linda Lane whose compensation from Seller collectively for
the fiscal year ended on the Balance Sheet Date exceeded an annualized rate of
$20,000, together with a statement of the full amount paid or payable to each
such person for services rendered during the current fiscal year to date.
4.24 PAYORS. Schedule 4.24 sets forth the ten largest payors of Seller for
the most recently completed fiscal year. The relationship of Seller with each of
such payors as of the date of this Agreement is a good commercial working
relationship, and except as set forth in Schedule 4.24 no payor representing
more than 3% of the gross patient service revenues of Seller has canceled or
otherwise terminated or, to the knowledge of Seller or the Shareholders
threatened to cancel or otherwise terminate its relationship with Seller within
the last three years.
4.25 ACCOUNTS RECEIVABLE. The Accounts Receivable included in the Assets
(or other Accounts Receivable substituted therefor) being acquired by Purchaser
pursuant to Section 2.1(d) are collectible in the ordinary course of business.
4.26 SOLVENCY. Seller is not entering into this Agreement with actual
intent to hinder, delay or defraud creditors. Immediately prior to and
immediately subsequent to the Closing Date:
(a) the present fair salable value of the Assets of Seller (on a
going concern basis) will exceed the liability of Seller on its debts
(including its contingent obligations of which Seller has knowledge net of
insurance coverage therefor);
(b) Seller has not incurred, nor does it intend to or believe that
it will incur, debts (including contingent obligations) beyond its ability
to pay such debts as such debts mature (taking into account the timing and
amounts of cash to be received from any source, and of amounts to be
payable on or in respect of debts); and the amount of cash available to
Seller after taking into account all other anticipated uses of funds is
anticipated to be sufficient to pay all such amounts on or in respect of
debts, when such amounts are required to be paid; and
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For purposes of this Section 4.26 "debt" means any liability or a (i)
right to payment whether or not such a right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed,
legal, equitable secured, or unsecured; or (ii) right to an equitable remedy for
breach of performance if such breach gives rise to a payment, whether or not
such a right to an equitable remedy is reduced to judgment, fixed, contingent,
matured, unmatured, disputed, undisputed, secured, or unsecured.
4.27 UNION CONTRACTS. Schedule 4.27 contains a true and correct list of
all written, and to the best of Sellers' and Shareholders' knowledge, verbal
Union Contracts to which the Seller is a party as of the date of this Agreement.
Except as set forth on Schedule 4.27, each of the Union Contracts is in full
force and effect, and there exists no default or event of default or event,
occurrence, condition or act (including the purchase of the Assets hereunder)
which, with the giving of notice, the lapse of time or the happening of any
other event or condition, would become a default or event of default thereunder.
Seller has not been given any notice of termination or notice of intent to
terminate any of the Union Contracts. Between the date hereof and the Closing
Date, Seller agrees to give Purchaser prompt notice of any termination, notice
of termination or notice of intent to terminate or not renew any of the Union
Contracts.
4.28 DISCLOSURE. To the knowledge of the Seller and the Shareholders, None
of this Agreement, the Financial Statements, any Schedule, Exhibit or
certificate attached hereto or delivered in accordance with the terms hereof
contains any untrue statement of a material fact, or omits any statement of a
material fact necessary in order to make the statements contained herein or
therein not misleading in light of the circumstances under which they were made.
4.29 INVESTMENTS.The Assets do not include any capital stock or other
equity ownership or proprietary interest in any other corporation, partnership,
association, trust, joint venture or other entity.
4.30 BROKER'S OR FINDER'S FEES. Except as set forth on Schedule 4.30, no
agent, broker, Person or firm acting on behalf of Seller or the Shareholders is,
or will be, entitled to any fee, commission or broker's or finder's fees in
connection with this Agreement or any of the transactions contemplated hereby.
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4.31 COPIES OF DOCUMENTS. Seller has caused to be made available for
inspection and copying by Purchaser and its advisers, true, complete and correct
copies of all documents referred to in this Article IV or in any Schedule
attached hereto.
4.32 INVESTMENT REPRESENTATIONS.
(a) Dr. Lane understands that the Common Stock has not been
registered under the Securities Act of 1933, as amended (the "Securities
Act"). Dr. Lane also understands that the Common Stock is being offered
and sold pursuant to an exemption from registration contained in the
Securities Act based in part upon its representations contained in this
Agreement.
(b) Dr. Lane, in consultation with his accountants, attorneys and
financial advisors has, the requisite experience in evaluating and
investing in private placement transactions of securities so that he is
capable of evaluating the merits and risks of his investment in Castle
Dental and has the capacity to protect his own interests. Dr. Lane
understands that he must bear the economic risk of this investment
indefinitely unless the Common Stock is registered pursuant to the
Securities Act, or an exemption from registration is available. Dr. Lane
also understands that there is no assurance that any exemption from
registration under the Securities Act will be available to Dr. Lane for
his resale and that, even if available, such exemption may not allow him
to transfer all or any portion of the Common Stock under the
circumstances, in the amounts or at the times he might propose.
(c) Dr. Lane is acquiring the Common Stock for his own account for
investment only, and not with a view towards distribution.
(d) Dr. Lane represents that by reason of his business or financial
experience, he has the capacity to protect his own interests in connection
with the transactions contemplated in this Agreement.
(e) Dr. Lane represents that he is an accredited investor within the
meaning of Regulation D under the Securities Act.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF PURCHASER AND CASTLE
REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser and Castle jointly
and severally represent and warrant to Seller and the Shareholders as follows:
5.1 EXISTENCE AND GOOD STANDING. Purchaser is a corporation duly organized
and validly existing under the laws of the State of New York with full corporate
power and authority to own, lease and operate its property and to carry on its
business as now being conducted and to own or lease the assets owned or leased
by it. Purchaser is duly qualified or licensed to do business in each
jurisdiction in which the character or location of the properties owned or
leased by it or the nature of the business conducted by it makes such
qualification necessary and the absence of which would have a material adverse
effect. Castle is a corporation duly organized and validly existing under the
laws of the State of Delaware with full corporate power and authority to own,
lease and operate its property and to carry on its business as now being
conducted and to own or lease the assets owned or leased by it. Castle is duly
qualified or licensed to do business in each jurisdiction in which the character
or location of the properties owned or leased by Castle or the nature of the
business conducted by Castle makes such qualification necessary and the absence
of which would have a material adverse effect.
5.2 AUTHORIZATION AND VALIDITY OF AGREEMENT. Purchaser has full corporate
power and authority to execute and deliver this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
The execution, delivery and performance of this Agreement by Purchaser and the
consummation by it of the transactions contemplated hereby, have been duly
authorized and approved by the Board of Directors of Purchaser, and no other
action on the part of Purchaser is necessary to authorize the execution,
delivery and performance of this Agreement by Purchaser and the consummation of
the transactions contemplated hereby. This Agreement has been duly executed and
delivered by Purchaser and is a valid and binding obligation of Purchaser
enforceable against it in accordance with its terms, except to the extent that
its enforceability may be subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles. Castle has full
corporate power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated
hereby. The execution, delivery and performance of this Agreement by Castle and
the consummation by it of the transactions contemplated hereby, have been duly
authorized and approved by the Board of Directors of Castle, and no other action
on the part of Castle is necessary to authorize the execution, delivery and
performance of this Agreement by Castle and the consummation of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
Castle and is a valid and binding obligation of Castle enforceable against it in
accordance with its terms, except to the extent that its enforceability may be
subject to applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws affecting the enforcement of creditors' rights generally and by
general equitable principles.
5.3 CONSENTS AND APPROVALS; NO VIOLATIONS. Except as set forth on Schedule
5.3, the execution, delivery and performance of this Agreement by Purchaser and
the consummation by Purchaser of the transactions contemplated hereby will not,
with or without the giving of notice or the lapse of time or both: (a) violate,
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conflict with, or result in a breach or default under any provision of the
organizational documents of Purchaser; (b) violate any statute, ordinance, rule,
regulation, order, judgment or decree of any court or of any governmental or
regulatory body, agency or authority applicable to Purchaser or by which any of
Purchaser's properties or assets may be bound; (c) require any filing by
Purchaser with, or require Purchaser to obtain any permit, consent
or approval of, or require Purchaser to give any notice to, any governmental or
regulatory body, agency or authority; or (d) result in a violation or breach by
Purchaser of, conflict with, constitute (with or without due notice or lapse of
time or both) a default by Purchaser (or give rise to any right of termination,
cancellation, payment or acceleration) under or result in the creation of any
Encumbrance upon any of the properties or assets of Purchaser under any of the
terms, conditions, or provision of any note, bond, mortgage, indenture, license,
franchise, permit, agreement, lease franchise agreement or other instrument or
obligation to which Purchaser is a party, or by which Purchaser or any of its
properties or assets may be bound, except for such violations, consents,
breaches, defaults, termination and accelerations which would not have a
material adverse effect. The execution, delivery and performance of this
Agreement by Castle and the consummation by Castle of the transactions
contemplated hereby will not, with or without the giving of notice or the lapse
of time or both: (a) violate, conflict with, or result in a breach or default
under any provision of the organizational documents of Castle; (b) violate any
statute, ordinance, rule, regulation, order, judgment or decree of any court or
of any governmental or regulatory body, agency or authority applicable to Castle
or by which any of Castle's properties or assets may be bound; (c) require any
filing by Castle with, or require Castle to obtain any permit, consent or
approval of, or require Castle to give any notice to, any governmental or
regulatory body, agency or authority; or (d) result in a violation or breach by
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Castle of, conflict with, constitute (with or without due notice or lapse of
time or both) a default by Castle (or give rise to any right of termination,
cancellation, payment or acceleration) under or result in the creation of any
Encumbrance upon any of the properties or assets of Castle under any of the
terms, conditions, or provision of any note, bond, mortgage, indenture, license,
franchise, permit, agreement, lease franchise agreement or other instrument or
obligation to which Castle is a party, or by which Castle or any of its
properties or assets may be bound, except for such violations, consents,
breaches, defaults, termination and accelerations which would not have a
material adverse effect. Castle has submitted certain information to NationsBank
of Texas, N.A. ("NationsBank") and has held informal discussions with
NationsBank regarding the transactions contemplated hereby. Based on such
discussions, Castle believes that NationsBank will consent to the transactions
contemplated by this Agreement.
5.4 COMPLIANCE WITH LAWS. To the knowledge of Purchaser, Purchaser is in
compliance with all applicable laws, regulations, orders, judgments and decrees
applicable to their respective business, except where any noncompliance would
not have a material adverse effect on the assets, liabilities, business,
condition (financial or otherwise), results of operations or prospects of
Purchaser. To the knowledge of Castle, Castle is in compliance with all
applicable laws, regulations, orders, judgments and decrees applicable to their
respective business, except where any noncompliance would not have a material
adverse effect on the assets, liabilities, business, condition (financial or
otherwise), results of operations or prospects of Castle.
5.5 BROKER'S OR FINDER'S FEES. No agent, broker, Person or firm acting on
behalf of Purchaser or Castle is, or will be, entitled to any fee, commission or
broker's or finder's fee in connection with this Agreement or any of the
transactions contemplated hereby.
5.6 CAPITAL STOCK. The authorized capital stock of Purchaser consists
solely of 100 shares of Common Stock, $.01 par value per share. All of the
shares of Common Stock of Purchaser have been validly issued, fully paid,
nonassessable and free of any liens or encumbrances and are owned by Castle. The
authorized capital stock of Castle consists solely of 45,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock, $.001 par value per share
("Preferred Stock"). All of the shares of Common Stock of Castle delivered
pursuant to Section 3.1 hereof shall be duly and validly authorized, and,
following the Closing, will be validly issued, fully paid, nonassessable and
free of any liens or encumbrances.
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5.7 LITIGATION. There is no action, suit, proceeding at law or in equity,
arbitration or administrative or other proceeding by or before (or any
investigation by) any governmental or other instrumentality or agency, pending,
or, to the knowledge of Purchaser, threatened, against or affecting the
properties, rights or goodwill of Purchaser or Castle or their respective
employees, except where such Proceeding would not have a material adverse effect
on the assets, liabilities, business, condition (financial or otherwise),
results of operations or prospects of Purchaser or Castle, and Purchaser and
Castle do not know of any valid basis for any such action, proceeding or
investigation. There are no such Proceedings pending or, to the knowledge of
Purchaser or Castle, threatened, seeking to prevent or challenge the
transactions contemplated by this Agreement.
5.8 FINANCIAL STATEMENT; NO MATERIAL ADVERSE CHANGE. Castle has heretofore
furnished Purchaser with its audited financial statements for the year ended
December 31, 1995 and the unaudited statements of operations and cash flows for
the interim period ended June 30, 1996 (the "Castle Financial Statements"). The
Castle Financial Statements fairly present in all material respects the
financial position of Castle at the dates thereof and the results of operations
of Castle and its cash flows for the period indicated. Since June 30, 1996,
there has been no material adverse change in the assets or liabilities, or in
the business or condition, financial or otherwise, or in the results of
operations of Castle.
5.9 BOOKS AND RECORDS. Castle has previously made available to Seller
true, correct and complete copies of its certificate of incorporation and
bylaws, and all amendments to each.
5.10 CAPITALIZATION TABLE. Attached hereto as Schedule 5.10 is a true and
correct listing of the stockholders of Castle and their ownership interest in
Castle as of the date hereof. Castle agrees to provide Dr. Lane and his counsel
copies of the Registration Statement and all amendments thereto as filed with
the Securities and Exchange Commission.
ARTICLE VI
CONDITIONS TO SELLER'S AND THE SHAREHOLDERS' OBLIGATIONS
The obligations of Seller and the Shareholders under this Agreement to
sell, or cause to be sold, the Assets and to consummate the other transactions
contemplated hereby shall be subject to the satisfaction (or waiver by the party
entitled to performance) on or prior to the Closing Date of all of the following
conditions:
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6.1 TRUTH OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Purchaser and Castle contained in this Agreement shall be true and
correct in all material respects on and as of the Closing Date with the same
effect as though such representations and warranties had been made on and as of
the Closing Date, subject only to such changes thereto as have occurred in the
ordinary course of business, and Purchaser and Castle shall have delivered to
Seller on the Closing Date a certificate of an authorized officer of Purchaser
and Castle, dated the Closing Date, to such effect.
6.2 PERFORMANCE OF AGREEMENTS. Each and all of the agreements and
covenants of Purchaser and Castle to be performed on or before the Closing Date
pursuant to the terms hereof shall have been duly performed in all material
respects, and Purchaser and Castle shall have delivered to Seller a certificate
of an authorized officer of Purchaser and Castle, dated the Closing Date, to
such effect.
6.3 NO LITIGATION THREATENED. No action or proceedings shall have been
instituted before a court or other governmental body or by any public authority
to restrain or prohibit any of the transactions contemplated hereby, and
Purchaser shall have delivered to Seller a certificate of an authorized officer
of Purchaser and Castle, dated the Closing Date, to such effect to the best
knowledge of such officer.
6.4 CONSIDERATION. The Seller shall have received the consideration
described in Section 3.1, and Purchaser shall have assumed the obligations set
forth in Section 2.3.
6.5 GOVERNMENTAL APPROVALS. All governmental consents and approvals, if
any, necessary to permit the consummation of the transactions contemplated by
this Agreement shall have been received.
6.6 PROCEEDINGS. All proceedings to be taken by Purchaser and Castle in
connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Seller and the Shareholders and their counsel, and Seller and the
Shareholders shall have received copies of all such documents and other evidence
as its or its counsel may reasonably request in order to establish the
consummation of such transactions and the taking of all proceedings in
connection therewith.
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6.7 GOOD STANDING CERTIFICATES. Seller shall have received good standing
and corporate existence certificates respecting Purchaser and Castle.
6.8 EMPLOYMENT AGREEMENT. Jules V. Lane D.D.S. shall have received an
Employment Agreement, substantially in the form of Exhibit A, executed by the
Purchaser.
6.9 REGISTRATION RIGHTS AGREEMENT. Jules V. Lane D.D.S. shall have
received a Registration Rights Agreement, substantially in the form of Exhibit C
hereto, executed by Castle.
6.10 LEASE AGREEMENTS. Purchaser and the Property Owners shall have
entered into Lease Agreements respecting each parcel of real property owned by
the Shareholders and used in the Business. Each of such Lease Agreements shall
contain the terms set forth on Schedule 4.10 and other commercially reasonable
terms and conditions.
6.11 ANCILLARY AGREEMENT. The parties hereto shall have executed and
delivered the Ancillary Agreement, substantially in the form attached hereto as
Exhibit E.
6.12 LEGAL OPINION. Purchaser shall have delivered to Seller and the
Shareholders the opinion of their counsel, in form and substance reasonably
satisfactory to the addressees.
6.13 INITIAL PUBLIC OFFERING. Castle shall have consummated the Initial
Public Offering and shall have provided Seller and the Shareholders with a
certificate to that effect.
ARTICLE VII
CONDITIONS TO PURCHASER'S OBLIGATIONS
The obligations of Purchaser under this Agreement to purchase the Assets
and to consummate the other transactions contemplated hereby shall be subject to
the satisfaction (or waiver by Purchaser) on or prior to the Closing Date of all
of the following conditions:
7.1 TRUTH OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Seller and the Shareholders contained herein shall be true and
correct in all material respects on and as of the Closing Date with the same
effect as though such representations and warranties had been made on and as of
the Closing Date, subject only to such changes thereto as have occurred in the
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ordinary course of business, and Seller and the Shareholders shall have
delivered to Purchaser on the Closing Date a certificate of an authorized
representative of Seller and the Shareholders, dated the Closing Date, to such
effect.
7.2 PERFORMANCE OF AGREEMENTS. Each and all of the agreements and
covenants of Seller to be performed on or before the Closing Date pursuant to
the terms hereof shall have been duly performed in all material respects, and
Seller shall have delivered to Purchaser a certificate of an authorized
representative of Seller, dated the Closing Date, to such effect.
7.3 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse
change in the financial condition of the Seller or the financial results of its
operations in the period commencing with the date of this Agreement and ending
on the Closing Date. Without limiting the generality of the foregoing, Seller
shall not have been given notice of termination or notice of intent
to terminate or not renew Union Contracts representing more than 10% of the
revenues attributable to all Union Contracts, unless new Union Contracts in
compensating amounts have been substituted therefor.
7.4 DOCUMENTS OF CONVEYANCE. Purchaser shall have received from Seller
fully executed documents of conveyance, in form and substance satisfactory to
Purchaser and its counsel, vesting in Purchaser good and valid title to the
Assets, free and clear of any Encumbrances except Permitted Encumbrances.
7.5 NO LITIGATION THREATENED. No action or proceedings shall have been
instituted before a court or other governmental body or by any public authority
to restrain or prohibit any of the transactions contemplated hereby, and Seller
shall have delivered to Purchaser a certificate of an authorized representative
of Seller, dated the Closing Date, to such effect to the best knowledge of such
officer.
7.6 GOVERNMENTAL APPROVALS. All governmental consents and approvals, if
any, necessary to permit the consummation of the transactions contemplated by
this Agreement shall have been received.
7.7 CONSENTS. Each of the consents referred to in Schedule 5.3 attached
hereto shall have been obtained, and Purchaser shall have also received the
consent of all other parties, including its senior lender, whose consent is
required to permit Purchaser to perform its obligations hereunder.
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7.8 LEGAL OPINION. Seller shall have delivered to Purchaser the opinion of
their counsel, in form and substance reasonably satisfactory to the addressees.
7.9 PROCEEDINGS. All proceedings to be taken in connection with the
transactions contemplated by this Agreement and all documents incident thereto
shall be reasonably satisfactory in form and substance to Purchaser and its
counsel, and Purchaser shall have received copies of all such documents and
other evidence as it or its counsel may reasonably request in order to establish
the consummation of such transactions and the taking of all proceedings in
connection therewith.
7.10 EXECUTION OF MANAGEMENT SERVICES AGREEMENT. Purchaser and Lane PC
shall have entered into a Management Services Agreement substantially in the
form of Exhibit D attached hereto.
7.11 LEASE AGREEMENT. Purchaser shall have entered into Lease Agreements
with the owners of such real property respecting each parcel of real property
owned by the Shareholders or their Affiliates and used in the Business. Each of
such Lease Agreements shall contain the terms set forth on Schedule 4.10 and
other commercially reasonable terms and conditions.
7.12 AGREEMENT WITH AMERICAN MEDICAL AND LIFE INSURANCE COMPANY. Lane PC
shall have entered into a mutually acceptable agreement with AMLI defining the
relationship between Lane PC and AMLI for periods following the Closing Date.
7.13 EMPLOYMENT AGREEMENT. The Purchaser shall have received an Employment
Agreement, substantially in the form of Exhibit A, executed by Jules V. Lane
D.D.S., and Lane PC shall have received an Employment Agreement from Jules V.
Lane D.D.S. in form and substance reasonably satisfactory to the parties.
7.14 DUE DILIGENCE.Purchaser shall have satisfactorily completed a due
diligence review of Seller and the Business and shall not have determined, in
the exercise of its reasonable discretion, that the information obtained from
such review materially and adversely affects its appraisal of the business,
prospects and financial condition of the Seller or the Business.
7.15 TRADENAME AND TRADEMARK LICENSE AGREEMENTS. Purchaser and Lane PC
shall have entered into a Tradename License Agreement and a Trademark License
Agreement in form and substance reasonably satisfactory to Purchaser and its
counsel pursuant to which Lane PC licenses the tradename "American Dental
Centers" and associated trademarks.
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7.16 ACCOUNTS RECEIVABLE PURCHASE AGREEMENT. Purchaser and Lane PC shall
have entered into an Accounts Receivable Purchase Agreement in form and
substance satisfactory to Purchaser and its counsel. Purchaser and Lane PC also
shall have sent to the appropriate parties the letters and notifications
attached as exhibits thereto, and filed in the appropriate offices the UCC
Financing Statement attached thereto.
7.17 OPTION AGREEMENT. Purchaser and Jules V. Lane D.D.S. shall have
entered into an Option Agreement regarding Jules V. Lane's ownership of stock in
Lane PC, in form and substance satisfactory to Purchaser and its counsel, and
the certificates shares of stock in Lane PC owned by Jules V. Lane D.D.S. shall
be inscribed with an appropriate legend referencing the Option Agreement.
7.18 ANCILLARY AGREEMENT. The parties hereto shall have executed and
delivered the Ancillary Agreement, substantially in the form attached hereto as
Exhibit E.
7.19 GOOD STANDING CERTIFICATES.Purchaser shall have received good
standing and corporate existence certificates respecting the Seller.
7.20 RELEASES OF LIENS.Purchaser shall have received evidence satisfactory
to Purchaser and its counsel to the effect that all liens and other encumbrances
on the Assets being transferred either to Purchaser or Lane PC (other than
Permitted Encumbrances) have been released.
7.21 TERMINATION OF S CORP STATUS. Lane PC shall have revoked its election
to be taxed under Subchapter S of the Code effective as of the Closing.
7.22 EXECUTION OF LOCK-UP AGREEMENT. Dr. Lane shall have executed a
lock-up agreement in customary form not to exceed 180 days and any other
documentation reasonably requested by Castle or Smith Barney necessary to permit
Castle to perform it obligations under the Underwriting Agreement or required by
Smith Barney as a condition to closing the Initial Public Offering.
7.23 INITIAL PUBLIC OFFERING. Castle shall have consummated the Initial
Public Offering.
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ARTICLE VIII
COVENANTS OF SELLER AND THE SHAREHOLDERS
Seller and the Shareholders hereby covenant and agree with Purchaser as
follows:
8.1 COOPERATION BY SELLER. Seller and the Shareholders shall use their
reasonable best efforts to cooperate with Purchaser to secure all necessary
consents, approvals, authorizations, exemptions and waivers from third parties
as shall be required in order to enable Seller and the Shareholders to effect
the transactions contemplated on its or his part hereby, and Seller and the
Shareholders shall otherwise use their reasonable best efforts to cause the
consummation of such transactions in accordance with the terms and conditions
hereof and to cause all conditions contained in this Agreement over which it has
control to be satisfied in a timely manner. Without limiting the generality of
the foregoing, the Property Owners agree to negotiate in good faith the Lease
Agreements described in Section 4.10 hereof. Seller and the Shareholders further
agree to deliver to Purchaser prompt written notice of any event or condition
which if it existed on the date of this Agreement, would result in any of the
representations and warranties of Seller or the Shareholders contained herein
being untrue in any material respect.
Immediately following the execution and delivery of this Agreement, Seller
agrees to permit the Purchaser and Smith Barney one contact with the parties
other than Seller to those of the five largest Union Contracts identified by
Purchaser to describe to such parties the substance of the transactions
contemplated by this Agreement in a manner calculated not to interfere with or
disrupt the contractual relationship. Such parties to the Union Contracts shall
be contacted sequentially, and Dr. Lane shall be notified promptly following
each contact. Seller, Purchaser and Smith Barney shall agree in advance as to
the characterization of the transactions contemplated by this Agreement, and
shall agree as to a script to be used in connection with such discussion.
Purchaser and Seller shall mutually agree as to the person having the
discussion. Except for the parties to the Union Contracts described herein,
Purchaser shall not contact any other parties to Union Contracts. The parties to
the Union Contracts to be contacted are: Building Services Local 32B-J;
Transportation Workers Local 100; Local 144-Hospital Employees; 1199 National
Benefits Fund (already contacted); and Local 144-Nursing Home Employees.
8.2 CONDUCT OF BUSINESS. Except as Purchaser may otherwise consent to in
writing, between the date hereof and the Closing Date, Seller shall, (a) conduct
the Business only in the
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ordinary course, (b) use its reasonable efforts to keep available the services
of its employees and independent contractors and maintain satisfactory
relationships with licensors, suppliers, lessors, distributors, customers,
clients and others, (c) use its best efforts to maintain the Union Contracts in
full force and effect; (d) maintain, consistent with past practice and good
business judgment, all the Assets in customary repair, order and condition,
ordinary wear and tear excepted, and insurance upon all the Assets used in the
conduct of the Business in such amounts and of such kinds comparable to that in
effect on the date hereof, to the extent available at current premiums, (e)
maintain the Books and Records in the usual, regular and ordinary manner, on a
basis consistent with past practice, (f) not incur any indebtedness or permit
any lien to be placed on any of the Assets, and (g) not make any capital
expenditures in excess of $5,000 other than replacements of assets in the
ordinary course of business.
8.3 EXCLUSIVE DEALING. During the period from the date of this Agreement
to the earlier of the Closing Date or the termination of this Agreement, neither
Seller nor the Shareholders shall take any action to, directly or indirectly,
encourage, initiate or engage in discussions or negotiations with, or provide
any information to, any Person other than Purchaser, concerning any sale of the
Assets or any material part thereof or a similar transaction involving Seller or
the Shareholders.
8.4 REVIEW OF THE ASSETS. Purchaser may at its expense, prior to the
Closing Date, through its representatives, review (a) the Assets, (b) the
complete working papers of Seller's certified public accountants used in their
preparation of financial statements for Seller and (c) the Books and Records of
Seller and to otherwise review the financial and legal condition of Seller as
Purchaser deems necessary or advisable to familiarize itself with the Business
and related matters; such review shall not, however, affect the representations
and warranties made by Seller and the Shareholders hereunder or the remedies of
Purchaser for breaches of those representations and warranties. Such review
shall occur only during normal business hours upon reasonable notice by
Purchaser and in a manner which will not interfere with the day-to-day operation
of the Business, except to the limited extent necessary to comply with due
diligence requests and updates. Seller and the Shareholders shall permit
Purchaser and its representatives to have, after the execution of this
Agreement, reasonable access to employees of any Seller who can furnish
Purchaser with financial and operating data and other information with respect
to the Business as Purchaser shall from time to time reasonably request. Seller
and the Shareholders shall not be required to provide any information requested
by the Purchaser more than once, and shall not be required to provide Purchaser
with any additional information except to the extent reasonably requested by
Purchaser or required by Smith Barney to complete their respective due diligence
reviews.
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8.5 FURTHER ASSURANCES. At any time or from time to time after the Closing
Date, Seller and the Shareholders shall, at the reasonable request of Purchaser
and at Purchaser's expense, execute and deliver any further instruments or
documents and take all such further action as Purchaser may reasonably request
in order to consummate and make effective the sale of the Assets and the
assumption of the Assumed Obligations pursuant to this Agreement.
ARTICLE IX
COVENANTS OF PURCHASER AND CASTLE
Purchaser and Castle hereby jointly and severally covenant and agree with
Seller and the Shareholders as follows:
9.1 COOPERATION BY PURCHASER. Purchaser will use its reasonable best
efforts, and will cooperate with Seller and the Shareholders, to secure all
necessary consents, approvals, authorizations, exemptions and waivers from third
parties as shall be required in order to enable Purchaser to effect the
transactions contemplated on its part hereby, and Purchaser will otherwise use
its reasonable best efforts to cause the consummation of such transactions in
accordance with the terms and conditions hereof and to cause all conditions
contained in this Agreement over which it has control to be satisfied in a
timely manner. Purchaser further agrees to deliver to Seller and the
Shareholders prompt written notice of any event or condition, which if it
existed on the date of this Agreement, would result in any of the
representations and warranties of Purchaser contained herein being untrue in any
material respect.
9.2 BOOKS AND RECORDS; PERSONNEL. At all times after the Closing Date,
Purchaser shall allow Seller and any agents of any Seller, upon reasonable
advance notice to Purchaser, access to all Books and Records of Seller (or
copies thereof) which are transferred to Purchaser in connection herewith, to
the extent necessary or desirable in anticipation of, or preparation for,
existing or future litigation, employment matters, tax returns or audits, or
reports to or filings with governmental agencies, during normal working hours at
Purchaser's principal places of business or at any location where such Books and
Records are stored, and Seller shall have the right, at Seller's sole cost, to
make copies of any such Books and Records. Purchaser agrees to maintain either
the original Books and Records or complete and current copies thereof at its
principal place of business in New York for not less than six years.
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9.3 FURTHER ASSURANCES. At any time or from time to time after the Closing
Date, Purchaser shall, at the request of Seller or the Shareholders and at such
Seller's expense, execute and deliver any further instruments or documents and
take all such further action as Seller may reasonably request in order to
consummate and make effective the sale of the Assets and the assumption of the
Assumed Obligations pursuant to this Agreement.
9.4 CASTLE BOARD OF DIRECTORS. At the Closing of the transactions
contemplated by this Agreement, Castle agrees to use its best efforts to
nominate and elect Dr. Lane to the Board of Directors of Castle for the longer
of three years or the period of time that Dr. Lane remains an employee of
Purchaser on substantially the same terms and conditions as contemplated by the
Employment Agreement, and Jack H. Castle, Jr. agrees to vote the shares he owns
or controls as trustee in favor of Dr. Lane's election to the Board of Directors
of Castle.
ARTICLE X
TERMINATION
10.1 TERMINATION. This Agreement may be terminated and the transactions
contemplated hereby may be abandoned at any time prior to the Closing Date:
(a) by the mutual written consent of Purchaser, Castle the
Shareholders and Seller; or
(b) by Purchaser, Castle, the Shareholders, or Seller in writing
without liability on the part of the terminating party on account of such
termination (provided the terminating party is not otherwise in material
default or in material breach of this Agreement), (i) if the Initial
Public Offering shall not have occurred by December 31, 1996, (ii) if
Castle shall have been notified in writing by Smith Barney that in the
reasonable opinion of Smith Barney the Initial Public Offering cannot be
consummated by December 31, 1996; (iii) if any party receiving a revised
Schedule to this Agreement pursuant to Section 2.7 elects to terminate
this Agreement pursuant to Section 2.7 hereof, or (iv) if any condition to
the obligations of the terminating party has not been met or waived on or
before December 31, 1996; or
(c) by either Purchaser and Castle, on the one hand, or the
Shareholders and Seller, on the other hand, in writing, without liability
on the part of the terminating party on
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account of such termination (provided the terminating party is not
otherwise in default or breach of this Agreement), if the other party
shall (i) fail to perform its or their material covenants or material
agreements contained herein required to be performed prior to the Closing
Date, or (ii) materially breach or have breached any of its material
representations or warranties contained herein.
10.2 EFFECT ON OBLIGATIONS. Termination of this Agreement pursuant to
Section 10.1(a) (b) or (c) shall terminate all obligations of the parties
hereunder, except for the obligations under Sections 12.8 and 12.11 hereof and
the obligations set forth in the last sentence of this Section 10.2. On
termination of this Agreement pursuant to Section 10.1(d) the terminating party
shall have all remedies for such failure to perform or material breach as are
provided by law. Upon any termination of this Agreement each party hereto will
redeliver all documents, work papers and other material of any other party
relating to the transactions contemplated hereby, and all copies of such
materials, whether so obtained before or after the execution hereof, to the
party furnishing the same. Any confidentiality agreements between the parties
hereto shall survive any termination pursuant to this Article X.
ARTICLE XI
SURVIVAL AND INDEMNIFICATION
11.1 INDEMNIFICATION OF THE SELLER AND THE SHAREHOLDERS. The Purchaser and
Castle, from and after the Closing Date, shall indemnify and hold Seller and the
Shareholders and their respective Affiliates (the "Seller Indemnitees") harmless
from and against any and all damages, penalties, losses, deficiencies, costs,
expenses, obligations, fines, expenditures, claims and liabilities, including
reasonable counsel fees and reasonable expenses of investigation, defending and
prosecuting litigation (collectively, the "Damages"), suffered by any Seller
Indemnitee as a result of, caused by, pr arising out of (a) any
misrepresentation, breach of warranty, or nonfulfillment of any agreement or
covenant on the part of the Purchaser and Castle under this Agreement or any
misrepresentation in or omission from any list, Schedule delivered at the
Closing , certificate, or other instrument furnished or to be furnished to the
Seller by the Purchaser and Castle pursuant to the terms of this Agreement (b)
any liability or obligation (other than those for which Purchaser and Castle are
being indemnified by Seller and the Shareholders hereunder) which pertains to
the ownership, operation or conduct of the Business or Assets arising from any
acts, omissions, events, conditions or circumstances occurring on or after the
Closing Date; or (c) any breach or default of Castle or the Purchaser under the
Ancillary Agreement; provided, however that Castle and the
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Purchaser shall have no obligations to indemnify Seller and the Shareholders of
any Damages for which a claim is not made within 23 months of the Closing Date.
11.2 INDEMNIFICATION OF THE PURCHASER AND CASTLE. Seller and the
Shareholders, jointly and severally, shall indemnify and hold Purchaser and
Castle and their respective Affiliates (the "Purchaser Indemnitees") harmless
from and against any and all Damages suffered by any Purchaser Indemnitee as a
result of, caused by or arising out of (a) any misrepresentation, breach of
warranty, or nonfulfillment of any agreement or covenant on the part of the
Seller or the Shareholders under this Agreement or any misrepresentation in or
omission from any list, Schedule delivered at the Closing , certificate, or
other instrument furnished or to be furnished to the Purchaser by the Seller
pursuant to the terms of this Agreement; (b) any liability or obligation (other
than those for which Seller and the Shareholders are being indemnified by
Purchaser and Castle hereunder and other than those relating to or arising from
the Assumed Obligations) which pertains to the ownership, operation or conduct
of the Business or Assets arising from any acts, omissions, events, conditions
or circumstances occurring before the Closing Date; (c) the failure of Seller to
discharge liabilities of Lane PC as described in Section 2.3 hereof; or (d) any
breach or default of the Seller or the Shareholders under the Ancillary
Agreement; provided, however, that with respect to subsection (a) and (b)
hereof, Seller and the Shareholders shall have no obligation to indemnify the
Purchaser and Castle for (i) exemplary or punitive damages, (ii) in excess of
the consideration paid to the Seller pursuant to Section 3.1; or (iii) for any
Damages for which a claim is not made within 23 months of the Closing Date; and
provided further, that no claim shall be made by way of indemnification for any
Damages of less than $10,000, and no claim shall be made for indemnification
until the aggregate of all claims for which indemnification is sought exceed
$150,000.
11.3 DEMANDS. Each indemnified party hereunder agrees that promptly upon
its discovery of facts giving rise to a claim for indemnity under the provisions
of this Agreement, including receipt by it of notice of any demand, assertion,
claim, action or proceeding, judicial or otherwise, by any third party (such
third party actions being collectively referred to herein as the "Claim"), with
respect to any matter as to which it claims to be entitled to indemnity under
the provisions of this Agreement, it will give prompt notice thereof in writing
to the indemnifying party, together with a statement of such information
respecting any of the foregoing as it shall have. Such notice shall include a
formal demand for indemnification under this Agreement. The indemnifying party
shall not be obligated to indemnify the indemnified party with respect to any
Claim if the indemnified party knowingly failed to notify the indemnifying party
thereof within three business days of the
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receipt of the Claim, if such failure to notify prevented the indemnifying party
or its counsel from defending against such matter and making a timely response
thereto including, without limitation, any responsive motion or answer to a
complaint, petition, notice or other legal, equitable or administrative process
relating to the Claim, but only insofar as such knowing failure to notify the
indemnifying party actually resulted in prejudice or damage to the indemnifying
party.
11.4 RIGHT TO CONTEST AND DEFEND. The indemnifying party shall be entitled
at its cost and expense to contest and defend by all appropriate legal
proceedings any Claim with respect to which it is called upon to indemnify the
indemnified party under the provisions of this Agreement; provided, that notice
of the intention so to contest shall be delivered by the indemnifying party to
the indemnified party within 20 days from the date of receipt by the
indemnifying party of notice by the indemnified party of the assertion of the
Claim. Any such contest may be conducted in the name and on behalf of the
indemnifying party or the indemnified party as may be appropriate. Such contest
shall be conducted by reputable counsel employed by the indemnifying party, but
the indemnified party shall have the right but not the obligation to participate
in such proceedings and to be represented by counsel of its own choosing at its
sole cost and expense. The indemnifying party shall have full authority to
determine all action to be taken with respect thereto; provided, however, that
the indemnifying party will not have the authority to subject the indemnified
party to any obligation whatsoever, other than the performance of purely
ministerial tasks or obligations not involving material expense, and in no event
shall any party be required to admit to professional negligence. If the
indemnifying party does not elect to contest any such Claim, the indemnifying
party shall be bound by the result obtained with respect thereto by the
indemnified party. At any time after the commencement of the defense of any
Claim, the indemnifying party may request the indemnified party to agree in
writing to the abandonment of such contest or to the payment or compromise by
the indemnified party of the asserted Claim, whereupon such action shall be
taken unless the indemnified party determines that the contest should be
continued, and so notifies the indemnifying party in writing within 15 days of
such request from the indemnifying party. If the indemnified party determines
that the contest should be continued, the indemnifying party shall be liable
hereunder only to the extent of the amount that the other party to the contested
Claim had agreed unconditionally to accept in payment or compromise as of the
time the indemnifying party made its request therefor to the indemnified party.
11.5 COOPERATION. If requested by the indemnifying party, the indemnified
party agrees to cooperate with the indemnifying party and its counsel in
contesting any Claim that the indemnifying party elects to contest or, if
appropriate, in making any counterclaim against the person
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asserting the Claim, or any cross-complaint against any person, and the
indemnifying party will reimburse the indemnified party for any expenses
incurred by it in so cooperating. At no cost or expense to the indemnified
party, the indemnifying party shall cooperate with the indemnified party and its
counsel in contesting any Claim.
11.6 RIGHT TO PARTICIPATE. The indemnified party agrees to afford the
indemnifying party and its counsel the opportunity to be present at, and to
participate in, conferences with all persons, including governmental
authorities, asserting any Claim against the indemnified party or conferences
with representatives of or counsel for such persons.
11.7 PAYMENT OF DAMAGES. The indemnifying party shall pay to the
indemnified party in immediately available funds any amounts to which the
indemnified party may become entitled by reason of the provisions of this
Agreement, such payment to be made within five days after any such amounts are
finally determined either by mutual agreement of the parties hereto or pursuant
to the final unappealable judgment of a court of competent jurisdiction.
ARTICLE XII
MISCELLANEOUS
12.1 ENTIRE AGREEMENT. This Agreement (including the Exhibits and
Schedules) set forth the entire understanding of the parties with respect to the
subject matter hereof. Any previous agreements or understandings (whether oral
or written) between the parties regarding the subject matter hereof are merged
into and superseded by this Agreement.
12.2 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors of
the parties hereto; provided that this Agreement, including the representations
and warranties herein, may not be assigned by Seller or the Shareholders without
the prior written consent of Purchaser and Castle or by Purchaser and Castle to
any Person without the prior written consent of Seller.
12.3 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
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12.4 HEADINGS. The headings of the Articles, Sections and paragraphs of
this Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
12.5 MODIFICATION AND WAIVER. No amendment, modification or alteration of
the terms or provisions of this Agreement shall be binding unless the same shall
be in writing and duly executed by the parties hereto, except that any of the
terms or provisions of this Agreement may be waived in writing at any time by
the party which is entitled to the benefits of such waived terms or provisions.
No waiver of any of the provisions of this Agreement shall be deemed to or shall
constitute a waiver of any other provision hereof (whether or not similar). No
delay on the part of either party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof.
12.6 NO THIRD PARTY BENEFICIARY RIGHTS. This Agreement is not intended to
and shall not be construed to give any Person (other than the parties signatory
hereto any interest or rights (including, without limitation, any third party
beneficiary rights) with respect to or in connection with any agreement or
provision contained herein or contemplated hereby.
12.7 SALES AND TRANSFER TAXES. Purchaser shall be responsible for and pay
all applicable sales, stamp, transfer, documentary, use, registration, filing
and other taxes and fees (including any penalties and interest) that may become
due or payable in connection with this Agreement and the transactions
contemplated hereby.
12.8 EXPENSES. Except as otherwise provided in this Agreement, Seller, the
Shareholders and Purchaser shall each pay all costs and expenses incurred by
them or on their behalf in connection with this Agreement and the transactions
contemplated hereby.
12.9 NOTICE. Any notice, request, instruction or other document to be
given hereunder by any party hereto to any other party shall be sufficiently
given if delivered in person or sent by telecopier or registered or certified
mail, postage prepaid, return receipt requested, addressed as follows:
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if to Purchaser, to:
Castle Dental Centers of New York, Inc.
if to Castle, to:
Castle Dental Centers, Inc.
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056-3021
with a copy to:
Mr. William D. Gutermuth
Bracewell & Patterson, LLP
South Tower Pennzoil Place
711 Louisiana, Suite 2900
Houston, Texas 77002-2856
if to Seller or the Shareholders to:
Jules V. Lane D.D.S. d/b/a American Dental Centers
35 Broadway
Hicksville, New York 11801
Attention: Jules V. Lane D.D.S.
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J.V. Lane Professional Corporation d/b/a American Dental Centers
35 Broadway
Hicksville, New York 11801
Attention: Jules V. Lane D.D.S.
Lisadent Corp.
35 Broadway
Hicksville, New York 11801
Jules V. Lane D.D.S.
with a copy to:
Mr. Michael G. Yamin
Kaufmann, Feiner, Yamin,
Gildin & Robbins, LLP
777 Third Avenue
New York, New York 10017
or at such other address for a party as shall be specified by like notice, and
such notice or communication shall be deemed to have been duly given as of the
date so delivered, mailed or sent by telecopier.
12.10 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regards to conflict of
law rules thereof.
12.11 CONFIDENTIALITY; PUBLICITY. The terms and conditions of this
Agreement shall not be disclosed by any party hereto without the prior written
consent of the other parties; provided, however, that Purchaser may disclose
such information as is required to comply with the requirements of its lenders
and investors and to comply with applicable securities laws. No party hereto
shall issue any press release or make any other public statement, in each case
relating to or connected with or arising out of this Agreement or the matters
contained herein, without obtaining the prior approval of the other party hereto
to the contents and the manner of presentation and publication thereof.
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<PAGE>
12.12 CONSENT TO JURISDICTION. Any judicial proceeding brought against any
of the parties to this Agreement on any dispute arising out of this Agreement or
any matter related hereto shall be brought in any federal or state court located
in New York, and, by execution and delivery of this Agreement, each of the
parties to this Agreement accepts for itself the exclusive jurisdiction of the
aforesaid courts, and irrevocably agrees to be bound by any judgment rendered
thereby in connection with this Agreement.
12.13 SEVERABILITY. If any provision of this Agreement is invalid, illegal
or incapable of being enforced by any rule of law or public policy, all other
provisions of this Agreement shall nevertheless remain in full force and effect
so long as the economic or legal substance of the transactions contemplated
hereby is not affected in any manner materially adverse to any party. Upon such
determination that any provision is invalid, illegal or incapable of being
enforced, the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner to the end that the transactions contemplated
hereby are fulfilled.
12.14 ENFORCEMENT. The parties hereto agree that the remedy at law for any
breach of this Agreement is inadequate and that should any dispute arise
concerning the sale of the Assets or any other matter hereunder, this Agreement
shall be enforceable in a court of equity by an injunction or a decree of
specific performance. Such remedies shall, however, be cumulative and
nonexclusive, and shall be in addition to any other remedies which the parties
hereto may have.
12.15 GUARANTY OF OBLIGATIONS. Castle hereby unconditionally guarantees
the performance by Purchaser of each of its obligations contained in this
Agreement.
12.16 CONSENT TO DISCLOSURE. Sellers and the Shareholders hereby consent
to the inclusion of the information and the references to them contained in the
Registration Statement as originally filed, but not any amendment thereto.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed on its behalf as of the date first above written.
CASTLE DENTAL CENTERS OF NEW YORK,
INC.
By:_____________________________
Name: Jack H. Castle, Jr.
Title: Chief Executive Officer
CASTLE DENTAL CENTERS, INC.
By:______________________________
Name: Jack H. Castle, Jr.
Title: Chief Executive Officer
JULES V. LANE D.D.S. D/B/A AMERICAN
DENTAL CENTERS
By:_____________________________
Name: Jules V. Lane D.D.S.
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<PAGE>
J.V. LANE PROFESSIONAL CORPORATION
D/B/A AMERICAN DENTAL CENTERS
--------------------------------
Name: Jules V. Lane D.D.S.
Title: President
LISADENT CORP.
By:______________________________
Name: Linda Lane
Title: President
----------------------------------
Jules V. Lane D.D.S.
----------------------------------
Linda Lane
----------------------------------
Jack H. Castle, Jr., solely for purposes
of Section 9.4 hereof
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EXHIBIT 10.46
PAGES WHERE CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED ARE STAMPED
"CONFIDENTIAL TREATMENT REQUESTED.
THE REDACTED MATERIAL HAS BEEN
SEPARATELY FILED WITH THE COMMISSION."
THE APPROPRIATE SECTION HAS BEEN MARKED
AT THE APPROPRIATE PLACE.
EXHIBIT D
MANAGEMENT SERVICES AGREEMENT
BY AND BETWEEN
CASTLE DENTAL CENTERS OF NEW YORK, INC.,
A NEW YORK CORPORATION
AND
J.V. LANE PROFESSIONAL CORPORATION, A NEW YORK
PROFESSIONAL CORPORATION,D/B/A AMERICAN DENTAL CENTERS
EFFECTIVE __________, ___, 1996
<PAGE>
TABLE OF CONTENTS
Page No.
ARTICLE I. DEFINITIONS........................................................2
Section 1.1 Act......................................................2
Section 1.2 Adjustments..............................................2
Section 1.3 AMLI.....................................................2
Section 1.4 Ancillary Revenue........................................2
Section 1.5 Budget...................................................2
Section 1.6 Business Manager.........................................2
Section 1.7 Business Manager Consent.................................3
Section 1.8 Business Manager Expense.................................3
Section 1.9 Confidential Information.................................3
Section 1.10 Center...................................................3
Section 1.11 Dental Services..........................................3
Section 1.12 Dentist..................................................4
Section 1.13 GAAP.....................................................4
Section 1.14 Management Fee...........................................4
Section 1.15 Management Services......................................4
Section 1.16 Management Services Agreement............................4
Section 1.17 Office Expense...........................................4
Section 1.18 PC.......................................................5
Section 1.19 PC Account...............................................5
Section 1.20 PC Consent...............................................6
Section 1.21 PC Expense...............................................6
Section 1.22 Practice Territory.......................................6
Section 1.23 Professional Services Revenues...........................6
Section 1.24 Representatives..........................................6
Section 1.25 State....................................................6
Section 1.26 Term.....................................................6
ARTICLE II. APPOINTMENT AND AUTHORITY OF BUSINESS MANAGER.....................6
Section 2.1 Appointment..............................................6
Section 2.2 Authority................................................7
Section 2.3 Patient Referrals and Payments...........................7
Section 2.4 Internal Management of PC................................7
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Section 2.5 Practice of Dentistry....................................7
ARTICLE III. RESPONSIBILITIES OF THE PC.......................................8
Section 3.1 Duties and Responsibilities of the PC....................8
(a) Capital Improvements and Expansion.......................8
(b) Marketing and Advertising................................8
(c) Patient Fees; Collection Policies........................8
(d) Ancillary Services.......................................8
(e) Provider and Payor Relationships.........................8
(f) Strategic Planning.......................................8
(g) Capital Expenditures.....................................9
(h) Dentist Hiring...........................................9
Section 3.2 Dental Treatment Decisions...............................9
ARTICLE IV. COVENANTS AND RESPONSIBILITIES OF BUSINESS MANAGER................9
Section 4.1 Centers and Equipment....................................9
Section 4.2 Dental Supplies.........................................10
Section 4.3 Support Services........................................11
Section 4.4 Quality Assurance, Risk Management, and
Utilization Review......................................11
Section 4.5 Licenses and Permits....................................11
Section 4.6 Personnel...............................................11
Section 4.7 Contract ...............................................12
Section 4.8 Billing and Collection..................................12
Section 4.9 PC Account..............................................13
Section 4.10 Fiscal Matters..........................................14
Section 4.11 Reports and Records.....................................16
Section 4.12 Recruitment of PC Dentists..............................16
Section 4.13 Business Manager's Insurance............................16
Section 4.14 No Warranty.............................................17
ARTICLE V. COVENANTS OF PC...................................................17
Section 5.1 Organization and Operation..............................17
Section 5.2 PC Personnel and Shareholders...........................17
Section 5.3 Professional Standards..................................18
Section 5.4 Dental Services.........................................18
Section 5.5 Peer Review/Quality Assurance...........................18
Section 5.6 PC's Insurance..........................................18
Section 5.7 Confidential and Proprietary Information................19
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Section 5.8 Noncompetition..........................................20
Section 5.9 Name, Trademark.........................................22
Section 5.10 Peer Review.............................................22
Section 5.11 Indemnification.........................................22
ARTICLE VI. FINANCIAL ARRANGEMENT............................................22
Section 6.1 Management Fee..........................................22
Section 6.2 Shortfalls..............................................23
Section 6.3 Reasonable Value........................................23
Section 6.4 Payment of Management Fee...............................23
Section 6.5 Periodic Adjustment of Compensation.....................23
Section 6.6 Accounts Receivable.....................................23
Section 6.7 Disputes Regarding Fees.................................24
ARTICLE VII. TERM AND TERMINATION............................................24
Section 7.1 Initial and Renewal Term................................24
Section 7.2 Termination.............................................24
Section 7.3 Effects of Termination..................................26
ARTICLE VIII. MISCELLANEOUS..................................................26
Section 8.1 Administrative Services Only............................26
Section 8.2 Status of Contractor; Agency............................27
Section 8.3 Notices.................................................27
Section 8.4 Governing Law...........................................28
Section 8.5 Assignment..............................................28
Section 8.6 Arbitration.............................................29
Section 8.7 Waiver of Breach........................................31
Section 8.8 Enforcement.............................................31
Section 8.9 Gender and Number.......................................31
Section 8.10 Additional Assurances...................................31
Section 8.11 Consents, Approvals, and Exercise of Discretion.........31
Section 8.12 Force Majeure...........................................32
Section 8.13 Severability............................................32
Section 8.14 Divisions and Headings..................................32
Section 8.15 Amendments and Management Services Agreement Execution..32
Section 8.16 Entire Management Services Agreement....................32
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<PAGE>
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT is made and entered into effective as
of _____________, 1996, by and between CASTLE DENTAL CENTERS OF NEW YORK, INC.,
a New York corporation ("Business Manager"), and J.V. LANE PROFESSIONAL
CORPORATION, a New York professional corporation ("PC"), D/B/A AMERICAN DENTAL
CENTERS.
RECITALS
This Management Services Agreement is made with reference to the
following facts:
A. PC is a validly existing New York professional corporation, formed
for and engaged in the practice of dentistry and the provision of dental
services to the general public in the State of New York through individual
dentists who are licensed to practice dentistry in the State of New York and who
are retained by PC.
B. Business Manager is a validly existing New York corporation, which
has been duly formed to manage the business aspects of the dental practice of
PC.
C. PC desires to focus its energies, expertise and time on the practice
of dentistry and on the delivery of dental services to patients, and to
accomplish this goal it desires to delegate the increasingly more complex
business functions of its dental practice to persons with business expertise.
D. PC wishes to engage Business Manager to provide such management,
administrative and business services as are necessary and appropriate for the
day-to-day administration of the nondental aspects of PC's dental practice in
the Practice Territory (as defined below), and Business Manager desires to
provide such services all upon the terms and conditions hereinafter set forth.
E. PC and Business Manager have determined a fair market value for the
services to be rendered by Business Manager, and based on this fair market
value, have agreed as to the compensation for Business Manager that will allow
the parties to establish a relationship permitting each party to devote its
skills and expertise to the appropriate responsibilities and functions.
<PAGE>
NOW, THEREFORE, in consideration of the mutual terms, covenants and
conditions hereinabove and hereinafter set forth, the parties agree as follows:
ARTICLE I. DEFINITIONS
For the purposes of this Management Services Agreement, the following
terms shall have the following meanings ascribed thereto, unless otherwise
clearly required by the context in which such term is used.
Section 1.1 ACT. The term "Act" shall mean Title 8, Article 133 of the
New York State Education Law.
Section 1.2 ADJUSTMENTS. The term "Adjustments" shall mean any
adjustments on an accrual basis for uncollectible accounts, third party payor
contractual adjustments, discounts, workers' compensation adjustments,
professional courtesies, and other reductions in collectible revenue that result
from activities that do not result in collectible charges.
Section 1.3 AMLI. The term AMLI shall mean American Medical and Life
Insurance Company, a New York insurance company.
Section 1.4 ANCILLARY REVENUE. The term "Ancillary Revenue" shall mean
all other revenue actually recorded each month (net of Adjustments) that is not
Professional Services Revenues consisting only of prepaid amounts for services
previously billed and collected, and shall include (a) any amounts received by
PC as liquidated damages under Section 4.2 or Section 4.3 of any Dentist's
employment agreement, and (b) the proceeds of key person life and disability
insurance as provided for in Section 4.14 below.
Section 1.5 BUDGET. The term "Budget" shall mean an operating budget and
capital expenditure budget for each fiscal year as prepared by Business Manager
and adopted by PC.
Section 1.6 BUSINESS MANAGER. The term "Business Manager" shall mean
Castle Dental Centers of New York, Inc., a New York corporation, or any entity
that succeeds to the interests of Castle Dental Centers of New York, Inc., a New
York corporation, and to whom the obligations of Business Manager are assigned
and transferred.
Section 1.7 BUSINESS MANAGER CONSENT. The term "Business Manager
Consent" shall mean written consents granted by Business Manager from time to
time at the request of PC.
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Section 1.8 BUSINESS MANAGER EXPENSE. The term "Business Manager
Expense" shall mean an expense or cost incurred by the Business Manager and for
which the Business Manager, and not PC, is financially liable other than
expenses incurred by Business Manager that directly benefit PC which may be
allocated to Office Expense consistent with the Budget.
Section 1.9 CONFIDENTIAL INFORMATION. The term "Confidential
Information" shall mean any information of Business Manager or PC, as
appropriate (whether written or oral), including all notes, studies, patient
lists, information, forms, business or management methods, marketing data, fee
schedules, or trade secrets of the Business Manager or of PC, as applicable,
whether or not such Confidential Information is disclosed or otherwise made
available to one party by the other party pursuant to this Management Services
Agreement. Confidential Information shall also include the terms and provisions
of this Management Services Agreement and any transaction or document executed
by the parties pursuant to this Management Services Agreement. Confidential
Information does not include any information that (i) is or becomes generally
available to and known by the public (other than as a result of an unpermitted
disclosure directly or indirectly by the receiving party or its affiliates,
advisors, or Representatives); (ii) is or becomes available to the receiving
party on a nonconfidential basis from a source other than the furnishing party
or its affiliates, advisors, or Representatives, provided that such source is
not and was not bound by a confidentiality agreement with or other obligation of
secrecy to the furnishing party of which the receiving party has knowledge at
the time of such disclosure; or (iii) has already been or is hereafter
independently acquired or developed by the receiving party without violating any
confidentiality agreement with or other obligation of secrecy to the furnishing
party. Information in the possession of a shareholder of PC pertaining to AMLI
and its business shall not be included within the term "Confidential
Information.
Section 1.10 CENTER. The term "Center" (collectively referred to as
"Centers") shall mean any office space, clinic, facility, including satellite
facilities, that Business Manager shall own or lease or otherwise procure for
the use of PC, as allowed by law, in the provision of Dental Services pursuant
to this Management Services Agreement.
Section 1.11 DENTAL SERVICES. The term "Dental Services" shall mean
dental care and services, including but not limited to the practice of general
dentistry, orthodontics and all related dental care services provided by PC
through PC's Dentists and other dental care providers that are retained by or
professionally affiliated with PC.
Section 1.12 DENTIST. The term "Dentist" shall mean each individually
licensed professional who is retained by or associated with PC, each of whom
shall meet at all times the qualifications described in Section 5.2 and Section
5.3.
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Section 1.13 GAAP. The term "GAAP" shall mean generally accepted
accounting principles set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity or other
practices and procedures as may be approved by a significant segment of the
accounting profession, which are applicable to the circumstances as of the date
of the determination. For purposes of this Management Services Agreement, GAAP
shall be applied on an accrual basis in a manner consistent with the historic
practices of the person to which the term applies.
Section 1.14 MANAGEMENT FEE. The term "Management Fee" shall mean
Business Manager's compensation established as described in Article VI hereof.
Section 1.15 MANAGEMENT SERVICES. The term "Management Services" shall
mean the business, administrative, and management services to be provided for
PC, including without limitation the provision of equipment, supplies, support
services, nondental personnel, office space, management, administration,
financial record keeping and reporting, and other business office services, but
in no event shall include or be construed as including any Dental Services.
Section 1.16 MANAGEMENT SERVICES AGREEMENT. The term "Management
Services Agreement" shall mean this Management Services Agreement by and between
PC and Business Manager and any amendments hereto as may be adopted as provided
in this Management Services Agreement.
Section 1.17 OFFICE EXPENSE. The term "Office Expense" shall mean all
operating and nonoperating expenses incurred by the Business Manager or PC in
the provision of nonprofessional services to or by PC. Office Expense shall not
include any State or federal income tax, or any other expense that is a PC
Expense or a Business Manager Expense. Without limitation, Office Expense shall
include:
(a) the salaries and benefits of all employees of Business Manager at
the Centers and the salaries and benefits of the nondental employees of PC, but
not the salaries or benefits of the Dentists;
(b) the direct cost of any employee or consultant that provides services
at or in connection with the Centers for improved clinic performance, such as
management, billing and collections, business office consultation, accounting
and legal services, but only when such services are consistent with the Budget
or otherwise with the consent of the PC;
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(c) reasonable recruitment costs and out-of-pocket expenses of Business
Manager or PC directly related to the recruitment of additional dental employees
of PC;
(d) professional liability insurance expenses for PC and comprehensive,
general liability and workers' compensation insurance covering the Centers and
employees of PC and Business Manager at each Center;
(e) the expense of using, leasing, purchasing or otherwise procuring
each Center and related equipment, including depreciation;
(f) the cost of capital (whether as actual interest on indebtedness
incurred on behalf of PC or as reasonable imputed interest on capital advanced
by Business Manager, which shall be equal to the average cost of funds available
to Business Manager other than from public equity markets) to finance or
refinance obligations of PC, purchase dental or nondental equipment, or finance
new ventures of PC;
(g) the reasonable out-of-pocket travel expenses associated with
attending meetings, conferences, or seminars to benefit PC;
(h) the reasonable costs and expenses associated with marketing,
advertising and promotional activities to benefit PC; and
(i) the cost of dental supplies (including but not limited to drugs and
pharmaceuticals (which shall be owned by PC), products, substances, items, or
dental devices), office supplies, inventory, and utilities other than those
dental supplies or dental inventory owned by PC on the date of this Management
Services Agreement.
Section 1.18 PC. The term "PC" shall mean J.V. Lane Professional
Corporation, a New York professional corporation, d/b/a American Dental Centers.
Section 1.19 PC ACCOUNT. The term "PC Account" shall mean the bank
account of PC established as described in Sections 4.8 and 4.9.
Section 1.20 PC CONSENT. The term "PC Consent" shall mean the written
consent granted by PC from time to time at the request of Business Manager. When
any provision of this Management Services Agreement requires PC Consent, PC
Consent shall not be unreasonably withheld and shall be binding on PC.
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Section 1.21 PC EXPENSE. The term "PC Expense" shall mean an expense
incurred by the Business Manager or PC that is consistent with the Budget or
otherwise with the consent of the PC and for which PC, and not the Business
Manager, is financially liable. PC Expense shall include such items as Dentist
salaries, benefits, and other direct costs (including professional dues,
subscriptions, continuing dental education expenses, and travel costs for
continuing dental education or other business travel but excluding business
travel requested by Business Manager, which shall be an Office Expense).
Section 1.22 PRACTICE TERRITORY. The term "Practice Territory" shall
mean the geographic area within a radius of ten (10) miles of any current or
future facility from which PC provides Dental Services in the State of New York
representing the specific geographic boundaries of the dental practice conducted
by PC within its particular urban metropolitan area.
Section 1.23 PROFESSIONAL SERVICES REVENUES. The term "Professional
Services Revenues" shall mean the sum of all professional fees actually recorded
each month on an accrual basis under GAAP (net of Adjustments) as a result of
Dental Services and related services rendered by the shareholders and dental
employees of PC.
Section 1.24 REPRESENTATIVES. The term "Representatives" shall mean a
party's officers, directors, employees, or other agents or representatives.
Section 1.25 STATE. The term "State" shall mean the State of New York.
Section 1.26 TERM. The term "Term" shall mean the initial and any
renewal periods of duration of this Management Services Agreement as described
in Section 7.1.
ARTICLE II. APPOINTMENT AND AUTHORITY OF BUSINESS MANAGER
Section 2.1 APPOINTMENT. PC hereby appoints Business Manager as its sole
and exclusive agent for the management and administration of the business
functions and business affairs of PC, and Business Manager hereby accepts such
appointment, subject at all times to the provisions of this Management Services
Agreement.
Section 2.2 AUTHORITY. Consistent with the provisions of this Management
Services Agreement, Business Manager shall have the responsibility and
commensurate authority to provide Management Services for PC. Subject to the
terms and conditions of this Management Services Agreement, Business Manager is
hereby expressly authorized to provide the Management Services in any reasonable
manner Business Manager deems appropriate to meet the day-to-day
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requirements of the business functions of PC. Business Manager is also expressly
and exclusively authorized to negotiate and execute on behalf of PC contracts
that do not relate to the provision of Dental Services. PC shall give Business
Manager thirty (30) days prior written notice of PC's intent to execute any
agreement obligating PC to perform Dental Services or otherwise creating a
binding legal obligation on PC. Unless an expense is expressly designated as a
Business Manager Expense in this Management Services Agreement, all expenses
incurred by Business Manager in providing services hereunder shall be an Office
Expense. The parties acknowledge and agree that PC, through its Dentists, shall
be responsible for and shall have complete authority, responsibility,
supervision, and control over the provision of all Dental Services and other
professional health care services performed for patients, and that all
diagnoses, treatments, procedures, and other professional health care services
shall be provided and performed exclusively by or under the supervision of
Dentists as such Dentists, in their sole discretion, deem appropriate. Business
Manager shall have and exercise absolutely no control or supervision over the
provision of Dental Services.
Section 2.3 PATIENT REFERRALS AND PAYMENTS. Business Manager and PC
agree that the benefits to PC hereunder do not require, are not payment for, and
are not in any way contingent upon the referral, admission, or any other
arrangement for the provision of any item or service offered by Business Manager
to patients of PC in any facility, laboratory or health care operation
controlled, managed, or operated by Business Manager. Further, Business Manager
and PC agree that the payment of monies hereunder in no way represents the
division, sharing, splitting or other allocation of fees for Dental Services
between PC and Business Manager.
Section 2.4 INTERNAL MANAGEMENT OF PC. Matters involving the internal
management, control, or finances of PC, including specifically the allocation of
professional income among the shareholders and Dentist employees and independent
contractors of PC, tax planning, and investment planning, shall remain the
responsibility of PC and the shareholders of PC.
Section 2.5 PRACTICE OF DENTISTRY. The parties acknowledge that Business
Manager is not authorized or qualified to engage in any activity that may be
construed or deemed to constitute the practice of dentistry nor shall Business
Manager now or in the future be regarded as practicing dentistry within the
meaning of the Act. To the extent any act or service herein required by Business
Manager should be construed by a court of competent jurisdiction or by the State
Board of Dental Examiners to constitute the practice of dentistry, the
requirement to perform that act or service by Business Manager shall be deemed
waived and unenforceable and shall not constitute a breach or default by
Business Manager under this Agreement, and the parties shall take the actions
contemplated by Section 7.2(d) hereof.
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<PAGE>
ARTICLE III. RESPONSIBILITIES OF THE PC
Section 3.1 DUTIES AND RESPONSIBILITIES OF THE PC. The PC shall have the
following duties, obligations, and authority:
(a) CAPITAL IMPROVEMENTS AND EXPANSION. Any renovation and expansion
plans and capital equipment expenditures with respect to PC's facilities shall
be reviewed and approved by the PC and shall be based upon economic feasibility,
dentist support, productivity, technological innovations, competitive
alternatives, age of existing capital equipment, and then current market
conditions.
(b) MARKETING AND ADVERTISING. All marketing and other advertising of
the services performed at PC's facilities shall be subject to the prior review
and approval of the PC.
(c) PATIENT FEES; COLLECTION POLICIES. As a part of the Budget process,
in consultation with the Business Manager, PC shall establish the fee schedule
and approve the related collection policies for all Dental Services and
ancillary services rendered by PC.
(d) ANCILLARY SERVICES. The PC shall approve PC-provided ancillary
services based upon the pricing, access to and quality of such services.
(e) PROVIDER AND PAYOR RELATIONSHIPS. Decisions regarding the
establishment or maintenance of relationships with institutional health care
providers and third party payors shall be approved by the PC. The PC shall
review and approve all proposed reimbursement arrangements with third party
payors.
(f) STRATEGIC PLANNING. The PC shall develop long-term strategic
planning objectives, including but not limited to the acquisition of or merger
with any other dental practices in the Practice Territory.
(g) CAPITAL EXPENDITURES. The PC shall determine the priority of major
capital expenditures.
(h) DENTIST HIRING. The PC shall determine the number and type of
Dentists required for the efficient operation of PC's facilities. The PC shall
review and approve any variations to the restrictive covenants in any dentist
employment contract.
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PC shall consult with and receive the approval of Business Manager in
exercising and performing the duties, obligations and authority under Sections
3.1(a), (b), (f) and (g), the collection policies described in Section 3.1(c),
and the second sentence of Section 3.1(h).
Section 3.2 DENTAL TREATMENT DECISIONS. Despite the above listing of
activities and areas of interest, all decisions relating directly or indirectly
to the practice of dentistry will be made solely by PC, but Business Manager may
participate in the discussion process. PC shall review and shall have exclusive
jurisdiction over the resolution of issues relating to:
(a) Types and levels of Dental Services to be provided;
(b) Recruitment of dentists to PC, including the specific
qualifications and specialties of recruited dentists;
(c) Fee schedules; and
(d) Any other function or decision relating to the practice of
dentistry.
ARTICLE IV. COVENANTS AND RESPONSIBILITIES OF BUSINESS MANAGER
During the Term, Business Manager shall provide all Management Services
as are necessary and appropriate for the day-to-day administration of the
business aspects of PC's operations, including without limitation those set
forth in this Article IV in accordance with all law, rules, regulations and
guidelines applicable to the provision of Management Services.
Section 4.1 CENTERS AND EQUIPMENT.
(a) Subject to Section 4.1(b), as necessary and appropriate, taking into
consideration the professional concerns of PC, Business Manager shall in its
reasonable discretion lease, acquire or otherwise procure Centers in a location
or locations reasonably acceptable to PC and shall permit PC to use each such
Center pursuant to this Management Services Agreement, by sublease or otherwise
as required by law.
(b) PC shall not enter into any lease or sublease with respect to a
Center without Business Manager's prior consent. In the event PC is the lessee
of any Center under a lease with an unrelated and nonaffiliated lessor, Business
Manager may require PC to assign such lease to Business Manager upon receipt of
consent from the lessor and Business Manager shall permit PC to use such Center
pursuant to this Management Services Agreement, by sublease or otherwise
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<PAGE>
as required by law. PC shall use its best efforts to assist in obtaining the
lessor's consent to the assignment. Upon request, PC shall execute any
instruments and shall take any acts that Business Manager may deem necessary to
accomplish the assignment of the lease. Any expenses incurred in the assignment
shall be Office Expenses.
(c) Business Manager shall provide all nondental equipment, fixtures,
office supplies, furniture and furnishings deemed reasonably necessary by
Business Manager for the operation of each Center and reasonably necessary for
the provision of Dental Services pursuant to this Management Services Agreement,
by lease, sublease or otherwise as required by law.
(d) Business Manager shall provide, finance, or cause to be provided or
financed dental related equipment as required by PC. Subject to economic
feasibility, PC shall have final authority in all dental equipment selections,
and Business Manager shall have no authority in regard to dental equipment
selection issues. Business Manager may, however, advise PC on the relationship
between its dental equipment decisions and the overall administrative and
financial operations of the practice. All dental and nondental equipment
acquired for the use of PC shall be owned by Business Manager.
(e) Business Manager shall be responsible for the repair and maintenance
of each Center, consistent with Business Manager's responsibilities under the
terms of any lease or other use arrangement, and for the repair, maintenance,
and replacement of all equipment other than such repairs, maintenance and
replacement necessitated by the negligence or willful misconduct of PC, its
Dentists or other personnel retained by PC, the repair or replacement of which
shall be a PC Expense and not an Office Expense.
Section 4.2 DENTAL SUPPLIES. Business Manager shall order, procure,
purchase and provide on behalf of and as agent for PC all dental supplies
necessary and appropriate for the practice of PC in the reasonable discretion of
PC unless otherwise prohibited by federal and/or State law. Furthermore,
Business Manager shall ensure that each Center is at all times adequately
stocked with the dental supplies that are necessary and appropriate for the
operation of PC and required for the provision of Dental Services. The ultimate
oversight, supervision and ownership for all dental supplies is and shall remain
the sole responsibility of PC. As used in this provision the term "dental
supplies" shall mean all drugs, pharmaceuticals, products, substances, items or
devices whose purchase, possession, maintenance, administration, prescription or
security requires the authorization or order of a licensed health care provider
or requires a permit, registration, certification or other governmental
authorization held by a licensed health care provider as specified under any
federal and/or State law.
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Section 4.3 SUPPORT SERVICES. Business Manager shall provide or arrange
for all printing, stationery, forms, postage, duplication or photocopying
services, and other support services as are reasonably necessary and appropriate
for the operation of each Center and the provision of Dental Services therein.
Section 4.4 QUALITY ASSURANCE, RISK MANAGEMENT, AND UTILIZATION REVIEW.
Business Manager shall, upon the request of PC, assist PC in PC's establishment
of procedures to ensure the consistency, quality, appropriateness and necessity
of Dental Services provided by PC, and shall provide administrative support for
PC's overall quality assurance, risk management, and utilization review
programs. Business Manager shall perform these tasks in a manner to ensure the
confidentiality and nondiscoverability of these program actions to the fullest
extent allowable under State and federal law.
Section 4.5 LICENSES AND PERMITS. Business Manager shall, on behalf of
and in the name of PC, coordinate all development and planning processes, and
apply for and use reasonable efforts to obtain and maintain all federal, State,
and local licenses and regulatory permits required for or in connection with the
operation of PC and equipment (existing and future) located at each Center,
other than those relating to the practice of dentistry or the administration of
drugs by Dentists retained by or associated with PC.
Section 4.6 PERSONNEL. Except as specifically provided in Section 5.2(b)
of this Management Services Agreement, Business Manager shall, consistent with
the Budget, retain and shall be responsible for selecting, hiring, training,
supervising, and terminating, all management, administrative, clerical,
secretarial, bookkeeping, accounting, payroll, billing and collection and other
nonprofessional personnel as Business Manager deems reasonably necessary and
appropriate to enable Business Manager to perform its duties and obligations
under this Management Services Agreement. Business Manager shall, consistent
with the Budget, have sole responsibility for determining the salaries and
providing such fringe benefits, and for withholding, as required by law, any
sums for income tax, unemployment insurance, social security, or any other
withholding required by applicable law or governmental requirement.
Section 4.7 CONTRACT NEGOTIATIONS. Business Manager shall advise PC with
respect to and negotiate, either directly or on PC's behalf, as appropriate and
allowed by law, all contractual arrangements between PC and third parties as are
reasonably necessary and appropriate for PC's provision of Dental Services,
including, without limitation, negotiated price agreements with third party
payors, alternative delivery systems, or other purchasers of group health care
services.
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Section 4.8 BILLING AND COLLECTION. On behalf of and for the account of
PC, Business Manager shall establish and maintain credit and billing and
collection policies and procedures, and shall timely bill and collect all
professional and other fees for all Dental Services provided by PC, or Dentists
retained by PC. Business Manager shall advise and consult with PC regarding the
fees for Dental Services provided by PC; it being understood, however, that PC
shall establish the fees to be charged for Dental Services and that Business
Manager shall have no authority whatsoever with respect to the establishment of
such fees. In connection with the billing and collection services to be provided
hereunder, and throughout the Term (and thereafter as provided in Section 7.3),
PC hereby grants to Business Manager a special power of attorney and appoints
Business Manager as PC's exclusive true and lawful agent and attorney-in-fact,
and Business Manager hereby accepts such special power of attorney and
appointment, for the following purposes:
(a) To bill PC's patients, in PC's name and on PC's behalf, for all
Dental Services provided by PC to patients.
(b) To bill, in PC's name and on PC's behalf, all claims for
reimbursement or indem nification from Blue Shield/Blue Cross, insurance
companies and all other third party payors or fiscal intermediaries for all
covered billable Dental Services provided by PC to patients.
(c) To collect and receive in Business Manager's name and for Business
Manager's account all accounts receivable of PC purchased by Business Manager,
and to deposit such collections in an account selected by Business Manager and
maintained in Business Manager's name.
(d) To collect and receive, in PC's name and on PC's behalf, all
accounts receivable generated by such billings and claims for reimbursement that
have not been purchased by Business Manager, to administer such accounts
including, but not limited to, (i) extending the time of payment of any such
accounts for cash, credit or otherwise; (ii) discharging or releasing the
obligors of any such accounts; (iii) suing, assigning or selling at a discount
such accounts to collection agencies; or (iv) taking other measures to require
the payment of any such accounts.
(e) To deposit all amounts collected under clause (d) above into PC
Account which shall be and at all times remain in PC's name. PC covenants to
transfer and deliver to Business Manager for deposit into PC Account (or, with
respect to accounts receivable purchased by Business Manager, Business Manager's
account) all funds received by PC from patients or third party payors for Dental
Services. Upon receipt by Business Manager of any funds from patients or third
party payors or from PC pursuant hereto for Dental Services, Business Manager
shall immediately deposit those that relate to accounts receivable covered by
clause (d) above into the
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PC Account. Business Manager shall disburse such deposited funds to creditors
and other persons on behalf of PC, maintaining records of such receipt and
disbursement of funds in accordance with Section 4.9(b).
(f) To take possession of, endorse in the name of PC, and deposit into
the PC Account any notes, checks, money orders, insurance payments, and any
other instruments received in payment for Dental Services that relate to
accounts receivable covered by clause (d) above.
(g) To sign checks, drafts, bank notes or other instruments on behalf of
PC, and to make withdrawals from the PC Account for payments specified in this
Management Services Agreement.
Upon request of Business Manager, PC shall execute and deliver to the financial
institution wherein the PC Account is maintained, such additional documents or
instruments as may be neces sary to evidence or effect the special and limited
power of attorney granted to Business Manager by PC pursuant to this Section 4.8
or pursuant to Section 4.9 of this Management Services Agreement. The special
and limited power of attorney granted herein shall be coupled with an interest
and shall be irrevocable except with Business Manager's written consent. The
irrevocable power of attorney shall expire on the later of when this Management
Services Agreement has been terminated, when all accounts receivable purchased
by Business Manager have been collected, or when all Management Fees due to
Business Manager have been paid. If Business Manager assigns this Management
Services Agreement in accordance with its terms, then PC shall execute a power
of attorney in favor of the assignee including substantially the same terms set
forth in this Section 4.8.
Section 4.9 PC ACCOUNT.
(a) ACCESS. Business Manager shall have access to the PC Account solely
for the purposes contemplated hereby.
(b) PRIORITY OF PAYMENTS. Business Manager shall apply on a monthly
basis, except as otherwise stated hereunder, funds that are in the PC Account in
the following order of priority: (i) PC Expenses on behalf and in the name of
PC; (ii) Office Expenses (other than the Management Fee); (iii) Management Fees;
and (iv) any other expenditures.
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Section 4.10 FISCAL MATTERS.
(a) ANNUAL BUDGET.
(1) INITIAL BUDGET. The initial Budget shall be agreed upon and
approved in writing by the parties within a reasonable period following
the execution of this Management Services Agreement.
(2) PROCESS FOR SUCCEEDING BUDGETS. Annually and at least thirty
(30) days prior to the commencement of each fiscal year of PC, Business
Manager, in consultation with PC, shall prepare and deliver to PC for
PC's approval a proposed Budget, setting forth an estimate of PC's
revenues and expenses for the upcoming fiscal year (including, without
limitation, the cash requirements to operate the business, including the
payment of expenses, and the Management Fee associated with the services
provided by Business Manager hereunder). PC shall review the proposed
Budget and either approve the proposed Budget or request any changes
within fifteen (15) days after receiving the proposed Budget. The Budget
shall be adopted by PC after its approval thereof and may be revised or
modified only in consultation with the Business Manager. PC shall not be
in default of any of its obligations hereunder if PC fails to perform
because it lacks sufficient funds to perform its required functions.
(3) DEADLOCK. In the event the parties are unable to agree on a
Budget by the beginning of the fiscal year, until an agreement is
reached, the Budget for the prior year shall be deemed to be adopted as
the Budget for the current year, with each line item in the Budget
increased or decreased by (i) the percentage by which the Adjusted Gross
Revenue in the current year has increased or decreased compared to the
corresponding period of the prior year; (ii) the increase or decrease
from the prior year in the Consumer Price Index - Health/Medical
Services, New York, New York area; and (iii) the proportionate increase
or decrease in mutually agreed upon personnel costs as measured by the
increase or decrease in full-time-equivalent personnel.
(4) OBLIGATION OF BUSINESS MANAGER. Business Manager shall use
commercially reasonable efforts to manage and administer the operations
of PC as herein provided so that the actual revenues, costs and expenses
of the operation and maintenance of PC during any applicable period of
PC's fiscal year shall be consistent with the Budget.
(b) ACCOUNTING AND FINANCIAL RECORDS. Business Manager shall establish
and administer accounting procedures, controls, and systems for the development,
preparation, and
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safekeeping of administrative or financial records and books of account relating
to the business and financial affairs of PC and the provision of Dental
Services, all of which shall be prepared and maintained in accordance with GAAP
and applicable laws and regulations. Business Manager shall prepare and deliver
to PC, within one hundred twenty (120) days of the end of each calendar year, a
balance sheet and a profit and loss statement reflecting the financial status of
PC in regard to the provision of Dental Services as of the end of such calendar
year, all of which shall be prepared in accordance with GAAP consistently
applied. In addition, Business Manager shall prepare or assist in the
preparation of any other financial statements or records as PC may reasonably
request.
(c) REVIEW OF EXPENDITURES. PC shall review all expenditures related to
the operation of PC, but PC shall not have the power to prohibit or invalidate
any expenditure that is consistent with the Budget. Business Manager shall not
have any authority to make any expenditures not consistent with the Budget
without PC Consent.
(d) TAX MATTERS.
(1) IN GENERAL. Business Manager shall prepare or arrange for
the preparation by an accountant approved in advance by PC
(which approval shall not be unreasonably withheld) of all
appropriate tax returns and reports required of PC.
(2) SALES AND USE TAXES. Business Manager and PC acknowledge
and agree that to the extent that any of the services to
be provided by Business Manager hereunder may be subject
to any State sales and use taxes, Business Manager may
have a legal obligation to collect such taxes from PC and
to remit same to the appropriate tax collection
authorities. PC agrees to pay in addition to the payment
of the Management Fee, the applicable State sales and use
taxes in respect of the portion of the Management Fees
attributable to such services.
Section 4.11 REPORTS AND RECORDS. Business Manager shall establish,
monitor, and maintain procedures and policies for the timely creation,
preparation, filing and retrieval of all dental records generated by PC in
connection with PC's provision of Dental Services; and, subject to applicable
law, shall use its best efforts to ensure that dental records are promptly
available to Dentists and any other appropriate persons. All such dental records
shall be retained and maintained in accordance with all applicable State and
federal laws relating to the confidentiality and retention thereof. All dental
records shall be and remain at all times the property and under
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the control of PC and shall be located at the applicable Center so that they are
readily available for patient care, and PC shall remain the custodian thereof
and responsible for their maintenance. Business Manager shall use its reasonable
efforts to preserve the confidentiality of dental records and use information
contained in such records only for the limited purpose necessary to perform the
services set forth herein; provided, however, in no event shall a breach of said
confidentiality be deemed a default under this Agreement. PC and its
shareholders shall not be liable to Business Manager if Business Manager
misplaces patient records through no act of PC or its shareholder.
Section 4.12 RECRUITMENT OF PC DENTISTS. Upon PC's request, Business
Manager shall perform all administrative services reasonably necessary and
appropriate to recruit potential Dentist personnel to become employees of PC.
Business Manager shall provide PC with model agreements to document PC's
employment, retention or other service arrangements with such indi viduals. It
will be and remain the sole and complete responsibility of PC to interview,
select, contract with, supervise, control and terminate all Dentists performing
Dental Services or other professional services, and Business Manager shall have
no authority whatsoever with respect to such activities.
Section 4.13 BUSINESS MANAGER'S INSURANCE. Throughout the Term, Business
Manager shall, as an Office Expense, obtain and maintain with commercial
carriers, through self-insurance or some combination thereof, appropriate
worker's compensation coverage for Business Manager's personnel provided
pursuant to this Management Services Agreement, and professional, casualty and
comprehensive general liability insurance covering Business Manager, Business
Manager's personnel, and all of Business Manager's equipment in such amounts, on
such basis and upon such terms and conditions as Business Manager deems
appropriate. Upon the request of PC, Business Manager shall provide PC with a
certificate evidencing such insurance coverage. Business Manager may also carry,
as an Office Expense, key person life and disability insurance on any
shareholder or Dentist employee of PC in amounts determined reasonable and
sufficient by Business Manager. Business Manager shall be the owner and
beneficiary of any such insurance.
Section 4.14 NO WARRANTY. PC acknowledges that Business Manager has not
made and will not make any express or implied warranties or representations that
the services provided by Business Manager will result in any particular amount
or level of dental practice or income to PC.
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ARTICLE V. COVENANTS OF PC
Section 5.1 ORGANIZATION AND OPERATION. PC, as a continuing condition of
Business Manager's obligations under this Management Services Agreement, shall
at all times during the Term be and remain legally organized and operated to
provide Dental Services in a manner consistent with all State and federal laws.
PC shall operate and maintain within the Practice Territory a full time practice
of dentistry specializing in the provision of Dental Services.
Section 5.2 PC PERSONNEL AND SHAREHOLDERS.
(a) DENTAL PERSONNEL. PC shall retain, as a PC Expense and not as an
Office Expense, that number of Dentists as are reasonably necessary and
appropriate in the sole discretion of PC for the provision of Dental Services.
Each Dentist retained by PC shall hold and maintain a valid and unrestricted
license to practice dentistry in the State, and shall be competent in the
practice of dentistry, including any subspecialties that the retained Dentist
will practice on behalf of PC. PC shall enter into, maintain and enforce with
each such retained Dentist a written employment or other agreement in a form
reasonably satisfactory to PC and Business Manager which will include provisions
that will permit PC to be in compliance with its obligations under Sections 5.6,
5.7 and 5.8, and will not commit and permit to remain outstanding any breach of
such employment or other agreement that would allow the Dentist to terminate for
cause. No such employment or other contract may be amended without the prior
written consent of Business Manager. PC shall be responsible for paying the
compensation and benefits, as applicable, for all Dentists and any other dental
personnel or other contracted or affiliated dentists, and for withholding, as
required by law, any sums for income tax, unemployment insurance, social
security, or any other withholding required by applicable law. Business Manager
may, on behalf of PC, establish and administer the compensation with respect to
such individuals in accordance with the written agreement between PC and each
Dentist. Business Manager shall neither control nor direct any Dentist in the
performance of Dental Services for patients.
(b) EMPLOYMENT OF NON-DENTIST DENTAL CARE PERSONNEL. PC shall retain as
employees or independent contractors, as an Office Expense, all non-dentist
dental care personnel, such as dental assistants, dental hygienists and dental
technicians, required under the Act or otherwise required by law to work under
the direct supervision of a Dentist or who Business Manager and PC determine
should work under the direct supervision of a Dentist. Such non-dentist dental
care personnel shall be under PC's control, supervision and direction in the
performance of Dental Services for patients.
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Section 5.3 PROFESSIONAL STANDARDS. As a continuing condition of
Business Manager's obligations hereunder, each Dentist and any other dental
personnel retained by PC to provide Dental Services must (i) comply with, be
controlled and governed by and otherwise provide Dental Services in accordance
with the code of professional conduct and applicable federal, State and
municipal laws, rules, regulations, ordinances and orders, and the ethics and
standard of care of the dental community wherein any Center is located, and (ii)
obtain and retain appropriate dental staff membership with appropriate clinical
privileges at any hospital or health care facility at which Dental Services are
to be provided. Procurement of temporary staff privileges pending the completion
of the dental staff approval process shall satisfy this provision, provided the
Dentist actively pursues full appointment and actually receives full appointment
within a reasonable time.
Section 5.4 DENTAL SERVICES. PC shall ensure that Dentists and
non-dentist dental care personnel are available to provide Dental Services to
patients. In the event that Dentists are not available to provide Dental
Services coverage, PC shall engage and retain LOCUM TENENS coverage as it deems
reasonable and appropriate based on patient care requirements. Dentists retained
on a LOCUM TENENS basis shall meet all of the requirements of Section 5.3, and
the cost of providing LOCUM TENENS coverage shall be a PC Expense. With the
assistance of the Business Manager, PC and the Dentists shall be responsible for
scheduling Dentist and non-dentist dental care personnel coverage of all dental
procedures. PC shall cause all Dentists to develop and promote PC.
Section 5.5 PEER REVIEW/QUALITY ASSURANCE. PC shall adopt a peer
review/quality assessment program to monitor and evaluate the quality and
cost-effectiveness of Dental Services provided by dental personnel of PC. Upon
request of PC, Business Manager shall provide administrative assistance to PC in
performing its peer review/quality assurance activities, but only if such
assistance can be provided consistent with maintaining the confidentiality and
nondiscoverability of the processes and actions of the Peer Review/Quality
Assurance process of PC and not be regarded as practicing dentistry under the
Act.
Section 5.6 PC'S INSURANCE. PC shall, as an Office Expense, obtain and
maintain with commercial carriers acceptable to Business Manager appropriate
worker's compensation coverage for PC's retained personnel, if any, and
professional and comprehensive general liability insurance covering PC. PC shall
use its best efforts to require each of the Dentists PC retains to provide
Dental Services to obtain and maintain professional liability insurance in the
minimum amount of Five Hundred Thousand Dollars ($500,000) for each occurrence
and One Million Five Hundred Thousand Dollars ($1,500,000) annual aggregate,
naming PC as an additional insured. The comprehensive general liability coverage
shall be in the minimum amount of One Million Dollars ($1,000,000) for each
occurrence and Two Million Dollars ($2,000,000) annual aggregate; and
professional
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liability coverage shall be in the minimum amount of Five Hundred Thousand
Dollars ($500,000) for each occurrence and One Million Five Hundred Thousand
Dollars ($1,500,000) annual aggregate. All insurance policies, including those
obtained by Dentists retained by PC, shall provide for at least thirty (30) days
advance written notice to PC from the insurer as to any alteration of coverage,
cancellation, or proposed cancellation for any cause, and provide that a copy of
such notice be sent to Business Manager. PC and each Dentist retained by PC
shall cause to be issued to Business Manager by such insurer or insurers a
certificate reflecting such coverage and shall provide written notice to
Business Manager promptly upon receipt of notice given to Dentist of the
cancellation or proposed cancellation of such insurance for any cause. Upon the
termination of this Management Services Agreement for any reason, PC shall
obtain and maintain as a PC Expense "tail" professional liability coverage, in
the amounts specified in this section for an extended reporting period of 15
years, and PC shall be responsible for paying all premiums for "tail" insurance
coverage. In no event shall the professional liability insurance carrier be
replaced or changed without PC Consent and Business Manager Consent. PC and
Business Manager agree to use their best efforts to have each other named as
additional insureds on the other's respective professional liability insurance
at Business Manager's expense.
Section 5.7 CONFIDENTIAL AND PROPRIETARY INFORMATION. PC will not
disclose any Confidential Information of Business Manager without Business
Manager's express written authorization, such Confidential Information will not
be used in any way directly or indirectly detrimental to Business Manager, and
PC will keep such Confidential Information confidential and will ensure that its
affiliates and advisors who have access to such Confidential Information comply
with these nondisclosure obligations; provided, however, that PC may disclose
Confidential Information to those of its Representatives who need to know
Confidential Information for the purposes of this Management Services Agreement,
it being understood and agreed to by PC that such Representatives will be
informed of the confidential nature of the Confidential Information, will agree
to be bound by this Section, and will be directed by PC not to disclose to any
other person any Confidential Information. PC agrees to be responsible for any
breach of this Section by its Representatives. If PC is requested or required
(by oral questions, interrogatories, requests for information or documents,
subpoenas, civil investigative demands, or similar processes) to disclose or
produce any Confidential Information furnished in the course of its dealings
with Business Manager or its affiliates, advisors, or Representatives, PC will
(i) provide Business Manager with prompt notice thereof and copies, if possible,
and, if not, a description, of the Confidential Information requested or
required to be produced so that Business Manager may seek an appropriate
protective order or waive compliance with the provisions of this Section and
(ii) consult with Business Manager as to the advisability of Business Manager's
taking of legally available steps to resist or narrow such request. PC further
agrees that, if in the absence of a protective order or the receipt of a waiver
hereunder PC is nonetheless, in the written
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opinion of its legal counsel, compelled to disclose or produce Confidential
Information concerning Business Manager to any tribunal or to stand liable for
contempt or suffer other censure or penalty, PC may disclose or produce such
Confidential Information to such tribunal legally authorized to request and
entitled to receive such Confidential Information without liability hereunder;
provided, however, that PC shall give Business Manager written notice of the
Confidential Information to be so disclosed or produced as far in advance of its
disclosure or production as is practicable and shall use its best efforts to
obtain, to the greatest extent practicable, an order or other reliable assurance
that confidential treatment will be accorded to such Confidential Information so
required to be disclosed or produced.
Section 5.8 NONCOMPETITION. PC hereby recognizes and acknowledges that
Business Manager will incur substantial costs in providing the equipment,
support services, personnel, management, administration, and other items and
services that are the subject matter of this Management Services Agreement and
that in the process of providing services under this Management Services
Agreement, PC will be privy to financial and Confidential Information, to which
PC would not otherwise be exposed. The parties also recognize that the services
to be provided by Business Manager will be feasible only if PC operates an
active practice to which the Dentists associated with PC devote sufficient
professional time and attention. PC agrees and acknowledges that the
noncompetition covenants described hereunder are important for the protection of
Business Manager and that Business Manager would not have entered into this
Management Services Agreement without the possibility of obtaining the following
covenants.
(a) During the Term of this Management Services Agreement and except for
its obligations pursuant to this Management Services Agreement, PC shall not
establish, operate, or provide Dental Services at a dental office, clinic or
other health care facility anywhere within the Practice Territory.
(b) Except as specifically agreed to by Business Manager in writing, PC
covenants and agrees that during the Term of this Management Services Agreement
and for a period of five (5) years from the date this Management Services
Agreement is terminated, PC shall not directly or indirectly own (excluding
passive ownership of less than five percent (5%) of the equity of any publicly
traded entity), manage, operate, control, or be otherwise associated with, lend
funds to, lend its name to, or maintain any interest whatsoever in any
enterprise (i) having to do with the provision, distribution, promotion, or
advertising of any type of management or administrative services or products to
third parties in competition with Business Manager, in the Practice Territory;
and/or (ii) offering any type of service(s) or product(s) to third parties
substantially similar to those offered by Business Manager to PC in the Practice
Territory. Notwithstanding the above restriction, nothing herein shall prohibit
PC or any of its shareholders from providing
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management and administrative services to its or their own dental practices
after the termination of this Management Services Agreement. Moreover, nothing
contained herein shall be construed or interpreted as intending to prohibit a
shareholder of PC form owning and operating AMLI substantially in the manner
presently operated, including but not limited to the negotiation of managed care
and indemnity contracts, which include without limitation, a dual choice option.
(c) The written employment agreements described in Section 5.2 may
contain covenants of the full-time employees pursuant to which such employees
agree not to compete with PC within the Practice Territory for one (1) year
after termination of the employment agreement in accordance with the terms,
conditions and limitations contained therein.
(d) PC may obtain formal written agreements from its full-time dentist
employees in the form of Exhibit 5.2(a), pursuant to which such the employees
agree not to compete with PC within the Noncompetition Territory (as defined in
such employment agreements) for one (1) year after termination of the employment
agreement in accordance with the terms, conditions and limitations contained
therein.
(e) PC understands and acknowledges that the foregoing provisions in
Section 5.7 and Section 5.8, including without limitation the failure to enter
into required contractual relations and to enforce them, are designed to
preserve the goodwill of Business Manager and the goodwill of the individual
Dentists of PC. Accordingly, if PC breaches any obligation of Section 5.7 or
Section 5.8, in addition to any other remedies available under this Management
Services Agreement, at law or in equity, Business Manager shall be entitled to
enforce this Management Services Agreement by injunctive relief and by specific
performance of the Management Services Agreement. Additionally, nothing in this
paragraph shall limit Business Manager's right to recover any other damages to
which it is entitled as result of PC's breach. If any provision of the covenants
is held by a court of competent jurisdiction to be unenforceable due to an
excessive time period, geographic area, or restricted activity, the covenant
shall be reformed to comply with such time period, geographic area, or
restricted activity that would be held enforceable.
(f) Business Manager acknowledges that the rights of Business Manager in
this Agreement, including without limitation those described in Section 5.8, are
to be enforced solely against PC and not against any officer, director or
shareholder of PC in their individual capacity.
Section 5.9 NAME, TRADEMARK. PC represents and warrants that, as of the
date hereof, PC conducts its professional practice under the name of, and only
under the name of "American Dental Centers" and that such name has been licensed
to PC by Business Manager. PC covenants and promises that, without the prior
written consent of the Business Manager, PC will not:
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CONFIDENTIAL TREATMENT REQUESTED. THE
REDACTED MATERIAL HAS BEEN SEPARATELY
FILED WITH THE COMMISSION.
(a) take any action or omit to take any action that is reasonably likely
to result in the change or loss of the name;
(b) license, sell, give, or otherwise transfer the name or the right to
use the name to any dental practice, dentist, professional corporation, or any
other entity; or
(c) cease conducting the professional practice of PC under the name.
Section 5.10 PEER REVIEW. PC shall designate a committee of Dentists to
function as a dental peer review committee to review credentials of potential
recruits, perform quality assurance functions, and otherwise resolve dental
competence issues. The dental peer review committee shall function pursuant to
formal written policies and procedures.
Section 5.11 INDEMNIFICATION. PC (but not its officers, directors or
shareholders) shall indemnify, hold harmless and defend Business Manager, its
officers, directors and employees, from and against any and all liability, loss,
damage, claim, causes of action and expenses (including reasonable attorneys'
fees), whether or not covered by insurance, caused or asserted to have been
caused, directly or indirectly, by or as a result of the performance of Dental
Services or any other acts or omissions by PC and/or its shareholders, agents,
employees and/or subcontractors (other than Business Manager) during the term
hereof. Business Manager shall indemnify, hold harmless and defend PC, its
officers, directors and shareholders from and against any and all liability,
loss, damage, claim, causes of action and expenses (including reasonable
attorneys' fees), caused or asserted to have been caused, directly or
indirectly, by or as a result of the performance of any intentional acts,
negligent acts, or omissions by Business Manager and/or its shareholders,
agents, employees and/or subcontractors (other than PC) during the term of this
Agreement.
ARTICLE VI. FINANCIAL ARRANGEMENT
Section 6.1 MANAGEMENT FEE. PC and Business Manager agree that as
compensation to Business Manager for the substantial commitment being made and
to be made by Business Manager hereunder, PC agrees that Business Manager shall
receive as payment for the Management Services performed hereunder (i) the
amount of all Office Expenses paid by the Business Manager on behalf of PC; and
(ii) a Management Fee equal to REDACTED% of the Office Expenses paid by Business
Manger on behalf of PC to cover interest and overhead expenses plus a reasonable
profit. The Management Fee shall be paid in the priority established by Section
4.9(b). PC and Business Manger agree that the fees set forth herein are fair and
reasonable and
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reflect the fair market value of the services rendered. The obligation to pay
Management Fees is an obligation of PC and not its officers, directors, or
shareholders.
Section 6.2 SHORTFALLS. If there are not sufficient funds to pay the
Management Fee, all unpaid amounts shall accumulate and carry over from month to
month until paid or until the termination of this Management Services Agreement,
in which case such unpaid amounts shall be immediately due and payable as of the
date of termination. Amounts carried over shall earn interest at the rate of ten
percent (10%) per annum.
Section 6.3 REASONABLE VALUE. Payment of the Management Fee is not
intended to be and shall not be interpreted or applied as permitting Business
Manager to share in PC's fees for Dental Services or any other services, but is
acknowledged as the parties' negotiated agreement as to the reasonable fair
market value of the equipment, contract analysis and support, other support
services, purchasing, personnel, office space, management, administration,
strategic management and other items and services furnished by Business Manager
pursuant to this Management Services Agreement, considering the nature and
volume of the services required and the risks assumed by Business Manager.
Section 6.4 PAYMENT OF MANAGEMENT FEE. To facilitate the payment of the
Management Fee as provided in Section 6.1 hereof, PC hereby expressly authorizes
Business Manager to make withdrawals of the Management Fee from the PC Account
in accordance with Section 4.9(b) and as such fee becomes due and payable during
the Term and thereafter as provided in Section 7.3.
Section 6.5 PERIODIC ADJUSTMENT OF COMPENSATION. The parties hereto
recognize that the Management Services may change in size and scope over the
term of this Management Services Agreement which may necessitate adjusting the
fees provided for herein. Therefore, the parties shall review the compensation
to Business Manager no less frequently than annually. Such review shall consider
the scope of Management Services performed pursuant to this Management Services
Agreement at the time of review, the size and number of facilities being
supplied by the Business Manager, the scope of the services and similar matters.
Any adjustment shall be effective retroactively.
Section 6.6 ACCOUNTS RECEIVABLE. To assure that PC receives the entire
amount of professional fees for its services and to assist PC in maintaining
reasonable cash flow for the payment of Office Expenses, Business Manager may,
during the Term, purchase, without recourse to PC for the amount of the
purchase, the accounts receivable of PC arising during the previous month by
transferring the amount set forth below into the PC Account. The consideration
for the purchase shall be an amount equal to the Adjusted Gross Revenue recorded
each month (according
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to GAAP reflecting adjustments related to the bad debt reserve). Business
Manager shall be entitled to offset Office Expenses reimbursement due to
Business Manager under Section 6.2 above against the amount payable for the
accounts receivable. Although it is the intention of the parties that Business
Manager purchase and thereby become the owner of the accounts receivable of PC,
in the event such purchase shall be ineffective for any reason, PC is
concurrently herewith granting to Business Manager a security interest in the
accounts so purchased, and PC shall cooperate with Business Manager and execute
all documents in connection with the pledge of such purchased accounts
receivable to Business Manager. All collections in respect to such accounts
receivable purchased by Business Manager shall be received by Business Manager
as the agent of PC and shall be endorsed to Business Manager and deposited in a
bank account at a bank designated by Business Manager. To the extent PC comes
into possession of any payments in respect of such accounts receivable, PC shall
direct such payments to Business Manager for deposit in bank accounts designated
by Business Manager.
Section 6.7 DISPUTES REGARDING FEES. PC shall not be entitled to a
set-off or reduction in the Management Fees payable hereunder by reason of its
belief that Business Manager has failed to perform its obligations hereunder or
otherwise.
ARTICLE VII. TERM AND TERMINATION
Section 7.1 INITIAL AND RENEWAL TERM. The Term of this Management
Services Agreement will be for an initial period of forty (40) years after the
effective date, and shall be automatically renewed for successive five (5) year
periods thereafter, provided that neither Business Manager nor PC shall have
given notice of termination of this Management Services Agreement at least
ninety (90) days before the end of the initial term or any renewal term, or un
less otherwise terminated as provided in Section 7.2 of this Management Services
Agreement.
Section 7.2 TERMINATION.
(a) TERMINATION BY BUSINESS MANAGER. Subject to Section 7.2(c), Business
Manager may only terminate this Management Services Agreement either without
cause upon ninety (90) days' written notice to PC, or upon the occurrence of any
one of the following events which shall be deemed to be "for cause":
(i) The dissolution of PC or the filing of a petition in
voluntary bankruptcy, an assignment for the benefit of
creditors, or other action taken voluntarily or
involuntarily under any State or federal statute for the
protection of debtors;
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(ii) PC materially defaults in the performance of any of its
material duties or obligations hereunder, and such default
continues uncured for thirty (30) days after PC receives
notice of the default.
(b) TERMINATION BY PC. Subject to Section 7.2(c) PC may only terminate
this Management Services Agreement upon any of the following occurrences which
shall be deemed to be "for cause":
(i) The dissolution of Business Manager or the filing of a
petition in voluntary bankruptcy, an assignment for the
benefit of creditors, or other action taken voluntarily or
involuntarily under any State or federal statute for the
protection of debtors;
(ii) In the event that Business Manager materially defaults in
the performance of any of its material obligations
hereunder and such default continues uncured for sixty
(60) days after Business Manager receives notice of the
default.
Termination by PC hereunder shall require the affirmative vote of three-fourths
of the outstanding voting shares of the common shareholders of PC entitled to
vote. Business Manager shall be given 15 days prior written notice of any such
vote.
(c) TERMINATION BY AGREEMENT. In the event PC and Business Manager shall
mutually agree in writing, this Management Services Agreement may be terminated
on the date specified in such written agreement.
(d) LEGISLATIVE, REGULATORY OR ADMINISTRATIVE CHANGE. In the event there
shall be a change in the Act, any federal or State statutes, case laws,
regulations or general instructions, the interpretation of any of the foregoing,
the adoption of new federal or State legislation, or a change in any third party
reimbursement system, any of which are reasonably likely to adversely affect the
manner in which either party may perform or be compensated for its services
under this Management Services Agreement or which shall make this Management
Services Agreement unlawful, the parties shall immediately enter into good faith
negotiations regarding a new service arrangement or basis for compensation for
the services furnished pursuant to this Management Services Agreement that
complies with the law, regulation, or policy and that approximates as closely as
possible the economic position of the parties prior to the change. If good faith
negotiations cannot resolve the matter, it shall be submitted to arbitration as
referenced in Section 8.6; provided however that in the event that the New York
State Board of Dental Examiners issues
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a final and non-appealable order revoking the license of any Dentist on the
grounds that PC's entering into and performing its obligations under this
Management Services Agreement is unlawful, PC may terminate this Management
Services Agreement upon thirty (30) days prior written notice. In no event
however, may Business Manager and PC be required to rescind this Management
Services Agreement or any other agreement between the parties as the result of
the occurrence of any event described in Section 7.2(d).
Section 7.3 EFFECTS OF TERMINATION. Upon termination of this Management
Services Agreement, as hereinabove provided, neither party shall have any
further obligations hereunder except for (i) obligations accruing prior to the
date of termination, including, without limitation, payment of the Management
Fees and PC Expenses relating to services provided prior to the termination of
this Management Services Agreement, and (ii) obligations, promises, or covenants
set forth herein that are expressly made to extend beyond the Term, including,
without limitation, the purchase of "tail" insurance as required by Section 5.6,
indemnities, which provisions shall survive the expiration or termination of
this Management Services Agreement for any reason, and noncompetition
provisions, which provisions shall survive the expiration or termination of this
Management Services Agreement by Business Manager for cause or by PC in breach
of this Agreement. In effectuating the provisions of this Section 7.3, PC
specifically acknowledges and agrees that Business Manager shall continue to
collect and receive on behalf of PC all cash collections from accounts
receivable in existence at the time this Management Services Agreement is
terminated, it being understood that such cash collections will represent, in
part, compensation to Business Manager for management services already rendered
and compensation on accounts receivable purchased by Business Manager. Upon the
expiration or termination of this Management Services Agreement for any reason
or cause whatsoever, Business Manager shall surrender to PC all books and
records pertaining to PC's dental practice.
ARTICLE VIII. MISCELLANEOUS
Section 8.1 ADMINISTRATIVE SERVICES ONLY. Nothing in this Management
Services Agreement is intended or shall be construed to allow Business Manager
to exercise control or direction over the manner or method by which PC and its
Dentists perform Dental Services or other professional health care services. The
rendition of all Dental Services, including, but not limited to, the
prescription or administration of drugs shall be the sole responsibility of PC
and its Dentists, and Business Manager shall not interfere in any manner or to
any extent therewith. Nothing contained in this Management Services Agreement
shall be construed to permit Business Manager to engage in the practice of
dentistry, it being the sole intention of the parties hereto that the services
to be rendered to PC by Business Manager are solely for the purpose of providing
nondental management and administrative services to PC so as to enable PC to
devote its full time
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and energies to the professional conduct of its dental practice and provision of
Dental Services to its patients and not to administration, or practice
management.
Section 8.2 STATUS OF CONTRACTOR; AGENCY. It is expressly acknowledged
that the parties hereto are independent contractors and that this Management
Services Agreement is intended to constitute Business Manager as PC's agent.
Nothing herein shall be construed to create an employer/employee, partnership,
or joint venture relationship, or to allow either to exercise control or
direction over the manner or method by which the other performs the services
that are the subject matter of this Management Services Agreement or to permit
Business Manager to take any action that would constitute the practice of
dentistry; provided always that the services to be provided hereunder shall be
furnished in a manner consistent with the standards governing such services and
the provisions of this Management Services Agreement. Each party understands and
agrees that (i) the other will not be treated as an employee for federal tax
purposes, (ii) neither will withhold on behalf of the other any sums for income
tax, unemployment insurance, social security, or any other withholding pursuant
to any law or requirement of any governmental body or make available any of the
benefits afforded to its employees, (iii) all of such payments, withholdings,
and benefits, if any, are the sole responsibility of the party incurring the
liability, and (iv) each will indemnify and hold the other harmless from any and
all loss or liability arising with respect to such payments, withholdings, and
benefits, if any.
Section 8.3 NOTICES. Any notice, demand, or communication required,
permitted, or desired to be given hereunder shall be in writing and shall be
served on the parties at the following respective addresses:
PC: J.V. LANE PROFESSIONAL CORPORATION, A NEW
YORK PROFESSIONAL CORPORATION, d/b/a
AMERICAN DENTAL CENTERS 35 Broadway
Hicksville, New York 11801
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with a copy to:
Mr. Michael G. Yamin
Kaufmann, Feiner, Yamin,
Gildin & Robbins, LLP
777 Third Avenue
New York, New York 10017
Business Manager: CASTLE DENTAL CENTERS OF NEW YORK, INC.
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056
or to such other address, or to the attention of such other person or officer,
as any party may by written notice designate. Any notice, demand, or
communication required, permitted, or desired to be given hereunder shall be
sent either (a) by hand delivery, in which case notice shall be deemed received
when actually delivered, (b) by prepaid certified or registered mail, return
receipt requested, in which case notice shall be deemed received five calendar
days after deposit, postage prepaid in the United States Mail, or (c) by a
nationally recognized overnight courier, in which case notice shall be deemed
received one business day after deposit with such courier.
Section 8.4 GOVERNING LAW. This Management Services Agreement shall be
governed by the laws of the State of New York applicable to agreements to be
performed wholly within the State. The law of the State was chosen by the
parties after negotiation to govern interpretation of this Management Services
Agreement because New York County, New York is the seat of management for
Business Manager. The federal and State courts of New York County, New York
shall be the exclusive venue for any litigation, special proceeding, or other
proceeding between the parties that may arise out of, or be brought in
connection with or by reason of, this Management Services Agreement.
Section 8.5 ASSIGNMENT. Except as may be herein specifically provided to
the contrary, this Management Services Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective legal
representatives, successors, and assigns; provided, however, that PC may not
assign this Management Services Agreement without the prior written consent of
Business Manager, which consent may be withheld. The sale, transfer, pledge, or
assignment of any of the common shares held by any shareholder of PC or the
issuance by PC of common or
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other voting shares to any other person, or any combination of such transactions
within a period of one (1) year, such that the existing shareholder in PC fails
to maintain a majority of the voting interests in PC shall be deemed an
attempted assignment by PC, and shall be null and void unless consented to in
writing by Business Manager prior to any such transfer or issuance. Any breach
of this provision, whether or not void or voidable, shall constitute a material
breach of this Management Services Agreement, and in the event of such breach,
Business Manager may terminate this Management Services Agreement upon
twenty-four (24) hours notice to PC.
Section 8.6 ARBITRATION.
(a) GENERAL. The parties shall use good faith negotiation to resolve any
controversy, dispute or disagreement arising out of or relating to this
Management Services Agreement or the breach of this Management Services
Agreement. Any matter not resolved by negotiation shall be submitted to binding
arbitration and such arbitration shall be governed by the terms of this Section
8.6.
(b) SCOPE. Unless otherwise specifically provided herein, the parties
hereto agree that any claim, controversy, dispute or disagreement between or
among any of the parties hereto arising out of or relating to this Management
Services Agreement (other than claims involving any noncompetition or
confidentiality covenant) shall be governed exclusively by the terms and
provisions of this Section 8.6; provided, however, that the terms and provisions
of this Section 8.6 shall not preclude any party hereto from seeking, or a court
of competent jurisdiction from granting, a temporary restraining order,
temporary injunction or other equitable relief for any breach of (i) any
noncompetition or confidentiality covenant herein or (ii) any duty, obligation,
covenant, representation or warranty, the breach of which may cause irreparable
harm or damage.
(c) ARBITRATORS. In the event of any claim, controversy, dispute or
disagreement between the parties hereto arising out of or relating to this
Management Services Agreement, and in the further event the parties are unable
to resolve such claim, controversy, dispute or disagreement within thirty (30)
days after notice is first delivered pursuant to Section 8.3, the parties agree
to select arbitrators to hear and decide all such claims under this Section 8.6.
Each party shall select one arbitrator, The two arbitrators so chosen shall then
select a third arbitrator who is experienced in the matter or action that is
subject to such arbitration. If such matter or action involves health-care
issues, then the third arbitrator shall have such qualifications as would
satisfy the requirements of the National Health Lawyers Association Alternative
Dispute Resolution Service. Each of the arbitrators chosen shall be impartial
and independent of all parties hereto. If either of the parties fails to select
an arbitrator within twenty days after the end of such thirty-day period, or if
the arbitrators chosen fail to select a third arbitrator within twenty days,
then any
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party may in writing request the judge of the United States District Court for
the Southern District of New York senior in term of service to appoint the
arbitrator or arbitrators and, subject to this Section 8.6, such arbitrators
shall hear all arbitration matters arising under this Section 8.6, and, in
default of such selection, may ask the American Arbitration Association.
(d) APPLICABLE RULES.
(i) Each arbitration hearing shall be held at a place in New York,
New York acceptable to a majority of the arbitrators. The
arbitration shall be conducted in accordance with the Commercial
Arbitration Rules of the American Arbitration Association to the
extent such rules do not conflict with the terms hereof. The
decision of a majority of the arbitrators shall be reduced to
writing and shall be binding on the parties. Judgment upon the
award(s) rendered by a majority of the arbitrators may be entered
and execution had in any court of competent jurisdiction or
application may be made to such court for a judicial acceptance
of the award and an order of enforcement. The charges and
expenses of the arbitrators shall be shared equally by the
parties to the hearing.
(ii) The arbitration shall commence within thirty (30) days after the
arbitrators are selected in accordance with the provisions of
this Section 8.6. In fulfilling their duties with respect to the
matter in arbitration, the arbitrators may consider such matters
as, in the opinion of the arbitrators, are necessary or helpful
to make a proper valuation. The arbitrators may consult with and
engage disinterested third parties to advise the arbitrators. The
arbitrators shall not add any interest factor reflecting the time
value of money to the amount of any award granted under any
arbitration hereunder and shall not award any punitive damages.
(iii) In no event may the decision of the arbitrators (a) require
recision of the transactions contemplated by this Management
Services Agreement or the Asset Purchase Agreement dated as of
August ___, 1996, to which PC and Business Manager are parties,
or (b) provide for the payment of damages by PC in excess of the
assets of PC that it acquires after the date of execution of this
Management Services Agreement.
(iv) If any of the arbitrators selected hereunder should die, resign
or be unable to perform his or her duties hereunder, the
remaining arbitrators or such senior judge (or such judge's
successor) shall select a replacement arbitrator. The procedure
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set forth in this Section 8.6 for selecting the arbitrators shall
be followed from time to time as necessary.
(v) As to the resolution of any claim, controversy, dispute or
disagreement that under the terms hereof is made subject to
arbitration, no lawsuit based on such resolution shall be
instituted by either of the parties hereto, other than to compel
arbitration proceedings or enforce the award of a majority of the
arbitrators.
(vi) All privileges under New York and federal law, including
attorney-client and work-product privileges, shall be preserved
and protected to the same extent that such privileges would be
protected in a federal court proceeding applying New York law.
Section 8.7 WAIVER OF BREACH. The waiver by either party of a breach or
violation of any provision of this Management Services Agreement shall not
operate as, or be construed to constitute, a waiver of any subsequent breach of
the same or another provision hereof.
Section 8.8 ENFORCEMENT. In the event either party resorts to legal
action to enforce or interpret any provision of this Management Services
Agreement, the prevailing party shall be entitled to recover the costs and
expenses of such action so incurred, including, without limitation, reasonable
attorneys' fees.
Section 8.9 GENDER AND NUMBER. Whenever the context of this Management
Services Agreement requires, the gender of all words herein shall include the
masculine, feminine, and neuter, and the number of all words herein shall
include the singular and plural.
Section 8.10 ADDITIONAL ASSURANCES. Except as may be herein specifically
provided to the contrary, the provisions of this Management Services Agreement
shall be self-operative and shall not require further agreement by the parties;
provided, however, at the request of either par ty, the other party shall
execute such additional instruments and take such additional acts as are
reasonable and as the requesting party may deem necessary to effectuate this
Management Services Agreement.
Section 8.11 CONSENTS, APPROVALS, AND EXERCISE OF DISCRETION. Whenever
this Management Services Agreement requires any consent or approval to be given
by either party, or either party must or may exercise discretion, and except
where specifically set forth to the contrary, the parties agree that such
consent or approval shall not be unreasonably withheld or delayed, and that such
discretion shall be reasonably exercised.
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Section 8.12 FORCE MAJEURE. Neither party shall be liable or deemed to
be in default for any delay or failure in performance under this Management
Services Agreement or other interruption of service deemed to result, directly
or indirectly, from acts of God, civil or military authority, acts of public
enemy, war, accidents, fires, explosions, earthquakes, floods, failure of
transportation, strikes or other work interruptions by either party's employees,
or any other sim ilar cause beyond the reasonable control of either party unless
such delay or failure in performance is expressly addressed elsewhere in this
Management Services Agreement.
Section 8.13 SEVERABILITY. The parties hereto have negotiated and
prepared the terms of this Management Services Agreement in good faith with the
intent that each and every one of the terms, covenants and conditions herein be
binding upon and inure to the benefit of the respective parties. Accordingly, if
any one or more of the terms, provisions, promises, covenants or conditions of
this Management Services Agreement or the application thereof to any person or
circumstance shall be adjudged to any extent invalid, unenforceable, void or
voidable for any reason whatsoever by a court of competent jurisdiction or an
arbitration tribunal, such provision shall be as narrowly construed as possible,
and each and all of the remaining terms, provisions, promises, covenants and
conditions of this Management Services Agreement or their application to other
persons or circumstances shall not be affected thereby and shall be valid and
enforceable to the fullest extent permitted by law. To the extent this
Management Services Agreement is in violation of applicable law, then the
parties agree to negotiate in good faith to amend the Management Services
Agreement, to the extent possible consistent with its purposes, to conform to
law.
Section 8.14 DIVISIONS AND HEADINGS. The divisions of this Management
Services Agreement into articles, sections, and subsections and the use of
captions and headings in connection therewith is solely for convenience and
shall not affect in any way the meaning or interpretation of this Management
Services Agreement.
Section 8.15 AMENDMENTS AND MANAGEMENT SERVICES AGREEMENT EXECUTION.
This Management Services Agreement and amendments hereto shall be in writing and
executed in multiple copies on behalf of PC by its President, and on behalf of
Business Manager by any duly authorized officer thereof. Each multiple copy
shall be deemed an original, but all multiple copies together shall constitute
one and the same instrument.
Section 8.16 ENTIRE MANAGEMENT SERVICES AGREEMENT. With respect to the
subject matter of this Management Services Agreement, this Management Services
Agreement supersedes all previous contracts and constitutes the entire agreement
between the parties. Neither party shall be entitled to benefits other than
those specified herein. No prior oral statements or
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contemporaneous negotiations or understandings, except for the Budget, or prior
written material not specifically incorporated herein shall be of any force and
effect, and no changes in or additions to this Management Services Agreement
shall be recognized unless incorporated herein by amendment as provided herein,
such amendment(s) to become effective on the date stipulated in such
amendment(s). The parties specifically acknowledge that, in entering into and
executing this Management Services Agreement, except for the Budget, the parties
rely solely upon the representations and agreements contained in this Management
Services Agreement and no others.
IN WITNESS WHEREOF, PC and Business Manager have caused this Management
Services Agreement to be executed by their duly authorized representatives, all
as of the day and year first above written.
PC: J.V. LANE PROFESSIONAL CORPORATION, A
NEW YORK CORPORATION, d/b/a AMERICAN
DENTAL CENTERS
By: _________________________________
Jules V. Lane D.D.S., President
BUSINESS MANAGER: CASTLE DENTAL CENTERS OF NEW YORK, INC.
By:
Name: Jack H. Castle
Title: Chief Executive Officer
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EXHIBIT 10.47
EXHIBIT E
ANCILLARY AGREEMENT
AGREEMENT dated as of ___________, 1996 by and among Castle Dental
Centers of New York, Inc., a New York corporation ("Purchaser"), Castle Dental
Centers, Inc., a Delaware corporation ("Castle"), Jules V. Lane D.D.S. d/b/a
American Dental Centers, J.V. Lane Professional Corporation, a New York
professional corporation d/b/a American Dental Centers ("Lane PC"), Lisadent
Corp. ("Lisadent") (collectively "Seller") and Jules V. Lane D.D.S.("Dr. Lane"),
the sole shareholder of Lane PC and one of the shareholders of Lisadent, and
Linda Lane, the other shareholder of Lisadent (Dr. Lane and Linda Lane are
referred to collectively as the "Shareholders").
1. INTRODUCTION. Prior to the date of this Agreement, on August __,
1996, the parties hereto entered into an Asset Purchase Agreement (the "Asset
Purchase Agreement") providing for the purchase by Purchaser of certain
identified assets of Seller as more fully described therein. Contemporaneously
with the execution and delivery of this Agreement, the parties hereto have
entered into certain additional agreements contemplated by the Asset Purchase
Agreement. The parties hereto have entered into this Agreement to document
certain additional agreements reached by them in connection with the Asset
Purchase Agreement and the other documents executed and delivered
contemporaneously herewith, and the transactions contemplated thereby. Initially
capitalized terms not otherwise defined herein shall have the meanings assigned
to such terms in the Asset Purchase Agreement.
2. PURCHASE OF MALPRACTICE AND "TAIL" INSURANCE; ACCESS TO RECORDS. From
and after the date hereof, until Purchaser and Castle purchase or cause to be
purchased the "tail" insurance hereinafter described, Purchaser and Castle agree
to pay up to $12,000 per year for professional liability insurance for Dr. Lane
in an amount of $2,000,000 per claim, $6,000,000 aggregate of all claims, with a
reputable insurance company selected by Dr. Lane. It is expressly understood
that
<PAGE>
the maximum annual obligation of Purchaser and Castle for such insurance is
$12,000, irrespective of actual cost. Purchaser and Castle agree that on the
earliest to occur of (i) such time as Dr. Lane is no longer a shareholder of
Lane PC, (ii) the Management Services Agreement by and between Purchaser and
Lane PC ("Management Services Agreement") is terminated for any reason, or (iii)
Dr. Lane is no longer an employee of Purchaser, notwithstanding the provisions
of the Management Services Agreement to the contrary, Castle will, irrespective
of the cost thereof, purchase or cause to be purchased malpractice "tail"
insurance in such amount and covering such risks as the malpractice insurance
carried by, or on behalf of Dr. Lane on the date he ceased to be a shareholder
of Lane PC or the date the Management Services Agreement terminates, whichever
occurs first.. The tail insurance shall have a coverage term of not less than 15
years.
From and after such time on the earliest to occur of (i) Dr. Lane is no
longer a shareholder of Lane PC, (ii) the Management Services Agreement is
terminated for any reason, or (iii) Dr. Lane is no longer an employee of
Purchaser, Castle will ensure that Dr. Lane shall have access to patient records
of patients of Lane PC for all lawful purposes for a period of not less than
seven years from the date Dr. Lane ceased to be a shareholder of Lane PC or the
Management Services Agreement terminated, and with respect to records pertaining
to a claim raised during such seven year period, for such longer period as is
required to resolve such claim fully, including all appeals thereof.
3. USE OF THE NAME "JULES V. LANE". From and after the Closing date,
Seller and Dr. Lane hereby grant to the Purchaser and Castle the perpetual and
exclusive right to use and license the name "Jules V. Lane" and all derivatives
thereof, to professional corporations or other entities providing dental
services to which the Purchaser or Castle or one of their respective affiliates
provide management services. In connection therewith, Castle and Purchaser agree
to use the name in a dignified, respectful and professional manner, and in a
manner reasonably calculated not to precipitate enforcement action by the New
York State Dental Board against Dr. Lane's license.
4. INDEMNIFICATION OF DR. LANE. From and after the Closing Date for so
long as Dr. Lane serves as a director of Castle, Castle agrees to maintain in
full force and effect an Indemnity Agreement with Dr. Lane, in substantially the
form to which other directors of Castle are parties. Additionally, for such
period as Dr. Lane serves as a director of Castle, Castle agrees to provide Dr.
Lane with the same directors' and officers' insurance coverage made available to
other directors of Castle. Castle hereby agrees to indemnify and hold Dr. Lane
harmless from and against any and all damages, penalties, losses, deficiencies,
costs, expenses, obligations, fines, expenditures, claims and liabilities,
including reasonable counsel fees and reasonable expenses of investigation,
defending and prosecuting litigation (collectively, the "Damages"), suffered by
Dr. Lane (i) as a result of, caused by or arising out of the failure of the
Purchaser to perform its obligations to Lane PC under the Management Services
Agreement after the Closing Date, including but not limited to (a) the payment
by the Purchaser on behalf of Lane PC to the Internal Revenue Service and other
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appropriate agencies of all required payroll and withholding taxes on employees
of Lane PC, and (b) the failure of Purchaser to perform any obligations assumed
by Purchaser under the Management Services Agreement in respect of pension
plans, if any, adopted by Lane PC in the future; (ii) arising out of the use of
Dr. Lane's name and/or professional license (but not the loss of his
professional license) after the Closing Date, as contemplated by Section 3
hereof; (iii) in his capacity as an officer, director or shareholder of Lane PC
for liabilities of Lane PC arising after the Closing Date; and (iv) as the
result of the failure by Castle to perform any obligations of Castle to Dr. Lane
from and after the Closing Date contained herein or in any other agreement to
which Dr. Lane and Castle are parties; provided, however, that Dr. Lane shall
not be entitled to indemnification from Castle with respect to any matter in
which professional negligence is alleged, it being the intent of the parties
hereto that such matters be insured against by Dr. Lane and paid for as provided
elsewhere herein; and provided further, that to qualify for indemnification
hereunder, the Board of Directors of Castle shall have determined in good faith
that in connection with such matters for which indemnification is sought by Dr.
Lane hereunder, he shall have acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of Lane PC and the
Purchaser. Pending the outcome of any such action, the Company shall advance Dr.
Lane the costs of defense if (a) Dr. Lane provides an opinion of counsel
reasonably acceptable to the Company that in the opinion of such counsel, Dr.
Lane ultimately will be entitled to indemnification hereunder, and (b) Dr. Lane
provides the Company with a written undertaking to reimburse such advances if it
is not ultimately determined by a court of competent jurisdiction that Dr. Lane
is entitled to indemnification hereunder. To the extent that Dr. Lane has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to herein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
5. RESPONSIBILITY FOR LIABILITIES OF LANE PC. Dr. Lane hereby agrees
that all liabilities of Lane PC, not covered by malpractice insurance whether
known or unknown, liquidated or unliquidated or fixed or contingent which exist
as of the Closing Date, or which arise after the Closing Date but are based on
facts or circumstances affecting Lane PC prior to or as of the Closing Date,
other than those liabilities of Lane PC which arise solely as a result of the
consummation of the transactions contemplated by the Asset Purchase Agreement or
the Management Services Agreement or are expressly assumed by Purchaser in
Section 2.3 of the Asset Purchase Agreement, shall be for the account of Dr.
Lane; it being the intent of the parties that as of the Closing Date, Lane PC
shall have no liabilities of any kind whatsoever attributable to periods prior
to the Closing Date other than those contemplated by the Asset Purchase
Agreement, including Section 2.3 thereof, or the Management Services Agreement.
Dr. Lane hereby agrees to indemnify and hold Lane PC, Castle and the Purchaser
harmless from and against any and all damages, penalties, losses, deficien cies,
costs, expenses, obligations, fines, expenditures, claims and liabilities,
including reasonable counsel fees and reasonable expenses of investigation,
defending and prosecuting litigation
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<PAGE>
(collectively, the "Damages"), suffered by Lane PC, Castle or Purchaser as a
result of, caused by or arising out of, the failure of Dr. Lane to discharge and
satisfy all of the liabilities of Lane PC attributable to periods prior to the
Closing Date, other than those contemplated by the Asset Purchase Agreement
including Section 2.3 thereof, or the Management Services Agreement, including
but not limited to, the payment by Lane PC to the Internal Revenue Service and
other appropriate agencies of all required payroll and withholding taxes on
employees of Lane PC for periods prior to the Closing Date.
6. RIGHT OF FIRST OFFER TO PURCHASE AMERICAN MEDICAL AND LIFE INSURANCE
COMPANY. Dr. Lane hereby grants to Purchaser and Castle a right of first offer
to purchase American Medical and Life Insurance Company ("American Medical"). At
such time as Dr. Lane has formulated an intention to solicit offers to purchase
American Medical from third parties, prior to soliciting any such offers,
directly or through agents, Dr. Lane agrees to notify Purchaser and Castle in
writing of this intent to solicit offers to purchase American Medical and to
provide the Purchaser and Castle a period of not less than 30 days to make an
offer to purchase American Medical. During such 30 day period, Purchaser, Castle
and their representatives shall have the right at their expense to conduct a due
diligence review of the business and affairs of American Medical necessary to
permit them to make an informed evaluation of the business and affairs of
American Medical. Purchaser and Castle agree to execute confidentiality
agreements in usual and customary form prior to commencing such due diligence
review.
In the event Purchaser and Castle elect, during such 30 day period to
deliver to Dr. Lane a written offer to purchase American Medical, Dr. Lane
agrees to negotiate in good faith exclusively with Purchaser and Castle for an
additional period of 30 days after receiving such written offer from Purchaser
and Castle with a view to reaching a definitive agreement for the purchase and
sale of American Medical; provided, however, that the parties are under no
obligation to reach an agreement.
7. ADDITIONAL MATTERS PERTAINING TO AMERICAN MEDICAL. Notwithstanding
anything contained in this Agreement to the contrary, with the exception of the
foregoing Section, nothing contained in this Agreement, the Asset Purchase
Agreement, the Management Services Agreement the Employment Agreement, or any
other agreement between Dr. Lane and the Purchaser shall be construed as giving
Purchaser, Castle or Lane PC any rights with respect to American Medical, its
assets, its business or the way in which it conducts its business, all such
matters being expressly excluded from the scope of the foregoing instruments.
During the term of the Employment Agreement and for a period of 24 months
following the termination of Dr. Lane's employment by the Purchaser, Castle, the
Purchaser and Lane PC following the exercise of the option in the Option
Agreement agree not to solicit or induce any employee of American Medical to
terminate his or her employment with American Medical, accept employment with
anyone else, or to interfere in any similar manner with the business of American
Medical.
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<PAGE>
8. LIMITATION OF RECOVERY AGAINST LANE PC. Notwithstanding anything
contained herein to the contrary, any damages payable by Lane PC in an action
brought by Purchaser or Castle against Lane PC under the Management Services
Agreement, the Option Agreement and/or any contractual relationships entered
into at or after the Closing Date between Castle or Purchaser and Lane PC shall
be limited to assets of Lane PC acquired after the Closing Date, and no recovery
with respect to any action brought in respect of such instruments shall be made
against assets owned by Lane PC, Dr. Lane or Linda Lane prior to the Closing
Date or amounts paid to Lane PC, Dr. Lane or Linda Lane by Purchaser in payment
for such assets.
9. EXCLUSIVE DENTAL PROFESSIONAL RELATIONSHIP. From and after the
Closing Date, Dr. Lane agrees that any services performed by Dr. Lane that
require a license to practice dentistry will be rendered and performed
exclusively through Lane PC, so long as the Management Services Agreement is in
effect.
10. CASTLE INITIAL PUBLIC OFFERING. Castle represents and warrants that
it is the entity referred to as Castle Dental Centers, Inc. in the Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
September 3, 1996, Registration No. 333-_____.
11. MISCELLANEOUS.
11.1 SUCCESSORS AND ASSIGNS. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors, heirs and assigns of the parties hereto.
11.2 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
11.3 HEADINGS. The headings of the Sections and paragraphs of
this Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
11.4 MODIFICATION AND WAIVER. No amendment, modification or
alteration of the terms or provisions of this Agreement shall be binding unless
the same shall be in writing and duly executed by the parties hereto, except
that any of the terms or provisions of this Agreement may be waived in writing
at any time by the party which is entitled to the benefits of such waived terms
or provisions. No waiver of any of the provisions of this Agreement shall be
deemed to or shall constitute a waiver of any other provision hereof (whether or
not similar). No delay on the part of either party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof.
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<PAGE>
11.5 NO THIRD PARTY BENEFICIARY RIGHTS. This Agreement is not
intended to and shall not be construed to give any Person (other than the
parties signatory hereto any interest or rights (including, without limitation,
any third party beneficiary rights) with respect to or in connection with any
agreement or provision contained herein or contemplated hereby.
11.6 NOTICE. Any notice, request, instruction or other document
to be given hereunder by any party hereto to any other party shall be
sufficiently given if delivered in person or sent by telecopier or registered or
certified mail, postage prepaid, return receipt requested, addressed as follows:
if to Purchaser, to:
Castle Dental Centers of New York, Inc.
if to Castle, to:
Castle Dental Centers, Inc.
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056-3021
with a copy to:
Mr. William D. Gutermuth
Bracewell & Patterson, L.L.P.
South Tower Pennzoil Place
711 Louisiana, Suite 2900
Houston, Texas 77002-2856
if to Seller or the Shareholders to:
Jules V. Lane D.D.S. d/b/a American Dental Centers
35 Broadway
Hicksville, New York 11801
Attention: Jules V. Lane D.D.S.
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<PAGE>
J.V. Lane Professional Corporation d/b/a American Dental Centers
35 Broadway
Hicksville, New York 11801
Attention: Jules V. Lane D.D.S.
Lisadent Corp.
35 Broadway
Hicksville, New York 11801
Attention: Jules V. Lane D.D.S.
Jules V. Lane D.D.S.
35 Broadway
Hicksville, New York 11801
Attention: Jules V. Lane D.D.S.
Linda Lane
35 Broadway
Hicksville, New York 11801
Attention: Jules V. Lane D.D.S.
with a copy to:
Mr. Michael G. Yamin
Kaufmann, Feiner, Yamin,
Gildin & Robbins, LLP
777 Third Avenue
New York, New York 10017
or at such other address for a party as shall be specified by like notice, and
such notice or communication shall be deemed to have been duly given as of the
date so delivered, mailed or sent by telecopier.
11.7 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regards
to conflict of law rules thereof.
11.8 SEVERABILITY. If any provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or public policy, all
other provisions of this Agreement shall nevertheless remain in full force and
effect so long as the economic or legal substance of the
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<PAGE>
transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled.
11.9 ENFORCEMENT. The parties hereto agree that the remedy at law
for any breach of this Agreement is inadequate and that should any dispute arise
concerning the sale of the Assets or any other matter hereunder, this Agreement
shall be enforceable in a court of equity by an injunction or a decree of
specific performance. Such remedies shall, however, be cumulative and
nonexclusive, and shall be in addition to any other remedies which the parties
hereto may have.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed on its behalf as of the date first above written.
CASTLE DENTAL CENTERS OF NEW YORK,
INC.
By:_____________________________
Name: Jack H. Castle, Jr.
Title: Chief Executive Officer
CASTLE DENTAL CENTERS, INC.
By:______________________________
Name: Jack H. Castle, Jr.
Title: Chief Executive Officer
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<PAGE>
JULES V. LANE D.D.S. D/B/A AMERICAN
DENTAL CENTERS
By:_____________________________
Name: Jules V. Lane D.D.S.
J.V. LANE PROFESSIONAL CORPORATION
D/B/A AMERICAN DENTAL CENTERS
--------------------------------
Name: Jules V. Lane D.D.S.
Title: President
LISADENT CORP.
By:______________________________
Name: Linda Lane
Title: President
----------------------------------
Jules V. Lane D.D.S.
----------------------------------
Linda Lane
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EXHIBIT 10.48
PAGES WHERE CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED ARE STAMPED
"CONFIDENTIAL TREATMENT REQUESTED.
THE REDACTED MATERIAL HAS BEEN
SEPARATELY FILED WITH THE COMMISSION."
THE APPROPRIATE SECTION HAS BEEN MARKED
AT THE APPROPRIATE PLACE.
EXHIBIT A
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of
____________, 1996 (the "Effective Date"), by and between Castle Dental Centers
of New York, Inc., a New York corporation (the "Company"), and Jules V. Lane
D.D.S. ("Employee").
RECITALS:
Prior to the date hereof, Employee was the owner of Jules V. Lane D.D.S.
d/b/a American Dental Centers, J.V. Lane Professional Corporation d/b/a American
Dental Centers (collectively, "American Dental Centers"), and Lisadent Corp.,
which along with the Company and the Employee is a party to that certain Asset
Purchase Agreement dated as of August 30, 1996 (the "Asset Purchase Agreement").
As a condition to the consummation of the transactions contemplated by the Asset
Purchase Agreement and as an inducement for the Company and Employee to perform
their respective obligations under the Asset Purchase Agreement, the Company and
Employee have entered into this Agreement.
The parties agree as follows:
ARTICLE I
1.1 EMPLOYMENT.
(a) The Company agrees to, and hereby does, employ Employee, on the
terms and conditions set forth herein, to hold such offices, have such titles
and perform such duties as are contemplated hereby.
(b) Employee's duties shall be to assume and discharge substantially the
same duties and responsibilities not requiring licensure as a dentist as
Employee has assumed and discharged on behalf of American Dental Centers. In
connection therewith, Employee may participate in the development and
implementation of the strategic plan of the Company for specified markets in the
New York area, the analysis of markets selected by the Company, the
identification of acquisition candidates and the acquisition of dental practices
and the development of new offices.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED. THE
REDACTED MATERIAL HAS BEEN SEPARATELY
FILED WITH THE COMMISSION.
(c) Employee shall devote such portion of his business time, efforts and
abilities to promoting the business of the Company and for the benefit and
advantage of the Company as he has traditionally devoted to such aspects of the
business of American Dental Centers.
(d) Employee shall not be required to relocate his principal residence
to perform his obligations hereunder, and all of Employee's duties shall be
performable in the metropolitan New York area.
ARTICLE II
2.1 SALARY. As compensation for his service during the term of this
Agreement (or until terminated pursuant to the provisions hereof), the Company
shall pay Employee a salary at the rate of $ REDACTED per annum (the "Base
Salary"), through and until the Termination Date, as herein defined, payable in
accordance with the regular payroll practices of the Company as in effect from
time to time. Such Base Salary shall be subject to withholding for the
prescribed federal and state income tax, social security and other items as
required by law, and for other items consistent with the Company's policy with
respect to health insurance and other benefit plans for similarly situated
employees.
2.2 BENEFITS. During the terms of this Agreement, Employee shall be
entitled to receive such benefits as are made available to other personnel of
the Company in senior positions, with comparable service credit and with
comparable duties and responsibilities, taking into account Employee's tenure
with American Dental Centers. Such benefits shall be subject to the terms of the
applicable plan documents, summary plan descriptions and/or employment policies
and shall be subject to modification, amendment or revocation in accordance with
the terms of such documents, policies and procedures.
2.3 REIMBURSEMENT OF EXPENSES. The Company shall reimburse all
reasonable travel and entertainment expenses incurred by Employee in connection
with the performance of his duties pursuant to this Agreement, consistent with
the Company's policies then in effect. Employee shall provide the Company with
written expense reports of his expenses in accordance with the usual customary
practice of the Company.
ARTICLE III
3.1 TERM. Upon the terms and subject to the conditions of this
Agreement, the Company hereby employs Employee and Employee accepts employment
with the Company for a term commencing on the closing of the initial public
offering of common stock of Castle Dental Centers,
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<PAGE>
Inc. and ending three years thereafter, subject to the right of either party to
terminate this agreement as provided below. The date on which this Agreement is
terminated is referred to hereunder as the "Termination Date". No termination of
this Agreement shall terminate any other agreement between the parties hereto,
except as expressly provided for in such agreement.
3.2 DEATH; DISABILITY. Subject to the provisions of Section 3.6(a), this
Agreement shall be automatically terminated on the death of Employee or on the
permanent disability of Employee if he is no longer able, with reasonable
accommodation, to perform the essential functions of his position with the
Company. In the event of Employee's disability, this Agreement shall not
terminate unless and until Employee has been unable to perform the essential
functions of his position hereunder for a period of three (3) consecutive months
as a result of the Employee's disability.
3.3 TERMINATION WITHOUT CAUSE. The Company may terminate this Agreement
at any time, without Cause, by giving the other thirty (30) days' written notice
of termination. Employee may not terminate this Agreement without Cause.
3.4 TERMINATION BY COMPANY FOR CAUSE. In addition to the Company's right
to terminate this Agreement without cause as provided in Section 3.3 hereof, the
Company may terminate this Agreement for "Cause." "Cause" means the termination
by the Company of Employee's employment for any of the following grounds:
(a) the commission of any act of fraud on the part of Employee
resulting in material personal gain or material enrichment at the expense of the
Company;
(b) misappropriation, embezzlement, theft or willful and material
damage of or to any asset of the Company or the use of the Company funds or
assets for any illegal purpose;
(c) Employee's material violation of this Agreement or commission
of an act of gross negligence or willful misconduct (in the case of a breach,
following notice thereof to Employee by the Company and a thirty day period
thereafter within which Employee shall have the opportunity to cure such breach)
that has or is reasonably expected to have a material adverse effect on the
business or affairs of the Company;
(d) the conviction for a Class A felony, after exhaustion of all
rights of appeal on the part of Employee which, in the good faith determination
of the Board of Directors of the Company, materially and adversely, directly or
indirectly, affects the name or goodwill of the Company; or
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<PAGE>
(e) for so long as Employee is a majority shareholder of J.V.
Lane Professional Corporation d/b/a American Dental Centers ("Lane PC"), the
termination of the Management Services Agreement by and between the Company and
Lane PC pursuant to Section 7.2(a) (but only for cause), (a)(i), (c) or (d) of
the Management Services Agreement.
A notice of termination pursuant to this Section 3.4 shall be in writing
and shall state the reason for termination. Within not less than five (5) nor
more than twenty (20) days after such notice, Employee shall be given the
opportunity to appear before the Board of Directors of the Company, or a
committee thereof, to rebut or dispute the alleged violation. If the Board of
Directors or committee makes a good faith reasonable determination, by vote of a
majority of the directors other than Employee (if Employee is then a director),
that one or more grounds exist for termination of Employee for Cause, the
Company may immediately terminate Employee's employment under this Section 3.4.
The Company may elect, during the pendency of any inquiry relative to
termination of Employee, to relieve Employee of his regular duties with pay.
3.5 TERMINATION BY EMPLOYEE FOR CAUSE. The Employee may terminate this
Agreement for "Cause" for any of the following grounds:
(a) the continued failure of the Company to pay Employee the
amounts contemplated by Article II hereof for 10 days following notice thereof
from Employee; provided, however, that Employee shall not be required to give
more than two notices in any twelve month period; or
(b) material violation of this Agreement following notice thereof
to the Company by Employee and a thirty day period thereafter within which the
Company shall have the opportunity to cure such breach, which breach has or is
reasonably expected to have a material adverse effect on the Employee.
A notice of termination pursuant to this Section 3.5 shall be in writing
and shall state the reason for termination.
3.6 SEVERANCE PAY. In the event of termination, Employee shall be
entitled to compensation (the "Severance Pay") in accordance with the following:
(a) If Employee's employment is terminated by reason of his
disability, the Company shall continue to pay Employee's monthly Base Salary,
(at his then current Base Salary rate excluding any increases that would have
taken effect beyond the date of termination and any noncash benefits) the
Employee would have earned for the three month period subsequent to the
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<PAGE>
effective date of termination, payable at such time or times as would have been
paid to Employee had he remained employed by the Company.
(b) If (i) Employee voluntarily terminates his employment, or
(ii) the Company terminates this Agreement for Cause, or (iii) if Employee's
employment is terminated by reason of his death, Employee shall not be entitled
to receive any additional salary or benefits beyond those earned or accrued as
of the effective date of the termination of his employment.
(c) If Employee's employment hereunder is terminated prior to the
expiration of the term of this Agreement, and such termination is either (i) by
the Employee for Cause, or (ii) by the Company and not for Cause, Employee shall
be entitled to Severance Pay in an amount equal to the amount of Base Salary
that the Employee would have earned for the remainder of the three year period
commencing on the date hereof, less applicable payroll deductions (and any other
deductions authorized in writing by the Employee), payable at such time or times
as would have been paid to Employee had he remained employed by the Company
through such term.
3.7 EFFECT OF TERMINATION ON AGREEMENT. Any termination of Employee's
employment shall not release either the Company or Employee from their
respective obligations under this Agreement that are required to be performed
subsequent to the date of such termination, including but not limited to those
obligations set forth under Section 3.6, 3.8 and Articles IV and V. No
termination of this Agreement shall diminish in any way the rights, duties and
obligations of any party under the Ancillary Agreement of even date herewith. On
the termination or expiration of this Agreement for any reason, the Company
agrees to exercise its rights under the Option Agreement between Company and
Employee.
3.8 PAYMENTS TO ESTATE. If Employee should die before all amounts
payable to him pursuant to Section 3.6 have been paid, such unpaid amounts shall
be paid to the personal representative of Employee's estate.
ARTICLE IV
4.1 NONDISCLOSURE AND NONUSE OF CONFIDENTIAL INFORMATION. Employee
understands and agrees that his employment by the Company creates a relationship
of confidence and trust between himself and the Company with respect to
Confidential Information (as defined below). Employee recognizes that he will
have access to and knowledge of Confidential Information. Employee will not,
during or after the term of his employment by the Company, in whole or in part,
disclose such Confidential Information to any person, firm, corporation,
association, or other entity for any reason or purpose whatsoever, nor shall he
make use of any such Confidential Information
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<PAGE>
for his own purposes or for the purposes of others; provided, however, that
nothing in this Article shall be construed to prohibit the disclosure of such
Confidential Information by the Employee (i) to another officer, director
employee or agent of the Company; (ii) as is reasonably necessary for the
performance of his duties and responsibilities under this Agreement; or (iii) as
otherwise required by law. If Employee is required by law to disclose
"Confidential Information," Employee shall notify the Company's Board of
Directors, in writing, of the nature of such disclosure and the Confidential
Information to be disclosed, as soon as is possible and/or practical, and permit
the Company the opportunity to contest or limit such disclosure.
4.2 CONFIDENTIAL INFORMATION DEFINED. The term "Confidential
Information" shall mean any information of the Company (whether written or
oral), including all notes, studies, patient lists, information, forms, business
or management methods, marketing data, fee schedules, or trade secrets of the
Company. Confidential Information shall also include the terms and provisions of
this Employment Agreement and any transaction or document executed by the
parties pursuant to this Employment Agreement. Confidential Information does not
include any information that (i) is or becomes generally available to and known
by the public (other than as a result of an unpermitted disclosure directly or
indirectly by Employee or his affiliates, advisors, or representatives); (ii) is
or becomes available to the receiving party on a nonconfidential basis from a
source other than the Employee or its affiliates, advisors, or representatives,
provided that such source is not and was not bound by a confidentiality
agreement with or other obligation of secrecy to the Company of which the
receiving party has knowledge at the time of such disclosure; or (iii) has
already been or is hereafter independently acquired or developed by the
receiving party without violating any confidentiality agreement with or other
obligation of secrecy to the Company. Information in the possession of Employee
pertaining to AMLI and its business and the way in which it conducts its
business, including but not limited to its dental managed care and indemnity
business, which includes, without limitation, a dual choice option, shall not be
included within the term "Confidential Information."
4.3 DELIVERY OF MATERIALS. Employee further agrees to deliver to the
Company at the termination of his employment, or at any other time upon request
by the Company, all correspondence, memoranda, notes, records (including
computer records and data), drawings, sketches, plans, customer lists, and other
documents, which are made, composed, or received by Employee, solely or jointly
with others, during the term of his employment and which are in Employee's
possession, custody, or control at such date and which are related in any manner
to the past, present or anticipated business of the Company, excluding therefrom
those items listed above that relate primarily to AMLI and its business and the
way in which it conducts its business, including but not limited to its dental
managed care and indemnity business, which includes, without limitation, a dual
choice option.
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<PAGE>
ARTICLE V
5.1 NONINTERFERENCE WITH EMPLOYMENT RELATIONSHIPS. Except for any
employee shared between AMLI and the Company, during the term of Employee's
employment and during the twenty-four months following the termination of the
Employee's employment, Employee agrees not to solicit or induce any employee of
the Company or Lane PC to terminate his or her employment, accept employment
with anyone else, or to interfere in a similar manner with the business of the
Company or Lane PC.
5.2 NONSOLICITATION OF CUSTOMERS AND SUPPLIERS During the employment of
the Employee pursuant to this Agreement and during the twenty-four months
following the termination of the Employee's employment, Employee agrees not to
contact, communicate with or solicit any customer, supplier, vendor,
distributor, promoter, contractor or prospective customer of the Company or Lane
PC for the purpose of engaging in the Same or Similar Business (as defined
below) as the Company.
5.3 NONCOMPETITION. Employee recognizes that in connection with the
performance of the Employee's duties and obligations under this Agreement, the
Company will provide Employee with confidential, proprietary and trade secret
information, which is necessary to Employee's employment with the Company, and
which Employee has agreed to protect and maintain as confidential, proprietary
and trade secret information for the Company's benefit. To protect and maintain
the confidentiality of the information, Employee agrees that, during the
employment of the Employee pursuant to this Agreement, including the period
during which Employee is receiving Severance Pay hereunder, and during the
twenty-four months following such period, Employee shall not directly or
indirectly engage in, manage, operate, join, control, or participate in the
ownership, management, operation, or control of, or be employed or engaged or
act as a consultant to in any manner by, any business competing in the Same or
Similar Business as the Company or Lane PC within a ten mile radius around any
dental center managed by this Company in the State of New York. The provisions
of this Section 5.3 shall not apply to the ownership by Employee or his
affiliates or leases to the Company of real property used for dental offices.
5.4 SAME OR SIMILAR BUSINESS DEFINED. For purposes of this Article V,
the "Same or Similar Business" as the Company or Lane PC shall be defined as any
business that is engaged to a significant extent in directly providing dental
care and services, including but not limited to the practice of general
dentistry, orthodontics and all related dental care services, the management of
such services or practices, or the management of or consulting with dental
practice management companies. "Same or Similar Business" shall not include the
ownership and operation by Employee of American Medical and Life Insurance
Company substantially in the manner presently conducted,
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<PAGE>
including but not limited to its dental managed care and indemnity business,
which includes, without limitation, a dual choice option.
5.5 REASONABLENESS OF RESTRICTIONS. Employee has carefully read and
considered the provisions of this Article V and, having done so, agrees that the
restrictions set forth in such Article contain reasonable limitations as to
time, geographical area, scope of activity to be restrained, and do not impose a
greater restraint than is necessary to protect the goodwill or other legitimate
business interests of the Company. The Employee further understands and agrees
that, if at some later date, a court of competent jurisdiction determines that
the scope, duration or geographic area of any covenant set forth in this Article
is overbroad or unenforceable for any reason, these covenants shall be reformed
by the court and enforced to the maximum extent permissible under New York law.
ARTICLE VI
6.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
parties and their heirs, legal representatives, successors and assigns. The
Company may assign its interest in this Agreement, and all covenants, conditions
and provisions hereunder shall inure to the benefit of and be enforceable by its
assignee or successor in interest. The rights and obligations of Employee under
this Agreement are personal to him, and no such rights, benefits or obligations
shall be assignable, except that his personal representatives and heirs may
enforce the obligations of the Company hereunder.
6.2 WAIVER OF BREACH. The waiver by any party to this Agreement of a
breach or violation of any provisions hereof shall not operate or be construed
to be a waiver of any subsequent breach hereof.
6.3 NOTICES. Any and all notices required or permitted to be given under
this Agreement shall be sufficient if furnished in writing and given in person,
or shall be deemed given five (5) business days after sent by certified mail,
return receipt requested, to the address as set forth below on the signature
pages of this Agreement. If any party hereto desires to amend its address
hereunder, that party shall send written notice of the new address to all other
parties hereto.
6.4 GOVERNING LAW. This Agreement shall be interpreted, construed and
governed in accordance with the laws of the State of New York without regard to
conflict of laws provision. This Agreement is performable in Nassau County, New
York.
6.5 HEADINGS. The paragraph headings contained in this Agreement are for
convenience only, and shall in no manner be construed to be part of this
Agreement.
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<PAGE>
6.6 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same agreement. A fully executed copy of
this Agreement shall be delivered to each party hereto.
6.7 LEGAL CONSTRUCTION. In case anyone or more of the provisions
contained in this Agreement shall for any reason be held to be invalid, illegal,
or unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not effect any other provision hereof, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein. In addition, such invalid, illegal or unenforceable
provision shall be modified to the minimum extent necessary to permit it to be
valid, legal and enforceable. Except as otherwise provided for herein to the
contrary, for all purposes hereof "day" shall mean calendar day and shall
include weekends and holidays; provided, however, that if any notice period
terminates on a weekend or holiday, the person who is required to deliver the
notice shall have until the next business day to complete the notice
requirement.
6.8 AMENDMENT. No modification, amendment, addition to, or termination
of this Agreement, nor waiver of any of its provisions, shall be valid or
enforceable unless it is in writing and signed by all of the parties hereto.
6.9 PRIOR AGREEMENTS SUPERSEDED. This Agreement constitutes the sole and
only Agreement of the parties hereto with respect to the subject matter hereof,
and supersedes any prior understanding or written or oral agreements,
correspondence or communications between the parties respecting the subject
matter hereof.
6.10 ARBITRATION. EXCEPT FOR THE REMEDY PROVIDED UNDER SECTION 6.11
BELOW, ANY CLAIM OR DISPUTE ARISING UNDER OR RELATING TO THIS AGREEMENT OR THE
EMPLOYMENT OF EMPLOYEE BY THE COMPANY SHALL BE SUBMITTED TO FINAL AND BINDING
ARBITRATION IN NEW YORK, NEW YORK PURSUANT TO THE EMPLOYMENT DISPUTE RESOLUTION
RULES OF THE AMERICAN ARBITRATION ASSOCIATION. THE PARTIES AGREE THAT ANY PARTY
REQUESTING ARBITRATION OF ANY DISPUTE UNDER THIS SECTION MUST GIVE FORMAL
WRITTEN NOTICE OF THE PARTY'S DEMAND FOR ARBITRATION ("ARBITRATION NOTICE")
WITHIN ONE HUNDRED TWENTY (120) DAYS AFTER SUCH DISPUTE FIRST ARISES AND FAILURE
TO TIMELY COMMUNICATE ARBITRATION NOTICE SHALL CONSTITUTE A WAIVER OF SUCH
DISPUTE. THE PARTIES FURTHER AGREE THAT EACH PARTY MAY BE REPRESENTED BY COUNSEL
IN ANY PROCEEDING UNDER THIS SECTION, AND THAT ALL EXPENSES AND FEES INCURRED IN
CONNECTION WITH ANY PROCEEDING UNDER THIS SECTION SHALL BE PAID BY THE
NON-PREVAILING
-9-
<PAGE>
PARTY (AS DETERMINED BY THE ARBITRATORS). BOTH PARTIES AGREE THAT NOTHING IN
THIS SECTION SHALL BE CONSTRUED TO REQUIRE THE ARBITRATION OF ANY DISPUTE OR
CLAIM (i) ARISING UNDER ARTICLES IV OR V OF THIS AGREEMENT; (ii) FOR
UNEMPLOYMENT COMPENSATION BENEFITS; OR (iii) FOR WORKERS' COMPENSATION BENEFITS.
BY THEIR EXECUTION OF THIS AGREEMENT, EACH PARTY TO THIS AGREEMENT CONSENTS, ON
BEHALF OF HIMSELF OR ITSELF AND THEIR RESPECTIVE SUCCESSORS, HEIRS AND ASSIGNS,
TO SUCH BINDING ARBITRATION IN ACCORDANCE WITH THE TERMS OF THIS SECTION.
6.11 REMEDIES. Both parties recognize that the services to be conducted
under this Agreement are special, unique and extraordinary in character.
Accordingly, Employee agrees that the remedy at law for any breach of any
provision of Articles IV and V will be inadequate and that the Company will be
entitled to injunctive and equitable relief for any such breach, in addition to
all other remedies permitted by law.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement in New York, New York as of the date first set forth above.
THE COMPANY:
CASTLE DENTAL CENTERS OF NEW YORK,
INC.
By:
Name: Jack H. Castle, Jr.
Title: Chief Executive Officer
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056
ATTENTION: President
EMPLOYEE:
Jules V. Lane D.D.S.
American Dental Centers
35 Broadway
Hicksville, New York 11801
with a copy to:
Mr. Michael G. Yamin
Kaufmann, Feiner, Yamin,
Gildin & Robbins, LLP
777 Third Avenue
New York, New York 10017
-11-
EXHIBIT 10.64
Draft
9/20/96
9/24/96
9/30/96
10/4/96
MARKETING AGREEMENT
THIS MARKETING AGREEMENT (the "Agreement") dated as of ___________, 1996
by and among Castle Dental Centers of New York, Inc., a New York corporation
("Castle"), Castle Dental Centers, Inc., a Delaware Corporation ("CDC"),
American Medical and Life Insurance Company, a New York insurance company
("AMLI"), and Jules V. Lane D.D.S.("Dr. Lane") who agree as follows:
1. INTRODUCTION. Prior to the date of this Agreement, on September 3, 1996,
Castle, Dr. Lane and certain other parties entered into an Asset Purchase
Agreement (the "Asset Purchase Agreement") which contemplated the purchase by
Castle of certain identified assets and the negotiation and execution of certain
other agreements between Castle and certain other parties, all as more fully
described in the Asset Purchase Agreement. The parties hereto have entered into
this Agreement to document certain of such additional agreements reached by them
as contemplated by the Asset Purchase Agreement. Initially capitalized terms not
otherwise defined herein shall have the meanings assigned to such terms in the
Asset Purchase Agreement.
2. RECIPROCAL MARKETING ARRANGEMENT. In markets in the State of New York served
by dental practices managed by Castle in which AMLI offers dental insurance,
AMLI agrees (i) to include information provided by Castle regarding its managed
dental practices in marketing materials produced and distributed by or on behalf
of AMLI relating to dental insurance or the provision of dental services to AMLI
policyholders, and (ii) subject to the ability of AMLI to reach agreement with
such managed dental practices regarding fee structure and the ability of Castle
to perform contracted services, to maintain preferred provider relationships
with dental practices managed by Castle and to offer such dental practices as
preferred providers to AMLI policyholders and other covered parties. AMLI shall
have the right to approve the information provided by Castle for inclusion in
the AMLI marketing materials, such approval not to be unreasonably withheld.
In markets in the State of New York served by dental practices managed by Castle
in which AMLI offers dental insurance, Castle agrees to include information
provided by AMLI regarding its insurance programs in marketing materials
produced and distributed by or on behalf of dental
<PAGE>
practices managed by Castle relating to the provision of dental services by such
managed dental practices. Castle shall have the right to approve the information
provided by AMLI for inclusion in the marketing materials produced and
distributed by or on behalf of dental practices managed by Castle, such approval
not to be unreasonably withheld.
3. RECIPROCAL RIGHT OF FIRST REFUSAL FOR ADDITIONAL MARKETS. AMLI agrees to
offer dental practices managed by Castle or one of its affiliates the right of
first refusal to participate on substantially the same terms and conditions as
set forth in Section 2 in markets in states other than New York in which AMLI
offers dental insurance. CDC agrees to cause its appropriate affiliate to offer
AMLI the right of first refusal to participate on substantially the same terms
and conditions as set forth in Section 2 in markets in states other than New
York in which an affiliate of CDC manages dental practices and in which AMLI is
licensed to offer dental insurance.
4. OBLIGATIONS SUBJECT TO REGULATORY COMPLIANCE. The obligations of CDC or its
affiliates and AMLI herein are subject to the ability of CDC or its affiliates
and/or AMLI to perform their respective obligations hereunder in compliance with
applicable laws and regulations of the jurisdictions in which the performance of
this Agreement will be undertaken. Nothing contained herein shall be construed
as requiring any party hereto to act in violation of such laws and regulations.
5. CONFIDENTIALITY. The parties hereto acknowledge that the transactions
contemplated by this Agreement involve the likelihood of each party hereto
having access to and knowledge of Confidential Information (as hereinafter
defined) of the other. CDC, on behalf of itself and its affiliates, and AMLI
each agree that it will not, during or after the term of this Agreement, in
whole or in part, disclose such Confidential Information of the other to any
person, firm, corporation, association, or other entity for any reason or
purpose whatsoever, nor shall it make use of any such Confidential Information
for its own purposes or for the purposes of others; provided, however, that
nothing in this Section shall be construed to prohibit the disclosure of such
Confidential Information by a party hereto (i) to an officer, director employee
or agent of CDC or its affiliates or AMLI who is subject to a confidentiality
obligation in favor of the disclosing party; (ii) as is reasonably necessary for
the performance of its duties and responsibilities under this Agreement; or
(iii) as otherwise required by law. If a party hereto is required by law to
disclose "Confidential Information," such party shall notify the other party, in
writing, of the nature of such disclosure and the Confidential Information to be
disclosed, as soon as is possible and/or practical, and permit such other party
the opportunity to contest or limit such disclosure.
6. CONFIDENTIAL INFORMATION DEFINED. The term "Confidential Information" shall
mean any information of CDC or its affiliates or AMLI, as the case may be
(whether written or oral), including all notes, studies, patient lists,
information, forms, business or management methods,
-2-
<PAGE>
marketing data, fee schedules, or trade secrets of CDC or its affiliates or
AMLI, as the case may be. Confidential Information shall also include the terms
and provisions of this Agreement and any transaction or document executed by the
parties pursuant to this Agreement. Confidential Information does not include
any information that (i) is or becomes generally available to and known by the
public (other than as a result of an unpermitted disclosure directly or
indirectly by a party hereto or its affiliates, advisors, or representatives);
(ii) is or becomes available to the receiving party on a nonconfidential basis
from a source other than a party hereto or its affiliates, advisors, or
representatives, provided that such source is not and was not bound by a
confidentiality agreement with or other obligation of secrecy to a party hereto
of which the receiving party has knowledge at the time of such disclosure; or
(iii) has already been or is hereafter independently acquired or developed by
the receiving party without violating any confidentiality agreement with or
other obligation of secrecy to a party hereto.
7. DELIVERY OF MATERIALS. Each party hereto further agrees to deliver to the
other at the termination of this Agreement, or at any other time upon request,
all correspondence, memoranda, notes, records (including computer records and
data), drawings, sketches, plans, customer lists, and other documents, which are
made, composed, or received by a party hereto solely or jointly with others,
during the term of this Agreement and which are in such party's possession,
custody, or control at such date and which are related in any manner to the
past, present or anticipated business of CDC or its affiliates or AMLI.
8. TERM. Unless terminated sooner by the written agreement of the parties
hereto, the term of this Agreement shall commence on the date hereof and
continue for the longer of (i) four years from the date hereof; (ii) the period
of time that Dr. Lane serves as a director of CDC; or (iii) the period until
CDC's right of first offer to purchase AMLI contained in the Ancillary Agreement
by and among the parties hereto has finally expired. This Agreement may be
extended, either during or at the end of its term, for an additional period on
the mutual agreement of the parties hereto and AMLI.
9. MISCELLANEOUS.
9.1 SUCCESSORS AND ASSIGNS. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors, heirs and assigns of the parties hereto.
9.2 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
-3-
<PAGE>
9.3 HEADINGS. The headings of the Sections and paragraphs of this
Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
9.4 MODIFICATION AND WAIVER. No amendment, modification or
alteration of the terms or provisions of this Agreement shall be binding unless
the same shall be in writing and duly executed by the parties hereto, except
that any of the terms or provisions of this Agreement may be waived in writing
at any time by the party which is entitled to the benefits of such waived terms
or provisions. No waiver of any of the provisions of this Agreement shall be
deemed to or shall constitute a waiver of any other provision hereof (whether or
not similar). No delay on the part of either party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof.
9.5 NO THIRD PARTY BENEFICIARY RIGHTS. This Agreement is not
intended to and shall not be construed to give any Person (other than the
parties signatory hereto any interest or rights (including, without limitation,
any third party beneficiary rights) with respect to or in connection with any
agreement or provision contained herein or contemplated hereby.
9.6 NOTICE. Any notice, request, instruction or other document to
be given hereunder by any party hereto to any other party shall be sufficiently
given if delivered in person or sent by telecopier or registered or certified
mail, postage prepaid, return receipt requested, addressed as follows:
if to Castle, to:
Castle Dental Centers of New York, Inc.
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056-3021
with a copy to:
Mr. William D. Gutermuth
Bracewell & Patterson, L.L.P.
South Tower Pennzoil Place
711 Louisiana, Suite 2900
Houston, Texas 77002-2856
-4-
<PAGE>
if to AMLI, to:
American Medical and Life Insurance Company
35 Broadway
Hicksville, New York 11801
Attention: Jules V. Lane D.D.S.
with a copy to:
Mr. Michael G. Yamin
Kaufmann, Feiner, Yamin,
Gildin & Robbins, LLP
777 Third Avenue
New York, New York 10017
or at such other address for a party as shall be specified by like notice, and
such notice or communication shall be deemed to have been duly given as of the
date so delivered, mailed or sent by telecopier.
9.7 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regards
to conflict of law rules thereof.
9.8 SEVERABILITY. If any provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or public policy, all
other provisions of this Agreement shall nevertheless remain in full force and
effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that the transactions
contemplated hereby are fulfilled.
9.9 ENFORCEMENT. The parties hereto agree that the remedy at law
for any breach of this Agreement is inadequate and that should any dispute arise
concerning any matter hereunder, this Agreement shall be enforceable in a court
of equity by an injunction or a decree of specific performance. Such remedies
shall, however, be cumulative and nonexclusive, and shall be in addition to any
other remedies which the parties hereto may have.
-5-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed on its behalf as of the date first above written.
CASTLE DENTAL CENTERS OF NEW YORK,
INC.
By:_____________________________
Name: Jack H. Castle, Jr.
Title: Chief Executive Officer
CASTLE DENTAL CENTERS, INC.
By:_____________________________
Name: Jack H. Castle, Jr.
Title: Chief Executive Officer
AMERICAN MEDICAL AND LIFE INSURANCE
COMPANY
By:_____________________________
Name: Jules V. Lane D.D.S.
--------------------------------
Jules V. Lane D.D.S.
-6-
EXHIBIT 10.65
Draft
9/20/96
9/24/96
9/30/96
SERVICES AGREEMENT
THIS SERVICES AGREEMENT (the "Agreement") dated as of ___________, 1996
by and among Castle Dental Centers of New York, Inc., a New York corporation
("Castle"), American Medical and Life Insurance Company, a New York insurance
company ("AMLI"), and Jules V. Lane D.D.S.("Dr. Lane") who agree as follows:
1. INTRODUCTION. Prior to the date of this Agreement, on September 3, 1996,
Castle, Dr. Lane and certain other parties entered into an Asset Purchase
Agreement (the "Asset Purchase Agreement") which contemplated the purchase by
Castle of certain identified assets and the negotiation and execution of certain
other agreements between Castle and certain other parties, all as more fully
described in the Asset Purchase Agreement. The parties hereto have entered into
this Agreement to document certain of such additional agreements reached by them
as contemplated by the Asset Purchase Agreement. Initially capitalized terms not
otherwise defined herein shall have the meanings assigned to such terms in the
Asset Purchase Agreement.
2. IDENTIFICATION OF SHARED FACILITIES AND EQUIPMENT.Schedule I contains a list
of all facilities and equipment to be shared by Castle and AMLI and the
ownership thereof. Castle and AMLI agree as to the accuracy of the information
contained on Schedule I.
3. USE OF SHARED FACILITIES AND EQUIPMENT. Castle and AMLI agree that for the
term of this Agreement, they will share the use of the facilities and equipment
described on Schedule I on an as needed basis, with an equitable sharing of
operating expenses related to maintenance and operation of the shared facilities
and equipment, including but not limited to taxes, insurance and cost of
repairs.
4. REPLACEMENT OR OBSOLESCENCE OF SHARED FACILITIES AND EQUIPMENT. At such time
as components of the shared facilities and equipment are replaced or become
obsolete, the party owning such facilities and equipment or leasing such
facilities and equipment shall have the absolute right, but not the obligation,
to replace or substitute other facilities and equipment for the facilities and
<PAGE>
equipment no longer in use. The non-owning or non-leasing party shall have the
right, but not the obligation, to share the use of such replaced facilities and
equipment on the basis described in Section 3.
5. IDENTIFICATION OF SHARED EMPLOYEES. Schedule II contains a list of all
employees shared by Castle and AMLI, the employer, job description and the
compensation of each. Castle and AMLI agree as to the accuracy of the
information contained on Schedule II.
6. USE OF SHARED EMPLOYEES. AMLI and Castle each agree that for the term of this
Agreement, each may use the employees of the other described on Schedule II on
an as-needed basis. Castle agrees to reimburse AMLI for salary and other
expenses related to employment of the AMLI employees used by Castle, including
but not limited to taxes, insurance and benefits, and AMLI agrees to reimburse
Castle for salary and other expenses related to employment of the Castle
employees used by AMLI, including but not limited to taxes, insurance and
benefits.
7. REPLACEMENT OF TERMINATED OR RESIGNED EMPLOYEES. At such time as shared
employees are terminated or resign, the employer of such personnel shall have
the absolute right, but not the obligation, to replace or not replace such
employee. The non-employing party shall have the right, but not the obligation,
to share the use of any replacement employee on an economic basis calculated in
the same manner as described in Section 6.
8. CONFIDENTIALITY. The parties hereto acknowledge that the sharing of
facilities, equipment and employees involves the likelihood of each party hereto
having access to and knowledge of Confidential Information (as hereinafter
defined) of the other. Castle and AMLI each agree that it will not, during or
after the term of this Agreement, in whole or in part, disclose such
Confidential Information of the other to any person, firm, corporation,
association, or other entity for any reason or purpose whatsoever, nor shall it
make use of any such Confidential Information for its own purposes or for the
purposes of others; provided, however, that nothing in this Section shall be
construed to prohibit the disclosure of such Confidential Information by a party
hereto (i) to an officer, director employee or agent of Castle or AMLI; (ii) as
is reasonably necessary for the performance of its duties and responsibilities
under this Agreement; or (iii) as otherwise required by law. If a party hereto
is required by law to disclose "Confidential Information," such party shall
notify the other party, in writing, of the nature of such disclosure and the
Confidential Information to be disclosed, as soon as is possible and/or
practical, and permit such other party the opportunity to contest or limit such
disclosure.
9. CONFIDENTIAL INFORMATION DEFINED. The term "Confidential Information" shall
mean any information of Castle or AMLI, as the case may be (whether written or
oral), including all notes, studies, patient lists, information, forms, business
or management methods, marketing data, fee schedules, or trade secrets of Castle
or AMLI, as the case may be. Confidential Information shall
-2-
<PAGE>
also include the terms and provisions of this Agreement and any transaction or
document executed by the parties pursuant to this Agreement. Confidential
Information does not include any information that (i) is or becomes generally
available to and known by the public (other than as a result of an unpermitted
disclosure directly or indirectly by a party hereto or its affiliates, advisors,
or representatives); (ii) is or becomes available to the receiving party on a
nonconfidential basis from a source other than a party hereto or its affiliates,
advisors, or representatives, provided that such source is not and was not bound
by a confidentiality agreement with or other obligation of secrecy to a party
hereto of which the receiving party has knowledge at the time of such
disclosure; or (iii) has already been or is hereafter independently acquired or
developed by the receiving party without violating any confidentiality agreement
with or other obligation of secrecy to a party hereto.
10. DELIVERY OF MATERIALS. Each party hereto further agrees to deliver to the
other at the termination of this Agreement, or at any other time upon request,
all correspondence, memoranda, notes, records (including computer records and
data), drawings, sketches, plans, customer lists, and other documents, which are
made, composed, or received by a party hereto solely or jointly with others,
during the term of this Agreement and which are in such party's possession,
custody, or control at such date and which are related in any manner to the
past, present or anticipated business of Castle or AMLI.
11. TERM. Unless terminated sooner by the written agreement of the parties
hereto, the term of this Agreement shall commence on the date hereof and
continue for so long as Castle (or any of its affiliated dental practices) and
AMLI occupy the same premises at 35 Broadway, Hicksville, New York. If either
party hereto shall elect to vacate such premises, it shall give the other party
hereto not less than eight months prior written notice of such intention to
vacate.
12. MISCELLANEOUS.
12.1 SUCCESSORS AND ASSIGNS. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors, heirs and assigns of the parties hereto.
12.2 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
12.3 HEADINGS. The headings of the Sections and paragraphs of
this Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
-3-
<PAGE>
12.4 MODIFICATION AND WAIVER. No amendment, modification or
alteration of the terms or provisions of this Agreement shall be binding unless
the same shall be in writing and duly executed by the parties hereto, except
that any of the terms or provisions of this Agreement may be waived in writing
at any time by the party which is entitled to the benefits of such waived terms
or provisions. No waiver of any of the provisions of this Agreement shall be
deemed to or shall constitute a waiver of any other provision hereof (whether or
not similar). No delay on the part of either party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof.
12.5 NO THIRD PARTY BENEFICIARY RIGHTS. This Agreement is not
intended to and shall not be construed to give any Person (other than the
parties signatory hereto any interest or rights (including, without limitation,
any third party beneficiary rights) with respect to or in connection with any
agreement or provision contained herein or contemplated hereby.
12.6 NOTICE. Any notice, request, instruction or other document
to be given hereunder by any party hereto to any other party shall be
sufficiently given if delivered in person or sent by telecopier or registered or
certified mail, postage prepaid, return receipt requested, addressed as follows:
if to Castle, to:
Castle Dental Centers of New York, Inc.
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056-3021
with a copy to:
Mr. William D. Gutermuth
Bracewell & Patterson, L.L.P.
South Tower Pennzoil Place
711 Louisiana, Suite 2900
Houston, Texas 77002-2856
if to AMLI to:
American Medical and Life Insurance Company
35 Broadway
Hicksville, New York 11801
Attention: Jules V. Lane D.D.S.
-4-
<PAGE>
with a copy to:
Mr. Michael G. Yamin
Kaufmann, Feiner, Yamin,
Gildin & Robbins, LLP
777 Third Avenue
New York, New York 10017
or at such other address for a party as shall be specified by like notice, and
such notice or communication shall be deemed to have been duly given as of the
date so delivered, mailed or sent by telecopier.
12.7 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regards
to conflict of law rules thereof.
12.8 SEVERABILITY. If any provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or public policy, all
other provisions of this Agreement shall nevertheless remain in full force and
effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that the transactions
contemplated hereby are fulfilled.
12.9 ENFORCEMENT. The parties hereto agree that the remedy at law
for any breach of this Agreement is inadequate and that should any dispute arise
concerning any matter hereunder, this Agreement shall be enforceable in a court
of equity by an injunction or a decree of specific performance. Such remedies
shall, however, be cumulative and nonexclusive, and shall be in addition to any
other remedies which the parties hereto may have.
-5-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed on its behalf as of the date first above written.
CASTLE DENTAL CENTERS OF NEW YORK,
INC.
By:_____________________________
Name: Jack H. Castle, Jr.
Title: Chief Executive Officer
AMERICAN MEDICAL AND LIFE INSURANCE
COMPANY
By:_____________________________
Name: Jules V. Lane D.D.S.
--------------------------------
Jules V. Lane D.D.S.
-6-
EXHIBIT 10.66
OPTION AGREEMENT
This OPTION AGREEMENT ("Option Agreement"), effective as of
____________, 1996, by and between Jules V. Lane D.D.S. (the "Shareholder") and
Castle Dental Centers of New York, Inc. or its designee (the "Optionee").
RECITALS
A. The Shareholder is the sole shareholder of J.V. Lane Professional
Corporation d/b/a American Dental Centers, a New York professional corporation
("Lane PC"), which is engaged in the practice of dentistry.
B. Shareholder desires to afford the Optionee an opportunity to purchase
all of the ownership interest held by him in Lane PC ("Shareholder Interest") on
the terms hereof.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth and for other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto, intending to be legally bound
hereunder, agree as follows:
1. GRANT OF OPTION. Shareholder hereby irrevocably grants to Optionee or
its designee the right and option (hereinafter called the "Option") to purchase
from Shareholder all the Shareholder Interest at the exercise price set forth in
Section 2, during the period and subject to the conditions herein set forth. The
Option may be exercised by Optionee in the event of a change in applicable law
permitting the Optionee to acquire the Shareholder Interest or by a qualified
designee of the Optionee in the event that the Optionee determines to transfer
the Shareholder Interest to a designee of the Optionee qualified under
applicable law to own the Shareholder Interest. The Optionee agrees that the
Option shall be exercised in a manner to ensure that the ownership of the
Shareholder Interest will not violate any applicable laws.
2. EXERCISE PRICE. The exercise price (the "Exercise Price") for the
Shareholder Interest shall be One Hundred Dollars ($100.00).
3. OPTION TERM. The term of this Option shall expire 30 days following
the first to occur of (i) the expiration or termination, in accordance with the
terms of the Management Services Agreement, effective as of _______________,
1996 (the "Management Services Agreement"), between Lane PC and Optionee; or
(ii) the expiration or termination in accordance with the terms of the
Employment Agreement of even date herewith by and between the Shareholder and
Optionee (the "Expiration Date").
<PAGE>
4. EXERCISE OF OPTION. On the execution of this Option Agreement, the
Option shall immediately become exercisable and shall be exercisable at any time
thereafter until the Expiration Date (the "Option Period"); provided that in no
event shall the Option be exercisable by Optionee or by any transferee under
Section 7 until such time as Optionee or such transferee shall have taken such
action as may be necessary to permit such person to lawfully hold an ownership
interest in Lane PC.
5. NOTICE PERIOD. Before exercising the Option, Optionee shall give at
least twenty-four (24) hours written notice to Shareholder (or Shareholder's
representative). During the notice period, Shareholder (or Shareholder's
representative) may not sell, transfer, exchange, encumber, or otherwise
alienate the Shareholder Interest. Any such sale, transfer, exchange,
encumbrance, or alienation shall be void. In addition, during the notice period,
Shareholder shall not take any action that is materially adverse to Lane PC's
practice of dentistry.
6. MANNER OF EXERCISE. The notice of exercise of the Option shall be
accompanied by the Optionee's check payable to Shareholder for the amount of the
Exercise Price and evidence of the purchase of "tail insurance" on behalf of
Shareholder as contemplated by the Ancillary Agreement of even date herewith, to
which Shareholder and Optionee are parties. Upon delivery of such notice and
payment, the Optionee shall be deemed to have acquired the Shareholder Interest
and shall be deemed to have become a shareholder of Lane PC without any further
action on the part of the Optionee, the Shareholder or Lane PC; provided that
Optionee has on or before such date complied with all regulatory requirements
necessary to acquire such interest. However, at the Optionee's request
Shareholder shall also deliver an assignment of his Shareholder Interest in Lane
PC to the Optionee in form and substance reasonably satisfactory to Optionee. In
the event the Option shall be exercised by any person or persons other than the
Optionee, such notice shall be accompanied by appropriate proof of the right to
such person or persons to exercise the Option.
7. TRANSFERABILITY OF OPTION. The Option is transferable by Optionee at
any time to any person.
8. NO OBLIGATION TO EXERCISE OPTION. Optionee shall be under no
obligation to exercise the Option.
9. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER. Shareholder hereby
represents and warrants to, and covenants with, Optionee that Shareholder is the
only shareholder of Lane PC and no other person will be permitted to become a
shareholder (other than pursuant to the exercise of this Option) without prior
written notice to the Optionee and the grant to Optionee of an option
-2-
<PAGE>
on all of such person's ownership interest in Lane PC in form and substance
comparable to this Agreement.
For so long as Shareholder is a shareholder of Lane PC, Shareholder
agrees to use his best efforts to maintain his license to practice dentistry in
good standing and in compliance with all laws and regulations of the State of
New York relating to the practice of dentistry, and to maintain professional
liability insurance coverage in amounts contemplated by the Management Services
Agreement as an Office Expense under the Management Services Agreement, and
Optionee will take no action calculated to cause Shareholder to be unable to
maintain his license to practice dentistry in good standing and in compliance
with all such laws and regulations; provided, however, in no event shall any
failure of Shareholder to maintain his license in good standing and in such
compliance constitute a default or breach of Shareholder hereunder.
10. RESTRICTIONS ON TRANSFER OF SHAREHOLDER INTEREST; CONSENTS. During
the Option Period, Shareholder shall not "Transfer" all or any part of his
Shareholder Interest without the prior written consent of the Optionee. For
purposes of this Option Agreement, "Transfer" shall include any dissolution of
Lane PC or any assignment, mortgage, hypothecation, transfer, pledge, creation
of a security interest in or lien upon, encumbrance, gift or other disposition
unless such "Transfer" is made subordinate to or subject to this Option.
Further, Lane PC and the Shareholder shall not amend or modify Lane PC's
Articles of Incorporation or Bylaws in any manner that would adversely affect
the Optionee's prior written consent.
11. LEGEND. At all times during the term of this Agreement, all
certificates representing Shareholders' shares of Lane PC shall bear a prominent
legend describing the restrictions on transferability contained herein and
Optionee's rights hereunder.
12. NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed to be properly given when personally delivered to
the party entitled to receive the notice or when sent by certified or registered
mail, postage prepaid, properly addressed to the party entitled to receive such
notice at the address stated below or at such other address as may be furnished
in writing by any party hereto to the other:
If to Shareholder: Jules V. Lane, D.D.S.
American Dental Centers
35 Broadway
Hicksville, New York 11801
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<PAGE>
with a copy to:
Mr. Michael G. Yamin
Kaufmann, Feiner, Yamin,
Gildin & Robbins, LLP
777 Third Avenue
New York, New York 10017
If to Optionee: Castle Dental Centers of New York, Inc.
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056
Attention: Jack H. Castle, Jr.
with a copy to:
Mr. William D. Gutermuth
Bracewell & Patterson, L.L.P.
South Tower Pennzoil Place
711 Louisiana Street, Suite 2600
Houston, Texas 7700202781
13. SUCCESSORS AND ASSIGNS. This Option Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective executors,
administrators, heirs and assigns.
14. GOVERNING LAW. This Option Agreement shall be governed by and
construed under the laws of the State of New York without regard to the
conflicts of laws provisions of that state.
15. COUNTERPARTS. This Option Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
16. AMENDMENT. This Option Agreement may not be amended except by an
instrument in writing signed by all the parties.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Option
Agreement as of the date first above written.
OPTIONEE:
CASTLE DENTAL CENTERS
OF NEW YORK, INC.
By:
Jack H. Castle, Jr.
Chief Executive Officer
SHAREHOLDER:
__________________________________
Jules V. Lane D.D.S.
-5-
<PAGE>
CONSENT
J.V. Lane Professional Corporation d/b/a American Dental Centers, a New
York professional corporation, consents to the Option on the Shareholder
Interest granted herein, and agrees to recognize Optionee as a substituted
shareholder immediately upon exercise of this Option with respect to the
Shareholder Interest and payment of the Exercise Price therefor, subject to
applicable state laws and regulations.
J.V. Lane Professional Corporation, a New
York professional corporation, d/b/a
American Dental Centers
By:
Jules V. Lane D.D.S.
President
-6-
EXHIBIT 10.67
OPTION AGREEMENT
This OPTION AGREEMENT ("Option Agreement"), effective as of December 18, 1995,
by and between Jack H. Castle, D.D.S. (the "Shareholder") and Castle Dental
Centers, Inc. (the "Optionee").
RECITALS
A. The Shareholder is the sole shareholder of Jack H. Castle, D.D.S.,
P.C., a Texas professional corporation ("New PC"), which is engaged in the
practice of dentistry.
B. Shareholder desires to afford the Optionee an opportunity to purchase
all of the ownership interest held by him in New PC ("Shareholder Interest") on
the terms hereof.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth and for other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto, intending to be legally bound
hereunder, agree as follows:
1. GRANT OF OPTION. Shareholder hereby irrevocably grants to Optionee the
right and option (hereinafter called the "Option") to purchase all of the
Shareholder Interest at the exercise price set forth in paragraph 2, during the
period and subject to the conditions herein set forth.
2. EXERCISE PRICE. The exercise price (the "Exercise Price") for the
Shareholder Interest shall be One Thousand Dollars ($1,000.00).
3. OPTION TERM. The term of this Option shall expire simultaneously with
the expiration or termination in accordance with its terms of the Management
Services Agreement, effective as of December 18, 1995 between New PC and
Optionee (the "Expiration Date").
4. EXERCISE OF OPTION. The Option shall immediately become exercisable on
the occurrence of any event described in Section 5 hereof and shall be
exercisable at any time thereafter until the Expiration Date (the "Option
Period"); provided that in no event shall the Option be exercisable by Optionee
or by any transferee under Section 8 until such time as Optionee or such
transferee shall have taken such action as may be necessary to permit such
person to lawfully hold an ownership interest in New PC.
5. OPTION EXERCISE EVENTS. The Option shall immediately become exercisable
on the first to occur of (i) Shareholder's death, (ii) the appointment of a
guardian for Shareholder, (iii) any event or circumstance that results in
Shareholder not being entitled to hold an ownership interest in New PC or (iv)
Shareholder's disability. Shareholder shall be deemed disabled if he becomes
incapable of performing the duties of the PC representative to the Policy Board
under the Management Services Agreement described above and is not expected to
resume such capability within a three month period. Determinations of disability
shall be made by a physician who shall be agreed upon by Optionee and
Shareholder (or Shareholder's representative).
<PAGE>
6. NOTICE PERIOD. Before exercising the Option, Optionee shall give at
least twenty-four (24) hours written notice to Shareholder (or Shareholder's
representative). During the notice period, Shareholder (or Shareholder's
representative) may not sell, transfer, exchange, encumber, or otherwise
alienate the Shareholder Interest. Any such sale, transfer, exchange,
encumbrance, or alienation shall be void. In addition, during the notice period,
Shareholder shall not take any action that is adverse to New PC's practice of
dentistry.
7. MANNER OF EXERCISE. The notice of exercise of the Option shall be
accompanied by the Optionee's check payable to Shareholder for the amount of the
Exercise Price. Upon delivery of such notice and payment, the Optionee shall be
deemed to have acquired the Shareholder Interest and shall be deemed to have
become a shareholder of New PC without any further action on the part of the
Optionee, the Shareholder or New PC. However, at the Optionee's request
Shareholder shall also deliver an assignment of his Shareholder Interest in New
PC to the Optionee in form and substance reasonably satisfactory to Optionee. In
the event the Option shall be exercised by any person or persons other than the
Optionee, such notice shall be accompanied by appropriate proof of the right to
such person or persons to exercise the Option.
8. TRANSFERABILITY OF OPTION. The Option is transferable by Optionee at
any time to any person.
9. NO OBLIGATION TO EXERCISE OPTION. Optionee shall be under no obligation
to exercise the Option.
10. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS. Shareholder hereby
represents and warrants to, and covenants with, Optionee that Shareholder is the
only shareholder of New PC and no other person will be permitted to become a
shareholder (other than pursuant to the exercise of this Option) without prior
written notice to the Optionee and the grant to Optionee of an option on all of
such person's ownership interest in New PC in form and substance comparable to
this Agreement.
11. RESTRICTIONS ON TRANSFER OF SHAREHOLDER INTEREST; CONSENTS. During the
Option Period, Shareholder shall not "Transfer" all or any part of his
Shareholder Interest without the prior written consent of the Optionee. For
purposes of this Option Agreement, "Transfer" shall include any dissolution of
New PC or any assignment, mortgage, hypothecation, transfer, pledge, creation of
a security interest in or lien upon, encumbrance, gift or other disposition
unless such "Transfer" is made subordinate to or subject to this Option.
Further, New PC and the Shareholder shall not amend or modify New PC's Articles
of Incorporation or Bylaws in any manner that would adversely affect the
Optionee's rights hereunder without the Optionee's prior written consent.
12. NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed to be properly given when personally delivered to
the party entitled to receive the notice or when sent by certified or registered
mail, postage prepaid, properly addressed to the
2
<PAGE>
party entitled to receive such notice at the address stated below or at such
other address as may be furnished in writing by any party hereto to the other:
If to Shareholder: Jack H. Castle, D.D.S.
1360 Post Oak Blvd., Suite 1300
Houston, Texas 77056
If to Optionee: Castle Dental Centers, Inc.
1360 Post Oak Blvd., Suite 1300
Houston, Texas 77056
Attn: Jack H. Castle, Jr.
13. SUCCESSORS AND ASSIGNS. This Option Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective executors,
administrators, heirs and assigns.
14. GOVERNING LAW. This Option Agreement shall be governed by and construed
under the laws of the State of Texas without regard to the conflicts of laws
provisions of that state.
15. COUNTERPARTS. This Option Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
16. AMENDMENT. This Option Agreement may not be amended except by an
instrument in writing signed by all the parties.
IN WITNESS WHEREOF, the parties hereto have duly executed this Option
Agreement as of the date first above written.
OPTIONEE:
CASTLE DENTAL CENTERS, INC.
By: /s/ JACK H. CASTLE, JR.
Jack H. Castle, Jr.
SHAREHOLDER:
By: /s/ JACK H. CASTLE, D.D.S.
Jack H. Castle, D.D.S.
3
<PAGE>
CONSENT
JACK H. CASTLE, D.D.S., P.C., a Texas professional corporation, consents to
the Option on the Shareholder Interest granted herein, and agrees to recognize
Optionee as a substituted shareholder immediately upon exercise of this Option
with respect to the Shareholder Interest and payment of the Exercise Price
therefor, subject to applicable state laws and regulations.
JACK H. CASTLE, D.D.S., P.C.
a Texas professional corporation
By: /s/ JACK H. CASTLE, D.D.S.
Name: Jack H. Castle, D.D.S.
Title: President
EXHIBIT 10.68
OPTION AGREEMENT
This OPTION AGREEMENT ("Option Agreement"), effective as of May 19,
1996, by and between Lester B. Greenberg, D.D.S. (the "Shareholder") and Castle
Dental Centers of Florida, Inc. (the "Optionee").
RECITALS
A. The Shareholder is the sole shareholder of Castle 1st Dental Care,
P.A., a Florida professional association ("New PC"), which is engaged in the
practice of dentistry.
B. Shareholder desires to afford the Optionee an opportunity to purchase
all of the ownership interest held by him in New PC ("Shareholder Interest") on
the terms hereof.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth and for other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto, intending to be legally bound
hereunder, agree as follows:
1. GRANT OF OPTION. Shareholder hereby irrevocably grants to Optionee
the right and option (hereinafter called the "Option") to purchase all of the
Shareholder Interest at the exercise price set forth in paragraph 2, during the
period and subject to the conditions herein set forth.
2. EXERCISE PRICE. The exercise price (the "Exercise Price") for the
Shareholder Interest shall be One Hundred Dollars ($100.00).
3. OPTION TERM. The term of this Option shall expire simultaneously with
the expiration or termination in accordance with the terms of the Management
Services Agreement effective as of May 19, 1996 (the "Management Services
Agreement") between New PC and Optionee (the "Expiration Date").
4. EXERCISE OF OPTION. On the execution of this Option Agreement, the
Option shall immediately become exercisable and shall be exercisable at any time
thereafter until the Expiration Date (the "Option Period"); provided that in no
event shall the Option be exercisable by Optionee or by any transferee under
Section 7 until such time as Optionee or such transferee shall have taken
<PAGE>
such action as may be necessary to permit such person to lawfully hold an
ownership interest in New PC.
5. NOTICE PERIOD. Before exercising the Option, Optionee shall give at
least twenty-four (24) hours written notice to Shareholder (or Shareholder's
representative). During the notice period, Shareholder (or Shareholder's
representative) may not sell, transfer, exchange, encumber, or otherwise
alienate the Shareholder Interest. Any such sale, transfer, exchange,
encumbrance, or alienation shall be void. In addition, during the notice period,
Shareholder shall not take any action that is adverse to New PC's practice of
dentistry.
6. MANNER OF EXERCISE. The notice of exercise of the Option shall be
accompanied by the Optionee's check payable to Shareholder for the amount of the
Exercise Price. Upon delivery of such notice and payment, the Optionee shall be
deemed to have acquired the Shareholder Interest and shall be deemed to have
become a shareholder of New PC without any further action on the part of the
Optionee, the Shareholder or New PC. However, at the Optionee's request
Shareholder shall also deliver an assignment of his Shareholder Interest in New
PC to the Optionee in form and substance reasonably satisfactory to Optionee. In
the event the Option shall be exercised by any person or persons other than the
Optionee, such notice shall be accompanied by appropriate proof of the right to
such person or persons to exercise the Option.
7. TRANSFERABILITY OF OPTION. The Option is transferable by Optionee at
any time to any person.
8. NO OBLIGATION TO EXERCISE OPTION. Optionee shall be under no
obligation to exercise the Option.
9. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER. Shareholder hereby
represents and warrants to, and covenants with, Optionee that Shareholder is the
only shareholder of New PC and no other person will be permitted to become a
shareholder (other than pursuant to the exercise of this Option) without prior
written notice to the Optionee and the grant to Optionee of an option on all of
such person's ownership interest in New PC in form and substance comparable to
this Agreement.
For so long as Shareholder is a shareholder of New PC, Shareholder
agrees to maintain his license to practice dentistry in good standing and in
compliance with all laws and regulations of the State of Florida relating to the
practice of dentistry, and to maintain professional liability insurance coverage
in amounts contemplated by the Management Services Agreement as an Office
Expense under the Management Services Agreement.
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<PAGE>
10. RESTRICTIONS ON TRANSFER OF SHAREHOLDER INTEREST; CONSENTS. During
the Option Period, Shareholder shall not "Transfer" all or any part of his
Shareholder Interest without the prior written consent of the Optionee. For
purposes of this Option Agreement, "Transfer" shall include any dissolution of
New PC or any assignment, mortgage, hypothecation, transfer, pledge, creation of
a security interest in or lien upon, encumbrance, gift or other disposition
unless such "Transfer" is made subordinate to or subject to this Option.
Further, New PC and the Shareholder shall not amend or modify New PC's Articles
of Incorporation or Bylaws in any manner that would adversely affect the
Optionee's prior written consent.
11. NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed to be properly given when personally delivered to
the party entitled to receive the notice or when sent by certified or registered
mail, postage prepaid, properly addressed to the party entitled to receive such
notice at the address stated below or at such other address as may be furnished
in writing by any party hereto to the other:
If to Shareholder: Lester B. Greenberg, D.D.S.
29605 U.S. Highway 19N., Suite 180
Clearwater, Florida 34621
If to Optionee: Castle Dental Centers of Florida, Inc.
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056
Attention: Jack H. Castle, Jr.
12. SUCCESSORS AND ASSIGNS. This Option Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective executors,
administrators, heirs and assigns.
13. GOVERNING LAW. This Option Agreement shall be governed by and
construed under the laws of the State of Florida without regard to the conflicts
of laws provisions of that state.
14. COUNTERPARTS. This Option Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
15. AMENDMENT. This Option Agreement may not be amended except by an
instrument in writing signed by all the parties.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Option
Agreement as of the date first above written.
OPTIONEE:
CASTLE DENTAL CENTERS OF FLORIDA, INC.
By:
Jack H. Castle, Jr.
President
SHAREHOLDER:
_______________________________
Lester B. Greenberg, D.D.S.
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<PAGE>
CONSENT
Castle 1st Dental Care, P.A., a Florida professional corporation,
consents to the Option on the Shareholder Interest granted herein, and agrees to
recognize Optionee as a substituted shareholder immediately upon exercise of
this Option with respect to the Shareholder Interest and payment of the Exercise
Price therefor, subject to applicable state laws and regulations.
Castle 1st Dental Care, P.A.
a Florida professional corporation
By:
Lester B. Greenberg, D.D.S.
President
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EXHIBIT 10.69
Doc. No. 11
CASTLE DENTAL CENTERS, INC.
INCENTIVE STOCK OPTION AGREEMENT
This Incentive Stock Option Agreement ("Option Agreement") is between
Castle Dental Centers, Inc., a Delaware corporation (the "Company"), and G.
Powell Bilyeu ("Optionee"), who agree as follows:
Section 1. INTRODUCTION. The Company has heretofore adopted the Castle
Dental Centers, Inc. Omnibus Stock and Incentive Plan (the "Plan") for the
purpose of providing eligible key employees and directors of the Company and its
Affiliates (as defined in the Plan) with increased incentive to render services,
to exert maximum effort for the business success of the Company and to
strengthen the identification of employees and directors with the shareholders.
The Company, acting through its Board of Directors (the "Board"), has determined
that its interests will be advanced by the issuance to Optionee of an incentive
stock option under the Plan.
Section 2. OPTION. Subject to the terms and conditions contained herein,
the Company hereby irrevocably grants to Optionee the right and option
("Option") to purchase from the Company 50,000 shares of the Company's common
stock, $.001 par value ("Common Stock"), at a price of $5.00 per share, which is
deemed to be not less than the fair market value of the Common Stock at the date
of grant of this Option.
Section 3. OPTION PERIOD. The Option herein granted may be exercised by
Optionee in whole or in part at any time during a five year period beginning on
May 31, 1997 (the "Option Period"), subject to the limitation that said Option
shall not be exercisable for more than a percentage of the aggregate number of
shares offered by this Option determined by the number of full years of
employment with the Company or its Affiliates from the effective date of
Optionee's grant, to the date of such exercise, in accordance with the following
schedule:
Number of Percentage of
FULL YEARS SHARES PURCHASABLE
1 20%
2 40%
3 60%
4 80%
5 100%
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<PAGE>
Notwithstanding anything in this Option Agreement to the contrary, the Board, in
its sole discretion, may waive the foregoing schedule of vesting and upon
written notice to Optionee, accelerate the earliest date or dates on which any
of the Options granted hereunder are exercisable.
Section 4. PROCEDURE FOR EXERCISE. The Option herein granted may be
exercised by the delivery by Optionee of written notice to the Secretary of the
Company setting forth the number of shares of Common Stock with respect to which
the Option is being exercised. The notice shall be accompanied by, at the
election of the Optionee, (i) cash, cashier's check, bank draft, or postal or
express money order payable to the order of the Company, (ii) certificates
representing shares of Common Stock theretofore owned by Optionee duly endorsed
for transfer to the Company, (iii) an election by Optionee to have the Company
withhold shares of Common Stock issuable upon exercise of the Option, or (iv)
any combination of the preceding, equal in value to the aggregate exercise
price. Notice may also be delivered by telecopy provided that the exercise price
of such shares is received by the Company via wire transfer on the same day the
telecopy transmission is received by the Company. The notice shall specify the
name in which such Shares are issued and the address to which the certificates
for such shares are to be mailed. An option to purchase shares of Common Stock
in accordance with this Plan, shall be deemed to have been exercised immediately
prior to the close of business on the date (i) written notice of such exercise
and (ii) payment in full of the exercise price for the number of shares for
which Options are being exercised, are both received by the Company and Optionee
shall be treated for all purposes as the record holder of such shares of Common
Stock as of such date.
As promptly as practicable after receipt of such written notice and
payment, the Company shall deliver to Optionee certificates for the number of
shares with respect to which such Option has been so exercised, issued in
Optionee's name or such other name as Optionee directs; provided, however, that
such delivery shall be deemed effected for all purposes when a stock transfer
agent of the Company shall have deposited such certificates in the United States
mail, addressed to Optionee at the address specified pursuant to this Section 4.
Section 5. TERMINATION OF EMPLOYMENT. If Optionee ceases to be employed
by the Company or its Affiliates for any reason other than death or disability,
any Option which is exercisable on the date of such termination of employment
shall expire upon such date of such termination of employment; provided,
however, the Board, in its sole discretion, may allow Optionee to exercise all
or a portion of the options granted but unexercised for a period of time after
Optionee's termination of employment.
Section 6. DISABILITY OR DEATH. In the event that Optionee dies or is
determined to be disabled while Optionee is employed by the Company, the options
previously granted to Optionee may be exercised (to the extent Optionee would
have been entitled to do so at the date of death or the determination of
disability) at any time and from time to time, within a one-year period after
such death or determination of disability, by the Optionee, the guardian of
Optionee's estate, the executor or administrator of Optionee's estate or by the
person or persons to whom Optionee's rights under
-2-
<PAGE>
this Option Agreement shall pass by will or the laws of descent and
distribution, but in no event may the Option be exercised after its expiration
under the terms of this Option Agreement. An Optionee shall be deemed to be
disabled if, in the opinion of a physician selected by the Board, Optionee is
incapable of performing services for the Company of the kind Optionee was
performing at the time the disability occurred by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or to be of long, continued and indefinite duration. The date of
determination of disability for purposes hereof shall be the date of such
determination by such physician.
Section 7. TRANSFERABILITY. This Option shall not be transferable by
Optionee otherwise than by Optionee's will or by the laws of descent and
distribution or pursuant to a transfer which is incident to a divorce, as
described in Code Section 1041(a). During the lifetime of Optionee, the Option
shall be exercisable only by Optionee or his authorized legal representative.
Any heir or legatee of Optionee shall take rights herein granted subject to the
terms and conditions hereof. No such transfer of this Option Agreement to heirs
or legatees of Optionee shall be effective to bind the Company unless the
Company shall have been furnished with written notice thereof and a copy of such
evidence as the Board may deem necessary to establish the validity of the
transfer and the acceptance by the transferee or transferees of the terms and
conditions hereof.
Section 8. NO RIGHTS AS SHAREHOLDER. Optionee shall have no rights as a
shareholder with respect to any shares of Common Stock covered by this Option
Agreement until the Option is exercised by written notice and accompanied by
payment as provided in Section 4 of this Option Agreement.
Section 9. EXTRAORDINARY CORPORATE TRANSACTIONS. The existence of
outstanding Options shall not affect in any way the right or power of the
Company or its shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issuance of Common Stock or subscription rights thereto, or any issuance of
bonds, debentures, preferred or prior preference stock ahead of or affecting the
Common Stock or the rights thereof, or the dissolution or liquidation of the
Company, or any sale or transfer of all or any part of its assets or business,
or any other corporate act or proceedings, whether of a similar character or
otherwise. If the Company goes through a "Fundamental Change" or a "Corporate
Change" (as defined in subsection 8.4 of the Plan), the Options granted
hereunder shall be governed by subsection 8.4 of the Plan.
Section 10. CHANGES IN CAPITAL STRUCTURE. If the outstanding shares of
Common Stock or other securities of the Company, or both, for which the Option
is then exercisable shall at any time be changed or exchanged by declaration of
a stock dividend, stock split, combination of shares, or recapitalization, the
number and kind of shares of Common Stock or other securities subject to the
Plan or subject to the Option and the exercise price, shall be appropriately and
equitably adjusted
-3-
<PAGE>
so as to maintain the proportionate number of shares or other securities without
changing the aggre gate exercise price.
Section 11. SHAREHOLDER AGREEMENT. Optionee, or Optionee's
representative upon Optionee's death, prior to the exercise of an Option granted
hereunder, agrees to enter into the Company's Shareholders Agreement at the
request of the Company.
Section 12. COMPLIANCE WITH SECURITIES LAWS. Upon the acquisition of any
shares pursuant to the exercise of the Option herein granted, Optionee (or any
person acting under Section 7) will enter into such written representations,
warranties and agreements as the Company may reasonably request in order to
comply with applicable securities laws or with this Option Agreement.
Section 13. COMPLIANCE WITH LAWS. Notwithstanding any of the other
provisions hereof, Optionee agrees that he or she will not exercise the Option
granted hereby, and that the Company will not be obligated to issue any shares
pursuant to this Option Agreement, if the exercise of the Option or the issuance
of such shares of Common Stock would constitute a violation by Optionee or by
the Company of any provision of any law or regulation of any governmental
authority.
Section 14. NO RIGHT TO EMPLOYMENT. Optionee who is an employee shall be
considered to be in the employment of the Company so long as he or she remains
an employee of the Company or its Affiliates. Any questions as to whether and
when there has been a termination of such employment and the cause of such
termination shall be determined by the Board, and its determination shall be
final. Nothing contained herein shall be construed as conferring upon Optionee
the right to continue in the employ of the Company, nor shall anything contained
herein be construed or interpreted to limit the "employment at will"
relationship between Optionee and the Company.
Section 15. RESOLUTION OF DISPUTES. As a condition of the granting of
the Option hereby, Optionee, and Optionee's heirs, personal representatives and
successors agree that any dispute or disagreement which may arise hereunder
shall be determined by the Board, in its sole discretion and judgment, and that
any such determination and any interpretation by the Board of the terms of this
Option Agreement shall be final and shall be binding and conclusive, for all
purposes, upon the Company, Optionee, and Optionee's heirs, personal
representatives and successors.
Section 16. LEGENDS ON CERTIFICATE. The certificates representing the
shares of Common Stock purchased by exercise of the Option will be stamped or
otherwise imprinted with legends in such form as the Company or its counsel may
require with respect to any applicable restrictions on sale or transfer and the
stock transfer records of the Company will reflect stop-transfer instructions
with respect to such shares.
Section 17. NOTICES. Every notice hereunder shall be in writing and
shall be given by registered or certified mail. All notices of the exercise of
any Option hereunder shall be directed to
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<PAGE>
Castle Dental Centers, Inc., 1360 Post Oak Boulevard, Suite 1300, Houston, Texas
77056, Attention: Secretary. Any notice given by the Company to Optionee
directed to Optionee at the address on file with the Company shall be effective
to bind Optionee and any other person who shall acquire rights hereunder. The
Company shall be under no obligation whatsoever to advise Optionee of the
existence, maturity or termination of any of Optionee's rights hereunder and
Optionee shall be deemed to have familiarized himself or herself with all
matters contained herein and in the Plan which may affect any of Optionee's
rights or privileges hereunder.
Section 18. CONSTRUCTION AND INTERPRETATION. Whenever the term
"Optionee" is used herein under circumstances applicable to any other person or
persons to whom this award, in accordance with the provisions of Section 7
hereof, may be transferred, the word "Optionee" shall be deemed to include such
person or persons.
Section 19. NOTICE OF DISPOSITION. If Optionee disposes of any shares of
Common Stock acquired pursuant to the exercise of an Option granted hereunder
prior to the earlier of (i) two years from the date of this Option Agreement or
(ii) one year from the date the shares of Common Stock were acquired, Optionee
shall notify the Company of such disposition within ten days of its occurrence
and deliver to the Company any amount of federal or state income tax withholding
required by law. Payment of the withholding shall be made in accordance with
Section 10 of the Plan. If the Optionee fails to pay the withholding tax, the
Company is authorized to withhold from any cash remuneration then or thereafter
payable to the Optionee any tax required to be withheld by reason of any
disposition named herein.
Section 20. AGREEMENT SUBJECT TO PLAN. This Option Agreement is subject
to the Plan. The terms and provisions of the Plan (including any subsequent
amendments thereto) are hereby incorporated herein by reference thereto. In the
event of a conflict between any term or provision contained herein and a term or
provision of the Plan, the applicable terms and provisions of the Plan will
govern and prevail. All definitions of words and terms contained in the Plan
shall be applicable to this Option Agreement.
Section 21. BINDING EFFECT. This Option Agreement shall be binding upon
and inure to the benefit of any successors to the Company and all persons
lawfully claiming under Optionee as provided herein.
-5-
<PAGE>
IN WITNESS WHEREOF, this Incentive Stock Option Agreement has been
executed as of the 31st day of May, 1996.
CASTLE DENTAL CENTERS, INC.
ATTEST: By: _________________________
Jack H. Castle, Jr.
President
OPTIONEE
_________________________
G. Powell Bilyeu
-6-
EXHIBIT 10.70
Doc. No. 12
CASTLE DENTAL CENTERS, INC.
INCENTIVE STOCK OPTION AGREEMENT
This Incentive Stock Option Agreement ("Option Agreement") is between
Castle Dental Centers, Inc., a Delaware corporation (the "Company"), and Phillip
T. Hamner ("Optionee"), who agree as follows:
Section 1. INTRODUCTION. The Company has heretofore adopted the Castle
Dental Centers, Inc. Omnibus Stock and Incentive Plan (the "Plan") for the
purpose of providing eligible key employees and directors of the Company and its
Affiliates (as defined in the Plan) with increased incentive to render services,
to exert maximum effort for the business success of the Company and to
strengthen the identification of employees and directors with the shareholders.
The Company, acting through its Board of Directors (the "Board"), has determined
that its interests will be advanced by the issuance to Optionee of an incentive
stock option under the Plan.
Section 2. OPTION. Subject to the terms and conditions contained herein,
the Company hereby irrevocably grants to Optionee the right and option
("Option") to purchase from the Company 5,000 shares of the Company's common
stock, $.001 par value ("Common Stock"), at a price of $5.00 per share, which is
deemed to be not less than the fair market value of the Common Stock at the date
of grant of this Option.
Section 3. OPTION PERIOD. The Option herein granted may be exercised by
Optionee in whole or in part at any time during a five year period beginning on
May 31, 1997 (the "Option Period"), subject to the limitation that said Option
shall not be exercisable for more than a percentage of the aggregate number of
shares offered by this Option determined by the number of full years of
employment with the Company or its Affiliates from the effective date of
Optionee's grant, to the date of such exercise, in accordance with the following
schedule:
Number of Percentage of
FULL YEARS SHARES PURCHASABLE
1 20%
2 40%
3 60%
4 80%
5 100%
-1-
<PAGE>
Notwithstanding anything in this Option Agreement to the contrary, the Board, in
its sole discretion, may waive the foregoing schedule of vesting and upon
written notice to Optionee, accelerate the earliest date or dates on which any
of the Options granted hereunder are exercisable.
Section 4. PROCEDURE FOR EXERCISE. The Option herein granted may be
exercised by the delivery by Optionee of written notice to the Secretary of the
Company setting forth the number of shares of Common Stock with respect to which
the Option is being exercised. The notice shall be accompanied by, at the
election of the Optionee, (i) cash, cashier's check, bank draft, or postal or
express money order payable to the order of the Company, (ii) certificates
representing shares of Common Stock theretofore owned by Optionee duly endorsed
for transfer to the Company, (iii) an election by Optionee to have the Company
withhold shares of Common Stock issuable upon exercise of the Option, or (iv)
any combination of the preceding, equal in value to the aggregate exercise
price. Notice may also be delivered by telecopy provided that the exercise price
of such shares is received by the Company via wire transfer on the same day the
telecopy transmission is received by the Company. The notice shall specify the
name in which such shares are issued and the address to which the certificates
for such shares are to be mailed. An option to purchase shares of Common Stock
in accordance with this Plan, shall be deemed to have been exercised immediately
prior to the close of business on the date (i) written notice of such exercise
and (ii) payment in full of the exercise price for the number of shares for
which Options are being exercised, are both received by the Company and Optionee
shall be treated for all purposes as the record holder of such shares of Common
Stock as of such date.
As promptly as practicable after receipt of such written notice and
payment, the Company shall deliver to Optionee certificates for the number of
shares with respect to which such Option has been so exercised, issued in
Optionee's name or such other name as Optionee directs; provided, however, that
such delivery shall be deemed effected for all purposes when a stock transfer
agent of the Company shall have deposited such certificates in the United States
mail, addressed to Optionee at the address specified pursuant to this Section 4.
Section 5. TERMINATION OF EMPLOYMENT. If Optionee ceases to be employed
by the Company or its Affiliates for any reason other than death or disability,
any Option which is exercisable on the date of such termination of employment
shall expire upon such date of such termination of employment; provided,
however, the Board, in its sole discretion, may allow Optionee to exercise all
or a portion of the options granted but unexercised for a period of time after
Optionee's termination of employment.
Section 6. DISABILITY OR DEATH. In the event that Optionee dies or is
determined to be disabled while Optionee is employed by the Company, the options
previously granted to Optionee may be exercised (to the extent Optionee would
have been entitled to do so at the date of death or the determination of
disability) at any time and from time to time, within a one-year period after
such death or determination of disability, by the Optionee, the guardian of
Optionee's estate, the executor or administrator of Optionee's estate or by the
person or persons to whom Optionee's rights under this Option Agreement shall
pass by will or the laws of descent and distribution, but in no event may
-2-
<PAGE>
the Option be exercised after its expiration under the terms of this Option
Agreement. An Optionee shall be deemed to be disabled if, in the opinion of a
physician selected by the Board, Optionee is incapable of performing services
for the Company of the kind Optionee was performing at the time the disability
occurred by reason of any medically determinable physical or mental impairment
which can be expected to result in death or to be of long, continued and
indefinite duration. The date of determination of disability for purposes hereof
shall be the date of such determination by such physician.
Section 7. TRANSFERABILITY. This Option shall not be transferable by
Optionee otherwise than by Optionee's will or by the laws of descent and
distribution or pursuant to a transfer which is incident to a divorce, as
described in Code Section 1041(a). During the lifetime of Optionee, the Option
shall be exercisable only by Optionee or his authorized legal representative.
Any heir or legatee of Optionee shall take rights herein granted subject to the
terms and conditions hereof. No such transfer of this Option Agreement to heirs
or legatees of Optionee shall be effective to bind the Company unless the
Company shall have been furnished with written notice thereof and a copy of such
evidence as the Board may deem necessary to establish the validity of the
transfer and the acceptance by the transferee or transferees of the terms and
conditions hereof.
Section 8. NO RIGHTS AS SHAREHOLDER. Optionee shall have no rights as a
shareholder with respect to any shares of Common Stock covered by this Option
Agreement until the Option is exercised by written notice and accompanied by
payment as provided in Section 4 of this Option Agreement.
Section 9. EXTRAORDINARY CORPORATE TRANSACTIONS. The existence of
outstanding Options shall not affect in any way the right or power of the
Company or its shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issuance of Common Stock or subscription rights thereto, or any issuance of
bonds, debentures, preferred or prior preference stock ahead of or affecting the
Common Stock or the rights thereof, or the dissolution or liquidation of the
Company, or any sale or transfer of all or any part of its assets or business,
or any other corporate act or proceedings, whether of a similar character or
otherwise. If the Company goes through a "Fundamental Change" or a "Corporate
Change" (as defined in subsection 8.4 of the Plan), the Options granted
hereunder shall be governed by subsection 8.4 of the Plan.
Section 10. CHANGES IN CAPITAL STRUCTURE. If the outstanding shares of
Common Stock or other securities of the Company, or both, for which the Option
is then exercisable shall at any time be changed or exchanged by declaration of
a stock dividend, stock split, combination of shares, or recapitalization, the
number and kind of shares of Common Stock or other securities subject to the
Plan or subject to the Option and the exercise price, shall be appropriately and
equitably adjusted so as to maintain the proportionate number of shares or other
securities without changing the aggre gate exercise price.
-3-
<PAGE>
Section 11. SHAREHOLDER AGREEMENT. Optionee, or Optionee's
representative upon Optionee's death, prior to the exercise of an Option granted
hereunder, agrees to enter into the Company's Shareholders Agreement at the
request of the Company.
Section 12. COMPLIANCE WITH SECURITIES LAWS. Upon the acquisition of any
shares pursuant to the exercise of the Option herein granted, Optionee (or any
person acting under Section 7) will enter into such written representations,
warranties and agreements as the Company may reasonably request in order to
comply with applicable securities laws or with this Option Agreement.
Section 13. COMPLIANCE WITH LAWS. Notwithstanding any of the other
provisions hereof, Optionee agrees that he or she will not exercise the Option
granted hereby, and that the Company will not be obligated to issue any shares
pursuant to this Option Agreement, if the exercise of the Option or the issuance
of such shares of Common Stock would constitute a violation by Optionee or by
the Company of any provision of any law or regulation of any governmental
authority.
Section 14. NO RIGHT TO EMPLOYMENT. Optionee who is an employee shall be
considered to be in the employment of the Company so long as he or she remains
an employee of the Company or its Affiliates. Any questions as to whether and
when there has been a termination of such employment and the cause of such
termination shall be determined by the Board, and its determination shall be
final. Nothing contained herein shall be construed as conferring upon Optionee
the right to continue in the employ of the Company, nor shall anything contained
herein be construed or interpreted to limit the "employment at will"
relationship between Optionee and the Company.
Section 15. RESOLUTION OF DISPUTES. As a condition of the granting of
the Option hereby, Optionee, and Optionee's heirs, personal representatives and
successors agree that any dispute or disagreement which may arise hereunder
shall be determined by the Board, in its sole discretion and judgment, and that
any such determination and any interpretation by the Board of the terms of this
Option Agreement shall be final and shall be binding and conclusive, for all
purposes, upon the Company, Optionee, and Optionee's heirs, personal
representatives and successors.
Section 16. LEGENDS ON CERTIFICATE. The certificates representing the
shares of Common Stock purchased by exercise of the Option will be stamped or
otherwise imprinted with legends in such form as the Company or its counsel may
require with respect to any applicable restrictions on sale or transfer and the
stock transfer records of the Company will reflect stop-transfer instructions
with respect to such shares.
Section 17. NOTICES. Every notice hereunder shall be in writing and
shall be given by registered or certified mail. All notices of the exercise of
any Option hereunder shall be directed to Castle Dental Centers, Inc., 1360 Post
Oak Boulevard, Suite 1300, Houston, Texas 77056, Attention: Secretary. Any
notice given by the Company to Optionee directed to Optionee at the address on
file with the Company shall be effective to bind Optionee and any other person
who shall acquire rights hereunder. The Company shall be under no obligation
whatsoever to advise Optionee of the
-4-
<PAGE>
existence, maturity or termination of any of Optionee's rights hereunder and
Optionee shall be deemed to have familiarized himself or herself with all
matters contained herein and in the Plan which may affect any of Optionee's
rights or privileges hereunder.
Section 18. CONSTRUCTION AND INTERPRETATION. Whenever the term
"Optionee" is used herein under circumstances applicable to any other person or
persons to whom this award, in accordance with the provisions of Section 7
hereof, may be transferred, the word "Optionee" shall be deemed to include such
person or persons.
Section 19. NOTICE OF DISPOSITION. If Optionee disposes of any shares of
Common Stock acquired pursuant to the exercise of an Option granted hereunder
prior to the earlier of (i) two years from the date of this Option Agreement or
(ii) one year from the date the shares of Common Stock were acquired, Optionee
shall notify the Company of such disposition within ten days of its occurrence
and deliver to the Company any amount of federal or state income tax withholding
required by law. Payment of the withholding shall be made in accordance with
Section 10 of the Plan. If the Optionee fails to pay the withholding tax, the
Company is authorized to withhold from any cash remuneration then or thereafter
payable to the Optionee any tax required to be withheld by reason of any
disposition named herein.
Section 20. AGREEMENT SUBJECT TO PLAN. This Option Agreement is subject
to the Plan. The terms and provisions of the Plan (including any subsequent
amendments thereto) are hereby incorporated herein by reference thereto. In the
event of a conflict between any term or provision contained herein and a term or
provision of the Plan, the applicable terms and provisions of the Plan will
govern and prevail. All definitions of words and terms contained in the Plan
shall be applicable to this Option Agreement.
Section 21. BINDING EFFECT. This Option Agreement shall be binding upon
and inure to the benefit of any successors to the Company and all persons
lawfully claiming under Optionee as provided herein.
-5-
<PAGE>
IN WITNESS WHEREOF, this Incentive Stock Option Agreement has been
executed as of the 31st day of May, 1996.
CASTLE DENTAL CENTERS, INC.
ATTEST: By: ___________________________
Jack H. Castle, Jr.
President
OPTIONEE
___________________________
Phillip T. Hamner
-6-
EXHIBIT 10.71
Doc. No. 13
CASTLE DENTAL CENTERS, INC.
INCENTIVE STOCK OPTION AGREEMENT
This Incentive Stock Option Agreement ("Option Agreement") is between
Castle Dental Centers, Inc., a Delaware corporation (the "Company"), and David
North ("Optionee"), who agree as follows:
Section 1. INTRODUCTION. The Company has heretofore adopted the Castle
Dental Centers, Inc. Omnibus Stock and Incentive Plan (the "Plan") for the
purpose of providing eligible key employees and directors of the Company and its
Affiliates (as defined in the Plan) with increased incentive to render services,
to exert maximum effort for the business success of the Company and to
strengthen the identification of employees and directors with the shareholders.
The Company, acting through its Board of Directors (the "Board"), has determined
that its interests will be advanced by the issuance to Optionee of an incentive
stock option under the Plan.
Section 2. OPTION. Subject to the terms and conditions contained herein,
the Company hereby irrevocably grants to Optionee the right and option
("Option") to purchase from the Company 5,000 shares of the Company's common
stock, $.001 par value ("Common Stock"), at a price of $5.00 per share, which is
deemed to be not less than the fair market value of the Common Stock at the date
of grant of this Option.
Section 3. OPTION PERIOD. The Option herein granted may be exercised by
Optionee in whole or in part at any time during a five year period beginning on
May 31, 1997 (the "Option Period"), subject to the limitation that said Option
shall not be exercisable for more than a percentage of the aggregate number of
shares offered by this Option determined by the number of full years of
employment with the Company or its Affiliates from the effective date of
Optionee's grant, to the date of such exercise, in accordance with the following
schedule:
Number of Percentage of
FULL YEARS SHARES PURCHASABLE
1 20%
2 40%
3 60%
4 80%
5 100%
-1-
<PAGE>
Notwithstanding anything in this Option Agreement to the contrary, the Board, in
its sole discretion, may waive the foregoing schedule of vesting and upon
written notice to Optionee, accelerate the earliest date or dates on which any
of the Options granted hereunder are exercisable.
Section 4. PROCEDURE FOR EXERCISE. The Option herein granted may be
exercised by the delivery by Optionee of written notice to the Secretary of the
Company setting forth the number of shares of Common Stock with respect to which
the Option is being exercised. The notice shall be accompanied by, at the
election of the Optionee, (i) cash, cashier's check, bank draft, or postal or
express money order payable to the order of the Company, (ii) certificates
representing shares of Common Stock theretofore owned by Optionee duly endorsed
for transfer to the Company, (iii) an election by Optionee to have the Company
withhold shares of Common Stock issuable upon exercise of the Option, or (iv)
any combination of the preceding, equal in value to the aggregate exercise
price. Notice may also be delivered by telecopy provided that the exercise price
of such shares is received by the Company via wire transfer on the same day the
telecopy transmission is received by the Company. The notice shall specify the
name in which such shares are issued and the address to which the certificates
for such shares are to be mailed. An option to purchase shares of Common Stock
in accordance with this Plan, shall be deemed to have been exercised immediately
prior to the close of business on the date (i) written notice of such exercise
and (ii) payment in full of the exercise price for the number of shares for
which Options are being exercised, are both received by the Company and Optionee
shall be treated for all purposes as the record holder of such shares of Common
Stock as of such date.
As promptly as practicable after receipt of such written notice and
payment, the Company shall deliver to Optionee certificates for the number of
shares with respect to which such Option has been so exercised, issued in
Optionee's name or such other name as Optionee directs; provided, however, that
such delivery shall be deemed effected for all purposes when a stock transfer
agent of the Company shall have deposited such certificates in the United States
mail, addressed to Optionee at the address specified pursuant to this Section 4.
Section 5. TERMINATION OF EMPLOYMENT. If Optionee ceases to be employed
by the Company or its Affiliates for any reason other than death or disability,
any Option which is exercisable on the date of such termination of employment
shall expire upon such date of such termination of employment; provided,
however, the Board, in its sole discretion, may allow Optionee to exercise all
or a portion of the options granted but unexercised for a period of time after
Optionee's termination of employment.
Section 6. DISABILITY OR DEATH. In the event that Optionee dies or is
determined to be disabled while Optionee is employed by the Company, the options
previously granted to Optionee may be exercised (to the extent Optionee would
have been entitled to do so at the date of death or the determination of
disability) at any time and from time to time, within a one-year period after
such death or determination of disability, by the Optionee, the guardian of
Optionee's estate, the executor or administrator of Optionee's estate or by the
person or persons to whom Optionee's rights under
-2-
<PAGE>
this Option Agreement shall pass by will or the laws of descent and
distribution, but in no event may the Option be exercised after its expiration
under the terms of this Option Agreement. An Optionee shall be deemed to be
disabled if, in the opinion of a physician selected by the Board, Optionee is
incapable of performing services for the Company of the kind Optionee was
performing at the time the disability occurred by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or to be of long, continued and indefinite duration. The date of
determination of disability for purposes hereof shall be the date of such
determination by such physician.
Section 7. TRANSFERABILITY. This Option shall not be transferable by
Optionee otherwise than by Optionee's will or by the laws of descent and
distribution or pursuant to a transfer which is incident to a divorce, as
described in Code Section 1041(a). During the lifetime of Optionee, the Option
shall be exercisable only by Optionee or his authorized legal representative.
Any heir or legatee of Optionee shall take rights herein granted subject to the
terms and conditions hereof. No such transfer of this Option Agreement to heirs
or legatees of Optionee shall be effective to bind the Company unless the
Company shall have been furnished with written notice thereof and a copy of such
evidence as the Board may deem necessary to establish the validity of the
transfer and the acceptance by the transferee or transferees of the terms and
conditions hereof.
Section 8. NO RIGHTS AS SHAREHOLDER. Optionee shall have no rights as a
shareholder with respect to any shares of Common Stock covered by this Option
Agreement until the Option is exercised by written notice and accompanied by
payment as provided in Section 4 of this Option Agreement.
Section 9. EXTRAORDINARY CORPORATE TRANSACTIONS. The existence of
outstanding Options shall not affect in any way the right or power of the
Company or its shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issuance of Common Stock or subscription rights thereto, or any issuance of
bonds, debentures, preferred or prior preference stock ahead of or affecting the
Common Stock or the rights thereof, or the dissolution or liquidation of the
Company, or any sale or transfer of all or any part of its assets or business,
or any other corporate act or proceedings, whether of a similar character or
otherwise. If the Company goes through a "Fundamental Change" or a "Corporate
Change" (as defined in subsection 8.4 of the Plan), the Options granted
hereunder shall be governed by subsection 8.4 of the Plan.
Section 10. CHANGES IN CAPITAL STRUCTURE. If the outstanding shares of
Common Stock or other securities of the Company, or both, for which the Option
is then exercisable shall at any time be changed or exchanged by declaration of
a stock dividend, stock split, combination of shares, or recapitalization, the
number and kind of shares of Common Stock or other securities subject to the
Plan or subject to the Option and the exercise price, shall be appropriately and
equitably adjusted
-3-
<PAGE>
so as to maintain the proportionate number of shares or other securities without
changing the aggre gate exercise price.
Section 11. SHAREHOLDER AGREEMENT. Optionee, or Optionee's
representative upon Optionee's death, prior to the exercise of an Option granted
hereunder, agrees to enter into the Company's Shareholders Agreement at the
request of the Company.
Section 12. COMPLIANCE WITH SECURITIES LAWS. Upon the acquisition of any
shares pursuant to the exercise of the Option herein granted, Optionee (or any
person acting under Section 7) will enter into such written representations,
warranties and agreements as the Company may reasonably request in order to
comply with applicable securities laws or with this Option Agreement.
Section 13. COMPLIANCE WITH LAWS. Notwithstanding any of the other
provisions hereof, Optionee agrees that he or she will not exercise the Option
granted hereby, and that the Company will not be obligated to issue any shares
pursuant to this Option Agreement, if the exercise of the Option or the issuance
of such shares of Common Stock would constitute a violation by Optionee or by
the Company of any provision of any law or regulation of any governmental
authority.
Section 14. NO RIGHT TO EMPLOYMENT. Optionee who is an employee shall be
considered to be in the employment of the Company so long as he or she remains
an employee of the Company or its Affiliates. Any questions as to whether and
when there has been a termination of such employment and the cause of such
termination shall be determined by the Board, and its determination shall be
final. Nothing contained herein shall be construed as conferring upon Optionee
the right to continue in the employ of the Company, nor shall anything contained
herein be construed or interpreted to limit the "employment at will"
relationship between Optionee and the Company.
Section 15. RESOLUTION OF DISPUTES. As a condition of the granting of
the Option hereby, Optionee, and Optionee's heirs, personal representatives and
successors agree that any dispute or disagreement which may arise hereunder
shall be determined by the Board, in its sole discretion and judgment, and that
any such determination and any interpretation by the Board of the terms of this
Option Agreement shall be final and shall be binding and conclusive, for all
purposes, upon the Company, Optionee, and Optionee's heirs, personal
representatives and successors.
Section 16. LEGENDS ON CERTIFICATE. The certificates representing the
shares of Common Stock purchased by exercise of the Option will be stamped or
otherwise imprinted with legends in such form as the Company or its counsel may
require with respect to any applicable restrictions on sale or transfer and the
stock transfer records of the Company will reflect stop-transfer instructions
with respect to such shares.
Section 17. NOTICES. Every notice hereunder shall be in writing and
shall be given by registered or certified mail. All notices of the exercise of
any Option hereunder shall be directed to
-4-
<PAGE>
Castle Dental Centers, Inc., 1360 Post Oak Boulevard, Suite 1300, Houston, Texas
77056, Attention: Secretary. Any notice given by the Company to Optionee
directed to Optionee at the address on file with the Company shall be effective
to bind Optionee and any other person who shall acquire rights hereunder. The
Company shall be under no obligation whatsoever to advise Optionee of the
existence, maturity or termination of any of Optionee's rights hereunder and
Optionee shall be deemed to have familiarized himself or herself with all
matters contained herein and in the Plan which may affect any of Optionee's
rights or privileges hereunder.
Section 18. CONSTRUCTION AND INTERPRETATION. Whenever the term
"Optionee" is used herein under circumstances applicable to any other person or
persons to whom this award, in accordance with the provisions of Section 7
hereof, may be transferred, the word "Optionee" shall be deemed to include such
person or persons.
Section 19. NOTICE OF DISPOSITION. If Optionee disposes of any shares of
Common Stock acquired pursuant to the exercise of an Option granted hereunder
prior to the earlier of (i) two years from the date of this Option Agreement or
(ii) one year from the date the shares of Common Stock were acquired, Optionee
shall notify the Company of such disposition within ten days of its occurrence
and deliver to the Company any amount of federal or state income tax withholding
required by law. Payment of the withholding shall be made in accordance with
Section 10 of the Plan. If the Optionee fails to pay the withholding tax, the
Company is authorized to withhold from any cash remuneration then or thereafter
payable to the Optionee any tax required to be withheld by reason of any
disposition named herein.
Section 20. AGREEMENT SUBJECT TO PLAN. This Option Agreement is subject
to the Plan. The terms and provisions of the Plan (including any subsequent
amendments thereto) are hereby incorporated herein by reference thereto. In the
event of a conflict between any term or provision contained herein and a term or
provision of the Plan, the applicable terms and provisions of the Plan will
govern and prevail. All definitions of words and terms contained in the Plan
shall be applicable to this Option Agreement.
Section 21. BINDING EFFECT. This Option Agreement shall be binding upon
and inure to the benefit of any successors to the Company and all persons
lawfully claiming under Optionee as provided herein.
-5-
<PAGE>
IN WITNESS WHEREOF, this Incentive Stock Option Agreement has been
executed as of the 31st day of May, 1996.
CASTLE DENTAL CENTERS, INC.
ATTEST: By: ___________________________
Jack H. Castle, Jr.
President
OPTIONEE
___________________________
David North
-6-
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
(File No. 333-11335) of i) our report dated September 3, 1996, on our audits of
the financial statements and financial statement schedule of Castle Dental
Centers, Inc. as of December 31, 1994 and 1995 and for each of the three years
in the period ended December 31, 1995, ii) our report dated June 10, 1996 on our
audits of the financial statements of 1st Dental Care as of December 31, 1994
and 1995 and for each of the three years in the period ended December 31, 1995,
iii) our report dated June 10, 1996 on our audits of the financial statements of
Mid-South Dental Centers as of December 31, 1994 and 1995 and for each of the
three years in the period ended December 31, 1995, iv) our report dated August
15, 1996 on our audits of the financial statements of Horizon Dental Centers as
of December 31, 1995 and for each of the two years in the period ended December
31, 1995, v) our report dated September 3, 1996 on our audits of the financial
statements of American Dental Centers as of December 31, 1994 and 1995 and for
each of the three years in the period ended December 31, 1995 and vi) our report
dated July 2, 1996 on our audits of the financial statements of United
DentalCare as of December 31, 1995 and for each of the two years in the period
ended December 31, 1995, vii) our report dated September 25, 1996 on our audit
of the financial statements of Southwest Dental Associates as of December 31,
1995 and for the period ended December 31, 1995. We also consent to the
reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Houston, Texas
October 18, 1996
EXHIBIT 23.2
CONSENT
The undersinged, Jules V. Lane D.D.S., hereby consents to the reference to
him as having agreed to become a Director of Castle Dental Centers, Inc. on the
closing of the acquisition by Castle Dental Centers, Inc. of American Dental
Centers, as described in the Registration Statement on Form S-1 relating to the
Common Stock of Castle Dental Centers, Inc.
/s/ JULES V. LANE D.D.S.
Jules V. Lane D.D.S.
Date: October 17, 1996
EXHIBIT 23.3
CONSENT
The undersigned, Emmett Moore, hereby consents to the reference to him as
having agreed to become a Director of Castle Dental Centers, Inc., as described
in the Registration Statement on Form S-1 relating to the Common Stock of Castle
Dental Centers, Inc.
________________________
Emmett Moore
Date: 10-8-96
EXHIBIT 23.4
CONSENT
The undersigned, Louis A. Waters, hereby consents to the reference to
him as having agreed to become a Director of Castle Dental Centers, Inc., as
described in the Registration Statement on Form S-1 relating to the Common Stock
of Castle Dental Centers, Inc.
/s/ LOUIS A. WATERS
Louis A. Waters
Date: 10/5/96
