AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 1997
REGISTRATION NO. 333-11335
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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 F. MITCHELL WALKER, JR.
BRACEWELL & PATTERSON, L.L.P. BASS, BERRY & SIMS PLC
SOUTH TOWER PENNZOIL PLACE 2700 FIRST AMERICAN CENTER
711 LOUISIANA STREET, SUITE 2900 NASHVILLE, TENNESSEE 37238
HOUSTON, TEXAS 77002-2781
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>
******************************************************************************
* *
* 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 JUNE 20, 1997
PROSPECTUS
2,500,000 SHARES
[LOGO CASTLE DENTAL CENTERS]
COMMON STOCK
The 2,500,000 shares of Common Stock (the "Common Stock") offered hereby
are being sold by Castle Dental Centers, Inc. (the "Company"). Prior to this
offering, there has been no public market for the Common Stock. It is currently
anticipated that the initial public offering price for the Common Stock will be
between $10.00 and $12.00 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."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ------------------------------------------------------------------
Per Share................ $ $ $
- ------------------------------------------------------------------
Total(3)................. $ $ $
================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $1,225,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 375,000 additional shares of Common Stock on the same terms
and conditions as set forth above. If all such shares are purchased by the
Underwriters, the total Price to Public will be $________, the total
Underwriting Discount will be $______ and the total Proceeds to the
Company will be $________. See "Underwriting."
------------------
The shares of Common Stock are offered subject to receipt and acceptance by
the several Underwriters, to prior sale and to the Underwriters' right to reject
any order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that certificates for the shares of Common Stock
will be available for delivery on or about ___________, 1997.
------------------
J.C. Bradford & Co. Southcoast Capital
Corporation
, 1997
<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 2/5 AND CASTLE DENTAL CENTERS 2/5 ARE REGISTERED
TRADEMARKS OF CASTLE DENTAL CENTERS, INC.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD CAREFULLY
CONSIDER MATTERS SET FORTH UNDER "RISK FACTORS" HEREIN. UNLESS OTHERWISE
INDICATED, ALL SHARE, PER SHARE AND FINANCIAL INFORMATION IN THIS PROSPECTUS (I)
ASSUMES AN INITIAL PUBLIC OFFERING PRICE OF $11.00, (II) GIVES EFFECT TO A
ONE-FOR-TWO REVERSE STOCK SPLIT OF THE COMMON STOCK EFFECTED IN JUNE 1997 AND
(III) ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. THE
INFORMATION IN THIS PROSPECTUS FURTHER ASSUMES THAT THE COMPANY WILL EITHER
RECEIVE APPROPRIATE WAIVERS UNDER THE BANK CREDIT FACILITY (AS HEREINAFTER
DEFINED) OR ENTER INTO AN AMENDED OR REPLACEMENT CREDIT FACILITY TO PERMIT THE
COMPANY TO APPLY THE PROCEEDS OF THIS OFFERING AS DESCRIBED UNDER "USE OF
PROCEEDS."
EFFECTIVE DECEMBER 31, 1995, AS PART OF A REORGANIZATION AND
RECAPITALIZATION PLAN (THE "REORGANIZATION"), THE COMPANY MERGED WITH AND
SUCCEEDED TO THE BUSINESS OF FAMILY DENTAL SERVICES OF TEXAS, INC. ("FAMILY
DENTAL"), A TEXAS CORPORATION FORMED IN 1981 AND WHOLLY-OWNED BY MEMBERS OF AND
ENTITIES CONTROLLED BY MEMBERS OF THE FAMILY OF JACK H. CASTLE, D.D.S. (THE
"CASTLE FAMILY"). SEE "THE COMPANY," "CERTAIN TRANSACTIONS" AND NOTES 1
AND 2 TO THE COMPANY'S FINANCIAL STATEMENTS. THE COMPANY DOES NOT ENGAGE IN THE
PRACTICE OF DENTISTRY BUT RATHER ESTABLISHES INTEGRATED DENTAL NETWORKS BY
ENTERING INTO MANAGEMENT SERVICES AGREEMENTS OBLIGATING THE COMPANY TO PROVIDE
MANAGEMENT AND ADMINISTRATIVE SERVICES TO AFFILIATED DENTAL PRACTICES. 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
MANAGEMENT SERVICES AGREEMENTS.
THE COMPANY
Castle Dental Centers, Inc. (the "Company") develops, manages and
operates integrated dental networks through contractual 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 is managing and has agreed to acquire a multi-location dental
practice located in Austin, Texas (the "Austin Acquisition") which the Company
believes will complement its existing Austin operations. The Company establishes
integrated dental networks through affiliations with dental practices providing
high-quality care in selected markets 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. The Company also seeks to enhance the revenues of
its affiliated dental practices by increasing both patient visits and the range
of specialty services offered. As of June 1, 1997, the Company provided
management services to 39 dental centers with 108 affiliated dentists,
orthodontists and other dental specialists.
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. Dental, orthodontic and other specialty practices are
increasingly forming larger group practices in which a separate professional
management team handles personnel, management, billing, marketing and other
business functions. The annual aggregate domestic market for dental services is
estimated to be approximately $42.9 billion for 1995, representing approximately
4.3% 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. Management believes that the market size and trends of the dental service
industry create an opportunity for the Company to implement its goal of
developing, managing and operating a national network of affiliated dental
practices.
3
<PAGE>
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 to the practice of dentistry,
including situating practices in high-profile locations, offering more
affordable fees and payment plans, expanding the range of services offered,
increasing market share through targeted 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
high-quality patient care and to realize 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 11 capitated managed care contracts covering approximately 27,000
members, and, upon consummation of the Austin Acquisition, the Company will have
an aggregate of 16 capitated managed care contracts covering approximately
55,000 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's strategy is to develop integrated dental networks through
affiliations with dental practices providing 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.
THE OFFERING
Common Stock offered by the Company..... 2,500,000 Shares
Common Stock to be outstanding after the
offering.............................. 5,780,239 Shares(1)
Use of proceeds......................... To repay a portion of the Company's
out- standing indebtedness and to
fund a portion of the Austin
Acquisition. See "Use of Proceeds."
Nasdaq National Market symbol........... CASL
- ------------
(1) Gives effect to the conversion of 1,244,737 shares of Series A Convertible
Preferred Stock into 705,552 shares of Common Stock, and 485,382 shares of
Series C Convertible Preferred Stock into 242,691 shares of Common Stock,
both of which will be effected simultaneously with and are conditioned upon
the consummation of this offering; and excludes an aggregate of
approximately 397,117 shares issuable on (i) the exercise of options to
purchase an aggregate of 129,750 shares of Common Stock which the Company
will have granted at 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"); (ii) the exercise of
a warrant held by GulfStar Investments, Ltd. to purchase 56,579 shares of
Common Stock (the "GulfStar Warrant"), (iii) the conversion of two Seller
Notes (as hereinafter defined) into 69,879 shares of Common Stock and (iv)
the conversion of 140,909 shares of Series B Convertible Preferred Stock
into 140,909 shares of Common Stock.
4
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THE PRO FORMA FINANCIAL AND OPERATING INFORMATION CONTAINED IN THE
FOLLOWING TABLE ASSUMES THAT THE COMPANY WILL EITHER RECEIVE APPROPRIATE WAIVERS
UNDER THE BANK CREDIT FACILITY OR ENTER INTO AN AMENDED OR REPLACEMENT CREDIT
FACILITY TO PERMIT THE COMPANY TO APPLY THE PROCEEDS OF THIS OFFERING AS
DESCRIBED UNDER "USE OF PROCEEDS."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------------ --------------------
PRO FORMA
(1)(2)
1992 1993 1994 1995 1996 1996 1996 1997
--------- --------- --------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Patient revenues of affiliated dental
practices(3).......................... $ 13,978 $ 15,053 $ 17,083 $ 18,257 $ 29,601 $ 42,569 $ 4,493 $ 10,464
Amounts retained by affiliated dental
practices(3).......................... -- -- -- -- 9,981 11,851 1,278 3,518
--------- --------- --------- --------- --------- ---------- --------- ---------
Net revenues(3)......................... 13,978 15,053 17,083 18,257 19,620 30,718 3,215 6,946
Expenses:
Dentists' salaries(3)................. 2,223 2,684 2,853 3,345 -- -- -- --
Professional fees and clinic
expenses(4)......................... -- -- -- -- -- 1,997 -- --
Clinical salaries..................... 946 1,529 1,811 1,879 4,233 7,178 484 1,445
Dental supplies and laboratory fees... 1,403 1,565 1,907 2,185 3,120 4,231 662 911
Rental and lease expense.............. 411 504 681 836 1,592 2,266 188 637
Advertising and marketing............. 580 729 1,062 959 1,522 2,034 218 513
Depreciation and amortization......... 193 245 309 336 1,088 1,675 120 427
Other operating expenses.............. 1,915 1,871 2,205 2,260 2,913 3,818 538 760
General and administrative............ 5,085 4,947 5,319 9,109 4,292 5,808 425 1,458
--------- --------- --------- --------- --------- ---------- --------- ---------
Total expenses.................... 12,756 14,074 16,147 20,909 18,760 29,007 2,635 6,151
--------- --------- --------- --------- --------- ---------- --------- ---------
Operating income (loss)................. 1,222 979 936 (2,652) 860 1,711 580 795
Interest expense........................ 182 130 112 87 2,596 712 504 775
Other income(5)......................... -- -- -- -- (89) (89) (40) --
--------- --------- --------- --------- --------- ---------- --------- ---------
Income (loss) before income taxes....... 1,040 849 824 (2,739) (1,647) 1,088 116 20
Provision (benefit) for income taxes.... -- 40 43 (325) (561) 370 39 8
--------- --------- --------- --------- --------- ---------- --------- ---------
Net income (loss)(6).................... $ 1,040 $ 809 $ 781 $ (2,414) $ (1,086) $ 718 $ 77 $ 12
========= ========= ========= ========= ========= ========== ========= =========
Net income (loss) per share(7).......... $ 0.35 $ 0.27 $ 0.26 $ (0.82) $ (0.30) $ 0.12 $ 0.03 $ --
========= ========= ========= ========= ========= ========== ========= =========
Weighted average outstanding
shares(7)............................. 2,948 2,948 2,948 2,948 3,653 5,753 2,948 3,825
</TABLE>
PRO FORMA
(1)(2)
1997
----------
STATEMENT OF OPERATIONS DATA:
Patient revenues of affiliated dental
practices(3).......................... $ 11,743
Amounts retained by affiliated dental
practices(3).......................... 3,831
----------
Net revenues(3)......................... 7,912
Expenses:
Dentists' salaries(3)................. --
Professional fees and clinic
expenses(4)......................... --
Clinical salaries..................... 1,759
Dental supplies and laboratory fees... 1,074
Rental and lease expense.............. 657
Advertising and marketing............. 543
Depreciation and amortization......... 481
Other operating expenses.............. 894
General and administrative............ 1,613
----------
Total expenses.................... 7,021
----------
Operating income (loss)................. 891
Interest expense........................ 172
Other income(5)......................... --
----------
Income (loss) before income taxes....... 719
Provision (benefit) for income taxes.... 274
----------
Net income (loss)(6).................... $ 445
==========
Net income (loss) per share(7).......... $ 0.08
==========
Weighted average outstanding
shares(7)............................. 5,753
<TABLE>
SELECTED OPERATING DATA:
(END OF PERIOD)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Number of Dental Centers................ 5 7 8 8 35 39 8 35
Number of Dentists...................... 30 39 35 39 98 112 39 93
</TABLE>
SELECTED OPERATING DATA:
(END OF PERIOD)
Number of Dental Centers................ 39
Number of Dentists...................... 108
MARCH 31, 1997
------------------------
PRO FORMA AS
ACTUAL ADJUSTED(8)
--------- ------------
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 794 $ 1,162
Working capital......................... (11,364) (4,147)
Total assets............................ 30,224 36,617
Long-term debt and capital lease
obligations, less current portion..... 10,833 1,021
Redeemable preferred stock(9)........... 2,928 1,203
Total stockholders' equity (deficit).... (3,497) 20,977
5
<PAGE>
- ------------
(1) Gives effect to (i) the issuance of $2.0 million of the Company's 12% Senior
Subordinated Notes ("Senior Subordinated Notes"), and the issuance of
485,382 shares of Series C Convertible Preferred Stock (the "Interim
Financing"), (ii) the sale of 2,500,000 shares of Common Stock offered by
the Company hereby and the application of the net proceeds therefrom as
described under "Use of Proceeds," and (iii) the Acquisition Transactions
(as hereinafter defined) as if each of such transactions had occurred as of
January 1, 1996. See "Unaudited Pro Forma Consolidated Financial
Information."
(2) The pro forma statements of operations do not reflect a $3,411,000
extraordinary loss on retirement of $9.5 million of the Senior Subordinated
Notes, which will be recognized in the period this offering is completed.
(3) In periods prior to 1996, the Company operated as a dental service company
and reported all of its revenues as patient revenues. Subsequent to the
Reorganization, the Company has restricted its activities to providing
practice management services to the affiliated dental practices, and, as a
result, its net revenues beginning January 1, 1996 consist of amounts earned
by the Company under the terms of its management services agreements with
affiliated dental practices, which equal patient revenues less amounts
retained by affiliated dental practices. Amounts retained by affiliated
dental practices consist primarily of compensation paid to dental
professionals, which were classified as expenses of the Company prior to the
Reorganization.
(4) Represents preacquisition operating costs that an acquired dental practice
paid to its affiliated dentists for dentist compensation, clinical salaries,
dental supplies and laboratory fees.
(5) Represents primarily gain or loss on sale of assets and interest income.
(6) 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 2 and 8 to the
Company's Financial Statements). If all of the Company's operations had been
subject to income taxes, net income (loss) would have been $660,000,
$546,000, $515,000 and ($1,698,000) for the years ended December 31, 1992,
1993, 1994 and 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 year ended December 31, 1996. See "Unaudited Pro Forma Consolidated
Financial Information."
(7) Shares used in calculating net income per share for the year ended December
31, 1996 and the three months ended March 31, 1997 include the weighted
average outstanding shares plus the number of shares, the proceeds from the
sale 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 Consolidated Financial
Information" and "Certain Transactions." Historical weighted average
shares outstanding and net income (loss) per share without considering such
shares outstanding were 3,108,000 and 3,280,000 and $(0.35) and less than
$0.01, respectively, for the year ended December 31, 1996 and the three
months ended March 31, 1997, respectively.
(8) Gives effect to (i) the sale of 2,500,000 shares of Common Stock offered by
the Company hereby and the application of the net proceeds therefrom as
described under "Use of Proceeds," (ii) the conversion of the Series A
Convertible Preferred Stock and Series C Convertible Preferred Stock into an
aggregate of 948,243 shares of Common Stock, (iii) the Austin Acquisition
and the issuance of 140,909 shares of Series B Convertible Preferred Stock
and (iv) the sale of $2.0 million of Senior Subordinated Notes, as if each
of such transactions had occurred as of March 31, 1997.
(9) Represents 1,244,737 shares of Series A Convertible Preferred Stock, 140,909
shares of Series B Convertible Preferred Stock and 485,382 shares of Series
C Convertible Preferred Stock.
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS IN EVALUATING AN
INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
RISKS ASSOCIATED WITH EXPANSION STRATEGY
The Company's strategy is to develop comprehensive dental networks through
practice affiliations. Key elements of this strategy include 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 as well as the development of DE NOVO dental
centers in those 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. Additionally,
other companies are pursuing the acquisition and development of dental
practices, which may adversely affect the availability of acquisition candidates
and may lead to higher acquisition prices. There can be no assurance that the
Company will successfully establish practice affiliations with additional dental
practices or develop DE NOVO dental centers. In addition, the Company's ability
to acquire or develop dental centers is dependent on factors such as its ability
to attract additional dentists, 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 them. 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 successfully establish DE NOVO dental centers,
that the Company will be able to realize expected operating and economic
efficiencies from recent, pending or future 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."
RETENTION AND HIRING OF DENTISTS
Each affiliated dental practice has entered into an employment agreement
with each of its full-time dentists, orthodontists and other dental specialists.
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 defined compensation arrangements, including performance-based
compensation, and where market conditions permit and to the extent permitted by
applicable law, a covenant not to compete. If the affiliated practice is not
successful in renewing a significant number of the employment agreements or if
the employment agreements are determined to be unenforceable or more limited in
scope than their terms, the Company's business, financial condition and
operating results could be materially and adversely affected. In addition, the
Company's strategy of DE NOVO development is dependent on the availability of
employable dentists and the Company's ability to compete successfully in
competitive hiring markets. There can be no assurance the affiliated practices
will be able to employ dentists in sufficient numbers for the Company's existing
dental centers, for acquired dental practices or for DE NOVO dental centers
planned for future development. Insufficient numbers of dentists available for
employment on favorable terms may have a material adverse effect on the
Company's business, results of operations and dental network development. See
"Business -- Dental Network Development."
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 dental specialists to practice dentistry or in any way
control the
7
<PAGE>
professional aspects of the practices of the dentists, orthodontists or other
dental specialists employed by the affiliated dental practices. The Company's
management services revenue is dependent on revenue generated by affiliated
dental practices. 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. Any difficulty on the part of the Company's affiliated
dental practices in hiring or retaining qualified dentists, orthodontists or
other specialists, or any material decrease in the revenues of affiliated dental
practices 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 Company has been providing management
services to 29 of the dental centers for a period of less than 18 months. The
entry of the Company into new geographic markets through acquisitions 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 affiliated dental practices located outside
of the Houston, Texas area into its existing operations.
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 " -- Risks
Associated with Expansion Strategy."
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 presently has a working capital deficit
and expects that its capital requirements will exceed cash flow generated from
operations and borrowings that may become available under the Company's existing
or future credit facilities. To finance capital requirements, the Company
anticipates that it will from time to time issue additional equity securities
and incur additional debt. Additional debt or non-Common Stock equity financings
could be required to the extent that the Company's Common Stock fails to
maintain a market value sufficient to warrant its use for future financing
needs. The Company may not be able to obtain additional required capital on
satisfactory terms, if at all. The failure to raise the funds necessary to
finance the expansion of the Company's operations or the Company's other capital
requirements could materially and adversely affect the Company's ability to
pursue its strategy and the Company's operating results in future periods. If
additional funds are raised through the issuance of equity securities, dilution
to the Company's existing stockholders may result. If additional funds are
raised through the incurrence of debt, such debt instruments will likely contain
restrictive financial, maintenance and security covenants. See
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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, anti-kickback legislation 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. The laws of many states also prohibit dental
practitioners from paying any portion of fees received for dental services 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; and
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 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 that its operations comply in all material respects 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 would 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
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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.
ANTI-KICKBACK LEGISLATION
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 purchasing, leasing or ordering of any item, in each case,
reimbursable under Medicare, Medicaid or other federal and state health care
programs. These provisions apply to dental services covered under various
government programs in which the Company participates. The federal government
has 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
transactions in the health care industry such as those to which the Company is
or may be a party has not been the subject of judicial interpretation. There can
be no assurance that judicial or administrative authorities will not find these
provisions applicable to the Company's operations, which could have a material
adverse effect on the Company's business and dental network development.
Under current federal law, a physician or dentist or member of his
immediate family is prohibited 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, 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. Any future expansion of these prohibitions to other health services
could restrict the Company's ability to integrate affiliated practices and carry
out the dental network development.
Noncompliance with, or violation of, either the anti-kickback provisions or
restrictions on referrals of designated health services can result in exclusion
from the Medicare and Medicaid programs as well as civil and criminal penalties.
Similar penalties apply for violations of state law. While the Company intends
to make every effort to comply with all applicable law, the exclusion from
Medicare, Medicaid or other capitation programs could have a material adverse
effect on the business and results of operations of the Company.
STATE INSURANCE REGULATION
In addition, there are certain regulatory risks associated with the
Company's role in negotiating and administering managed care and capitation
contracts. The application of state insurance laws to reimbursement arrangements
other than various types of fee-for-service arrangements is an unsettled area of
law and is 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 arrangements, the Company or
the affiliated dental practice may become subject to state insurance laws. In
the event that the Company or the affiliated practices are determined to be
engaged in the business of insurance, such parties could be required either to
seek licensure as an insurance company or to change the form of their
relationships with third-party payors and may become subject to regulatory
enforcement actions. In such event, the Company's revenues may be adversely
affected.
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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."
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. Accordingly, the Company expects to face competition for acquisition
candidates, which may limit the number of acquisition opportunities and lead to
higher acquisition prices. 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 these competitors, that additional competitors will not enter
the market or that their 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 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
dental maintenance organizations, 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. These 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 these 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 30 to 90 days notice. For the 12 months ended
December 31, 1996, the Company derived approximately 6% of total pro forma
adjusted net patient revenues from such capitated contracts. For a discussion of
the regulatory aspects of certain capitation contracts, see "-- Government
Regulation -- State Insurance Regulation." To the extent the Company's
affiliated dental practices enter into additional managed care contracts, the
affiliated dental practices 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 these contracts require
more frequent or extensive care than is anticipated, operating margins may be
reduced, or the revenues derived from these agreements may be insufficient to
cover the costs of the services provided. As a result, affiliated practices are
at risk for additional costs which would reduce or eliminate any earnings for
the affiliated practices under these contracts.
RISKS RELATED TO INTANGIBLE ASSETS
As of March 31, 1997, the Company's total pro forma adjusted assets were
approximately $36.6 million, of which approximately $22.4 million, or 61%, were
intangible assets, net of accumulated amortization. The intangible assets
represent the value assigned to the management services agreements,
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which is the excess of the purchase price over the fair market value of the net
assets of acquired dental practices (which net assets include any separately
identifiable intangible assets). In connection with the allocation of the
purchase price to identifiable intangible assets, the Company analyzes the
nature of the affiliated dental practice with which a management services
agreement is entered into, including the number of dentists in each practice,
number of dental centers and its ability to recruit additional dentists, the
affiliated practice's relative market position, the length of time each
affiliated dental practice has been in existence, and the term and
enforceability of the management services agreement. Because the Company does
not practice dentistry, maintain patient relationships, hire dentists, enter
into employment and noncompete agreements with the dentists, or directly
contract with payors, the intangible asset created in the purchase price
allocation process is associated solely with the management services agreement
with the affiliated dental practice. There can be no assurance that the value of
these intangible assets will ever be realized by the Company.
All of the intangible assets on the Company's pro forma adjusted balance
sheet as of March 31, 1997 are related to the Acquisition Transactions (as
hereinafter defined) with $6.1 million being attributable to the Austin
Acquisition. 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 intangible
asset continues to be realizable and if the amortization period continues to be
appropriate. Amounts assigned to the management services agreements associated
with the Acquisition Transactions are being amortized on a straight-line basis
over a 40-year period.
Amortization of the intangible assets on the Company's pro forma adjusted
balance sheet as of March 31, 1997 will produce an annual amortization expense
of approximately $560,000. Of this amount, the Austin Acquisition is expected to
produce annual amortization expense of approximately $153,000. Acquisitions of
additional dental practices resulting in the recognition of additional
intangible assets would cause amortization expense to increase further. Although
the net unamortized balance of intangible assets on the Company's pro forma
balance sheet as of March 31, 1997 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 intangible assets, which would
have a material adverse effect on the Company's results of operations. See
"Unaudited Pro Forma Consolidated Financial Information."
DEPENDENCE UPON SENIOR EXECUTIVES
The Company is dependent upon the continued services of its executive
officers, especially its Chairman, President and Chief Executive Officer, Jack
H. Castle, Jr. The loss of the services of Jack H. Castle, Jr. 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 employment
agreements 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."
LITIGATION 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 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
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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 34.6% (32.5%, 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 Stockholders."
BENEFITS TO INSIDERS
In connection with the Reorganization, the Company 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. The payment was funded by a portion of the $13.5 million of
indebtedness incurred in connection with the Reorganization. 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 (the "Deferred Compensation
Agreement"). In June 1997, Dr. Castle and the Company amended the Deferred
Compensation Agreement (i) postponing the payment of any scheduled payments
under the Deferred Compensation Agreement until the earlier of (a) the issuance
of any debt consented to by the bank the proceeds of which are applied to pay
amounts owed under the Bank Credit Facility and the Interim Financing, or the
closing of any equity offering the proceeds of which are applied to pay amounts
owed under the Bank Credit Facility and the Interim Financing, and (b) January
31, 1998, at which time the scheduled deferred compensation payments shall
become payable beginning on the next scheduled payment date, and (ii) deferring
payment of the scheduled payments under the Deferred Compensation Agreement
which were not made on and after September 30, 1996 until the earlier of (a) the
closing of an initial public offering of the Company's common stock in which the
gross proceeds are not less than $25 million; provided, however, that such
payments shall only be made in the event the Company first pays any amounts
owing under the Bank Credit Facility and the Interim Financing; or (b) December
31, 2000. Amounts not paid when scheduled under the original Deferred
Compensation Agreement bear interest at the rate of 10% per annum. See "Certain
Transactions." Approximately $526,000 of the proceeds of this offering will be
used to pay such deferred amounts owed by the Company to Dr. Castle under the
Deferred Compensation Agreement.
In addition, approximately $10.4 million of the proceeds will be used to
repay the principal of and interest on the Company's 12% Senior Subordinated
Notes due 2002 held by the Pecks Investors (as hereinafter defined). 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; VOLATILITY OF MARKET 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. From time to time after this
offering, there may be significant volatility in the market price of the Common
Stock. If the Company is unable to operate its dental centers profitably or
develop new dental networks at a pace that reflects the expectations of the
market, investors could sell shares of Common Stock at or after the time that it
becomes apparent that such expectations may not be realized, resulting in a
decrease in the market price of the Common Stock. In addition to the operating
results of the Company, changes in earnings estimates by analysts, changes in
general conditions in the economy or the financial markets or other developments
affecting the Company or comparable companies within the dental services
industry could cause the market price of the Common Stock to fluctuate
substantially. In recent years, the stock market has experienced extreme price
and volume fluctuations. This volatility has had a significant effect on the
market prices of securities issued by many companies for reasons unrelated to
their operating performance.
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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. After giving effect to the shares of Common
Stock offered hereby, the closing of the Austin Acquisition, the conversion of
the Series A Convertible Preferred Stock and the Series C Convertible Preferred
Stock upon the closing of this offering (without giving effect to the conversion
of the Series B Convertible Preferred Stock), the Company will have outstanding
5,780,239 shares of Common Stock. Of these shares, the 2,500,000 shares
(2,875,000 shares if the Underwriters' over-allotment option is exercised in
full) of Common Stock sold in this offering will be freely tradeable 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.
The remaining 3,280,239 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 executive officers and directors and all of the
stockholders of the Company have agreed with the Representatives not to offer,
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
shares of Common Stock issued in connection with acquisitions to parties that
agree to be bound by the same restrictions on offers and sales, for a period of
180 days after the date of this Prospectus without the prior written consent of
the Representatives of the Underwriters. After such 180-day period, such persons
will be entitled to sell, distribute or otherwise dispose of the Common Stock,
subject to the provisions of applicable securities laws.
The Company anticipates that on the consummation of this offering, the
Company will have outstanding under the Plan and the Directors' Plan options to
purchase an aggregate of approximately 129,750 shares of Common Stock. 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 56,579 shares of Common Stock at $11.00 per share, and
two Seller Notes, presently convertible into 69,879 shares of Common Stock at a
conversion price of $14.34 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 Bylaws
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 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's Bylaws 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 Bylaws. 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 $11.25 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 this offering may experience further dilution in the net
tangible book value per share of the Common Stock of the Company.
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THE COMPANY
Castle Dental Centers, Inc., a Delaware corporation, is a holding company
that conducts its business through 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.
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 10 locations
with 39 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.
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. At the same time, the Company
acquired all of the outstanding stock and certain assets of Jack H. Castle,
D.D.S., Inc. and entered into a management services agreement with 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 and 2 to the Company's Financial Statements and "Certain
Transactions."
In connection with the Reorganization, the Company entered into a
Securities Purchase Agreement with the Pecks Investors (the "Securities
Purchase Agreement") pursuant to which the Company issued 1,244,737 shares of
Series A Convertible Preferred Stock and $7.5 million of Senior Subordinated
Notes. At the same time, the Company entered into the Bank Credit Facility (as
hereinafter defined), which provided for a term loan of $6.0 million and a
revolving credit facility of $3.0 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
In May 1996, the Company acquired the assets of and entered into long-term
management services agreements with 1st Dental Care, P.A., a dental practice
with 12 locations in the Tampa/Clearwater, Florida area ("1st Dental Care"),
and Mid-South Dental Centers, P.C., a dental practice with six dental centers in
various locations in Tennessee ("Mid-South Dental Centers"). In August 1996,
the Company increased its dental practices under management in Texas by
acquiring 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 June 1997, the Company entered into a management services
agreement with and agreed to acquire SW Dental Associates, LC, a dental practice
that operates four dental centers in the Austin, Texas metropolitan area ("SW
Dental"). The Austin Acquisition is referred to together with the Completed
Acquisitions as the "Acquisition Transactions." The closing of the Austin
Acquisition is a condition to, and will occur contemporaneously with, the
consummation of this offering.
The consideration for the Completed Acquisitions consisted of approximately
$9.3 million in cash, $0.9 million in assumed debt and capital lease
obligations, $4.5 million in Seller Notes and 331,996 shares of the Company's
Common Stock. The consideration for the Austin Acquisition consists of
approximately $5.2 million in cash, $1.5 million of which has already been paid,
and 140,909 shares of the Company's Series B Convertible Preferred Stock. The
Company will also assume approximately $447,000 of long-term debt and capital
lease obligations in connection with the Austin Acquisition.
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USE OF PROCEEDS
THE INFORMATION IN THIS SECTION ASSUMES THAT THE COMPANY WILL EITHER
RECEIVE APPROPRIATE WAIVERS UNDER THE BANK CREDIT FACILITY OR ENTER INTO AN
AMENDED OR REPLACEMENT CREDIT FACILITY TO PERMIT THE COMPANY TO APPLY THE
PROCEEDS OF THIS OFFERING AS DESCRIBED HEREUNDER.
The net proceeds from the sale of the 2,500,000 shares of Common Stock
offered by the Company hereby are estimated to be approximately $24.4 million
(approximately $28.2 million if the Underwriters' over-allotment option is
exercised in full) after deducting the underwriting discount and estimated
offering expenses.
The Company intends to use $3.7 million of the net proceeds of this
offering to fund the cash portion of the purchase price of the Austin
Acquisition. The Company also intends to use approximately $10.4 million of the
net proceeds to repay the principal of and accrued interest on the Company's 12%
Senior Subordinated Notes due in 2002 (the "Senior Subordinated Notes"), $7.5
million of which were issued by the Company in December 1995 to provide funds
for the Reorganization and the acquisition of affiliated dental practices and
$2.0 million of which were issued in June 1997. 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 $5.4 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
its bank which was incurred to finance certain of the Company's acquisitions.
The Bank Credit Facility, as amended, provides for a term loan, revolving credit
facility and advancing term loan which expire or mature, as applicable, on
January 31, 1998, and bear interest at variable rates which are based upon the
bank's base rate plus a margin which varies according to whether the loan is a
term loan or, revolving credit loan. As of June 16, 1997, the interest rate on
the term loan was 10.0% and the interest rate on the revolving credit loan was
9.5%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and Note 2 to the
Company's Financial Statements included elsewhere in this Prospectus for a
description of the interest rate and other terms of the Bank Credit Facility.
Approximately $4.4 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. Each of the Seller Notes bears interest at 10% per annum. An aggregate
of $943,363 of the Seller Notes is convertible at the option of the holder
exercisable prior to the payment of such Seller Notes into shares of the
Company's Common Stock at a conversion price of $14.34 per share, subject to
antidilution adjustments and automatic annual increases in conversion price.
Approximately $526,000 of the proceeds will be used to pay 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. In June 1997, Dr.
Castle and the Company amended the Deferred Compensation Agreement (i)
postponing the payment of any scheduled payments under the Deferred Compensation
Agreement until the earlier of (a) the issuance of any debt consented to by the
bank the proceeds of which are applied to pay amounts owed under the Bank Credit
Facility and the Interim Financing or the closing of any equity offering the
proceeds of which are applied to pay amounts owed under the Bank Credit Facility
and the Interim Financing and (b) January 31, 1998, at which time the scheduled
deferred compensation payments shall become payable beginning on the next
scheduled payment date, and (ii) deferring payment of the scheduled payments
under the Deferred Compensation Agreement which were not made from September 30,
1996 until the earlier of (a) the closing of an initial public offering of the
Company's Common Stock in which the gross proceeds are not less than $25
million; provided, however, that such payments shall only be made in the event
the Company first pays any amounts owing under the Bank Credit Facility and the
Interim Financing; or (b) December 31, 2000. Amounts not paid when scheduled
under the original Deferred Compensation Agreement bear interest at the rate of
10%
16
<PAGE>
per annum. Following the closing of this offering and the payment of the
deferred amounts, the Company intends to make quarterly payments to Dr. Castle
in the amount of $131,500 for the remainder of the term of the Deferred
Compensation Agreement.
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 March 31, 1997, was a deficit
of approximately $(19.8) million, or $(8.49) 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.
After giving effect to the sale of 2,500,000 shares of Common Stock offered by
the Company hereby and the consummation of the Austin Acquisition, the pro forma
net tangible book value of the Company as of March 31, 1997 would have been
approximately $(1.4) million or $(0.25) per share. This represents an immediate
increase in pro forma net tangible book value of $8.24 per share to stockholders
as of March 31, 1997, consisting of $9.80 per share attributable to this
offering offset by a decrease of $1.06 per share attributable to the Austin
Acquisition. This results in an immediate dilution in pro forma net tangible
book value of $11.25 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............................ $ 11.00
---------
Net deficit book value per share
as of March 31, 1997........... $ (8.49)
Increase in net tangible book
value per share attributable to
this offering.................. 9.80
Decrease in net tangible book
value per share attributable to
the Austin Acquisition......... (1.06)
---------
Pro forma net tangible book value per
share after this offering.......... (0.25)
---------
Dilution per share to purchasers of
Common Stock in this offering...... $ 11.25
=========
The following table shows, on a pro forma basis as of March 31, 1997, the
difference between existing stockholders (including shares issued upon
conversion of the Series A Convertible Preferred Stock and the Series C
Convertible Preferred Stock) and purchasers of Common Stock in this offering
with respect to the number of shares purchased from the Company, the aggregate
cash consideration paid (based, in the case of purchasers of Common Stock in
this offering, on the initial public offering price) 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................ 3,280,239 56.7% $ 6,953,000 20.2% $ 2.12
New investors........................ 2,500,000 43.3 27,500,000 79.8 11.00
----------- ------- -------------- -------
Total................................ 5,780,239 100.0% $ 34,453,000 100.0%
=========== ======= ============== =======
</TABLE>
The foregoing tables assume no exercise of outstanding options or warrants.
As of the closing of this offering, there will be 129,750 shares of Common Stock
issuable upon the exercise of stock options granted to certain officers,
directors, key employees of the Company and other eligible participants under
the Plan and the Directors' Plan. The exercise prices of such options range from
$10.00 to the initial public offering price per share. Additionally, the Company
has outstanding two Seller Notes convertible prior to the payment of such Seller
Notes into an aggregate of 69,879 shares of Common Stock at a conversion price
of $14.34 per share, and a warrant to purchase 56,579 shares of Common Stock at
an exercise price of $11.00 per share, all of which are subject to adjustment on
the occurrence of certain events.
17
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
March 31, 1997, and (ii) the pro forma capitalization as of March 31, 1997,
giving effect to the Austin Acquisition as if such transaction 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, the application of the net proceeds
therefrom as described under "Use of Proceeds," the issuance of 485,382 shares
of Series C Convertible Preferred Stock, the issuance of an aggregate of 948,243
shares of Common Stock upon conversion of the Series A Convertible Preferred
Stock and the Series C Convertible Preferred Stock, and the issuance of 140,909
shares of Series B Convertible Preferred Stock in connection with the Austin
Acquisition as if each of such events had occurred as of March 31, 1997. The pro
forma financial information presented herein assumes that the Company will
either receive appropriate waivers under the Bank Credit Facility or enter into
an amended or replacement credit facility to permit the Company to apply the
proceeds of this offering as described under "Use of Proceeds."
MARCH 31, 1997
------------------------
PRO FORMA
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
Current portion of long-term debt and
capital lease obligations.......... $ 11,113 $ 5,490
========= ===========
Long-term debt and capital lease
obligations, less current
portion............................ $ 10,833 $ 1,021
Redeemable Preferred Stock, $0.001
par value; 1,244,737 shares of
Series A, issued and outstanding
actual; no shares issued and
outstanding pro forma as
adjusted(1)........................ 2,928 --
Redeemable Preferred Stock, $0.001
par value, 140,909 shares of Series
B issued and outstanding pro forma
as adjusted(2)..................... -- 1,203
Stockholders' equity (deficit):
Common Stock, $0.001 par value;
30,000,000 shares authorized;
2,331,996 shares issued and
outstanding actual, and
5,780,239 issued and outstanding
pro forma as adjusted(3)........ 2 6
Additional paid-in capital......... 3,416 31,297
Accumulated deficit(4)............. (6,915) (10,326)
--------- -----------
Total stockholders' equity
(deficit)...................... (3,497) 20,977
--------- -----------
Total capitalization....... $ 10,264 $ 23,201
========= ===========
- ------------
(1) Represents the Series A Convertible Preferred Stock and Series C Convertible
Preferred Stock which will be converted into an aggregate of 948,243 shares
of Common Stock upon consummation of this offering. See "Description of
Capital Stock."
(2) Represents the Series B Convertible Preferred Stock which is convertible
into 140,909 shares of Common Stock, one year after the consummation of this
offering at the option of the holder.
(3) Excludes an aggregate of approximately 397,117 shares issuable on (i) the
exercise of options to purchase an aggregate of 129,750 shares of Common
Stock which the Company will have granted at the consummation of this
offering under the Plan and the Directors' Plan; (ii) the exercise of the
GulfStar Warrant for an aggregate of 56,579 shares, (iii) the conversion of
two Seller Notes into 69,879 shares of Common stock, and (iv) the conversion
of the Series B Convertible Preferred Stock into 140,909 shares of Common
Stock.
(4) Pro Forma deficit has been increased for $3,411,000 unamortized discount and
debt offering costs relating to long-term debt that will be repaid upon
consummation of this offering. The unamortized discount will be included as
an extraordinary loss in the period in which the debt is repaid.
18
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The pro forma financial and operating information contained in the
following table assumes that the Company will either receive appropriate waivers
under the Bank Credit Facility or enter into an amended or replacement credit
facility to permit the Company to apply the proceeds of this offering as
described under "Use of Proceeds."
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, 1995 and 1996 and for
each of the periods ended December 31, 1993, 1994, 1995 and 1996 have been
derived from the audited financial statements of the Company, and its combined
predecessor companies, for such periods. The selected historical financial data
set forth below as of March 31, 1997 and for the three months ended March 31,
1996 and 1997 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 financial statements and which, in the
opinion of management, include all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the information set forth below. The
selected historical financial data as of December 31, 1992 and 1993 and for the
year ended December 31, 1992 have been derived from the Company's financial
records, which were prepared on the same basis as the audited 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 financial data set forth
below as of March 31, 1997 and for the year ended December 31, 1996 and for the
three months ended March 31, 1997 have been derived from the unaudited pro forma
financial statements of the Company. The pro forma statement of operations data
give effect to (i) the issuance of $2.0 million in Senior Subordinated Notes,
(ii) the sale of 2,500,000 shares of Common Stock offered by the Company hereby
and the application of net proceeds therefrom as described under "Use of
Proceeds" and (iii) the Acquisition Transactions as if each of such
transactions had occurred as of January 1, 1996. The pro forma balance sheet
data give effect to (i) the issuance of $2.0 million in Senior Subordinated
Notes, (ii) the sale of 2,500,000 shares of Common Stock offered by the Company
hereby and the application of net proceeds therefrom as described under "Use of
Proceeds," (iii) the conversion of the Series A Convertible Preferred Stock and
the Series C Convertible Preferred Stock into an aggregate of 948,243 shares of
Common Stock, and (iv) the Austin Acquisition and the issuance of 140,909 shares
of Series B Convertible Preferred Stock, as if each of such transactions had
occurred as of March 31, 1997. 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 Consolidated Financial Information."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------------------- --------------------
PRO FORMA
(1)(2)
1992 1993 1994 1995 1996 1996 1996 1997
--------- --------- --------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Patient revenues of affiliated dental
practices(3).......................... $ 13,978 $ 15,053 $ 17,083 $ 18,257 $ 29,601 $ 42,569 $ 4,493 $ 10,464
Amounts retained by affiliated dental
practices(3).......................... -- -- -- -- 9,981 11,851 1,278 3,518
--------- --------- --------- --------- --------- ---------- --------- ---------
Net revenues(3)......................... 13,978 15,053 17,083 18,257 19,620 30,718 3,215 6,946
Expenses:
Dentists' salaries(3)................. 2,223 2,684 2,853 3,345 -- -- -- --
Professional fees & clinic
expenses(4)......................... -- -- -- -- -- 1,997 -- --
Clinical salaries..................... 946 1,529 1,811 1,879 4,233 7,178 484 1,445
Dental supplies and laboratory fees... 1,403 1,565 1,907 2,185 3,120 4,231 662 911
Rental and lease expense.............. 411 504 681 836 1,592 2,266 188 637
Advertising and marketing............. 580 729 1,062 959 1,522 2,034 218 513
Depreciation and amortization......... 193 245 309 336 1,088 1,675 120 427
Other operating expenses.............. 1,915 1,871 2,205 2,260 2,913 3,818 538 760
General and administrative............ 5,085 4,947 5,319 9,109 4,292 5,808 425 1,458
--------- --------- --------- --------- --------- ---------- --------- ---------
Total expenses.................... 12,756 14,074 16,147 20,909 18,760 29,007 2,635 6,151
--------- --------- --------- --------- --------- ---------- --------- ---------
Operating income (loss)................. 1,222 979 936 (2,652) 860 1,711 580 795
Interest expense........................ 182 130 112 87 2,596 712 504 775
Other income(5)......................... -- -- -- -- (89) (89) (40) --
--------- --------- --------- --------- --------- ---------- --------- ---------
Income (loss) before income taxes....... 1,040 849 824 (2,739) (1,647) 1,088 116 20
Provision (benefit) for income taxes.... -- 40 43 (325) (561) 370 39 8
--------- --------- --------- --------- --------- ---------- --------- ---------
Net income (loss)(6).................... $ 1,040 $ 809 $ 781 $ (2,414) $ (1,086) $ 718 $ 77 $ 12
========= ========= ========= ========= ========= ========== ========= =========
Net income (loss) per share(7).......... $ 0.35 $ 0.27 $ 0.26 $ (0.82) $ (0.30) $ 0.12 $ 0.03 --
========= ========= ========= ========= ========= ========== ========= =========
Weighted average outstanding
shares(7)............................. 2,948 2,948 2,948 2,948 3,653 5,753 2,948 3,825
</TABLE>
PRO FORMA
(1)(2)
1997
----------
STATEMENT OF OPERATIONS DATA:
Patient revenues of affiliated dental
practices(3).......................... $ 11,743
Amounts retained by affiliated dental
practices(3).......................... 3,831
----------
Net revenues(3)......................... 7,912
Expenses:
Dentists' salaries(3)................. --
Professional fees & clinic
expenses(4)......................... --
Clinical salaries..................... 1,759
Dental supplies and laboratory fees... 1,074
Rental and lease expense.............. 657
Advertising and marketing............. 543
Depreciation and amortization......... 481
Other operating expenses.............. 894
General and administrative............ 1,613
----------
Total expenses.................... 7,021
----------
Operating income (loss)................. 891
Interest expense........................ 172
Other income(5)......................... --
----------
Income (loss) before income taxes....... 719
Provision (benefit) for income taxes.... 274
----------
Net income (loss)(6).................... $ 445
==========
Net income (loss) per share(7).......... $ 0.08
==========
Weighted average outstanding
shares(7)............................. 5,753
19
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1997
DECEMBER 31, ------------------------
----------------------------------------------------- PRO FORMA AS
1992 1993 1994 1995 1996 ACTUAL ADJUSTED(8)
--------- --------- --------- --------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 292 $ 34 $ 22 $ 6,439 $ 79 $ 794 $ 1,162
Working capital......................... 2,247 773 1,212 6,208 (3,244) (11,364) (4,147)
Total assets............................ 5,087 4,130 4,711 12,677 29,167 30,224 36,617
Long-term debt and capital lease
obligations, less current portion..... 785 496 162 9,462 18,951 10,833 1,021
Redeemable preferred stock(9)........... -- -- -- 2,928 2,928 2,928 1,203
Total stockholders' equity (deficit).... 2,631 1,796 2,577 (5,743) (3,509) (3,497) 20,977
</TABLE>
- ------------
(1) Gives effect to (i) the issuance of $2.0 million in Senior Subordinated
Notes in June 1997, (ii) the sale of the 2,500,000 shares of Common Stock
offered by the Company hereby and the application of the net proceeds
therefrom as described under "Use of Proceeds," and (iii) the Acquisition
Transactions, as if each of such transactions had occurred as of January 1,
1996. See "Unaudited Pro Forma Consolidated Financial Information."
(2) The pro forma statements of operations do not reflect a $3,411,000
extraordinary loss on retirement of the Senior Subordinated Notes, which
will be recognized in the period this offering is completed.
(3) In periods prior to 1996, the Company operated as a dental service company
and reported all of its revenues as patient revenues. Subsequent to the
Reorganization, the Company has restricted its activities to providing
practice management services to the affiliated dental practices, and, as a
result, its net revenues beginning January 1, 1996 consist of amounts earned
by the Company under the terms of its management services agreements with
affiliated dental practices, which equal patient revenues less amounts
retained by affiliated dental practices. Amounts retained by affiliated
dental practices consist primarily of compensation paid to dental
professionals, which were classified as expenses of the Company prior to the
Reorganization.
(4) Represents preacquisition operating costs that an acquired dental practice
paid to its affiliated dentists for dentist compensation, clinical
salaries, dental supplies and laboratory fees.
(5) Represents primarily gain or loss on sale of assets and interest income.
(6) 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 2 and 8 to the
Company's Audited Financial Statements). If all of the Company's operations
had been subject to income taxes, net income (loss) would have been
$660,000, $546,000, $515,000 and ($1,698,000) for the years ended December
31, 1992, 1993, 1994 and 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 year ended December 31, 1996. See "Unaudited Pro Forma
Consolidated Financial Information."
(7) Shares used in calculating net income per share for the year ended December
31, 1996 and the three months ended March 31, 1997 include the weighted
average outstanding shares plus the number of shares, 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 Consolidated Financial
Information" and "Certain Transactions." Historical weighted average
shares outstanding and net income (loss) per share were 3,108,000 and
3,280,000 and $0.35 and less than $0.01, respectively, for the year ended
December 31, 1996, and the three months ended March 31, 1997 respectively.
(8) Gives effect to (i) the sale of 2,500,000 shares of Common Stock offered by
the Company hereby and the application of the net proceeds therefrom as
described under "Use of Proceeds," (ii) the conversion of the Series A
Convertible Preferred Stock and Series C Convertible Preferred Stock into an
aggregate of 948,243 shares of Common Stock, and (iii) the Austin
Acquisition, and the issuance of 140,909 shares of Series B Convertible
Preferred Stock and (iv) the sale of $2.0 million of Senior Subordinated
Notes, as if such transactions had occurred as of March 31, 1997.
(9) Represents 1,244,737 shares of Series A Convertible Preferred Stock, 140,909
shares of Series B Convertible Preferred Stock and 485,382 shares of Series
C Convertible Preferred Stock.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Financial Statements, Unaudited Condensed Consolidated Interim Financial
Statements and the Notes thereto included elsewhere in this Prospectus.
OVERVIEW
The Company manages group dental practices in Texas, Florida and Tennessee.
Since its founding in 1981 with the opening of a single dental office in
Houston, the Company has expanded through DE NOVO development of dental centers
and, since 1996, the acquisition of group dental practices. At June 1, 1997, the
Company managed 39 dental centers with 108 affiliated dentists, orthodontists
and other dental specialists, with four additional dental centers in various
stages of development.
In the period from 1981 through 1995, the Company operated only in Houston,
Texas, with a total of eight dental centers with 37 dentists at the end of 1995.
In December 1995, the Company acquired the dental practice owned by Dr. Jack H.
Castle, and entered into a management services agreement with a newly-formed
dental practice owned by Dr. Castle to manage the non-dental operations of the
dental centers in Houston. During 1996, the Company opened two DE NOVO dental
offices in Houston, resulting in a total of 10 dental centers with 39 dentists
at the end of 1996. Total patient revenues from its affiliated practice in
Houston were $18.6 million in 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 in June 1997 entered into a management services agreement with and
agreed to acquire another group dental practice located in Austin, Texas. 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 Consolidated 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 services 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. The Completed Acquisitions resulted in
the addition of 25 dental centers with 60 affiliated dentists. In addition, the
Company has entered into a management services agreement with and has agreed to
acquire SW Dental in Austin, Texas. The purchase price for the Austin
Acquisition is $5.2 million in cash and 140,909 shares of Series B Convertible
Preferred Stock. See "Description of Capital Stock -- Preferred Stock." The
Company will also assume debt obligations of $447,000 in connection with the
Austin Acquisition. Non-refundable payments of $1.5 million have been made in
connection with the Austin Acquisition, and $3.7 million in cash is due at
closing. The closing of the Austin Acquisition is a condition to, and will occur
contemporaneously with, the closing of this offering.
21
<PAGE>
The aggregate consideration for the Completed Acquisitions consisted of
approximately $9.3 million in cash, $0.9 million of assumed debt, $4.5 million
in Seller Notes and 331,996 shares of Common Stock. An aggregate of $943,363 of
the Seller Notes is convertible into Common Stock prior to the time such Seller
Notes are paid at a current conversion price of $14.34 per share, subject to
antidilution adjustments and automatic annual increases in conversion price.
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. Other than the Austin Acquisition, the Company presently does
not have any letters of intent or binding agreements for the acquisition of
dental practices and there can be no assurance that these discussions will
result in new practice affiliations in the near future or at all.
COMPONENTS OF REVENUES AND EXPENSES
Patient revenues from affiliated dental practices represent amounts billed
by the affiliated dental practices to patients and third-party payors for dental
services rendered. Such amounts also include monthly capitation payments
received from third-party payors pursuant to managed care contracts. Amounts
retained by group dental practices include compensation paid to dentists,
hygienists and other dental care personnel employed by the affiliated dental
practices, as well as other costs directly incurred by the affiliated practices
such as employment taxes, personnel benefits and insurance costs. Net revenues
represent amounts earned by the Company under the terms of its management
services agreements with the affiliated dental practices, which generally equal
patient revenues less amounts retained by the affiliated practices. The
Company's net revenues, therefore, are dependent upon patient revenues realized
by the affiliated practices as well as compensation and other expenses of the
affiliated practices.
Under the terms of the typical management services agreement with an
affiliated dental practice, the Company becomes the exclusive manager and
administrator of all non-dental services relating to the operation of the
practice. The obligations of the Company include assuming responsibility for the
operating expenses incurred in connection with managing the dental centers.
These expenses include salaries, wages and related costs of non-dental
personnel, dental supplies and laboratory fees, rental and lease expenses,
advertising and marketing costs, management information systems, and other
operating expenses incurred at the dental centers. In addition to these
expenses, the Company incurs general and administrative expenses related to the
billing and collection of accounts receivable, financial management and control
of the dental operations, insurance, training and development, and other general
corporate expenditures. As compensation for its services under the typical
management services agreement and subject to applicable law, the Company is paid
a management fee comprised of the costs incurred by it on behalf of the
affiliated practice and an amount ranging from 12.5% to 20.0% of adjusted gross
revenues.
RESULTS OF OPERATIONS
In December 1995, the Company was reorganized as a Delaware corporation and
acquired the assets of the professional corporation, owned by Dr. Jack H.
Castle, which provided dental services in Houston. Prior to the Reorganization,
therefore, the financial results of the Company and the professional corporation
have been combined for the fiscal years prior to 1996. In 1996, the Company
acquired the assets of three group dental practices. As a result of these
transactions, the Company believes that the period-to-period comparisons set
forth below may not be meaningful.
The following table sets forth the percentages of patient revenues
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 pre-acquisition results of the dental practices
that the Company has acquired, nor any results of the Austin Acquisition
discussed herein. The information that follows should be read in conjunction
with the Financial Statements of the Company and notes thereto, as well as the
Unaudited Pro Forma Consolidated Financial Information, included elsewhere in
this Prospectus.
22
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Patient revenues of affiliated dental
practices.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Amounts retained by affiliated dental
practices.......................... -- -- 33.7 28.4 33.6
--------- --------- --------- --------- ---------
Net revenues......................... 100.0 100.0 66.3 71.6 66.4
Expenses:
Dentists' salaries................. 16.7 18.3 -- -- --
Clinical salaries.................. 10.6 10.3 14.3 10.8 13.8
Dental supplies and laboratory
fees............................ 11.2 12.0 10.5 14.7 8.7
Rental and lease expense........... 4.0 4.6 5.4 4.2 6.1
Advertising and marketing.......... 6.2 5.3 5.1 4.9 4.9
Depreciation and amortization...... 1.8 1.8 3.7 2.7 4.1
Other operating expenses........... 12.9 12.4 9.8 11.9 7.3
General and administrative......... 31.1 49.9 14.6 9.4 13.9
--------- --------- --------- --------- ---------
Total expenses............. 94.5 114.6 63.4 58.6 58.8
--------- --------- --------- --------- ---------
Operating income (loss).............. 5.5 (14.6) 2.9 12.9 7.6
Interest expense..................... 0.7 0.5 8.8 11.2 7.4
Other expense (income)............... -- -- (0.3) (0.9) --
--------- --------- --------- --------- ---------
Income (loss) before income taxes.... 4.8 (15.1) (5.6) 2.6 0.2
Provision (benefit) for income
taxes.............................. 0.3 (1.8) (1.9) 0.9 0.1
--------- --------- --------- --------- ---------
Net income (loss).................... 4.5% (13.3)% (3.7)% 1.7% 0.1%
========= ========= ========= ========= =========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996
The Company acquired the assets of and entered into management agreements
with three group dental practices during the period from May through August
1996, the results of which are included in the Company's operating results from
the dates of acquisition. Changes in results of operations for the three-month
period ended March 31, 1997 compared to the three-month period ended March 31,
1996 were caused primarily by these acquisitions. For periods prior to May 1996,
the Company's operations were conducted entirely in Houston, Texas.
PATIENT REVENUES OF AFFILIATED DENTAL PRACTICES -- Patient revenues of
affiliated dental practices increased from $4.5 million for the three months
ended March 31, 1996 to $10.5 million for the three months ended March 31, 1997,
an increase of $6.0 million or 133%. Approximately $5.8 million of the increase
was attributable to the Completed Acquisitions. Patient revenues in Houston
increased from $4.5 million in the first quarter of 1996 to $4.7 million in the
first quarter of 1997, primarily the result of the opening of two new dental
centers in Houston in April 1996 and December 1996.
AMOUNTS RETAINED BY AFFILIATED DENTAL PRACTICES -- For the three months
ended March 31, 1997, amounts retained by affiliated dental practices were $3.5
million, an increase of $2.2 million, or 175%, from the comparable period in
1996. The acquired dental practices accounted for nearly all of the increase.
Expressed as a percentage of patient revenues, amounts retained by affiliated
dental practices increased from 28.4% to 33.6% for the three month periods ended
March 31, 1996 and 1997, respectively, as the Completed Acquisitions had
relatively higher compensation paid to dentists and other dental professionals
than the affiliated dental practice in Houston. The Company believes that the
amounts retained by affiliated dental practices as a percentage of patient
revenues in the most recent period is representative of expected future results
of operations.
NET REVENUES -- For the three-month period ended March 31, 1997, net
revenues were $6.9 million, an increase of $3.7 million, or 116%, from the
three-month period ended March 31, 1996. The increase is attributable to net
revenues of the Completed Acquisitions.
23
<PAGE>
CLINICAL SALARIES -- Clinical salaries increased from $484,000 for the
three months ended March 31, 1996 to $1,445,000 for the three months ended March
31, 1997, an increase of $961,000 or 199%. The Completed Acquisitions accounted
for $878,000 of the increase in clinic employee salaries. Expressed as a
percentage of patient revenues, clinical salaries increased from 10.8% to 13.8%
for the three-month periods ended March 31, 1996 and 1997, respectively.
DENTAL SUPPLIES AND LABORATORY FEES -- Dental supplies and laboratory fees
increased from $662,000 for the three months ended March 31, 1996 to $911,000
for the three months ended March 31, 1997, an increase of $249,000 or 37.6%.
This increase was attributed to the Completed Acquisitions, which incurred
$390,000 in dental supplies and laboratory expenses. Dental supplies and
laboratory expenses in the Houston market decreased from $662,000 to $521,000 in
the first three months of 1996 and 1997, respectively, primarily resulting from
the outsourcing of the Company's purchasing and inventory control functions in
Houston in mid 1996. Expressed as a percentage of patient revenues, dental
supplies and laboratory fees decreased from 14.7% in the first three months of
1996 to 8.7% in the first three months of 1997.
RENTAL AND LEASE EXPENSE -- Rental and lease expense increased from
$188,000 for the three months ended March 31, 1996 to $637,000 for the three
months ended March 31, 1997, an increase of $449,000, or 239%. Rental expense
from the acquisitions in Florida, Tennessee and Texas accounted for $377,000 of
the increase, with the remainder resulting from the opening of two new dental
centers in Houston. Expressed as a percentage of patient revenues, rental and
lease expense increased from 4.2% in the first quarter of 1996 to 6.1% in the
first quarter of 1997, as the Completed Acquisitions had relatively higher
percentage rental and lease expense than the Houston operation.
ADVERTISING AND MARKETING -- Advertising and marketing expense increased
from $218,000 for the three months ended March 31, 1996 to $513,000 for the
three months ended March 31, 1997, an increase of $295,000, or 135%. The
Completed Acquisitions accounted for $243,000 of the increase. Expressed as a
percentage of patient revenues, advertising and marketing costs were unchanged
at 4.9%.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization increased
from $120,000 for the three months ended March 31, 1996 to $427,000 for the
three months ended March 31, 1997, an increase of approximately $307,000,
primarily resulting from the Completed Acquisitions and amortization of deferred
loan costs incurred in connection with the Reorganization in December 1995.
Amortization of intangibles resulting from the Completed Acquisitions was
$102,000 in the first three months of 1997. There was no amortization of
intangibles in the first three months of 1996 related to acquisitions. As a
percentage of patient revenues, depreciation and amortization increased from
2.7% to 4.1% for the three-month periods ended March 31, 1996 and 1997,
respectively.
OTHER OPERATING EXPENSES -- Other operating expenses increased from
$538,000 for the three months ended March 31, 1996 to $760,000 for the three
months ended March 31, 1997, an increase of approximately $222,000 or 41.3%.
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. The Completed
Acquisitions accounted for all of the increase in other operating expenses.
Expressed as a percentage of patient revenues, other operating expenses
decreased from 11.9% to 7.3% for the three-month periods ended March 31, 1996
and 1997, respectively, primarily due to the lower percentage of bad debt
expense of the Completed Acquisitions as compared to the Houston dental centers.
GENERAL AND ADMINISTRATIVE -- General and administrative expense increased
from $425,000 for the three months ended March 31, 1996 to $1,458,000 for the
three months ended March 31, 1997, an increase of approximately $1.0 million or
243%. The increase resulted from the addition of general and administrative
expenses of the Completed Acquisitions and increased personnel and general
corporate expenses at the Company's headquarters in Houston. Expressed as a
percentage of patient revenues, general and administrative expense increased
from 9.4% to 13.9% for the three-month periods ended March 31, 1996 and 1997,
respectively.
24
<PAGE>
INTEREST EXPENSE -- Interest expense increased from $504,000 for the three
months ended March 31, 1996 to $775,000 for the three months ended March 31,
1997, an increase of approximately $271,000 or 54%. Increased borrowings related
to the Completed Acquisitions resulted in higher interest expense. Expressed as
a percentage of patient revenues; however, interest expense decreased from 11.2%
to 7.4% for the three-month periods ended March 31, 1996 and 1997, respectively,
primarily resulting from the relatively greater percentage increase in patient
revenues from the prior year period.
INCOME TAXES -- The provision for income taxes in the three-month period
ended March 31, 1997 was $7,400, equal to 37.6% of income before taxes, compared
to a provision for income taxes of $5,500, or 38.8% of income before taxes for
the three-month period ended March 31, 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
PATIENT REVENUES OF AFFILIATED DENTAL PRACTICES -- Patient revenues of
affiliated dental practices increased from $18.3 million for the year ended
December 31, 1995 to $29.6 million for the year ended December 31, 1996, an
increase of $11.3 million or 62%. Approximately $11.0 million of the increase
was attributable to the Completed Acquisitions. Patient revenues in Houston
increased from $18.3 million in 1995 to $18.6 million in 1996, primarily the
result of the opening of the Company's ninth dental center in Houston in April
1996.
AMOUNTS RETAINED BY AFFILIATED DENTAL PRACTICES -- For the year ended
December 31, 1996, amounts retained by affiliated dental practices were $10.0
million, or 33.7% of patient revenues. For the year ended December 31, 1995,
compensation paid to dental professionals was classified as dentist salaries and
clinical salaries. The Company estimates that amounts retained by the affiliated
dental practice in 1995, calculated on a basis comparable to 1996, was $5.2
million, or 28.6% of patient revenues. The percentage increase from 1995 to 1996
resulted from the relatively higher percentage of dentist and clinical salaries
from the Completed Acquisitions.
NET REVENUES -- Net revenues of $19.6 million for the year ended December
31, 1996 represent management fees earned by the Company in accordance with
management services agreements with the affiliated practices. In periods prior
to 1996, the Company's predecessor companies, Family Dental and Jack H. Castle
D.D.S., Inc, operated as a combined entity, and did not distinguish between
patient revenues and net revenues.
DENTISTS' SALARIES -- Compensation paid to dentists for the year ended
December 31, 1995 was $3.3 million, or 18.3% of patient revenues. Dentist
salaries in 1996, which are included in amounts retained by affiliated dental
practices, were $5.9 million, or 20% of patient revenues. Dentist salaries from
the 25 dental centers of the Completed Acquisitions accounted for $2.4 million
of the increase. The addition of one DE NOVO dental center and higher
compensation paid to dentists in Houston accounted for the balance of the
increase.
CLINICAL SALARIES -- Clinical salaries increased from $1.9 million for the
year ended December 31, 1995 to $4.2 million for the year ended December 31,
1996, an increase of $2.3 million or 125%. The Completed Acquisitions accounted
for the increase in clinic employee salaries. Expressed as a percentage of
patient revenues, clinical salaries increased from 10.3% to 14.3% for the years
ended December 31, 1995 and 1996, respectively, as the Completed Acquisitions
had relatively higher percentage clinical salaries costs than the Houston
operations.
DENTAL SUPPLIES AND LABORATORY FEES -- Dental supplies and laboratory fees
increased from $2.2 million for the year ended December 31, 1995 to $3.1 million
for the year ended December 31, 1996, an increase of $0.9 million or 43%. This
increase resulted primarily from the Completed Acquisitions, which incurred $1.1
million in dental supplies and laboratory expenses. Expressed as a percentage of
patient revenues, dental supplies and laboratory fees decreased from 12% in 1995
to 10.5% in 1996.
RENTAL AND LEASE EXPENSE -- Rental and lease expense increased from
$836,000 for the year ended December 31, 1995 to $1.6 million for the year ended
December 31, 1996, an increase of 90%. Rental expense from the Completed
Acquisitions accounted for nearly all of the increase. Expressed as a
25
<PAGE>
percentage of patient revenues, rental and lease expense increased from 4.6% in
1995 to 5.4% in 1996, as the Completed Acquisitions had relatively higher
percentage rental and lease expense than the Houston operation.
ADVERTISING AND MARKETING -- Advertising and marketing expense increased
from $1.0 million for the year ended December 31, 1995 to $1.5 million for the
year ended December 31, 1996, an increase of 59%. The Completed Acquisitions
accounted for $416,000 of the increase. Higher expenditures for television
advertising and direct mail campaigns conducted in conjunction with the opening
of two new dental centers in Houston resulted in increased advertising and
marketing costs of approximately $150,000 in Houston. Expressed as a percentage
of patient revenues, however, advertising and marketing costs decreased from
5.3% in 1995 to 5.1% in 1996.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization increased
from $336,000 for the year ended December 31, 1995 to $1.1 million for the year
ended December 31, 1996, an increase of approximately $752,000, primarily
resulting from the Completed Acquisitions and amortization of deferred loan
costs incurred in connection with the Reorganization in December 1995.
Amortization of intangibles incurred in the period following the completion of
the acquisitions was $231,000 in 1996. As a percentage of patient revenues,
depreciation and amortization increased from 1.8% to 3.7% for the years ended
December 31, 1995 and 1996, respectively.
OTHER OPERATING EXPENSES -- Other operating expenses increased from $2.3
million for the year ended December 31, 1995 to $2.9 million for the year ended
December 31, 1996, an increase of approximately $600,000 or 29%. 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. The Completed Acquisitions
accounted for all of the increase in other operating expenses from 1995 to 1996.
Expressed as a percentage of patient revenues, other operating expenses
decreased from 12.4% to 9.8% for the years ended December 31, 1995 and 1996,
respectively, primarily due to the lower percentage of bad debt expense of the
Completed Acquisitions as compared to the Houston dental centers.
GENERAL AND ADMINISTRATIVE -- General and administrative expense decreased
from $9.1 million for the year ended December 31, 1995 to $4.3 million for the
year ended December 31, 1996, a decrease of $4.8 million or 53%. Compensation
paid to the Company's owners was $5.3 million in 1995 including $2.6 million in
accrued deferred compensation payable to a shareholder. Compensation to
stockholders declined to $592,000 in 1996. This reduction was partially offset
by general and administrative expense of $1.2 million from the Completed
Acquisitions. In addition, the Company incurred approximately $400,000 in 1996
related to potential acquisitions that were not completed and approximately
$200,000 in personnel severance costs. Expressed as a percentage of patient
revenues, general and administrative expense decreased from 49.9% to 14.4% for
years ended December 31, 1995 and 1996, respectively.
INTEREST EXPENSE -- Interest expense increased from $87,000 for the year
ended December 31, 1995 to $2.6 million for the year ended December 31, 1996. In
the period from December 1995 through August 1996, the Company borrowed
approximately $25 million in order to fund the Reorganization and the
acquisition of affiliated dental practices in Florida, Tennessee and Texas,
resulting in $2.1 million in higher interest costs in 1996. In addition, the
amortization of the discount on the Senior Subordinated Notes was $522,000 for
the year ended December 31, 1996.
INCOME TAXES -- Prior to 1996, the Company did not accrue significant
corporate income taxes because a major portion of the Company's operations were
conducted through a Subchapter S corporation. Subsequent to the Reorganization
in December 1995, all of the Company's operations became subject to corporate
income taxes. For the year ended December 31, 1996 the Company recorded a
benefit for income taxes of $561,000, related to the loss before taxes of $1.6
million for the year. At December 31, 1996, the Company had net tax loss
carryforwards of $2.1 million, which may be used in future periods to offset
taxable income.
26
<PAGE>
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. 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 expenses 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,
27
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
THE FOLLOWING DISCUSSION WITH RESPECT TO THE APPLICATION OF THE PROCEEDS
FROM THIS OFFERING ASSUMES THAT THE COMPANY WILL EITHER RECEIVE APPROPRIATE
WAIVERS UNDER THE BANK CREDIT FACILITY OR ENTER INTO AN AMENDED OR REPLACEMENT
CREDIT FACILITY TO PERMIT THE COMPANY TO APPLY THE PROCEEDS OF THIS OFFERING AS
DESCRIBED UNDER "USE OF PROCEEDS."
At March 31, 1997, the Company had a net working capital deficit of $11.4
million, representing a decrease in working capital of $8.2 million from the net
working capital deficit of $3.2 million at December 31, 1996. Current
liabilities were $18.4 million at March 31, 1997, consisting of $12.4 million in
current maturities of notes payable and subordinated debt, $5.2 million in
accounts payable and accrued liabilities, which includes $344,000 in accrued
interest and $789,000 in accrued deferred compensation payments, and $817,000
payable to affiliated dental practices in consideration for accounts receivable
from the affiliated practices. These current liabilities were partially offset
by current assets of $7.0 million, consisting of cash of $794,000, billed and
unbilled accounts receivable of $5.5 million and other current assets of
$454,000. A portion of proceeds of this offering will be used to repay $7.1
million of current indebtedness and to reduce the Company's working capital
deficit to $4.1 million.
Cash provided by operations was $498,000 and $406,000 for the years ended
December 31, 1995 and 1996, respectively. Cash used in investing activities was
$441,000 in 1995, consisting of capital expenditures to relocate one dental
center and to establish a new corporate office in Houston. In 1996, cash used in
investing activities was $11.6 million, comprised of net capital expenditures of
$730,000 to develop two DE NOVO dental centers in Houston, and of $10.3 million
to acquire three group dental practices. Cash provided from financing activities
was $6.4 million and $4.8 million for the years ended December 31, 1995 and
1996, respectively. In 1995, bank borrowings and the sale of $7.5 million of
Senior Subordinated Notes and the Series A Convertible Preferred Stock were
partially offset by a $6.0 million distribution to the sole shareholder of Jack
H. Castle, D.D.S., Inc. as part of the Reorganization. In 1996, cash provided
from financing activities consisted primarily of bank borrowings of $7.3
million, partially offset by debt repayments of $1.5 million.
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 the Bank Credit Facility with a bank. The Securities
Purchase Agreement provided for (i) the issuance of $7.5 million in Senior
Subordinated Notes to the Pecks Investors bearing interest at a rate of 12% per
annum payable quarterly in arrears, with principal payable in two installments
of $3.75 million each on December 18, 2001 and 2002, and (ii) the issuance of
1,244,737 shares of Series A Convertible Preferred Stock to the Pecks Investors.
The Bank Credit Facility initially included a $6 million term loan and a $3
million revolving line of credit. Of these amounts, $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.
During 1996, the Company financed its acquisitions, capital expenditures
and working capital requirements through a combination of borrowings under the
Bank Credit Facility, the sale of Senior Subordinated Notes, the issuance of
Common Stock and Seller Notes, and the assumption of certain debt
28
<PAGE>
and lease obligations of the acquired dental practices. In the aggregate, the
total consideration for the Completed Acquisitions consisted of $9.3 million in
cash, $0.9 million of assumed debt and capital lease obligations, $4.5 million
in Seller Notes and 331,996 shares of Common Stock.
In May 1996, the Bank Credit Facility was amended to provide a $16 million
term loan facility and a $3 million revolving line of credit. As a condition to
this amendment of the Bank Credit Facility, the Pecks Investors agreed to accept
interest notes in lieu of interest payments if the Company did not maintain
certain financial covenant ratios under the Bank Credit Facility. At December
31, 1996, the Company had outstanding balances of $8.0 million on the Senior
Subordinated Notes (including $450,000 in interest notes), $10.8 million under
the term loan and $1.2 million under the revolving line of credit.
In the third and fourth quarters of 1996 and the first quarter of 1997, the
Company did not make scheduled payments under two Seller Notes in the aggregate
amount of approximately $500,000 because the payment of those amounts would have
breached covenants under the Bank Credit Facility. In May and June 1997, the
Company restructured each of the Seller Notes to provide for payments of
interest only through January 1998 at interest rates of 10% per annum. All of
the defaults under the Seller Notes that were in default have been waived, the
Company is in compliance with the terms of each of the Seller Notes, as
restructured, and the Company intends to pay all of the Seller Notes in full out
of the proceeds of this offering. See "Use of Proceeds."
In connection with the restructuring of the Seller Notes issued in
connection with the acquisition of 1st Dental Care in the aggregate original
principal amount of $2.7 million (the "1st Dental Care Notes"), the Company
granted the holder of the 1st Dental Care Notes, an option to acquire its
operations in Florida for an aggregate consideration of $3.1 million in cash,
the discharge of the 1st Dental Care Notes and the return of the 72,621 shares
of the Company's Common Stock issued in connection with the acquisition of 1st
Dental Care. The option may be exercised only if the Company defaults on
scheduled payments under the restructured 1st Dental Care Notes or if the
Company's lender under the Bank Credit Facility declares a default under the
Bank Credit Facility and accelerates amounts due thereunder. As a component of
the restructuring of the 1st Dental Care Notes, the Company modified certain
other contractual relationships between the Company and Lester Greenberg, D.D.S.
The Company and Dr. Greenberg, and their respective affiliates, also entered
into a limited mutual release with respect to claims arising out of the
Company's default under the 1st Dental Care Notes. An aggregate of $943,363 of
the 1st Dental Notes remains convertible into Common Stock prior to the time
they are paid at a conversion price of $14.34 per share, subject to antidilution
adjustments and automatic annual increases in conversion price.
In January 1997, the Company advised the bank that it was not in compliance
with certain covenants under the Bank Credit Facility. As a result the Company
and the bank amended the Bank Credit Facility in June 1997, to reduce the term
loan commitment to $10.8 million, the amount outstanding as of the amendment
date, and the bank waived any events of default which had occurred up to the
date of the amendment. As amended, the Bank Credit Facility requires principal
payments of $602,500 to be paid on September 30 and December 31, 1997, with the
remaining balance to be paid on January 31, 1998. The term loan bears interest,
payable quarterly, at the bank's base rate plus 1.5%. The $3.0 million revolving
line of credit bears interest at the bank's base rate plus 1.0% and also expires
on January 31, 1998. As of June 1997, there was $1.7 million available for
borrowing under the revolving line of credit. A commitment fee is payable
quarterly at rates ranging from 0.25% to 0.5% of the unused amounts under the
Bank Credit Facility for such quarter. 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
$5.4 million of the term loan from the proceeds of this offering. See "Use of
Proceeds." The restructuring of the Bank Credit Facility in June 1997 resulted
in the classification of all amounts owing under the Bank Credit Facility as
current liabilities as of March 31, 1997, contributing $12.1 million to the
Company's working capital deficit.
As a condition to the second amendment to the Bank Credit Facility, the
Pecks Investors agreed to accept interest notes in lieu of interest payments
through the earliest of the consummation of this offering, a private equity
financing, or January 31, 1998. As a result, as of March 31, 1997, the Company
had issued
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$675,000 in interest notes to the Pecks Investors in lieu of quarterly interest
payments accruing from July 1996, and intends to issue an additional interest
note to the Pecks Investors on June 30, 1997 in the amount of $225,000. In June
1997, the Company and the Pecks Investors amended the Securities Purchase
Agreement to provide an additional $2.0 million in Senior Subordinated Notes,
with interest payable monthly at a rate of 12% per annum. The funds provided by
the new Senior Subordinated Notes were used to fund the option to acquire SW
Dental and to provide additional working capital. The Company also issued to the
Pecks Investors 485,382 shares of Series C Convertible Preferred Stock,
convertible into 242,691 shares of Common Stock. The terms of the Series C
Convertible Preferred Stock are similar to those of the Series A Convertible
Preferred Stock. The holders of Series A Convertible Preferred Stock and the
Series C Convertible Preferred Stock have advised the Company that they intend
to convert the Series A Convertible Preferred Stock and the Series C Convertible
Preferred Stock into 705,552 and 242,691 shares of Common Stock, respectively,
simultaneously with, and conditioned on, the completion of this offering.
The Bank Credit Facility, as amended, and the Securities Purchase
Agreement, as amended, each 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, limit the
ability of the Company to use the proceeds of debt and equity financings, and
set certain restrictions on acquisitions, mergers and sales of assets.
The Company intends to fund the remaining $3.7 million cash portion of the
consideration for the Austin Acquisition with the proceeds of this offering. The
Company intends to use a portion of the remaining proceeds of this offering to
reduce its aggregate indebtedness by approximately $20.7 million. In order to
fund its acquisition strategy following the Austin Acquisition, the Company will
be required to raise additional capital by increasing bank debt or issuing new
securities. The Company is negotiating with a bank to refinance and expand its
existing credit facility to $25 million upon the consummation of this offering.
If the Company is successful in doing so, the Company will have approximately
$17 million of additional borrowing capacity which the Company believes will be
sufficient to fund its acquisition, expansion and working capital needs for the
next 12 months, along with existing cash resources and cash flow from
operations. There can be no assurance that the Company will be able to refinance
and expand its bank credit facility or that acceptable financing for future
acquisitions or expansion of existing dental networks can be obtained. If the
Company is unable to obtain additional financing it is unlikely that the Company
will be able to implement its acquisition strategy.
RECENTLY ISSUED PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128") and Statement of Financial Accounting Standards No. 129,
Disclosures of Information about Capital Structure ("SFAS 129"). These
statements will be adopted by the Company effective January 31, 1998. SFAS 128
simplifies the computation of earnings per share by replacing primary and fully
diluted presentations with the new basic and diluted disclosures. SFAS 129
establishes standards for disclosing information about an entity's capital
structure. The Company has not determined the impact of these pronouncements on
its financial statements.
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BUSINESS
OVERVIEW
The Company develops, manages and operates integrated dental networks
through contractual 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 a management
services agreement with and has agreed to acquire a multi-location dental
practice located in Austin, Texas which the Company believes will complement its
existing Austin operations. The Company does not engage in the practice of
dentistry but rather establishes integrated dental networks by entering into
management services agreements with affiliated dental practices to provide on an
exclusive basis management and administrative services to affiliated dental
practices. The Company's strategy is to provide high-quality care in selected
markets 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 June 1, 1997, the
Company provided management services to 39 dental centers with 108 affiliated
dentists, orthodontists and other dental specialists.
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
targeted 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's affiliated dental
practices currently maintain an aggregate of 11 capitated managed care contracts
covering approximately 27,000 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 on behalf of the affiliated
practices.
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.
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 10 locations
with 39 dentists in the Houston metropolitan area. During this period the
Company developed, implemented and refined the integrated dental network
approach that it intends to utilize as a basis for its national expansion.
There presently are 10 Castle Dental Centers operating in the Houston,
Texas area and three additional centers in Houston in various stages of
development. In May 1996, the Company acquired the assets of and entered into
long-term management services agreements with 1st Dental Care, a dental practice
with 11 locations in the Tampa/Clearwater, Florida area, and Mid-South Dental
Centers, 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. In June 1997, the Company entered into a management services
agreement with and agreed to acquire SW Dental, a dental practice with
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four dental centers in the Austin, Texas metropolitan area. The closing of the
Austin Acquisition is a condition to, and will occur contemporaneously with, 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 was estimated to
be approximately $42.9 billion for 1995, representing approximately 4.3% 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 were 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 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.
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BUSINESS STRATEGY
The Company's strategy is to develop integrated networks for the provision
of a broad range of dental services through practice affiliations that provide
high-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 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 their 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 expansion of existing networks, as well as improve
the utilization of existing facilities by providing a source of patients
to dentists with whom the Company is affiliated. 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 the acquisition of
existing dental practices and the DE NOVO development of dental practices in
retail environments.
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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.
COMPLETED ACQUISITIONS
The following table describes acquisitions completed as of May 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
AFFILIATED DENTAL PRACTICE PRINCIPAL LOCATIONS CENTERS AFFILIATED DENTISTS*
- ---------------------------------------- ------------------------------ --------- ---------------------
<S> <C> <C> <C>
1st Dental Care......................... Clearwater/Tampa, Florida 11 16
Mid-South Dental Nashville and 6 21
Centers............................... Chattanooga, Tennessee
Horizon Dental Centers.................. Austin and Fort Worth, Texas 8 23
</TABLE>
- ------------
* Includes full-time and part-time dentists.
The following table describes the consideration paid by the Company for the
Completed Acquisitions.
<TABLE>
<CAPTION>
ASSUMED DEBT AND SHARES OF
AFFILIATED DENTAL PRACTICE CASH CAPITAL LEASES SELLER NOTES COMMON STOCK
- ------------------------------------- --------- ----------------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
1st Dental Care...................... $ 3.1 $ 0.2 $2.7 72,621
Mid-South Dental Centers............. 4.0 0.7 0.8 75,000
Horizon Dental Centers............... 2.2 -- 1.0 184,375
--------- ----- ------------ ------------
Total........................... $ 9.3 $ 0.9 $4.5 331,996
========= ===== ============ ============
</TABLE>
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 with the affiliated practices
containing noncompetition provisions with the former owners of such practices.
Additionally, the Company typically enters into an option agreement with the
owner of the affiliated dental practice which entitles the Company to select
successor owners of the affiliated dental practice. The Common Stock issued in
these 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."
AUSTIN ACQUISITION
In June 1997, the Company entered into a management services agreement with
and agreed to acquire SW Dental. The management services agreement with SW
Dental obligates the Company to act as the sole and exclusive agent for SW
Dental in the management and administration of its business functions and
business affairs. Unlike the Company's typical management services agreement,
however, SW Dental has retained control over the management of its facilities
and supplies, as well as the administration of its accounts receivable and
accounts payable. As compensation for its services under the management services
agreement, the Company receives a monthly management fee which includes the
costs incurred by it on behalf of SW Dental. The term of the management services
agreement with SW Dental expires on the
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earlier of June 1, 1998 or the closing of the transactions referred to in the
Option Agreement described below.
In June 1997, the Company and SW Dental also entered into an Option
Agreement for the Purchase and Sale of Businesses (the "Option Agreement")
which provides for the acquisition by the Company of SW Dental for a
consideration of $5.2 million in cash, $1.5 million of which has already been
paid, and 140,909 shares of Series B Convertible Preferred Stock. The Company
will also assume approximately $447,000 of long-term debt and capital lease
obligations in connection with the Austin Acquisition. The closing of the Austin
Acquisition by the Company is a condition to, and will occur contemporaneously
with, the closing of this offering. In the event the Company does not consummate
the acquisition of SW Dental, the Company will forfeit the $1.5 million
previously paid to SW Dental as partial consideration for the Austin
Acquisition. Moreover, the Company has granted SW Dental an exclusive,
non-transferable option exercisable during the 60-day period beginning May 31,
1998 to acquire the Company's existing operations in the Austin, Texas
metropolitan area at a price of $3.4 million in the event the Austin Acquisition
is not consummated by May 31, 1998.
The contractual arrangements pursuant to which the Austin Acquisition 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 upon conversion of the Series B Convertible Preferred Stock
to be issued in the Austin Acquisition 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
as allowable by federal and state law; (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)
requires that the affiliated dentists enter into employment agreements with the
affiliated practices 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.
Management will retain the name of an affiliated practice in situations where
brand recognition has been established. This conversion 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. The Company anticipates that it will enter into a
similar management services agreement 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. Subject to
applicable law, the Company is paid a monthly management fee comprised of the
costs incurred by it on behalf of the affiliated practice and an amount ranging
from 12.5% to 20.0% of adjusted gross
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revenues as described in each agreement. 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.
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 dentist
employment agreements 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 permit and to the extent deemed enforceable under applicable law, 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 the 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 part-time dentists retained by
the affiliated dental practices 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 from five 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
may seek to relocate such affiliated practice to a more desirable 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.
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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 several centers in order to
utilize their time optimally. Each patient typically is assigned to and 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 Company's dental centers are staffed with patient care coordinators who
are responsible for the non-clinical aspects of the patient's experience with
the practice. The patient care coordinator's function is (i) to act as a liaison
between the dentist and patient; (ii) to work with the patient to develop a
treatment schedule with payments tailored to the patient's needs within the
Company's established credit policies; and (iii) to optimize 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
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 ranging from $89
to $98 per month. After consultation with the patient care coordinator 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 implement 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 that name recognition 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 to market its dental services
to potential patients in Houston, Texas and the Company intends to use the same
marketing techniques in its regional markets.
The Company has also established a regional telemarketing system in Houston
and Austin, Texas to field calls generated by advertising, to confirm upcoming
scheduled patient visits and 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.
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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. 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, the ability to offer career paths previously unavailable to dentists
and the ability to recruit for multiple markets 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.
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. 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.
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<PAGE>
The practice of dentistry at each affiliated dental practice is under the
exclusive control of the dentists who practice at such location.
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 to 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 management information 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.
39
<PAGE>
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 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 Medicare, Medicaid or other
federal and state programs, 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 the Company's operations, 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 from Medicare and Medicaid as well as 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. The laws of
many states also prohibit dental practitioners from paying any portion of fees
received for dental services 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
40
<PAGE>
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 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 the management fees the
Company charges for those services are consistent with the laws and regulations
of the jurisdictions in which it operates.
In addition, there are certain regulatory risks associated with the
Company's role in negotiating and administering managed care and capitation
contracts. The application of state insurance laws to reimbursement arrangements
other than various types of fee-for-service arrangements is an unsettled area of
law and is 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 or the affiliated dental practices may become subject to state insurance
laws. In the event that the Company or the affiliated practices are determined
to be engaged in the business of insurance, these parties could be required
either to seek licensure as an insurance company or to change the form of their
relationships with third-party payors, and may become subject to regulatory
enforcement actions. In such events, 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 or marketing from time to time in response to changes in the
business, statutory and regulatory environments. 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 May 31, 1997, the Company and its affiliated dental practices
employed approximately 490 administrative and dental office personnel on a
full-time or part-time basis, and the affiliated dental practices employed
approximately 77 general dentists and 17 specialists on a full-time or part-time
basis. Following consummation of the Austin Acquisition, the Company expects
that approximately 560 people
41
<PAGE>
will be employed on a full-time or part-time basis by the Company and
approximately 108 dentists 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
for ongoing management and administrative services 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. Two of the centers 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
basis not less favorable to the Company than fair market value basis.
The Company intends to lease centers or enter into to build-to-suit
arrangements with third parties for dental centers to be leased 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 the 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
$1.0 million for each occurrence and $2.0 million annual aggregate, and
professional liability coverage of not less than $1.0 million for each
occurrence and $1.0 million 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.
42
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
directors, executive officers and significant employees of the Company:
NAME AGE POSITION
- ---------------------------------- ---- ------------------------------------
Jack H. Castle, Jr................ 42 Chairman, President, Chief Executive
` Officer and Director
John M. Slack..................... 49 Vice President, Chief Financial
Officer and Secretary
Eric H. Shamban................... 44 Vice President--Operations
Stephen L. Clayton, D.D.S......... 43 Regional Director of Patient Care
G. Powell Bilyeu, D.D.S........... 65 Regional Director of Patient Care
Lester B. Greenberg, D.D.S........ 62 Regional Director of Patient Care
John G. Goodman, D.D.S............ 44 Regional Director of Patient Care
Jack H. Castle, D.D.S............. 75 Director
Robert J. Cresci.................. 52 Director
G. Kent Kahle..................... 45 Director
Emmett E. Moore*.................. 55 Director
Elizabeth A. Tilney............... 40 Director
Louis A. Waters*.................. 58 Director
- ------------
* 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 (other than the period between August 1996 and February 1997) 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.
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. publicly-held
environmental services company. From 1985 through August 1994, Mr. Slack was
Vice President and Chief Financial Officer of Serv-Tech, Inc., a publicly-held
industrial services company. Mr. Slack received a B.S. in international
economics from Georgetown University in 1969.
ERIC H. SHAMBAN joined the Company in October 1996 as Vice
President -- Operations. From March 1995 through October 1996, he served as
Senior Sales Consultant for Quality Systems, Inc., a leading provider of
management information systems to group dental practices. From November 1994
until February 1995, Mr. Shamban was director of managed care programs for
United HealthCare. Prior to that Mr. Shamban was senior applications consultant
for Quality Systems, Inc. Mr. Shamban received a B.A. from Boston University.
STEPHEN L. CLAYTON, D.D.S. has been the clinical director of the Company
since February 1988 and has served as Regional Director of Patient Care 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. Dr. Bilyeu founded Mid-South Dental Centers in 1978 and served
as president and owner until 1996. Dr. Bilyeu received a Doctor of Dental
Surgery from the University of Tennessee College of Dentistry in 1962.
43
<PAGE>
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. Dr. Greenberg received a Doctor of Dental Surgery
from the University of Tennessee College of Dentistry in 1957.
JOHN G. GOODMAN, D.D.S. has been a Regional Director of Patient Care of the
Company since June 1997, when the Company entered into a management services
agreement with SW Dental. Dr. Goodman founded SW Dental in 1992 and serves as
President. Dr. Goodman also founded, owned, and operated a multi-practitioner
practice in Oregon for 12 years. Dr. Goodman received a Doctor of Dental Surgery
from the University of Texas Health Science Center of San Antonio in 1978.
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.
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 Pennsylvania and an A.B. from Brown University. He currently serves on the
boards of Total Safety, Inc., Litigation Resources of America, 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., 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.
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 held
various positions 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.
in 1969, serving as Chairman of the Board and Chief Executive Officer until
1980. He served as Chairman of the Executive Committee and subsequently Chairman
of the Finance Committee until March 1997. He also served as Chairman and Chief
Executive
44
<PAGE>
Officer of BFI International, Inc. from December 1991 to March 1997. 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 and Series C Convertible Preferred
Stock is held by the Pecks Investors. See " -- Securityholders Agreement."
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 and Kahle, both 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 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 expenses 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. In June 1997, Dr. Castle and the Company
amended the Deferred Compensation Agreement (i) postponing the payment of any
scheduled payments under the Deferred Compensation Agreement until the earlier
of (a) the issuance of any debt consented to by the bank the proceeds of which
are applied to pay amounts owed under the Bank Credit Facility and the Interim
Financing, or the closing of any equity offering the proceeds of which are
applied to pay amounts owed under the Bank Credit Facility and the Interim
Financing, and (b) January 31, 1998, at which time the scheduled deferred
compensation payments shall become payable beginning on the next scheduled
payment date, and (ii) deferring payment of the scheduled payments under the
Deferred Compensation Agreement which were not made on and after September 30,
1996 until the earlier of (a) the
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<PAGE>
closing of an initial public offering of the Company's Common Stock in which the
gross proceeds are not less than $25 million; provided, however, that such
payments shall only be made in the event the Company first pays any amounts
owing under the Bank Credit Facility and the Interim Financing; or (b) December
31, 2000. Amounts not paid when scheduled under the original Deferred
Compensation Agreement bear interest at the rate of 10% per annum. A portion of
the proceeds of this offering will be used to pay amounts so deferred 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 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.
SUMMARY COMPENSATION. The following table sets forth the total
compensation paid by the Company for services rendered during the years ended
December 31, 1994, 1995 and 1996, to the Company's Chief Executive Officer and
other executive officers whose total 1996 salary and bonus exceeded $100,000
during such year.
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
--------------------
FISCAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(2)
- ------------------------------------- ------- ---------- -------- ---------------
<S> <C> <C> <C> <C>
Jack H. Castle, Jr................... 1996 $ 300,018 $200,000 --
President and Chief 1995 401,639 -- $ 219,132
Executive Officer 1994 428,956 -- 174,074
Jack H. Castle, D.D.S................ 1996 100,000 -- 263,000
President of Jack H. Castle, 1995 327,693 -- 1,795,681
D.D.S., P.C.(3) 1994 300,033 -- 1,245,532
Seth L. Miller....................... 1996 117,340 -- 33,014
President(4)
John M. Slack........................ 1996 120,003 -- --
Vice President,
Chief Financial Officer
and Secretary
</TABLE>
- ------------
(1) The columns for "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) In 1994 and 1995, significant operations of the Company were conducted
through a subchapter S Corporation. Other compensation in 1994 and 1995
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. All other compensation paid in
1996 to Dr. Castle represents payments made under the Deferred Compensation
Agreement. See "Unaudited Pro Forma Consolidated Financial Information"
and "Certain Transactions."
(4) Mr. 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. Mr. Miller resigned from the Company in February 1997.
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<PAGE>
OPTION GRANTS. During 1996, the following executive officers of the
Company were granted incentive stock options under the Plan:
NAME NUMBER OF OPTIONS EXERCISE PRICE
- ------------------------------------- ----------------- --------------
Seth L. Miller....................... 25,000 $11.00
John M. Slack........................ 20,000 10.00
None of Mr. Miller's options were vested at the time of his resignation.
Twenty percent of Mr. Slack's options vested in February 1997, and an additional
20% of Mr. Slack's options will vest in February of each of the next four years.
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 $6.0 million in cash and entered into a Deferred Compensation
Agreement with Dr. Castle pursuant to which the Company has agreed to pay Dr.
Castle $2.63 million in 20 quarterly installments beginning March 1996. In June
1997, Dr. Castle and the Company amended the Deferred Compensation Agreement (i)
postponing the payment of any scheduled payments under the Deferred Compensation
Agreement until the earlier of (a) the issuance of any debt consented to by the
bank the proceeds of which are applied to pay amounts owed under the Bank Credit
Facility and the Interim Financing, or the closing of any equity offering the
proceeds of which are applied to pay amounts owed under the Bank Credit Facility
and the Interim Financing, and (b) January 31, 1998, at which time the scheduled
deferred compensation payments shall become payable beginning on the next
scheduled payment date, and (ii) deferring payment of the scheduled payments
under the Deferred Compensation Agreement which were not made on and after
September 30, 1996 until the earlier of (a) the closing of an initial public
offering of the Company's Common Stock in which the gross proceeds are not less
than $25 million; provided, however, that such payments shall only be made in
the event the Company first pays any amounts owing under the Bank Credit
Facility and the Interim Financing; or (b) December 31, 2000. Amounts not paid
when scheduled under the Deferred Compensation Agreement bear interest at the
rate of 10% per annum. Proceeds of this offering will be used to pay amounts so
deferred 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, President 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.
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 -- Registration Rights," and
"Certain Transactions."
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<PAGE>
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 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 500,000 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
determined at the discretion of the Compensation Committee.
At the consummation of this offering, the Company anticipates that it will
have granted Awards to purchase 67,250 shares of Common Stock under the Plan at
prices per share ranging from $10.00 to $11.00. 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 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 150,000 shares.
The Directors' Plan provides for the automatic grant of 12,500 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.
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<PAGE>
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 upon the consummation of this offering it will
have outstanding Options to purchase a total of approximately 62,500 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.
The Company did not make any contributions to the 401(k) Plan in 1996.
49
<PAGE>
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 56,579
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 an amount equal to one percent of the total
consideration for each of the Company's acquisitions which has been consummated.
The GulfStar Group received approximately $195,000 in investment banking and
financial advisory fees from the Company in 1996. 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 485,382 shares of Series C 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 and Series C Convertible Preferred Stock, or Common
Stock following conversion of Series A Convertible Preferred Stock and Series C
Convertible Preferred Stock, are maintained, these 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 and Series C
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 $6.0 million in cash and entered into a Deferred Compensation
Agreement with Dr. Castle pursuant to which the Company has agreed to pay Dr.
Castle $2.63 million in 20 quarterly installments beginning March 1996. In June
1997, Dr. Castle and the Company amended the Deferred Compensation Agreement (i)
postponing the payment of any scheduled payments under the Deferred Compensation
Agreement until the earlier of (a) the issuance of any debt consented to by the
bank the proceeds of which are applied to pay amounts owwed under the Bank
Credit Facility and the Interim Financing, or the closing of any equity offering
the proceeds of which are applied to pay amounts owed under the Bank Credit
Facility and the Interim Financing, and (b) January 31, 1998, at which time the
scheduled deferred compensation payments shall become payable beginning on the
next scheduled payment date, and (ii) deferring payment of the scheduled
payments under the Deferred Compensation Agreement which were not made on and
after September 30, 1996 until the earlier of (a) the closing of an initial
public offering of the Company's Common Stock in which the gross proceeds are
not less than $25 million; provided, however, that such payments shall only be
made in the event the Company first pays any amounts owing under the Bank Credit
Facility and the Interim Financing; or (b) December 31, 2000. Amounts not paid
when scheduled under the Deferred Compensation Agreement bear interest at the
rate of 10% per annum. Proceeds of this offering will be used to pay amounts so
deferred 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, President 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
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<PAGE>
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, 1995,
as amended, 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 Series C Convertible
Preferred Stock and exercise of the GulfStar Warrant. See "Description of
Capital Stock -- 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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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of May 31, 1997, 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 the outstanding Common Stock, by each director or executive
officer of the Company and by all directors and executive officers as a group.
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.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED
SHARES ------------------------
NAME AND ADDRESS OF BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED OFFERING OFFERING(1)
- ---------------------------------------- ------------ -------- -----------
<S> <C> <C> <C>
Jack H. Castle, Jr.(2)(3)............... 1,228,000 37.4% 21.6%
Jack H. Castle, D.D.S.(3)............... 871,000 26.6 15.1
Loretta Castle(3)....................... 871,000 26.6 15.1
Castle Interests, Ltd.(3)............... 514,000 15.7 8.9
Pecks Management Partners Ltd.(4)....... 948,243 28.9 --
Robert J. Cresci(5)..................... 948,243 28.9 16.4
G. Kent Kahle(6)........................ 56,579 1.7 1.0
John M. Slack(7)........................ 5,000 * *
Elizabeth A. Tilney..................... -- -- --
Emmett E. Moore(8)...................... -- -- --
Louis A. Waters(8)...................... -- -- --
All directors and executive officers as
a group (11 persons)(9)............... 2,594,822 77.6% 44.4%
</TABLE>
- ------------
* Less than 1%.
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) Includes 714,000 shares held by the Castle 1995 Gift Trust f/b/o Jack H.
Castle, Jr., of which Mr. Castle is Trustee.
(3) Includes 514,000 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. The mailing address for each person or entity is 1360 Post Oak
Boulevard, Suite 1300, Houston, Texas 77056.
(4) 475,071, 94,074 and 136,407 of such shares are owned of record by Delaware
State Employees' Retirement Fund, Declaration of Trust for Defined Benefit
Plans of ICI American Holdings Inc. and Declaration of Trust for Defined
Benefit Plans of Zeneca Holdings Inc., respectively (the "Pecks
Investors"). Pecks Management Partners Ltd. ("Pecks"), as investment
manager for the Pecks Investors, 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 705,552
shares of Common Stock, and 485,382 shares of Series C Convertible Preferred
Stock, which is convertible into 242,691 shares of Common Stock. Mr. Cresci,
a director of the Company, is a Managing Director of Pecks. The principal
business address for Pecks is One Rockefeller Plaza, New York, New York
10020. Pecks disclaims beneficial ownership of such shares. Pecks has
advised the Company that it intends on behalf of the Pecks Investors to
convert all of the Series A Convertible Preferred Stock and Series C
Convertible Preferred Stock into Common Stock simultaneously with, and
conditioned on, the closing of this offering.
(5) Includes all shares deemed to be beneficially owned by Pecks, of which Mr.
Cresci is a Managing Director. As a result, Mr. Cresci may be deemed to
share voting and investment power with respect to such shares. Mr. Cresci
disclaims beneficial ownership of such shares. See note 4 above.
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<PAGE>
(6) 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.
(7) Includes options to acquire 5,000 shares of Common Stock issued under the
Plan.
(8) Messrs. Moore and Waters have agreed to serve as directors of the Company
upon the closing of this offering.
(9) Includes (i) 714,000 shares of Common Stock held by the Castle 1995 Gift
Trust f/b/o Jack H. Castle, Jr., (ii) 514,000 shares of Common Stock held by
Castle Interests, Ltd., (iii) 705,552 shares of Common Stock issued on
conversion of 1,244,737 shares of Series A Convertible Preferred Stock, and
242,691 shares of Common Stock issued on conversion of 485,382 shares of
Series C Convertible Preferred Stock, all of which are beneficially owned by
the Pecks Investors, and (iv) 56,579 shares of Common Stock issuable to
GulfStar Investments, Ltd. on exercise of the GulfStar Warrant.
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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"). Of the Preferred Stock,
1,244,737 shares have been designated Series A Convertible Preferred Stock, all
of which will be converted into an aggregate of 705,552 shares of Common Stock
at the closing of this offering, 140,909 shares have been designated Series B
Convertible Preferred Stock, all of which will be issued as partial
consideration for the Austin Acquisition, and 485,382 shares have been
designated Series C Convertible Preferred Stock, all of which will be converted
into 242,691 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. The Company has designated (i)
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, (ii)
140,909 shares of Preferred Stock as Series B Convertible Preferred Stock which
will be issued in connection with the Austin Acquisition, and (iii) 485,382
shares of Preferred Stock as Series C Convertible Preferred Stock, all of which
are issued and outstanding and owned by the Pecks Investors. See "Principal
Stockholders." All of the shares of Series A Convertible Preferred Stock will
be converted into an aggregate of 705,552 shares of Common Stock at the closing
of this offering. All of the shares of Series C Convertible Preferred Stock will
be converted into an aggregate of 242,691 shares of Common Stock at the closing
of this offering.
Although the Company has no present plans to issue any additional shares of
Preferred Stock following the closing of this offering, the issuance of
additional 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
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<PAGE>
takeover attempts not first approved by the Board of Directors (including
takeovers 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
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
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<PAGE>
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 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 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 who 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 3,280,239 shares of Common Stock and shares of Common Stock issuable on
conversion of the Series A Convertible Preferred Stock and the Series C
Convertible Preferred Stock presently have some form of registration rights.
After completion of this offering and assuming the conversion into Common Stock
of the Series B Convertible Preferred Stock issued in connection with the Austin
Acquisition, a total of 3,421,148 shares of Common Stock will have some form of
registration rights. See "Principal 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 and Series C 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
56
<PAGE>
eligible to use such form. All registrations pursuant to the Registration Rights
Agreement are undertaken at the Company's expense other than underwriting
discount.
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, 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 giving effect to the conversion of
the Series A Convertible Preferred Stock and Series C Convertible Preferred
Stock, the Company will have 5,580,239 shares of Common Stock outstanding. Up to
69,879 shares of Common Stock are presently issuable on the conversion of two
Seller Notes issued by the Company, and 140,909 shares of Common Stock are
issuable on conversion of the Series B Convertible Preferred Stock. Of the
outstanding shares, the 2,500,000 shares sold in this offering (2,875,000 shares
if the Underwriters exercise their over-allotment option in full) will be freely
tradeable 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 3,280,239 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 first 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 56,579 shares of
Common Stock at $11.00 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
one year has elapsed between the later of the date on which restricted
securities were acquired from the Company or 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
one-year holding period. Under Rule 144(k), 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, 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
57
<PAGE>
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 (the "Lock-up Period"), they will not, without the
prior written consent of J. C. Bradford & Co., 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 shares of
Common Stock issued 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 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 1,150,000
shares reserved for issuance. As of the closing of this offering, the Company
anticipates that it will have issued options to purchase 129,750 shares of
Common Stock pursuant to the Plan and the Directors' Plan, 11,900 of which are
currently 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 one-year minimum holding period.
58
<PAGE>
UNDERWRITING
Pursuant to the Underwriting Agreement, and subject to the terms and
conditions thereof, the Underwriters named below, acting through J.C. Bradford &
Co. and Southcoast Capital Corporation, as representatives of the several
Underwriters (the "Representatives"), have agreed, severally, to purchase from
the Company the number of shares of Common Stock set forth below opposite their
respective names.
NUMBER OF
NAME OF UNDERWRITER SHARES
- ------------------------------------- ----------
J.C. Bradford & Co...................
Southcoast Capital Corporation.......
----------
Total........................... 2,500,000
==========
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions therein set forth, to purchase all shares of Common Stock
offered hereby if any such shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the shares of Common Stock to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $
per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers.
After the initial public offering, the public offering price and such
concessions may be changed. The Representatives have informed the Company that
the Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
The offering of the shares of Common Stock is made for delivery when, as
and if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any order for the purchase of shares.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days from the date of this Prospectus, to purchase up to an
aggregate of 375,000 additional shares of Common Stock to cover over-allotments,
if any. To the extent the Underwriters exercise this option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of Common Stock to be purchased by
it shown in the table above bears to the total number of shares in such table,
and the Company will be obligated, pursuant to the option, to sell such shares
to the Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the 2,500,000 shares of
Common Stock offered hereby. If purchased, the Underwriters will sell these
additional shares on the same terms as those on which the 2,500,000 shares are
being offered.
Subject to applicable limitations, the Underwriters, in connection with the
offering, may place bids for or make purchases of the Common Stock in the open
market or otherwise, for long or short account, or cover short positions
incurred, to stabilize, maintain or otherwise affect the price of the Common
Stock, which may be higher than the price that might otherwise prevail in the
open market. There can be no assurance that the price of the Common Stock will
be stablized, or that stabilizing, if commenced, will not be discontinued at any
time. Subject to applicable limitations, the Underwriters may also place bids or
make purchases on behalf of the underwriting syndicate to reduce a short
position created in connection with the offering.
Prior to this offering, there has been no public market for the Common
Stock. The offering price has been determined by negotiations among the Company
and the Representatives. In determining such price, consideration was given to,
among other things, the financial and operating history and trends of the
Company, the experience of its management, the position of the Company in its
industry, the Company's prospects and the Company's financial results.
Additionally, consideration was given to the status of the
59
<PAGE>
securities markets, market conditions for new offerings of securities and the
prices of similar securities of comparable companies.
The Company, its executive officers and directors and all of the
stockholders of the Company have agreed with the Representatives not to offer,
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, shares of
Common Stock issued in connection with acquisitions to parties that agree to be
bound by the same restrictions on offers and sales, for a period of 180 days
after the date of this Prospectus without the prior written consent of the
Representatives of the Underwriters. After such 180-day period, such persons
will be entitled to sell, distribute or otherwise dispose of the Common Stock,
subject to the provisions of applicable securities laws.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters and controlling persons, if any, against certain liabilities,
including liabilities under the Securities Act, or will contribute to payments
that the Underwriters or any such controlling persons may be required to make in
respect thereof.
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
related to the offering will be passed on for the Underwriters by Bass, Berry &
Sims PLC, Nashville, Tennessee.
EXPERTS
The financial statements and financial statement schedule of Castle Dental
Centers, Inc. and the financial statements of the affiliated dental practices
acquired by Castle Dental Centers, Inc. for the indicated periods ended December
31, 1993, 1994, 1995 and 1996, 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 reports 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.
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
CASTLE DENTAL CENTERS, INC.
Unaudited Pro Forma Consolidated
Financial Information.......... F-3
Unaudited Pro Forma Consolidated
Balance Sheet as of March 31,
1997........................... F-4
Notes to Unaudited Pro Forma
Consolidated Balance Sheet..... F-5
Unaudited Pro Forma Consolidated
Statement of Operations for the
year ended
December 31, 1996............. F-7
Unaudited Pro Forma Consolidated
Statement of Operations for the
three months
ended March 31, 1997.......... F-8
Notes to Unaudited Pro Forma
Consolidated Statement of
Operations..................... F-9
CASTLE DENTAL CENTERS, INC.
Report of Independent
Accountants.................... F-12
Balance Sheets as of December
31, 1995 and 1996.............. F-13
Statements of Operations for the
years ended December 31, 1994,
1995 and 1996.................. F-14
Statements of Changes in
Stockholders' Equity (Deficit)
for the years ended December
31, 1994, 1995 and 1996........ F-15
Statements of Cash Flows for the
years ended December 31, 1994,
1995 and 1996.................. F-16
Notes to Financial Statements... F-17
CASTLE DENTAL CENTERS, INC.
Condensed Consolidated Balance
Sheets (Unaudited) as of
December 31, 1996 and
March 31, 1997................ F-32
Condensed Consolidated
Statements of Operations
(Unaudited) for the three
months ended March 31, 1996 and
1997........................... F-33
Condensed Consolidated
Statements of Cash Flows
(Unaudited) for the three
months ended March 31, 1996 and
1997........................... F-34
Notes to Condensed Consolidated
Financial Statements
(Unaudited).................... F-35
SW DENTAL ASSOCIATES
Report of Independent
Accountants.................... F-37
Balance Sheets as of December
31, 1995 and 1996.............. F-38
Statements of Operations for the
years ended December 31, 1995
and 1996....................... F-39
Statements of Changes in
Members' Equity (Deficit) for
the year ended December 31,
1995 and 1996.................. F-40
Statements of Cash Flows for the
year ended December 31, 1995
and 1996....................... F-41
Notes to Financial Statements... F-42
SW DENTAL ASSOCIATES
Condensed Balance Sheets
(Unaudited) as of December 31,
1996, and March 31, 1997....... F-46
Condensed Statements of
Operations (Unaudited) for the
three months ended March 31,
1996 and 1997.................. F-47
Condensed Statements of Cash
Flows (Unaudited) for the three
months ended March 31, 1996 and
1997........................... F-48
Notes to Condensed Financial
Statements (Unaudited)......... F-49
1ST DENTAL CARE
Report of Independent
Accountants.................... F-50
Combined Balance Sheets as of
December 31, 1994 and 1995..... F-51
Combined Statements of
Operations for the years ended
December 31, 1993,
1994 and 1995................. F-52
Combined Statements of Changes
in Stockholder's Equity
(Deficit) for the years ended
December 31, 1993, 1994 and
1995........................... F-53
Combined Statements of Cash
Flows for the years ended
December 31, 1993,
1994 and 1995................. F-54
Notes to Combined Financial
Statements..................... F-55
F-1
<PAGE>
PAGE
-----
MID-SOUTH DENTAL CENTERS
Report of Independent
Accountants.................... F-60
Balance Sheets as of December
31, 1994 and 1995.............. F-61
Statements of Operations for the
years ended December 31, 1993,
1994 and 1995.................. F-62
Statements of Changes in
Stockholder's Equity for the
years ended December 31, 1993,
1994 and 1995.................. F-63
Statements of Cash Flows for the
years ended December 31, 1993,
1994 and 1995.................. F-64
Notes to Financial Statements... F-65
HORIZON DENTAL CENTERS
Report of Independent
Accountants.................... F-70
Combined Balance Sheet as of
December 31, 1995.............. F-71
Combined Statements of
Operations for the years ended
December 31, 1994 and 1995..... F-72
Combined Statements of Changes
in Stockholder's Equity
(Deficit) for the years ended
December 31, 1994 and 1995..... F-73
Combined Statements of Cash
Flows for the years ended
December 31, 1994 and 1995..... f-74
Notes to Combined Financial
Statements..................... F-75
CASTLE DENTAL CENTERS, INC.
Report of Independent
Accountants.................... S-1
Schedule II -- Valuation and
Qualifying Accounts............ S-2
F-2
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
THE INFORMATION HEREIN ASSUMES THAT THE COMPANY WILL EITHER RECEIVE
APPROPRIATE WAIVERS UNDER THE BANK CREDIT FACILITY OR ENTER INTO AN AMENDED OR
REPLACEMENT CREDIT FACILITY TO PERMIT THE COMPANY TO APPLY THE PROCEEDS OF THIS
OFFERING AS DESCRIBED UNDER "USE OF PROCEEDS."
The following Unaudited Pro Forma Consolidated Balance Sheet as of March
31, 1997 and the Unaudited Pro Forma Consolidated Statements of Operations for
the year ended December 31, 1996 and the three months ended March 31, 1997 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 Consolidated Balance Sheet reflects such
transactions as if they had occurred as of March 31, 1997, and the Unaudited Pro
Forma Consolidated Statement of Operations for the year ended December 31, 1996
and for the three months ended March 31, 1997 reflect such transactions as if
they had occurred as of January 1, 1996. Initially capitalized terms not
otherwise defined herein shall have the meaning assigned to them in the
accompanying Prospectus.
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
Horizon Dental Centers, a group dental practice with four offices in Ft. Worth,
Texas and four offices in Austin, Texas. In June 1997, the Company entered into
a management services agreement with and agreed to acquire a multi-location
dental practice that operates four dental centers in the Austin, Texas
metropolitan area. The closing of the Austin Acquisition is a condition of, and
will occur contemporaneously with, the closing of this offering.
In June 1997, the Company amended the Securities Purchase Agreement with
the Pecks Investors pursuant to which the Company issued an additional $2.0
million in Senior Subordinated Notes and 485,382 shares of Series C Convertible
Preferred Stock (the "Interim Financing").
The Unaudited Pro Forma Consolidated Balance Sheet as of March 31, 1997
gives effect to (i) the Interim Financing, (ii) the sale of 2,500,000 shares of
Common Stock offered by the Company hereby and the application of the net
proceeds therefrom, as described in "Use of Proceeds," assuming an initial
public offering price of $11.00, (iii) the conversion of the Series A and Series
C Convertible Preferred Stock into an aggregate of 948,243 shares of Common
Stock, and (iv) the Austin Acquisition and the issuance of 140,909 shares of
Series B Preferred Stock, as if each of such transactions had occurred as of
March 31, 1997. The Unaudited Pro Forma Consolidated Statement of Operations for
the year ended December 31, 1996, and three months ended March 31, 1997 give
effect to (i) the Interim Financing, (ii) the sale of 2,500,000 shares of Common
Stock offered by the Company hereby and the application of net proceeds
therefrom as described in "Use of Proceeds," assuming an initial public
offering price of $11.00 and (iii) the Acquisition Transactions, as if each of
such transactions had occurred as of January 1, 1996.
The pro forma consolidated financial statements have been prepared by the
Company based on the historical financial statements of the Company and the
affiliated 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 consolidated 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 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.
F-3
<PAGE>
CASTLE DENTAL CENTERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
------------------------- HISTORICAL -------------------------
HISTORICAL INTERIM ----------- AUSTIN
---------- FINANCING OFFERING AUSTIN ACQUISITION
COMPANY ADJUSTMENTS ADJUSTMENTS ACQUISITION ADJUSTMENTS
(A) (B) (C) (D) (D) AS ADJUSTED
---------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 794 $ 500 $ 3,458 $ 210 $(3,800) $ 1,162
Patient receivables, net........... 5,486 -- -- 258 -- 5,744
Prepaid expenses and other current
assets.......................... 454 -- -- 47 -- 501
Deferred income taxes.............. 284 -- -- -- -- 284
---------- ----------- ----------- ----------- ----------- -----------
Total current assets....... 7,018 500 3,458 515 (3,800) 7,691
---------- ----------- ----------- ----------- ----------- -----------
Property and equipment, net.......... 4,028 -- -- 394 100 4,522
Intangible assets, net............... 16,303 -- -- -- 6,104 22,407
Other assets......................... 2,283 1,000 (320) 3 (1,561) 1,405
Deferred income taxes................ 592 -- -- -- -- 592
---------- ----------- ----------- ----------- ----------- -----------
Total assets.................... $ 30,224 $ 1,500 $ 3,138 $ 912 $ 843 $36,617
========== =========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit........... $ 1,270 $-- $-- $ -- $-- $ 1,270
Current portion of long-term debt
and capital lease obligations... 11,113 1,393 (7,141) 125 -- 5,490
Accounts payable and accrued
liabilities..................... 5,182 (500) (526) 182 (77) 4,261
Due to affiliated dental
practices....................... 817 -- -- -- -- 817
---------- ----------- ----------- ----------- ----------- -----------
Total current
liabilities............. 18,382 893 (7,667) 307 (77) 11,838
---------- ----------- ----------- ----------- ----------- -----------
Long-term debt and capital lease
obligations, less current
portion............................ 10,833 -- (10,134) 322 -- 1,021
Other long-term liabilities.......... 1,578 -- 1,578
Redeemable preferred stock........... 2,928 607 (3,535)(E) -- 1,203 1,203
Stockholders' equity (deficit):
Common stock....................... 2 -- 3 1 (1) 6
1(E)
Additional paid-in capital......... 3,416 -- 24,347 -- 31,297
3,534(E)
Retained earnings (accumulated
deficit)........................ (6,915) -- (3,411) 282 (282) (10,326)
---------- ----------- ----------- ----------- ----------- -----------
Total stockholders' equity
(deficit)............... (3,497) -- 24,474 283 (283) 20,977
---------- ----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity (deficit)................... $ 30,224 $ 1,500 $ 3,138 $ 912 $ 843 $36,617
========== =========== =========== =========== =========== ===========
</TABLE>
F-4
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Represents the March 31, 1997 historical consolidated balance sheet of the
Company, which includes 1st Dental Care and Mid-South Dental Centers, both
acquired in May 1996, and Horizon Dental Centers, acquired in August 1996.
(B) Represents the Interim Financing of $2.0 million, the proceeds of which
will be used to fund a $1.0 million non-refundable deposit to be credited
to the purchase price of the Austin Acquisition and to pay certain
accounts payable and accrued liabilities.
(C) Represents the issuance of 2.5 million shares of Common Stock offered by
the Company hereby and the use of proceeds therefrom, at an assumed
initial public offering price of $11.00 per share, as follows:
IN THOUSANDS
------------
Gross proceeds of the offering.......... $ 27,500
Underwriting discount................... (1,925)
Expenses related to the offering........ (1,225)
------------
Net proceeds....................... 24,350(1)
Repayment of debt, including current
portion............................... (20,366)(2)
Payment of amounts due under the
Deferred Compensation
Agreement with Jack H. Castle,
D.D.S................................. (526)
------------
Net increase in cash and cash
equivalents...................... $ 3,458
============
The Company plans to use the net increase in cash and cash equivalents to
fund the Austin Acquisition.
(1) The Common Stock to be issued will affect pro forma equity,
as follows:
IN THOUSANDS
------------
Common stock....................... $ 3
Additional paid-in capital......... 24,347
------------
$ 24,350
============
(2) The repayment of long-term debt will affect pro forma assets
and liabilities, as follows:
IN THOUSANDS
------------
Other assets....................... $ (320)(a)
Current portion of long-term
debt............................. 7,141
Long-term debt, net of unamortized
discount of $3,091............... 10,134
Retained earnings.................. 3,411(b)
------------
Cash paid................ $ 20,366
============
- ------------
(a) To charge to expense deferred financing costs related to the
retirement of the Senior Subordinated Notes.
(b) To reflect the reduction in retained earnings for the
extraordinary charge resulting from the retirement of the
Senior Subordinated Notes, with no income tax effect.
(D) Represents the March 31, 1997 historical balance sheet of SW Dental, the
affiliated dental practice to be acquired in the Austin Acquisition, and
the purchase adjustments thereto.
F-5
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET -- (CONTINUED)
The estimated fair value of the assets to be acquired in the Austin
Acquisition is summarized below:
IN THOUSANDS
------------
Cash.................................... $ 60
Patient receivables, net................ 258
Prepaid expenses and other current
assets................................ 47
Property and equipment.................. 494
Other assets............................ 3
Management services agreement........... 6,104
Current portion of long-term debt and
capital leases assumed................ (125)
Accounts payable and accrued liabilities
assumed............................... (105)
Long-term debt and capital lease
obligations assumed................... (322)
------------
$ 6,414
============
The aggregate acquisition price for the Austin Acquisition will be funded
as follows:
IN THOUSANDS
------------
Cash.................................... $ 3,650
Escrow deposit and acquisition costs.... 1,561
Estimated fair market value of Series B
Convertible Preferred Stock........... 1,203
------------
$ 6,414
============
The value of the Series B Convertible Preferred Stock to be issued is based
on the discounted redemption value. The excess of cost over the fair value
of the net assets acquired will be amortized over the terms of the
management services agreement entered into in connection with the Austin
Acquisition, which is 40 years.
(E) Represents conversion of the Series A and Series C Convertible Preferred
Stock into Common Stock.
F-6
<PAGE>
CASTLE DENTAL CENTERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------
HISTORICAL OFFERING HISTORICAL
---------------------- AND INTERIM ------------
COMPLETED COMPLETED FINANCING AUSTIN
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTMENTS ACQUISITION
(A) (B) ADJUSTMENTS COMBINED (C) (D)
------- ------------ --------------- -------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Patient revenues of affiliated dental
practices............................. $29,601 $ 8,118 $-- $37,719 $-- $ 4,850
Amounts retained by affiliated dental
practices............................. 9,981 -- 732(E) 10,713 -- --
------- ------------ --------------- -------- ----------- ------------
Net revenues............................ 19,620 8,118 (732) 27,006 -- 4,850
Expenses:
Dentists' salaries.................. -- 832 (832)(E) -- -- 1,138
Professional fees and clinic
expenses.......................... -- 1,997 -- 1,997 -- --
Clinical salaries................... 4,233 1,696 -- 5,929 -- 1,249
Dental supplies and laboratory
fees.............................. 3,120 490 -- 3,610 -- 621
Management fees..................... -- 538 (538)(F) -- -- --
Rental and lease expense............ 1,592 532 5(G) 2,129 -- 137
Advertising and marketing........... 1,522 290 25(H) 1,837 -- 197
Depreciation and amortization....... 1,088 129 240(I) 1,457 (55)(L) 100
Other operating expenses............ 2,913 394 -- 3,307 -- 511
General and administrative.......... 4,292 859 91(J) 5,242 -- 351
------- ------------ --------------- -------- ----------- ------------
Total expenses................. 18,760 7,757 (1,009) 25,508 (55) 4,304
------- ------------ --------------- -------- ----------- ------------
Operating income (loss)................. 860 361 277 1,498 55 546
Interest expense........................ 2,596 108 351(K) 3,055 (2,617)(M) 34
240(K)
Other expense (income).................. (89 ) -- -- (89 ) -- --
------- ------------ --------------- -------- ----------- ------------
Income (loss) before income taxes....... (1,647 ) 253 (74) (1,468 ) 2,432 512
Provision (benefit) for income taxes.... (561 ) -- 61(N) (500 ) 828(N) --
------- ------------ --------------- -------- ----------- ------------
Net income (loss)....................... $(1,086) $ 253 $ (135) $ (968 ) $ 1,604 $ 512
======= ============ =============== ======== =========== ============
Net income (loss) per share (O)......... $(0.30 )
=======
Weighted average outstanding shares
(O)................................... 3,653
=======
</TABLE>
PRO FORMA
---------------------------
AUSTIN
ACQUISITION
ADJUSTMENTS AS ADJUSTED
------------- -----------
Patient revenues of affiliated dental
practices............................. $-- $42,569
Amounts retained by affiliated dental
practices............................. 1,138(E) 11,851
------------- -----------
Net revenues............................ (1,138) 30,718
Expenses:
Dentists' salaries.................. (1,138)(E) --
Professional fees and clinic
expenses.......................... -- 1,997
Clinical salaries................... -- 7,178
Dental supplies and laboratory
fees.............................. -- 4,231
Management fees..................... -- --
Rental and lease expense............ -- 2,266
Advertising and marketing........... -- 2,034
Depreciation and amortization....... 173(I) 1,675
Other operating expenses............ -- 3,818
General and administrative.......... 215(J) 5,808
------------- -----------
Total expenses................. (750) 29,007
------------- -----------
Operating income (loss)................. (388) 1,711
Interest expense........................ 712
Other expense (income).................. -- (89)
------------- -----------
Income (loss) before income taxes....... (388) 1,088
Provision (benefit) for income taxes.... 42(N) 370
------------- -----------
Net income (loss)....................... $ (430) $ 718
============= ===========
Net income (loss) per share (O)......... $ 0.12
===========
Weighted average outstanding shares
(O)................................... 5,753
===========
F-7
<PAGE>
CASTLE DENTAL CENTERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
------------
OFFERING HISTORICAL PRO FORMA
HISTORICAL AND INTERIM ------------ -----------------------------
-------- FINANCING AUSTIN AUSTIN
COMPANY ADJUSTMENTS ACQUISITION ACQUISITION
(A) (C) (D) ADJUSTMENTS AS ADJUSTED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Patient revenues of affiliated dental
practices.......................... $10,464 $-- $1,279 $-- $ 11,743
Amount retained by affiliated dental
practices.......................... 3,518 -- -- 313(E) 3,831
-------- ------------ ------------ ------------ ------------
Net revenues......................... 6,946 -- 1,279 (313) 7,912
-------- ------------ ------------ ------------ ------------
Expenses:
Dentists' salaries.............. -- -- 313 (313)(E) --
Clinical salaries............... 1,445 -- 314 -- 1,759
Dental supplies and laboratory
fees.......................... 911 -- 163 -- 1,074
Rental and lease expense........ 637 -- 20 -- 657
Advertising and marketing....... 513 -- 30 -- 543
Depreciation and amortization... 427 (14)(L) 25 43(I) 481
Other operating expenses........ 760 -- 134 -- 894
General and administrative...... 1,458 -- 101 54(J) 1,613
-------- ------------ ------------ ------------ ------------
Total expenses 6,151 (14) 1,100 (216) 7,021
-------- ------------ ------------ ------------ ------------
Operating income (loss).............. 795 14 179 (97) 891
Interest expense..................... 775 (673)(M) 10 172
60(K)
-------- ------------ ------------ ------------ ------------
Income (loss) before income taxes.... 20 627 169 (97) 719
Provision for income taxes........... 8 238(N) -- 28(N) 274
-------- ------------ ------------ ------------ ------------
Net income (loss).................... $ 12 $ 389 $ 169 $ (125) $ 445
======== ============ ============ ============ ============
Net income (loss) per share(O)....... $ -- $ 0.08
======== ============
Weighted average outstanding
shares(O).......................... 3,825 5,753
======== ============
</TABLE>
F-8
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS 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, both acquired in May 1996, and Horizon Dental Centers,
acquired in August 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
period from January 1, 1996 through the acquisition date, as appropriate.
(C) Offering and Interim Financing adjustments represent those adjustments
resulting from the Interim Financing and this offering that will affect
the historical statements of operations on a continuing basis. The Pro
Forma Consolidated Statements of Operations do not reflect the $3,411,000
extraordinary loss on retirement of the Senior Subordinated Notes, with no
income tax effect, that will be recognized in the period this offering is
completed.
(D) Represents the historical statement of operations data of SW Dental for the
year ended December 31, 1996 and three months ended March 31, 1997.
(E) 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) reclassification of amounts that would have
been retained by the affiliated dental practices pursuant to the terms of
the management services agreements:
<TABLE>
<CAPTION>
COMPLETED AUSTIN ACQUISITION
ACQUISITIONS ----------------------------------
----------------- THREE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1996 MARCH 31, 1997
----------------- ----------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Reduction in owner's
compensation..................... $ 100 $-- $--
Reclassification of expenses....... 732 1,138 313
------ -------- --------------
$ 832 $ 1,138 $ 313
====== ======== ==============
</TABLE>
(F) 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 G, H, I and J for increased
expenses related to the management fees.
(G) 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
DECEMBER 31, 1996
-----------------
(IN THOUSANDS)
Reduction for excess rent
payments.......................... $ (39)
Additional rent expense to be
incurred by the Company........... 44
------
$ 5
======
(H) Represents increased expenses for advertising and marketing services that
were historically provided by the owner of an acquired dental practice
based on the owner's historical cost prior to its acquisition by the
Company.
F-9
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS
OF OPERATIONS -- (CONTINUED)
(I) Represents (i) an increase in amortization of management services
agreements 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 assigned to management services agreements and
amortized over the term of the management services agreements entered into
in connection with the acquisitions, which is 40 years.
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
(IN THOUSANDS)
Amortization of management services
agreements....................... $ 337 $ 38
Depreciation adjustment............ 76 5
------ --------------
$ 413 $ 43
====== ==============
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
(IN THOUSANDS)
Completed Acquisitions............. $ 240 $ --
Austin Acquisition................. 173 43
------ --------------
Total......................... $ 413 $ 43
====== ==============
(J) Represents adjustments to compensation and other overhead expenses in
accordance with amounts due under the terms of employment and management
services agreements entered into in connection with the Acquisition
Transactions.
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
(IN THOUSANDS)
Adjust owners compensation of
acquired dental practices
pursuant to the terms of the
related employment agreements.... $ 289 $ 54
Adjust other costs, pursuant to the
terms of the acquisition
agreements....................... 17 --
------ --------------
$ 306 $ 54
====== ==============
Completed Acquisitions............. $ 91 $ --
Austin Acquisition................. 215 54
------ --------------
$ 306 $ 54
====== ==============
F-10
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS
OF OPERATIONS -- (CONTINUED)
(K) Represents adjustments to interest expense for additional debt issued in
connection with the Acquisition Transactions. The interest expense was
computed based upon actual interest rates on the Senior Subordinated Notes
and Seller Notes and the actual variable rate on the Bank Credit Facility
at the time the Company entered into the agreement. 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:
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
(IN THOUSANDS)
Seller Notes (6.34% - 10%)......... $ 181 $ --
Senior Subordinated Notes (12%).... 240 60
Bank Credit Facility (8.75%)....... 251 --
Interest on acquisition debt paid
or not assumed................... (81) --
------ --------------
$ 591 $ 60
====== ==============
Completed Acquisitions............. $ 351 $ --
Offering and interim financing
adjustments...................... 240 60
------ --------------
$ 591 $ 60
====== ==============
(L) Represents the elimination of amortization associated with deferred
financing costs related to debt that will be repaid upon consummation of
this offering.
(M) 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:
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
(IN THOUSANDS)
Seller Notes (6.34% - 10%)......... $ (412) $ (105)
Senior Subordinated Notes (12%).... (1,140) (305)
Bank Credit Facility (8.75%)....... (543) (132)
Amortization of Senior Subordinated
Note discount.................... (522) (131)
----------------- --------------
$(2,617) $ (673)
================= ==============
(N) Represents adjustments to accrue income taxes on earnings untaxed at the
corporate level and to reflect tax effects of adjustments described above
based on a tax rate of 34.1% for the year ended December 31, 1996 and 38%
for the three months ended March 31, 1997.
(O) Shares used in calculating net income per share include the weighted
average shares outstanding plus the number of shares, the proceeds of which
would be necessary to repay the portion of the Company's debt that funded
the $6.0 million 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 3,108,000 and 3,280,000 and $0.35 and less
than $0.01, respectively, for the year ended December 31, 1996 and the
three months ended March 31, 1997, respectively.
F-11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Castle Dental Centers, Inc.:
We have audited the accompanying balance sheets of Castle Dental Centers,
Inc. as of December 31, 1995 and 1996, and the related statements of operations,
changes in stockholder's deficit, and cash flows for the year ended December 31,
1996 and the related statements of operations, changes in stockholder's equity
(deficit) and cash flows of its combined predecessor companies 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 Castle Dental Centers, Inc.
as of December 31, 1995 and 1996, and the results of its operations and its cash
flows for the year ended December 31, 1996 and the results of operations and
cash flows of its combined predecessor companies 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
June 19, 1997
F-12
<PAGE>
CASTLE DENTAL CENTERS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
--------------------
1995 1996
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents.......... $ 6,439 $ 79
Patient receivables, net of
allowance for uncollectable
accounts of $2,437 and $2,425 in
1995 and 1996, respectively....... 2,710 3,649
Unbilled patient receivables, net
of allowance for uncollectible
accounts of $228 and $361 in 1995
and 1996, respectively............ 913 1,637
Prepaid expenses and other current
assets............................ 22 326
Deferred income taxes, net......... -- 284
--------- ---------
Total current assets.......... 10,084 5,975
--------- ---------
Property and equipment, net............. 1,583 3,882
Intangibles............................. -- 16,432
Other assets............................ 757 2,278
Deferred income taxes, net.............. 253 600
--------- ---------
Total assets.................. $ 12,677 $ 29,167
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving line of credit........... $ -- $ 1,200
Current portion of long-term
debt.............................. 900 2,371
Current portion of capital lease
obligations....................... 140 --
Accounts payable and accrued
liabilities....................... 2,836 4,638
Due to affiliated dental
practices......................... -- 1,010
--------- ---------
Total current liabilities..... 3,876 9,219
--------- ---------
Long-term debt, net of current
portion............................... 9,462 18,951
Capital lease obligations, net of
current portion....................... 50 --
Other long-term liabilities............. 2,104 1,578
Commitments and contingencies
Preferred stock, $.001 par value,
5,000,000 shares authorized; 1,244,737
shares Series A issued and
outstanding........................... 2,928 2,928
Stockholders' deficit:
Common stock, $.001 par value,
30,000,000 shares authorized,
2,000,000 and 2,331,996 shares
issued and outstanding,
respectively...................... 2 2
Additional paid-in capital......... 96 3,416
Accumulated deficit................ (5,841) (6,927)
--------- ---------
Total stockholders' deficit... (5,743) (3,509)
--------- ---------
Total liabilities and
stockholders' deficit...... $ 12,677 $ 29,167
========= =========
The accompanying notes are an integral part of the financial statements.
F-13
<PAGE>
CASTLE DENTAL CENTERS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
COMBINED PREDECESSOR
COMPANIES
-------------------- CONSOLIDATED
YEAR ENDED ------------
DECEMBER 31, YEAR ENDED
-------------------- DECEMBER 31,
1994 1995 1996
--------- --------- ------------
Patient revenues of affiliated dental
practices.......................... $ 17,083 $ 18,257 $ 29,601
Amounts retained by affiliated dental
practices.......................... -- -- 9,981
--------- --------- ------------
Net revenues.................... 17,083 18,257 19,620
--------- --------- ------------
Expenses:
Dentist salaries................ 2,853 3,345 --
Clinical salaries............... 1,811 1,879 4,233
Dental supplies and laboratory
fees.......................... 1,907 2,185 3,120
Rental and lease expense........ 681 836 1,592
Advertising and marketing....... 1,062 959 1,522
Depreciation and amortization... 309 336 1,088
Other operating expenses........ 2,205 2,260 2,913
General and administrative...... 3,172 3,825 3,700
Compensation to stockholders.... 2,147 5,284 592
--------- --------- ------------
Total expenses............. 16,147 20,909 18,760
--------- --------- ------------
Operating income (loss).... 936 (2,652) 860
Interest expense..................... 112 87 2,596
Other income......................... -- -- (89)
--------- --------- ------------
Income (loss) before income taxes.... 824 (2,739) (1,647)
Provision (benefit) for income
taxes.............................. 43 (325) (561)
--------- --------- ------------
Net income (loss).................... $ 781 $ (2,414) $ (1,086)
========= ========= ============
Net income (loss) per share.......... $ 0.26 $ (0.82) $ (0.35)
========= ========= ============
If all of the Company's operations
had been subject to income taxes,
net income (loss) would have been
as follows (unaudited):
Historical income (loss) before
income taxes.................. $ 824 $ (2,739)
Provision (benefit) for income
taxes......................... 309 (1,041)
--------- ---------
Net income (loss)............... $ 515 $ (1,698)
========= =========
Pro forma net income (loss) per
share.............................. $ 0.17 $ (0.58)
========= =========
Weighted average number of common and
common equivalent shares
outstanding........................ 2,948 2,948 3,108
========= ========= ============
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......................... $ (0.30)
============
Weighted average number of
common and common equivalent
shares outstanding............ 3,653
============
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE>
CASTLE DENTAL CENTERS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER 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, 1994................ 2,000,000 2 3 1,791 1,796
Net income......................... -- -- -- 781 781
----------- ---------- ---------- ------------ -------------
Balance, December 31, 1994.............. 2,000,000 2 3 2,572 2,577
Issuance of common stock and
distribution in connection with
the Reorganization............... 500 -- 1 (6,000) (5,999)
Cancellation of common stock in
connection with the
Reorganization................... (500) -- (1) 1 --
Issuance of warrant................ -- -- 93 -- 93
Net loss........................... -- -- -- (2,414) (2,414)
----------- ---------- ---------- ------------ -------------
Balance, December 31, 1995.............. 2,000,000 2 96 (5,841) (5,743)
Issuance of common stock........... 331,996 -- 3,320 -- 3,320
Net loss........................... -- -- -- (1,086) (1,086)
----------- ---------- ---------- ------------ -------------
Balance, December 31, 1996.............. 2,331,996 $ 2 $3,416 $ (6,927) $(3,509)
=========== ========== ========== ============ =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE>
CASTLE DENTAL CENTERS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
COMBINED PREDECESSOR
COMPANIES
-------------------- CONSOLIDATED
YEAR ENDED -------------
DECEMBER 31, YEAR ENDED
-------------------- DECEMBER 31,
1994 1995 1996
--------- --------- -------------
Cash flows from operating activities
Net income (loss)............... $ 781 $ (2,414) $(1,086)
Adjustments:
Provision for bad debts.... 1,501 1,399 1,227
Depreciation and
amortization............ 309 336 1,088
Gain on sale of property,
plant and equipment..... -- -- (16)
Amortization of debt
discount................ -- -- 522
Deferred income taxes
(benefit)............... 30 (325) (561)
Issuance of deferred
compensation
agreement............... -- 2,630 --
Changes in operating assets
and liabilities:
Patient receivables... (1,848) (1,285) (1,514)
Unbilled patient
receivables........ (286) (578) (748)
Prepaid expenses and
other current
assets............. 45 -- (206)
Other assets.......... (8) (13) (283)
Accounts payable and
accrued
liabilities........ 522 748 1,386
Due to affiliated
dental practices -- -- 860
Deferred compensation
payments........... -- -- (263)
--------- --------- -------------
Net cash
provided by
operating
activities.... 1,046 498 406
--------- --------- -------------
Cash flows used in investing
activities:
Capital expenditures............ (308).... (441) (1,337)
Proceeds from sale of property,
plant and equipment........... -- -- 607
Acquisition of affiliated dental
practices, net of cash
acquired...................... -- -- (10,335)
Escrow deposit.................. -- -- (500)
--------- --------- -------------
Net cash used in investing
activities.............. (308) (441) (11,565)
--------- --------- -------------
Cash flows from financing activities:
Proceeds from debt.............. 67 10,362 7,250
Repayment of debt............... (817) (328) (1,543)
Issuance of redeemable preferred
stock......................... -- 3,138 --
Distribution to shareholder..... -- (6,000) --
Offering costs.................. -- -- (650)
Payment of debt and preferred
stock issuance costs.......... -- (812) (258)
--------- --------- -------------
Net cash provided by (used
in) financing
activities.............. (750) 6,360 4,799
--------- --------- -------------
Net change in cash and cash
equivalents........................ (12) 6,417 (6,360)
Cash and cash equivalents, beginning
of period.......................... 34 22 6,439
--------- --------- -------------
Cash and cash equivalents, end of
period............................. $ 22 $ 6,439 $ 79
========= ========= =============
The accompanying notes are an integral part of the financial statements.
F-16
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CORPORATE ORGANIZATION AND BASIS OF PRESENTATION
Castle Dental Centers, Inc. and subsidiaries (the "Company") provide
administrative and management services, non-healthcare personnel, facilities and
equipment to certain professional corporations in Texas, Florida and Tennessee
under long-term management services 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
equipment, facilities, administrative personnel and management services, in
exchange for a contracted management fee based on a formula. Each of these
agreements is for an initial term of 40 years with successive automatic five
year renewal terms, unless terminated at least 90 days before the end of the
initial term or any renewal term.
Through the management services agreement, the Company generally 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 generally 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).
The Company was formed in December 1995 and merged with Family Dental
Services of Texas, Inc. ("FDS"), a company wholly owned by members of the
family of and entities controlled by Jack H. Castle, D.D.S. (the "Castle
Family"). The Company's operations began on January 1, 1996. Simultaneously
with this transaction, the Company paid $6,000,000 to acquire all of the
outstanding stock of Jack H. Castle, D.D.S., Inc. ("JCD"), a professional
corporation of which Dr. Jack H. Castle was the sole owner. JCD provided dental
care to patients from 1949 through December 31, 1995. FDS had been established
in 1981 to carry out administrative functions for the professional corporation
and had no business other than providing administrative services to JCD. All of
FDS's revenues consisted of reimbursement of its costs incurred on behalf of
JCD. Effective with the acquisition, JCD ceased to operate as a separate entity,
and a new professional corporation, Jack H. Castle, D.D.S., P.C. ("PC") was
established to continue the dental practice previously operated by JCD.
Therefore, at December 31, 1995, the Company's financial statements included
both the operations and assets of FDS, the administrative and management
services company, and JCD, the professional corporation (together the
"predecessor companies"). The combined statements of operations, changes in
stockholders' equity (deficit) and cash flows for the years ended December 31,
1994 and 1995 reflect the combined operations of predecessor companies because
these entities' activities were assumed by the Company and the PC and they were
under common control. All of the services provided by FDS to JDC have been
eliminated in combination of the predecessor companies' financial statements
(see discussion below).
At December 31, 1995 and 1996, and for the year ended December 31, 1996,
the consolidated financial statements include Castle Dental Centers, Inc. and
its wholly-owned management company subsidiaries. The Company does not
consolidate the financial statements of the affiliated dental practices. For
disclosure purposes, the Company has presented the affiliated dental practice
revenues and amounts retained by the affiliated dental practices in the
accompanying consolidated statements of operations for the year ended December
31, 1996.
All intercompany accounts and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt investments with original
maturities of three months or less at the date of acquisition to be cash
equivalents. The carrying amounts approximate fair value.
F-17
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Patient revenues from affiliated dental practices ("Patient Revenues")
represent the estimated realizable amounts to be received from patients,
third-party payors and others for services rendered by affiliated dentists.
Patient Revenues from general dentistry are recognized as the services are
performed. Patient Revenues from orthodontic services are 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.
Amounts retained by affiliated dental practices consist primarily of
compensation paid to dental professionals, including dentists, orthodontists,
hygienists, and dental assistants.
Net revenues represent management fees earned by the Company in accordance
with management services agreements with the affiliated dental practices and are
generally equal to Patient Revenues less amounts retained by affiliated dental
practices.
Accounts receivable consist primarily of receivables from patients,
insurers, government programs and contracts between the affiliated dental
practices and third-party payors for dental services provided by dentists. The
Company does not believe that change in the reimbursement arrangements for its
affiliated dental practice contracts with third-party payors would have a
material impact on management fee revenues. 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 is 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 in use as of December 31, 1995 and 1996 were $490,000
and $948,400, respectively. Maintenance and repairs are charged to expense
whereas renewals and major replacements are capitalized. Gains and losses from
dispositions are included in operations.
INTANGIBLE ASSETS
The Company's acquisitions involve the purchase of tangible and intangible
assets and the assumption of certain liabilities of the affiliated dental
practices. As part of the purchase allocation, the Company allocates the
purchase price to the tangible assets acquired and liabilities assumed, based on
estimated fair market values. In connection with each acquisition, the Company
enters into a long-term management services agreement with each affiliated
dental practice, which cannot be terminated by either party without cause. The
cost of the management services agreement is amortized on a straight line basis
over its term, or such shorter period as may be indicated by the facts and
circumstances, as described below. Amortization periods of the management
services agreements acquired through December 31, 1996, are 40 years.
In connection with the allocation of the purchase price to identifiable
intangible assets, the Company analyzes the nature of the group with which a
management services agreement is entered into, including the number of dentists
in each group, number of dental centers and ability to recruit additional
dentists, the affiliated dental practice's relative market position, the length
of time each affiliated dental practice has been in existence, and the term and
enforceability of the management services agreement. Because the Company does
not practice dentistry, maintain patient relationships, hire dentists, enter
into employment and noncompete agreements with the dentist, or directly contract
with payors, the intangible asset created in the purchase allocation process is
associated solely with the management services agreement with the affiliated
dental practice.
F-18
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Emerging Issues Task Force of the Financial Accounting Standards Board
is currently evaluating certain matters relating to the physician practice
management industry, which the Company expects will include a review of
accounting for affiliated dental practices. The Company is unable to predict the
impact, if any, that this review may have on the Company's acquisition strategy,
allocation of purchase price related to acquisitions, and amortization life
assigned to intangible assets.
At each balance sheet date the Company reviews intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. If this review indicates that the carrying
amount of the asset may not be recoverable, as determined based on the
undiscounted cash flows of the operations acquired over the remaining
amortization period, the carrying value of the asset is reduced to fair value.
Among the factors that the Company will continually evaluate are unfavorable
changes in each affiliated dental practice's relative market share and local
market competitive environment, current period and forecasted operating results
and cash flows of the affiliated dental practice and its impact on the
management fee earned by the Company, and legal factors governing the practice
of dentistry.
OTHER ASSETS
At December 31, 1996, other assets consist primarily of debt issuance costs
and capitalized offering 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.
The Company has capitalized all costs associated with an initial public
offering. Upon completion of the offering, such costs will be netted against the
proceeds. In the event the offering is not successful, the Company will expense
these costs.
DUE TO AFFILIATED DENTAL PRACTICES
Amounts due to affiliated dental practices represent transfers of patient
receivables to the Company in excess of management fees earned.
INCOME TAXES
Prior to January 1, 1996, 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
years ended December 31, 1994 and 1995.
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.
EARNINGS PER SHARE
In June 1997, the Company's Board of Directors declared and the
stockholders approved a 1-for-2 reverse split of the Company's common stock. All
share and per share information in the accompanying financial statements has
been retroactively restated to reflect the effects of the reverse stock split.
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 and the issuance of
common stock upon the contemplated conversion of the Series A and Series C Stock
in connection with the planned initial public offering (Notes 6 and 14).
Additionally, in accordance with SAB Number 55, pro forma earnings per share
have been presented for 1996 to reflect issuance of the number of
F-19
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 $11.00 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.
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.
RECENTLY ISSUED PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128") and Statement of Financial Accounting Standards No. 129,
Disclosure of Information about Capital Structure ("SFAS 129"). These
statements will be adopted by the Company effective January 31, 1998. SFAS 128
simplifies the computation of earnings per share by replacing primary and fully
diluted presentations with the new basic and diluted disclosures. SFAS 129
establishes standards for disclosing information about an entity's capital
structure. The Company has not determined the impact of these pronouncements on
its financial statements.
2. REORGANIZATION AND RELATED TRANSACTIONS:
In December 1995, the Company completed a reorganization (the
"Reorganization") by (i) entering into a credit agreement that included a
$3,000,000 revolving line of credit and a $6,000,000 bank term loan (the "Bank
Credit Facility"), (ii) issuing $7,500,000 face amount of senior subordinated
notes (the "Senior Subordinated Notes") together with 1,244,737 shares of
Series A Convertible Preferred Stock (the "Series A Stock") (Note 6) and (iii)
issuing 2,000,000 shares of common stock to the former owner of JCD and certain
related parties. A portion of the proceeds from the Reorganization was used to
acquire JCD, which acquisition was recorded as a capital distribution to JCD's
shareholder because the Company and JCD were under common control. The Company
has retroactively applied these common shares to all historical financial
statements as a stock split.
In connection with the purchase of the stock of JCD, the Company entered
into a deferred compensation agreement (the "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. The Company accrued the entire
liability under the agreement in December 1995 through a charge to compensation
to shareholders. The Company was two payments in arrears at December 31, 1996
(Note 5). In June 1997, the shareholder and the Company amended the Deferred
Compensation Agreement to postpone the payment of any scheduled payments until
the earlier of a qualified equity or debt financing, as described in the amended
agreement, or December 31, 2000, by the bank of which the proceeds are applied
to the Bank Credit Facility and the $2.0 million Senior Subordinated Notes
issued in June 1997 ("Notes"), or the closing of any equity offering of which
the proceeds are applied to the Bank Credit Facility and those Senior
Subordinated Notes and (b) January 31, 1998, at which time the scheduled
deferred compensation payments shall become payable beginning on the next
scheduled payment date, and (ii) deferring payment of the scheduled payments
under the Deferred Compensation Agreement which were not made from September 30,
1996 until the earlier of (a) the closing
F-20
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
or December 31, 2000. Amounts not paid when scheduled under the original
Deferred Compensation Agreement bear interest at the rate of ten percent per
year.
A warrant to purchase 56,579 shares of common stock at an exercise price of
$11.00 per share was issued to an investment advisor in connection with the
Reorganization (Note 13). The warrant is exercisable at any time prior to its
expiration date of December 18, 2000. The value of the warrant ($1.64 per share)
has been recorded as deferred offering costs of the Senior Subordinated Notes.
3. SELECTED BALANCE SHEET INFORMATION:
The details of certain balance sheet accounts were as follows:
DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
Property and equipment:
Equipment.......................... $ 1,616 $ 3,841
Leasehold improvements............. 632 1,825
Furniture and fixtures............. 520 610
Vehicles........................... 17 75
Equipment under capital leases..... 602 --
--------- ---------
Total property and
equipment.................. 3,387 6,351
Less accumulated depreciation and
amortization..................... 1,804 2,469
--------- ---------
Property and equipment, net... $ 1,583 $ 3,882
========= =========
Depreciation expense was approximately $309,000, $336,000 and $678,000 for
the years ended December 31, 1994, 1995 and 1996, respectively.
Intangible assets:
Management services
agreements.................... $ -- $ 16,513
Other........................... -- 150
--------- ---------
Total intangible assets.... -- 16,663
Less accumulated amortization... -- 231
--------- ---------
Intangible assets,
net................ $ -- $ 16,432
========= =========
Accounts payable and accrued
liabilities:
Trade........................... $ 1,645 $ 2,458
Salaries, wages and payroll
taxes......................... 49 596
Deferred compensation........... 526 789
Other........................... 616 795
--------- ---------
$ 2,836 $ 4,638
========= =========
4. ACQUISITIONS:
In May 1996, the Company acquired substantially all of the assets and
assumed certain liabilities of 1st Dental Care and Mid-South Dental Centers,
group dental practices headquartered in Clearwater, Florida, and Nashville,
Tennessee, respectively. In August 1996, the Company acquired substantially all
of the assets and assumed certain liabilities of five dental practices and
acquired the stock of three dental practices operated by Horizon Dental Centers,
a group dental practice with offices in Austin and Ft. Worth, Texas.
F-21
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate purchase price, including the payment of certain assumed debt
and related acquisition expenses, of $18.2 million consisted of $10.3 million in
cash, $4.6 million in seller notes payable (Note 5) and 332,000 shares of
Company common stock with a fair market value of $3.3 million. In connection
with these acquisitions, the Company entered into employment agreements with
certain employees and former owners of the businesses acquired and into
long-term management services agreements with each of the affiliated dental
practices.
The assets and liabilities have been recorded at their estimated fair
values at the date of acquisition. The aggregate purchase price and related
expenses exceeded the fair market value of net assets by approximately $16.5
million, which has been assigned to management services agreements, included in
intangible assets. Patient Revenues, management fees and related costs are
included in the consolidated financial statements from their acquisition dates.
The estimated fair value of assets acquired and liabilities assumed are
summarized as follows:
Patient receivables, net............. $ 562
Unbilled patient receivables, net.... 66
Prepaid expenses and other current
assets............................... 99
Property and equipment............... 2,104
Other assets......................... 10
Management services agreements....... 16,663
Accounts payable and accrued
liabilities.......................... (603)
Long-term debt, assumed.............. (535)
Other liabilities.................... (80)
---------
18,286
Less: fair value of common stock
issued and to be issued............ 3,320
Less: issuance of notes payable...... 4,631
---------
Cash purchase price, net of cash
acquired........................ $ 10,335
=========
At December 31, 1996 other current assets include a purchase price
adjustment of approximately $136,000 due from a former shareholder of an
acquired dental practice. The former shareholder is a regional director of the
Company.
Unaudited pro forma combined results of operations, assuming all of the
acquisitions occurred at January 1, 1995, are as follows:
YEAR ENDED
DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
Net revenues......................... $ 25,405 $ 27,006
Net income (loss).................... (2,280) (968)
Net income (loss) per share.......... $ (0.70) $ (0.30)
The unaudited pro forma summary is not necessarily indicative either of
results of operations, that would have occurred had the acquisitions been made
at the beginning of the periods presented, or of future results of operations of
the combined companies.
In September 1996, the Company entered into a letter of intent and paid a
$500,000 nonrefundable deposit to acquire substantially all of the assets and
assume certain liabilities of SW Dental Associates, LC ("SW Dental"), a group
dental practice located in Austin, Texas. The deposit will be applied against
the purchase price of $6.4 million which will consist of cash and shares of the
Company's Series B Convertible
F-22
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock (Note 6). In June 1997, the Company entered into management
services and option agreements with SW Dental and paid an additional $1.0
million nonrefundable deposit as partial consideration for the acquisition. In
the event the acquisition is not consummated by May 31, 1998, the Company will
forfeit the $1.5 million paid as partial consideration and the owners of SW
Dental will have the option for 60 days thereafter to purchase the Company's
operations and facilities in the Austin, Texas area for $3.4 million.
5. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT:
In June 1997, the Company and the bank amended and restated the Bank Credit
Facility (the "1997 Amendment"). At December 31, 1996, the Company classified
the current and long-term portion of debt outstanding under the Bank Credit
Facility in accordance with the 1997 Amendment. The following discussion
reflects those terms. The Bank Credit Facility is collateralized by
substantially all of the Company's assets and is personally guaranteed by a
member of the Castle family.
REVOLVING LINE OF CREDIT
Under the terms of the Bank Credit Facility, the Company maintains a $3.0
million revolving line of credit that is used for working capital requirements
and acquisitions. During 1996, interest on the revolving line of credit was
computed at variable rates based upon either the bank's base rate or LIBOR plus
an applicable margin. The Company's borrowing rate under the Bank Credit
Facility at December 31, 1996 was 8.75 percent. A commitment fee is payable
quarterly at rates ranging from 0.25 percent to 0.5 percent of the unused
amounts for such quarter. At December 31, 1996, $1.2 million was outstanding
under the revolving line of credit. In June 1997, the interest rate under the
revolving line of credit was amended to the bank's base rate plus 1.0 percent.
The revolving line of credit expires on January 31, 1998. The bank's base rate
at May 31, 1997 was 8.50 percent.
LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
Term loan............................ $ 6,000 $ 10,847
Senior Subordinated Notes............ 7,500 7,950
Seller Notes......................... -- 4,444
Other various notes payable.......... -- 696
--------- ---------
Total debt...................... 13,500 23,937
Less discount on Senior Subordinated
Notes................................ 3,138 2,615
--------- ---------
Long-term debt, net of discount...... 10,362 21,322
Less current portion................. 900 2,371
--------- ---------
Long-term debt.................. $ 9,462 $ 18,951
========= =========
Under the terms of the 1997 Amendment, the aggregate commitment under the
term loan was reduced to $10.8 million, the amount outstanding as of the
amendment date. Principal payments of $602,500 are due on September 30 and
December 31, 1997 with a final maturity date of January 31, 1998. Interest at
the bank's base rate plus 1.5 percent is payable quarterly. The Company's
weighted average borrowing rate at December 31, 1996 was 9.16 percent and was
computed during the year based upon the same rate as the revolving line of
credit.
F-23
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Senior Subordinated Notes bear interest at 12 percent, payable
quarterly in arrears with principal payable in two installments of $3.75 million
each on December 18, 2001 and 2002. The Company is required to repurchase all
outstanding Senior Subordinated Notes in the event of a change in control or if
no secondary market exists at December 18, 2001. The holders of the Senior
Subordinated Notes have agreed to accept interest notes in lieu of interest
payments if the Company does not maintain certain financial covenant ratios
under the Bank Credit Facility. As of December 31, 1996, the Company had issued
$450,000 in interest notes in lieu of quarterly interest payments. Through May
31, 1997, the Company had issued an additional $225,000 in interest notes and
expects to issue an additional $225,000 interest note in June 1997. The Senior
Subordinated Notes are not collateralized and are subordinated to the Bank
Credit Facility. The discount on the Senior Subordinated Notes is being
amortized using the interest method through their maturities. The effective
interest rate of the Senior Subordinated Notes was 24.1% as of December 31,
1996.
In June 1997, the Company and the holders of Senior Subordinated Notes
amended the agreement to provide an additional $2.0 million in Senior
Subordinated Notes, due January 31, 1998, with interest payable monthly at a
rate of 12 percent per annum. The Company also issued 485,382 shares of Series C
Convertible Preferred Stock (Note 6).
The Bank Credit Facility and the Senior Subordinated Notes 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. At December 31, 1996, the Company was not in
compliance with certain covenants of the Bank Credit Facility and of the Senior
Subordinated Notes. In connection with the June 1997 amendment, both lenders
waived any events of default that had occurred through the date of the
amendments.
At December 31, 1996, approximately $776,000 (net of accumulated
amortization of $179,000) of debt issuance costs, had been capitalized in
connection with the issuance of the Bank Credit Facility and the Subordinated
Notes. Additionally, approximately $210,000 of issuance costs were charged to
the Series A Stock.
The Company has issued various subordinated promissory notes payable in
connection with certain acquisitions ("Seller Notes") (Note 4). During 1996
interest on the Seller Notes ranged from 6.36 percent to 10.0 percent. At
December 31, 1996, the Company was in arrears on payments due under certain
Seller Notes. In April and June 1997, the Company restructured each of the
Seller Notes to provide for interest payments through January 1998, at interest
rates of 10 percent per annum. Principal is due in equal installments beginning
January 1998 through various dates in 2001. All of the defaults under each of
the Seller Notes have been waived and the Company is in compliance with the
Seller Notes, as restructured. The Seller Notes are not collateralized. The
Seller Notes are subordinated to the Bank Credit Facility and the Senior
Subordinated Notes.
In connection with restructuring the Seller Notes, the Company granted an
option to the former owner of its Florida facilities to acquire its operations
in Florida for an aggregate consideration of $3.1 million in cash, the discharge
of $2.7 million Seller Notes and the return of the 72,621 shares of the
Company's common stock that had been issued in connection with the Company's
acquisition of the Florida facilities. The option may only be exercised if the
Company defaults on scheduled payments under the related restructured Seller
Notes or if the Company's lender under the Bank Credit Facility declares a
default under the Bank Credit Facility and accelerates amounts due thereunder.
Also, in connection with restructuring of the Seller Notes, the Company modified
certain other contractual relationships between the Company and the former owner
of the Florida facilities and entered into a limited mutual release with respect
to claims arising out of the Company's default under the original terms of the
related Seller Notes. An aggregate of $943,000 of these Seller Notes remains
convertible into common stock prior to the time they are paid at a
F-24
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
conversion price of $14.34 per share, subject to antidilution adjustments and
automatic annual increases in conversion price.
The aggregate maturities of long-term debt for each of the next five years
subsequent to December 31, 1996 were as follows (in thousands):
1997................................. $ 2,371
1998................................. 4,531
1999................................. 3,226
2000................................. 4,125
2001................................. 5,660
Thereafter........................... 4,024
---------
$ 23,937
=========
6. PREFERRED STOCK:
SERIES A CONVERTIBLE PREFERRED STOCK
As of December 31, 1996, there were 1,244,737 shares of the Series A
Convertible Preferred Stock (the "Series A Stock") outstanding. The Series A
Stock was convertible into 663,960 shares of the Company's common stock. The
conversion ratio increases proportionately when the Company issues interest
notes in lieu of interest payments to the holders of the Senior Subordinated
Notes. Consequently, after the expected issuance of interest notes in June 1997
(Note 5) the Series A Stock will be convertible into 705,552 shares of common
stock. The Series A Stock is mandatorily redeemable at the fair market value at
the date of redemption at the holders 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 Senior Subordinated Notes. The Company has a
right to call all the shares of the Series A Stock at $.001 per share, upon a
completed or anticipated change of control.
SERIES B CONVERTIBLE PREFERRED STOCK
The Company has agreed to issue Series B Convertible Preferred Stock (the
"Series B Stock") in connection with the planned acquisition of SW Dental
(Note 4). The number of shares to be issued will be those equivalent to
$1,550,000 divided by the price of the Company's common stock in its planned
initial public offering, which will close contemporaneously with the acquisition
of SW Dental. The Series B Stock will be convertible at the holder's option, for
a thirty-day period beginning one year after its issuance (the "Conversion
Period"), into an equivalent number of shares of the Company's common stock.
Alternatively, during the Conversion Period, the holder may require the Company
to redeem the Series B Stock in quarterly increments of $114,000. The Company
may call the Series B Stock at any time following the Conversion Period.
SERIES C CONVERTIBLE PREFERRED STOCK
In June 1997, the Company issued 485,382 shares of its Series C Convertible
Preferred Stock (the "Series C Stock") in connection with issuance of $2
million in Senior Subordinated Notes (Note 5). The terms of the Series C Stock
are substantially the same as those of the Series A Stock. The Series C Stock is
convertible into 242,691 shares of the Company's common stock.
F-25
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENT AND CONTINGENCIES:
LEASE COMMITMENTS
Future minimum lease payments under non-cancellable operating leases with
remaining terms of one or more years consisted of the following at December 31,
1996 (in thousands):
1997.................................... $ 1,687
1998.................................... 1,377
1999.................................... 1,203
2000.................................... 928
2001.................................... 574
Thereafter.............................. 1,358
---------
Total minimum lease obligation.......... $ 7,127
=========
The Company has entered into operating leases for various types of office
equipment and for its building facilities. Certain building facility leases
include rent escalation clauses. Most leases contain purchase and renewal
options at fair market and rental values.
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 an employment agreement
with each full time dentist, orthodontist and other dental specialist it
employs. 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.
F-26
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES:
Significant components of the Company's deferred tax assets (liabilities)
were as follows:
DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforward.... $ -- $ 758
Deferred compensation.............. 999 982
Allowances for bad debts........... 926 922
Accrued amounts not currently
deductible....................... -- 149
--------- ---------
Total deferred assets......... 1,925 2,811
--------- ---------
Deferred tax liabilities:
Unbilled receivables............... (347) (622)
Loss of Subchapter S status in
connection with changes in
corporate form................... (1,307) (1,059)
Other.............................. -- (16)
Management services agreements..... -- (122)
Property and equipment............. -- (108)
--------- ---------
Total deferred tax
liabilities................ (1,654) (1,927)
--------- ---------
Net deferred tax assets................. 271 884
Less current portion.................... 18 284
--------- ---------
Noncurrent......................... $ 253 $ 600
========= =========
Significant components of the provision for income taxes were as follows:
DECEMBER 31,
---------------------------------
1994 1995 1996
----------- --------- ---------
Current tax provision:
Federal............................ $ 13 $ -- $ --
State.............................. -- -- --
--- --------- ---------
Total current................. 13 -- --
--- --------- ---------
Deferred tax provision (benefit):
Federal............................ -- $ (217) $ (512)
State.............................. 30 (108) (49)
--- --------- ---------
Total deferred................ 30 (325) (561)
--- --------- ---------
Provision (benefit) for income taxes.... $ 43 $ (325) $ (561)
=== ========= =========
F-27
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The differences between the statutory federal tax rate and the Company's
effective tax rate were as follows:
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
Tax at U.S. statutory rate (34%)........ $ 280 $ (931) $ (560)
State income taxes, net of federal
tax................................... 30 (71) (66)
Income not subject to corporate level
federal tax........................... (266) (83) --
Difference due to graduated tax rates... (10) -- --
Nondeductible expenses and other........ 9 10 65
Effect of conversion to taxable
entity................................ -- 750 --
--------- --------- ---------
$ 43 $ (325) $ (561)
========= ========= =========
At December 31, 1996, the Company had net operating loss carryforwards
available to reduce future taxable income of approximately $2 million, expiring
in 2011. The Company has not recorded a valuation allowance for the potential
inability to realize its net deferred tax assets because, after consideration of
the affiliated dental practices' historical operating results and the Company's
planned operations, management believes that it is more likely than not that the
Company will realize those assets.
9. STOCK OPTION PLANS
The Company has adopted the Castle Dental Centers, Inc. Omnibus Stock and
Incentive Plan (the "Employees Plan"), a stock-based incentive compensation
plan, and the Nonemployee Directors Stock Option Plan (the "Directors' Plan,"
together, the "Plans"), which are described below. The Company applies APB
Opinion 25 and related Interpretations in accounting for the Plans. In 1995, the
FASB issued Statement of Financial Accounting Standards Statement No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123") which, if fully
adopted by the Company, would change the methods the Company applies in
recognizing the cost of the Plans. Adoption of the cost recognition provisions
of SFAS 123 is optional and the Company has decided not to elect these
provisions of SFAS 123. However, pro forma disclosures as if the Company adopted
the cost recognition provisions of SFAS 123 in 1995 are required by SFAS 123 and
are presented below.
Under the Employees' Plan, the Company is authorized to issue 1,000,000
shares of Common Stock pursuant to awards granted to officers and key employees
in the form of stock options and restricted stock. Under the Directors' Plan,
the Company is authorized to issue 150,000 shares of Common Stock to non-
employee directors of the Company. There were no options granted under the
Directors' Plan at December 31, 1996. The Compensation Committee administers the
Plans.
The stock options granted in 1996 have exercise prices of $10.00 and $11.00
per share, which in each case was greater than or equal to the fair market value
of the Common Stock on the date of grant. These options have contractual terms
of 10 years, and vest 20 percent per year over a five-year period, beginning on
the first anniversary of the date of grant. All of the options granted in 1996
are incentive stock options.
F-28
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock options as of December 31,
1996 and the changes during the year ended on that date is presented below:
1996
-------------------------------------
NUMBER OF
SHARES OF WEIGHTED AVERAGE
UNDERLYING OPTIONS EXERCISE PRICES
------------------ ----------------
Outstanding at beginning of year........ -- n/a
Granted at-a-premium............... 28,000 $11.00
Granted at-the-money............... 64,250 $10.00
------------------
Total granted........................... 92,250 $10.30
==================
Outstanding at end of year.............. 92,250 $10.30
==================
The weighted average fair value of options granted during the year at a
premium was $2.44, for options granted at-the-money was $3.02, and for all
options was $2.86.
The fair value of each new stock option granted in 1996 is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: no dividend yield risk-free interest rates range
from 5.37 percent to 6.67 percent; and the expected lives of the options are six
years (SFAS 123 does not require the volatility of the Company's common stock
underlying the options to be calculated or considered because the Company was
not publicly-traded when the options were granted).
As of December 31, 1996, 92,250 options are outstanding, with a
weighted-average exercise price of $10.30 and a weighted average contractual
life of 9.35 years. None of the options were exercisable at December 31, 1996.
The Company has calculated the pro forma effects of adopting the
measurement principles of SFAS 123 and determined that the differences from
reported results are immaterial.
10. DEFINED CONTRIBUTION PLANS:
In August 1996, the Company adopted a defined contribution plan qualified
under Section 401(k) of the Internal Revenue Code of 1986 (the "401(k) Plan").
All permanent employees of the Company, except those of the Tennessee
subsidiary, are eligible to participate in the 401(k) Plan upon the completion
of six months of service. The Company maintains a separate defined contribution
401(k) plan for all permanent employees of the Company's Tennessee subsidiary
("Tennessee 401(k) Plan"). Employees are eligible to participate in the
Tennessee 401(k) Plan upon the completion of four months of service. The Company
may match contributions made by participants under both Plans each year in an
amount determined by the Company on a year-to-year basis.
The Company did not make any contributions to either Plan in 1996.
F-29
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. SUPPLEMENTAL CASH FLOW INFORMATION:
DECEMBER 31,
-----------------------------
1994 1995 1996
--------- ---- ---------
(IN THOUSANDS)
Cash paid during the period for:
Interest........................ $ 150 $87 $ 1,358
Income taxes.................... 14 1 --
Supplemental disclosure of noncash
investing and financing activities:
Effect of reorganization on
capital structure............... -- 39 --
Issuance of warrant............. -- 93 --
Issuance of notes payable for
accrued interest and purchase
of property and equipment..... -- -- 576
12. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:
CREDIT RISK
The Company grants customers credit in the normal course of business. The
Company does not require collateral on the extension of credit. Procedures are
in effect to monitor the creditworthiness of customers and appropriate
allowances are made to reduce accounts to their net realizable values.
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.
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 the revolving line of credit 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, 1995 and 1996, respectively,
approximate their fair value based on the Company's current incremental
borrowing rates for similar type of borrowing arrangements.
13. RELATED PARTY TRANSACTIONS:
The Company maintains a management services agreement with the PC pursuant
to which the PC's shareholder receives an annual salary of $100,000 to take
actions necessary to maintain the dental license for the affiliated dental
practice in the state of Texas, for as long as he holds such license and is the
sole shareholder of the practice. Such compensation arrangement was negotiated
between the shareholder and previously unaffiliated investors in the Company. In
addition, the shareholder receives $131,500 per quarter pursuant to the terms of
Deferred Compensation Agreement (Note 2).
During 1995, the Company entered into 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 $188,400 and
$235,000 under this agreement during 1996 and 1995, respectively.
F-30
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A Director of the Company is a Managing Director of The GulfStar Group,
Inc., which provides investment banking and advisory services to the Company.
The Company paid $540,000 and $198,000 during 1995 and 1996, respectively, in
investment banking fees to The GulfStar Group, and in 1995 issued a warrant for
56,579 shares of Common Stock to GulfStar Investments, Ltd., an affiliate of The
GulfStar Group, Inc. (Note 2).
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 at December 31, 1996 (Note 2). Pursuant to the provisions of
a Securities Purchase Agreement dated as of December 18, 1995, as amended in
June 1997, for so long as certain ownership thresholds are maintained with
respect to Series A Stock and Series C Stock or common stock following
conversion of the Series A Stock and Series C Stock, the investors have the
contractual right to nominate one member of the Company's Board of Directors.
14. PLANNED INITIAL PUBLIC OFFERING
The Company has prepared a registration statement on SEC Form S-1 to
register 2.5 million of its common shares.
F-31
<PAGE>
CASTLE DENTAL CENTERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, MARCH 31,
1996 1997
------------- ------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents....... $ 79 $ 794
Patient receivables, net........ 3,649 3,764
Unbilled patient receivables,
net............................ 1,637 1,722
Prepaid expenses and other
current assets................. 326 454
Deferred income taxes, net...... 284 284
------------- ------------
Total current assets....... 5,975 7,018
Property and equipment, net.......... 3,882 4,028
Intangible assets, net............... 16,432 16,303
Other assets......................... 2,278 2,283
Deferred income taxes, net........... 600 592
------------- ------------
Total assets............... $29,167 $ 30,224
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving line of credit........ $ 1,200 $ 1,270
Current portion of long-term
debt and capital lease
obligations.................... 2,371 11,113
Accounts payable and accrued
liabilities.................... 4,638 5,182
Due to affiliated dental
practices...................... 1,010 817
------------- ------------
Total current
liabilities............. 9,219 18,382
Long-term debt and capital lease
obligations, net of current
portion............................ 18,951 10,833
Commitments and contingencies
Other long-term liabilities.......... 1,578 1,578
Preferred stock, $.001 par value,
5,000,000 shares authorized;
1,244,737 shares Series A issued
and outstanding.................... 2,928 2,928
Stockholders' deficit:
Common stock, $.001 par value,
30,000,000 shares authorized,
and 2,331,996 shares issued and
outstanding.................... 2 2
Additional paid in capital...... 3,416 3,416
Accumulated deficit............. (6,927) (6,915)
------------- ------------
Total stockholders'
deficit................. (3,509) (3,497)
------------- ------------
Total liabilities and
stockholders' deficit... $29,167 $ 30,224
============= ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-32
<PAGE>
CASTLE DENTAL CENTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1997
---------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Patient revenues of affiliated dental
practices.......................... $ 4,493 $ 10,464
Amounts retained by affiliated dental
practices.......................... 1,278 3,518
---------- ----------
Net revenues.................... 3,215 6,946
---------- ----------
Expenses:
Clinical salaries............... 484 1,445
Dental supplies and laboratory
fees........................... 662 911
Rental and lease expense........ 188 637
Advertising and marketing....... 218 513
Depreciation and amortization... 120 427
Other operating expenses........ 538 760
General and administrative...... 425 1,458
---------- ----------
Total expenses............. 2,635 6,151
---------- ----------
Operating income........... 580 795
Interest expense..................... 504 775
Other income......................... (40) --
---------- ----------
Income before income taxes........... 116 20
Provision for income taxes........... 39 8
---------- ----------
Net income................. $ 77 $ 12
========== ==========
Net income per share................. $ 0.03 $ --
========== ==========
Weighted average number of common and
common equivalent shares
outstanding........................ 2,948 3,280
========== ==========
If the shares necessary to fund a
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.......................... $ --
==========
Weighted average number of
common and common equivalent
shares outstanding............. 3,825
==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-33
<PAGE>
CASTLE DENTAL CENTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
Net cash (used in) provided by
operating activities............... $ (1,698) $ 834
Net cash used in investing
activities--capital expenditures... (568) (113)
Financing activities:
Payments on long-term debt and
capital lease obligations...... (64) (77)
Proceeds from debt.............. -- 71
Payment of debt issuance cost... (28) --
--------- ---------
Net cash used by financing
activities......................... (92) (6)
--------- ---------
Net change in cash and cash
equivalents.............. (2,358) 715
Cash and cash equivalents, beginning
of period.......................... 6,439 79
--------- ---------
Cash and cash equivalents, end of
period............................. $ 4,081 $ 794
========= =========
Supplemental Cash Flow Information:
Supplemental disclosure of
noncash investing and financing
activities
Issuance of capital lease
obligation for purchase
of property and
equipment................ $ -- $ 284
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-34
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
Castle Dental Centers, Inc. and subsidiaries (the "Company") provide
administrative and management systems and services, non-healthcare personnel,
facilities and equipment to certain professional corporations in Texas, Florida
and Tennessee under long-term management services agreements. These professional
corporations are collectively referred to as the affiliated dental practices.
The accompanying condensed consolidated financial statements as of March
31, 1997 and for the three months ended March 31, 1996 and 1997 include the
accounts of the Company and its wholly-owned management company subsidiaries.
The Company's subsidiaries acquire operating assets and assume certain
liabilities of the affiliated dental practices and account for the Company's
management activities with the affiliated dental practices under the Company's
long-term management services agreements. The condensed consolidated financial
statements 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 condensed consolidated 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. EARNINGS PER SHARE:
In June 1997, the Company's Board of Directors declared and the
stockholders approved a 1-for-2 reverse split of the Company's common stock. All
share and per share information in the accompanying consolidated financial
statements has been retroactively restated to reflect the effects of the reverse
stock split.
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 and the issuance of common stock upon the contemplated conversion of
the Series A and Series C stock in connection with the planned initial public
offering. Additionally, in accordance with SAB Number 55, pro forma earnings per
share have been presented for 1997 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 $11.00 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.
F-35
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Long-term debt and capital lease obligations consisted of the following at
March 31, 1997 (dollars in thousands):
Term loan............................... $ 10,847
Senior Subordinated Notes............... 8,175
Seller Notes............................ 4,444
Other various notes payable and capital
lease obligations..................... 964
---------
Total debt and capital lease
obligations....................... 24,430
Less discount on Senior Subordinated
Notes................................. 2,484
---------
Long-term debt, net of discount......... 21,946
Less current portion.................... 11,113
---------
Total long-term debt and capital
lease obligations................. $ 10,833
=========
In June 1997, the Company amended and restated the Bank Credit Facility
with the bank, which among other items as further described in the Company's
annual financial statements, reduced the aggregate commitment of the term loan
to $10.8 million.
4. 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 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 an 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 specific amounts.
F-36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of
SW Dental Associates, LC:
We have audited the accompanying balance sheets of SW Dental Associates, LC
("SW Dental Associates") as of December 31, 1995 and 1996, and the related
statements of operations, changes in members' equity (deficit) and cash flows
for the years then ended. 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 SW Dental Associates as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
Houston, Texas
June 18, 1997
F-37
<PAGE>
SW DENTAL ASSOCIATES
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
--------------------
1995 1996
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents....... $ 101 $ 285
Patient receivables, net of
allowance for uncollectible
accounts of $170 and $121,
respectively................... 164 218
Other current assets............ 30 35
--------- ---------
Total current assets.......... 295 538
Property and equipment, net..... 334 419
Other assets.................... 2 3
--------- ---------
Total assets............... $ 631 $ 960
========= =========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:.................
Current portion of long-term
debt........................... $ 55 $ 60
Current portion of capital lease
obligations -- related party... 37 66
Accounts payable and accrued
liabilities.................... 164 186
--------- ---------
Total current
liabilities.............. 256 312
Long-term debt, net of current
portion............................ 128 68
Capital lease obligations -- related
party, net of current portion...... 182 251
Commitments and contingencies
Members' equity:
Common stock, $1 par value,
1,000 shares authorized, 1,000
shares issued and
outstanding.................... 1 1
Retained earnings............... 64 328
--------- ---------
Members' equity............ 65 329
--------- ---------
Total liabilities and
members' equity.......... $ 631 $ 960
========= =========
The accompanying notes are an integral part of the financial statements
F-38
<PAGE>
SW DENTAL ASSOCIATES
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Net patient revenue..................... $ 3,745 $ 4,850
--------- ---------
Expenses:
Dentists' salaries................. 672 1,138
Clinical salaries.................. 1,051 1,249
Dental supplies and laboratory
fees.............................. 641 621
Rental and lease expense........... 108 137
Advertising and marketing.......... 90 197
Depreciation and amortization...... 74 100
Other operating expenses........... 610 511
General and administrative......... 237 351
--------- ---------
Total expenses................ 3,483 4,304
--------- ---------
Operating income.............. 262 546
Interest expense........................ 43 34
--------- ---------
Net income.............................. $ 219 $ 512
========= =========
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 $ 512
Provision for income taxes......... (81) (189)
--------- ---------
Pro forma net income.................... $ 138 $ 323
========= =========
The accompanying notes are an integral part of the financial statements.
F-39
<PAGE>
SW DENTAL ASSOCIATES
STATEMENTS OF CHANGES IN MEMBERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS TOTAL
---------------- (ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT) (DEFICIT)
------ ------ ------------ ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1995........... 1,000 $ 1 $ (24) $ (23)
Distribution to members......... -- -- (131) (131)
Net income...................... -- -- 219 219
------ ------ ------------ ---------
Balance at December 31, 1995......... 1,000 1 64 65
Distribution to members......... -- -- (248) (248)
Net income...................... -- -- 512 512
------ ------ ------------ ---------
Balance at December 31, 1996......... 1,000 $ 1 $ 328 $ 329
====== ====== ============ =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-40
<PAGE>
SW DENTAL ASSOCIATES
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER
31,
--------------------
1995 1996
--------- ---------
Cash flows from operating activities:
Net income......................... $ 219 $ 512
Adjustments:
Provision for bad debts....... 114 61
Depreciation and
amortization................ 74 100
Changes in operating assets
and liabilities:
Patient receivables...... (224) (115)
Other current assets..... (25) (5)
Other assets............. (2) (1)
Accounts payable and
accrued liabilities.... 34 22
--------- ---------
Net cash provided
by operating
activities......... 190 574
--------- ---------
Cash flows used in investing
activities -- capital expenditures... (28) (35)
--------- ---------
Cash flows from financing activities:
Repayment of debt.................. (46) (55)
Repayment of capital leases........ (35) (52)
Distributions to members........... (131) (248)
--------- ---------
Net cash used in
financing
activities......... (212) (355)
Net change in cash and cash
equivalents........................... (50) 184
Cash and cash equivalents at beginning
of period............................. 151 101
--------- ---------
Cash and cash equivalents at end of
period................................ $ 101 $ 285
========= =========
The accompanying notes are an integral part of the financial statements.
F-41
<PAGE>
SW DENTAL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CORPORATE ORGANIZATION
The statements reflect the operations of SW Dental Associates, LC (the
"Company"), which is a provider of dental and orthodontic services and
products that owns and operates dental centers in the Austin, Texas area.
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 financial 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 payors 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 expense whereas renewals and
major replacements are capitalized. Gains and losses from dispositions are
included in operations.
INCOME TAXES
The Company is a limited liability company and, accordingly, all federal
and state tax liabilities are the responsibility of the respective members.
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-42
<PAGE>
SW DENTAL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996 the Company adopted 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." The adoption of
this standard had no effect on the financial statements.
2. SELECTED BALANCE SHEET INFORMATION:
The details of certain balance sheet accounts are as follows:
DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
Property and equipment:
Leasehold improvements.......... $ 202 $ 204
Equipment....................... 12 37
Furniture and fixtures.......... 2 10
Equipment under capital
leases......................... 296 446
--------- ---------
Total property and
equipment.............. 512 697
Less accumulated depreciation
and amortization............... 178 278
--------- ---------
Property and equipment,
net.................... $ 334 $ 419
========= =========
Accumulated amortization for equipment under capital leases as of December
31, 1995 and 1996 was $100 and $162, respectively.
DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
Accounts payable and accrued
liabilities:
Trade........................... $ 88 $ 64
Accrued payroll................. 76 119
Other accrued liabilities....... -- 3
--------- ---------
$ 164 $ 186
========= =========
3. LONG-TERM DEBT:
At December 31, 1995 and 1996, long-term debt consisted of the following:
DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
Uncollateralized note payable due in
monthly installments of $2
principal and interest, interest
rate of 9% per year, maturing in
1999............................... $ 92 $ 70
Uncollateralized note payable to a
related party (see Note 8) due in
monthly installments of $1
principal and interest, interest
rate of 10% per year, maturing in
1997............................... 19 10
Note payable due in monthly
installments 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 48
--------- ---------
Total...................... 183 128
Less current portion....... 55 60
--------- ---------
Total long-term debt....... $ 128 $ 68
========= =========
F-43
<PAGE>
SW DENTAL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt as of December 31, 1996 for each
of the next five years were as follows (in thousands):
1997.................................... $ 60
1998.................................... 47
1999.................................... 21
---------
$ 128
=========
4. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
The Company leases a portion of its property and equipment under capital
and operating leases. The capital leases are with a related party (see Note 8).
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, 1996 (in thousands):
CAPITAL OPERATING
------- ---------
1997.................................... $ 94 $ 67
1998.................................... 86 59
1999.................................... 70 62
2000.................................... 64 54
2001.................................... 45 49
Thereafter.............................. 43 135
------- ---------
Total minimum lease obligations......... 402 $ 426
=========
Less amount representing interest....... 85
-------
Present value of minimum lease
obligations........................... 317
Less current portion............... 66
-------
Long-term capital lease obligations..... $ 251
=======
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 for the years ended December 31, 1995 and 1996 was as follows:
DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
Tax at U.S. statutory rate (34%)........ $ 74 $ 174
State income taxes, net of federal
tax................................... 7 15
Income not subject to corporate level
federal tax........................... (81) (189)
--------- ---------
$ -- $ --
========= =========
F-44
<PAGE>
SW DENTAL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. SUPPLEMENTAL CASH FLOW INFORMATION:
YEAR ENDED
DECEMBER 31,
--------------------
1995 1996
--- ---------
(IN THOUSANDS)
Cash paid during the period for
interest.............................. $ 43 $ 34
Noncash transactions -- capital
leases................................ 34 150
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, 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 and capitalized lease obligations as of December 31, 1995 and 1996,
approximate their fair value.
8. RELATED PARTY TRANSACTIONS:
The Company leased certain assets from a relative of the owners. These
leases were recorded as capital leases. At December 31, 1995 and 1996, the
balance of capital lease obligations was approximately $220,000 and $317,000,
respectively.
9. SUBSEQUENT EVENT:
In September 1996, the Company and its members entered into a letter of
intent to sell the Company to Castle Dental Centers of Texas, Inc. ("Castle").
In June 1997, the Company entered into management services and option agreements
concerning the sale to Castle. As consideration for the letter of intent and
option agreements, the Company's members received non-refundable deposits of
$1.5 million, which will be applied against the purchase price. In the event the
sale is not consummated by May 31, 1998, the Company's members will retain the
deposits and the Company will have the option for 60 days thereafter to purchase
Castle's operations and facilities in Austin, Texas.
F-45
<PAGE>
SW DENTAL ASSOCIATES
CONDENSED BALANCE SHEET (UNAUDITED)
DECEMBER 31, MARCH 31,
1996 1997
------------ -------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 285 $ 210
Patient receivables, net........... 218 258
Other current assets............... 35 47
------------ -------------
Total current assets.......... 538 515
Property and equipment, net............. 419 394
Other assets............................ 3 3
------------ -------------
Total assets.................. $ 960 $ 912
============ =============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Current portion of long-term debt
and capital lease obligations..... $ 126 $ 125
Accounts payable and accrued
liabilities....................... 186 182
------------ -------------
Total current liabilities..... 312 307
Long-term debt and capital lease
obligations, net of current portion... 319 322
Commitments and contingencies
Common stock, $1 par value, 1,000 shares
authorized, issued and
outstanding........................... 1 1
Retained earnings....................... 328 282
------------ -------------
Total liabilities and members'
equity..................... $ 960 $ 912
============ =============
The accompanying notes are an integral part of the financial statements.
F-46
<PAGE>
SW DENTAL ASSOCIATES
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1997
--------- ---------
(IN THOUSANDS)
Net patient revenue.................. $ 1,098 $ 1,279
Expenses:
Dentists' salaries.............. 217 313
Clinical salaries............... 312 314
Dental supplies and laboratory
fees........................... 172 163
Rental and lease expense........ 35 20
Advertising and marketing....... 41 30
Depreciation.................... 19 25
Other operating expenses........ 155 134
General and administrative...... 56 101
--------- ---------
Total expenses............. 1,007 1,100
--------- ---------
Operating income........... 91 179
Interest expense..................... 5 10
--------- ---------
Net income (loss).................... $ 86 $ 169
========= =========
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.......................... $ 86 $ 169
Provision for income taxes...... 32 63
--------- ---------
Pro forma net income (loss)..... $ 54 $ 106
========= =========
The accompanying notes are an integral part of the financial statements.
F-47
<PAGE>
SW DENTAL ASSOCIATES
CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1997
--------- ---------
(IN THOUSANDS)
Net cash provided (used) by operating
activities............................ $ 179 $ 139
--------- ---------
Net cash used in investing
activities - capital expenditures..... (79) --
--------- ---------
Financing activities:
Payments on long-term debt and
capital leases.................... (21) 2
Distributions to members........... (59) (216)
--------- ---------
Net cash used in financing activities... (80) (214)
--------- ---------
Net increase in cash and cash
equivalents................. 20 (75)
Cash and cash equivalents, beginning of
period................................ 101 285
--------- ---------
Cash and cash equivalents, end of
period................................ $ 121 $ 210
========= =========
The accompanying notes are an integral part of the financial statements.
F-48
<PAGE>
SW DENTAL ASSOCIATES
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. CORPORATE ORGANIZATION AND BASIS OF PRESENTATION:
ORGANIZATION
SW Dental Associates (the "Company") is a provider of dental and
orthodontic services and products in the Austin, Texas area. The accompanying
unaudited condensed financial statements for the three months ended March 31,
1996 and 1997, 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 adverse
effect on the Company's financial position, results of operations or liquidity.
F-49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of
1st Dental Care Inc.:
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 stockholders' 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-50
<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 STOCKHOLDERS' 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)
--------- ---------
Stockholders' deficit...... (151) (377)
--------- ---------
Total liabilities and
stockholders' deficit.... $ 1,518 $ 1,518
========= =========
The accompanying notes are an integral part of the combined financial
statements.
F-51
<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-52
<PAGE>
1ST DENTAL CARE
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' 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 stockholders.... -- -- (599) (599)
Net income...................... -- -- 322 322
------ ---------- ----------- ---------
Balance at December 31, 1993......... 5 427 (436) (4)
Distribution to stockholders.... -- -- (364) (364)
Net income...................... -- -- 217 217
------ ---------- ----------- ---------
Balance at December 31, 1994......... 5 427 (583) (151)
Distribution to stockholders.... -- -- (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-53
<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-54
<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 orthodontic
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 payors for services provided
by dentists. An allowance for doubtful accounts is recorded by the Company based
on historical experience.
F-55
<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
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-56
<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-57
<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):
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-58
<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 one of the Company's stockholders. 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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<PAGE>
[GRAPHIC OMITTED]
[GRAPHICS: PHOTOGRAPHS DEPICTING INTERIOR AND EXTERIOR OF DENTAL OFFICES
INCLUDING DENTAL OFFICE PERSONNEL AND PATIENTS.]
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR ANY 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 CONTAINED HEREIN 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 OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
UNTIL _________________ __, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS)
ALL DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY, 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.
------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................... 3
Risk Factors......................... 7
The Company.......................... 15
Use of Proceeds...................... 16
Dividend Policy...................... 17
Dilution............................. 17
Capitalization....................... 18
Selected Historical and Pro Forma
Financial Data..................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 21
Business............................. 31
Management........................... 43
Certain Transactions................. 50
Principal Stockholders............... 52
Description of Capital Stock......... 54
Shares Eligible for Future Sale...... 57
Underwriting......................... 59
Legal Matters........................ 60
Experts.............................. 60
Additional Information............... 60
Index to Combined Financial
Statements......................... F-1
2,500,000 SHARES
[CASTLE DENTAL CENTERS LOGO]
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
J.C. Bradford & Co.
Southcoast Capital
Corporation
, 1997
================================================================================
<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 issuance and distribution 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.................... $ 150,000
Legal fees and expenses.............. $ 350,000
Accounting fees and expenses......... $ 600,000
Transfer Agent's and Registrar's
fees................................. $ 15,000
Miscellaneous........................ $ 88,189
----------
TOTAL........................... $1,225,000
==========
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, D.D.S.-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 Consolidated 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., and 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.
On June 16, 1997, the Company issued and sold shares of its Series C
Convertible Preferred Stock to the following investors in the following amounts:
Declaration of Trust for Defined Benefit Plans of Zeneca Holdings, Inc.-32,351
shares, Delaware State Employees' Retirement Fund-163,331 shares and Declaration
II-2
<PAGE>
of Trust for Defined Benefit Plans of ICI American Holdings, Inc.-247,009
shares, each of which represented to the Company that it is an accredited
investor under Rule 501(a) of Regulation D. The Series C Preferred Stock was
issued in connection with a loan from the Pecks Investors to the Company of $2.0
million. These sales were exempt from registration under Section 4(2) of the
Securities Act, no public offering being involved.
Effective June 1, 1997, the Company entered into an Option Agreement for
the Purchase and Sale of Businesses with SW Dental Associates, LC and its
owners. Under the terms of the Option Agreement, the Company has paid $1.5
million for an option to acquire all of the outstanding limited liability
company interests in and capital stock of SW Dental. At the time the Company
exercises its option under the Option Agreement, the Company will enter into a
definitive purchase agreement (the "Acquisition Agreement") with SW Dental and
its two equity owners, the terms of which have been fully negotiated and are
subject to no conditions within the control of the equity owners of SW Dental,
and the form of which is attached to the Option Agreement. The consideration for
the transactions contemplated by the Acquisition Agreement are (i) $5.2 million
in cash, of which $1.5 million has previously been paid, and (ii) the issuance
to one of SW Dental's equity owners, John Goodman, D.D.S., an accredited
investor, of a number of shares of the Company's Series B Convertible Preferred
Stock calculated in accordance with a formula set forth in the Acquisition
Agreement, which the Company presently expects to be 140,909. The foregoing
transaction is exempt from registration under Section 4(2) of the Securities
Act, no public offering being involved.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------------------------------------------------------------
**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.
3.5 -- Certificate of Amendment of
Certificate of Incorporation of
Castle Dental Centers, Inc. dated
June 16, 1997.
**3.6 -- Certificate of Designation of Series
B Convertible Preferred Stock, dated
, 1997.
3.7 -- Certificate of Designation of Series
C Convertible Preferred Stock, dated
June 16, 1997.
*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 -- Reserved.
4.12 -- Amended and Restated Securityholders
Agreement dated June 16, 1997, 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 sharehold-
ers of Jack H. Castle, D.D.S., P.C.
II-4
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------------------------------------------------------------
4.13 -- Amended and Restated Registration
Rights Agreement dated June 16, 1997,
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.
4.14 -- Registration Rights Agreement dated
as of June , 1997, by and between
Castle Dental Centers, Inc. and John
Goodman, 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 No. 1 to Securities
Purchase Agreement dated June 16,
1997 among Castle Dental Centers,
Inc., Jack H. Castle, D.D.S., P.C.,
JHCDDS, Inc. and certain investors.
*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.
*10.5 -- 12% Senior Subordinated Note due
December 18, 2002 between Castle
Dental Centers, Inc. and Northman &
Company in the principal amount of
$1,450,000.
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.
II-5
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------------------------------------------------------------
*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.
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, D.D.S. 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.
II-6
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------------------------------------------------------------
*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 -- Reserved
10.44 -- Reserved
10.45 -- Reserved
10.46 -- Reserved
10.47 -- Reserved
10.48 -- Reserved
*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 -- Reserved
10.65 -- Reserved
10.66 -- Reserved
*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-7
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------------------------------------------------------------
*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, D.D.S.
*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.
10.72 -- Option Agreement effective as of May
31, 1996 by and between G. Powell
Bilyeu and Castle Dental Centers of
Tennessee, Inc.
10.73 -- Second Amendment and Supplement to
Amended and Restated Credit Agreement
dated as of June 16, 1997 between
Castle Dental Centers, Inc. and
NationsBank of Texas, N.A.
10.74 -- 12% Senior Subordinated Note due
January 31, 1998 between Castle
Dental Centers, Inc. and NAP &
Company in the principal amount of
$1,347,000.
10.75 -- 12% Senior Subordinated Note due
January 31, 1998 between Castle
Dental Centers, Inc. and Fuelship &
Company in the principal amount of
$267,000.
10.76 -- 12% Senior Subordinated Note due
January 31, 1998 between Castle
Dental Centers, Inc. and Northman &
Co. in the principal amount of
$386,000.
10.77 -- Amendment No. 1 to Deferred
Compensation Agreement dated June 16,
1997 by and between Castle Dental
Centers, Inc. and Jack H. Castle,
D.D.S.
10.78 -- Option Agreement for the Purchase and
Sale of Businesses dated as of June
1, 1997 by and among Castle Dental
Centers of Texas, Inc., Castle Dental
Centers, Inc., Jack H. Castle,
D.D.S., P.C., SW Dental Associates,
LC, John Goodman, D.D.S. and Harold
Simpson, Jr.
10.79 -- Asset Purchase Agreement dated as of
June , 1997 by and among Castle
Dental Centers of Texas, Inc., Jack
H. Castle, D.D.S., P.C. and SW Dental
Associates, LC.
10.80 -- Member Interests Purchase Agreement
dated as of June 1, 1997 by and among
Castle Dental Centers of Texas, Inc.,
Castle Dental Centers, Inc., Jack H.
Castle, D.D.S., P.C., SW Dental
Associates, LC, John Goodman, D.D.S.
and Harold Simpson, Jr.
10.81 -- Management Services Agreement
effective June 1, 1997 by and between
Castle Dental Centers of Texas, Inc.,
and SW Dental Associates, LC.
10.82 -- Employment Agreement dated as of June
1, 1997 by and between Castle Dental
Centers of Texas, Inc. and John
Goodman, D.D.S.
10.83 -- Consulting Agreement dated as of June
1, 1997 by and between Castle Dental
Centers of Texas, Inc. and Sheryl K.
Goodman.
**10.84 -- Option Agreement dated as of , 1997
by and among Castle Dental Centers,
Inc., Castle Dental Centers of
Florida, Inc., Lester Greenberg
D.D.S. and NationsBank of Texas, N.A.
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 -- Reserved
*23.3 -- Consent of Emmett Moore.
*23.4 -- Consent of Louis A. Waters.
**27 -- Financial Data Schedule.
- ------------
* Filed previously.
** To be filed by amendment.
II-8
<PAGE>
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-9
<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 JUNE 20, 1997.
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 JUNE 20, 1997.
SIGNATURE TITLE
--------- -----
/s/ JACK H. CASTLE, JR. Chairman of the Board of Directors,
Jack H. Castle, Jr. Chief Executive Officer and Director
(principal executive officer)
* Director
JACK H. CASTLE, D.D.S.
/s/ JOHN M. SLACK Vice President and Chief Financial Officer
John M. Slack (principal financial and accounting
officer)
* Director
G. Kent Kahle
* Director
Robert J. Cresci
* Director
Elizabeth A. Tilney
By: s/ JACK H. CASTLE, JR.
*Jack H. Castle, Jr.,
ATTORNEY-IN-FACT
II-10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Castle Dental Centers, Inc.:
Our report on the financial statements of Castle Dental Centers, Inc. is
included on page F-12 of this registration statement. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule 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
June 19, 1997
S-1
<PAGE>
CASTLE DENTAL CENTERS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE BALANCE AT
BEGINNING CHARGED TO END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OTHER OF YEAR
- ------------------------------------- --------- ---------- ------------- ----- ----------
<S> <C> <C> <C> <C> <C>
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 $1,284 $ 1,443 -- $2,437
========= ========== ============= ===== ==========
Year ended December 31, 1996:
Allowance for uncollectible
accounts-- patient
receivables................... $ 2,437 $1,137 $ 1,324 $ 175(1) $2,425
========= ========== ============= ===== ==========
BALANCE BALANCE AT
BEGINNING CHARGED TO END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OTHER OF YEAR
- ------------------------------------- --------- ---------- ------------- ----- ----------
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
========= ========== ============= ===== ==========
Year ended December 31, 1996:
Allowance for uncollectible
accounts-- unbilled patient
receivables................... $ 228 $ 90 $-- $ 43(1) $ 361
========= ========== ============= ===== ==========
</TABLE>
- --------------
(1) Acquired allowances for uncollectible accounts of Affiliated Dental
Practices.
S-2
EXHIBIT 3.5
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
CASTLE DENTAL CENTERS, INC.
The undersigned, Jack H. Castle, Jr., Chief Executive Officer, and John M.
Slack, Secretary, of Castle Dental Centers, Inc., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), do hereby
certify as follows:
FIRST: The name of the Corporation is
Castle Dental Centers, Inc.
SECOND: The Certificate of Incorporation of the Corporation was filed in
the Office of the Secretary of State of the State of Delaware on December 15,
1995.
THIRD: This Certificate of Amendment of the Certificate of Incorporation
of the Corporation (the "Certificate of Amendment") was duly adopted in
accordance with the provisions of Section 242 of the Delaware General
Corporation Law, the Board of Directors having duly adopted resolutions setting
forth and declaring advisable this Certificate of Amendment, and in lieu of a
meeting of the stockholders, written consent to this Certificate of Amendment
having been given by the holders of a majority of the outstanding stock of the
Corporation in accordance with Section 228 of the General Corporation Law of the
state of Delaware.
FOURTH: The Certificate of Incorporation of the Corporation is hereby
amended as follows:
(a) Section A.1. of ARTICLE IV is hereby amended to add the following
definition:
"l. SERIES C PREFERRED STOCK" means the Series C Convertible
Preferred Stock authorized by the Certificate of Designation of the Series
C Convertible Preferred Stock."
(b) Section A.3. of ARTICLE IV is hereby amended to read in its entirety as
follows:
"LIQUIDATION PREFERENCE. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
holders of shares of
<PAGE>
Series A Preferred Stock then outstanding shall be entitled to be paid out
of the assets of the Corporation available for distribution to its
stockholders, after and subject to the payment in full of all amounts
required to be distributed to the holders of any other Preferred Stock of
the Corporation ranking on liquidation prior and in preference to the
Series A Preferred Stock (such Preferred Stock being referred to
hereinafter as "Senior Preferred Stock") upon such liquidation,
dissolution or winding up, but before any payment shall be made to the
holders of Common Stock or any other stock ranking on liquidation junior
to the Series A Preferred Stock (such stock being referred to hereinafter
collectively as "Junior Stock"), an amount equal to the Liquidation
Preference per share (subject to adjustment in the event of any stock
dividend, stock split, stock distribution or combination with respect to
such shares). If upon any such liquidation, dissolution or winding up of
the Corporation the remaining assets of the Corporation available for the
distribution to its stockholders after payment in full of amounts required
to be paid or distributed to holders of Senior Preferred Stock shall be
insufficient to pay the holders of shares of Series A Preferred Stock the
full amount to which they shall be entitled, the holders of shares of
Series A Preferred Stock, Series C Preferred Stock and any other class of
stock ranking on liquidation on a parity with the Series A Preferred Stock
and Series C Preferred Stock, shall share ratably in any distribution of
the remaining assets and funds of the Corporation in proportion to the
respective amounts which would otherwise be payable in respect of the
shares held by them upon such distribution if all amounts payable on or
with respect to said shares were paid in full. Neither the sale, exchange
or other conveyance (for cash, shares of stock, securities or other
consideration) of all or substantially all the property and assets of the
Corporation nor the merger or consolidation of the Corporation into or
with any other corporation, or the merger or consolidation of any other
corporation into or with the Corporation, shall be deemed to be a
dissolution, liquidation or winding up, voluntary or involuntary, for the
purposes of this Section 3."
(c) Section A.4.c(xi) of ARTICLE IV is hereby amended to read in its entirety
as follows:
"(xi) For purposes hereof, "Excluded Shares" shall mean (A)
shares of Common Stock issued or issuable upon conversion of shares of
Series A Preferred Stock or Series C Preferred Stock, (B) shares of Common
Stock issued or issuable on exercise of the Common Stock Warrant issued to
GulfStar Investments, Ltd. for 113,158 shares, subject to adjustment as
provided therein (the "GulfStar Warrant"), and (C) 600,000 shares of
Common Stock, or options to purchase such shares, issued or issuable to
officers, directors, consultants and employees of the Corporation and
-2-
<PAGE>
its Subsidiaries (such number and amount to be appropriately adjusted in
the event the Common Stock is subdivided into a greater or combined into a
lesser number) pursuant to any equity incentive plan, agreement, or other
arrangement adopted by the Corporation."
(d) Section B.2. is hereby deleted in its entirety.
IN WITNESS WHEREOF, the undersigned have executed this Certificate of
Amendment on behalf of the Corporation and have attested such execution and do
verify and affirm, under penalty of perjury, that this Certificate of Amendment
is the act and deed of the Corporation and that the facts stated herein are true
as of this 16th day of June, 1997.
CASTLE DENTAL CENTERS, INC.
By: /s/ JACK H. CASTLE, JR.
Jack H. Castle, Jr.
Chief Executive Officer
Attest:
/s/ JOHN M. SLACK
John M. Slack
Secretary
-3-
EXHIBIT 3.7
CERTIFICATE OF THE VOTING POWERS, DESIGNATIONS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER
SPECIAL RIGHTS, AND QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS THEREOF, OF SERIES C CONVERTIBLE
PREFERRED STOCK
OF
CASTLE DENTAL CENTERS, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
CASTLE DENTAL CENTERS, INC., a corporation organized and existing by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that the following resolution was duly
adopted by the Board of Directors of the Corporation on June 16, 1997.
RESOLVED that pursuant to the authority expressly granted to and vested in
the Board of Directors of the Corporation by the provisions of Article IV of the
Certificate of Incorporation of the Corporation, as amended from time to time
(the "Certificate of Incorporation"), and Section 151(g) of the General
Corporation Law of the State of Delaware, such Board of Directors hereby
creates, from the authorized shares of Preferred Stock, par value $.001 per
share (the "Preferred Stock"), of the Corporation authorized to be issued
pursuant to the Certificate of Incorporation, a series of Preferred Stock, and
hereby fixes the voting powers, designations, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, of the shares of such series as follows:
The series of Preferred Stock hereby established shall consist of 485,382
shares designated as Series C Convertible Preferred Stock or such higher number
of shares (not in excess of the total number of shares of authorized Preferred
Stock then available for issuance) as
<PAGE>
shall be determined from time to time by the Board of Directors. The rights,
preferences and limitations of such series shall be as follows:
1. Definitions. All capitalized terms defined herein will have the
meanings assigned to them above or as specified below. Capitalized terms used
but not defined herein have the meanings ascribed to them in the Securities
Purchase Agreement dated as of December 18, 1995, as amended by Amendment No. 1
thereto, dated as of June 5, 1997, by and among the Corporation and the
Investors named therein, relating to, among other things, the purchase by such
Investors of Shares of Series C Preferred Stock (as amended, the "Purchase
Agreement"):
"APPLICABLE PERCENTAGE" shall have the meaning set forth in Section
4)(c)(i).
"CONVERTIBLE SECURITIES" shall have the meaning set forth in Section
(4)(c)(ii).
"EXCLUDED SHARES" shall have the meaning set forth in Section (4)(c)
(xi).
"FULLY DILUTED OUTSTANDING SHARES" shall have the meaning set forth
in Section (4)(c)(x).
"LIQUIDATION PREFERENCE" means $.001 per share for each share of
Series C Preferred Stock.
"NEWLY ISSUED SECURITIES" shall have the meaning set forth in
Section (4)(c)(i).
"PURCHASE AGREEMENT" shall have the meaning set forth in the first
paragraph of this Section 1.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SERIES A PREFERRED STOCK" means the Series A Convertible Preferred
Stock authorized by the Certificate of Incorporation.
"SERIES C PREFERRED STOCK" means the Series C Convertible Preferred
Stock authorized by this Certificate of Designation.
"SHARE" shall have the meaning set forth in Section (4)(a).
"TRIGGER VALUE" shall have the meaning set forth in Section (4)(c)
(ii).
-2-
<PAGE>
2. DIVIDEND PROVISIONS. Holders of Series C Preferred Stock shall not be
entitled to receive any dividends declared by the Corporation from time to time.
3. LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, the holders of shares
of Series C Preferred Stock then outstanding shall be entitled to be paid out of
the assets of the Corporation available for distribution to its stockholders,
after and subject to the payment in full of all amounts required to be
distributed to the holders of any other Preferred Stock of the Corporation
ranking on liquidation prior and in preference to the Series C Preferred Stock
(such Preferred Stock being referred to hereinafter as "Senior Preferred Stock")
upon such liquidation, dissolution or winding up, but before any payment shall
be made to the holders of Common Stock or any other stock ranking on liquidation
junior to the Series C Preferred Stock (such stock being referred to hereinafter
collectively as "Junior Stock"), an amount equal to the Liquidation Preference
per share (subject to adjustment in the event of any stock dividend, stock
split, stock distribution or combination with respect to such shares). If upon
any such liquidation, dissolution or winding up of the Corporation the remaining
assets of the Corporation available for the distribution to its stockholders
after payment in full of amounts required to be paid or distributed to holders
of Senior Preferred Stock shall be insufficient to pay the holders of shares of
Series C Preferred Stock the full amount to which they shall be entitled, the
holders of shares of Series C Preferred Stock, Series A Preferred Stock and any
other class of stock ranking on liquidation on a parity with the Series C
Preferred Stock and Series A Preferred Stock, shall share ratably in any
distribution of the remaining assets and funds of the Corporation in proportion
to the respective amounts which would otherwise be payable in respect of the
shares held by them upon such distribution if all amounts payable on or with
respect to said shares were paid in full. Neither the sale, exchange or other
conveyance (for cash, shares of stock, securities or other consideration) of all
or substantially all the property and assets of the Corporation nor the merger
or consolidation of the Corporation into or with any other corporation, or the
merger or consolidation of any other corporation into or with the Corporation,
shall be deemed to be a dissolution, liquidation or winding up, voluntary or
involuntary, for the purposes of this Section (3)(a).
4. CONVERSION. The holders of the Series C Preferred Stock shall have
conversion rights (the "Conversion Rights") as follows:
a. RIGHTS TO CONVERT. Subject to the provisions for adjustment
hereinafter set forth in Section (4)(c), each share of Series C Preferred Stock
(each, a "Share") shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share, at the office of the
Corporation or any transfer agent for such Series into one fully paid and
nonassessable share of Common Stock.
-3-
<PAGE>
b. MECHANICS OF CONVERSION. Before any holder of Series C Preferred
Stock shall be entitled to convert any of such Shares into shares of Common
Stock, such holder shall surrender the certificate or certificates therefor duly
endorsed, at the office of the Corporation or of any transfer agent for such
Series, and shall give written notice by mail, postage prepaid, to the
Corporation at its principal corporate office or at the office of any transfer
agent, that such holder elects to convert all or a part of the Shares of Series
C Preferred Stock represented by such certificate or certificates in accordance
with the terms of this Section (4), and shall state therein the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder, or to the nominee or nominees of such
holder, a certificate or certificates for the number of shares of Common Stock
to which such holder shall be entitled as aforesaid. If surrendered certificates
for Series C Preferred Stock are converted only in part, the Corporation will
issue and deliver to the holder or his nominee(s), without charge therefor, a
new certificate or certificates representing the aggregate of the unconverted
Shares. Such conversion shall be deemed to have been made immediately prior to
the close of business on the date of such surrender of the Shares of Series C
Preferred Stock to be converted and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the recordholder or holders of such shares of Common Stock as of
such date. If the conversion is in connection with an underwritten offering of
securities registered pursuant to the Securities Act, the conversion may, at the
option of any holder tendering Series C Preferred Stock for conversion, be
conditioned upon the closing with the underwriter of the sale of securities
pursuant to such offering, in which event the person(s) entitled to receive the
Common Stock issuable upon such conversion of the Series C Preferred Stock shall
not be deemed to have converted such Series C Preferred Stock until immediately
prior to the closing of such sale of securities. The issuance of certificates or
shares of Common Stock upon conversion of Shares of Series C Preferred Stock
shall be made without charge for any issue, stamp or other similar tax in
respect of such issuance.
c. CONVERSION ADJUSTMENT OF SERIES C PREFERRED STOCK. It is the
intent of the Corporation that the shares of Common Stock issuable on conversion
of the Series C Preferred Stock will be equal to the Applicable Percentage of
the Fully Diluted Outstanding Shares of Common Stock. The number of shares of
Common Stock issuable on conversion of the Series C Preferred Stock shall be
subject to adjustment from time to time as follows:
(i) In the event of the issuance of any shares of Common Stock,
preferred stock, warrants, options, rights or other securities convertible into
or exchangeable or exercisable for shares of Common Stock other than Excluded
Shares (collectively, the "Newly Issued Securities") for a consideration (paid
in cash, securities or other property) per share less than the Trigger Value of
such Newly Issued Securities, then the number of shares of Common Stock then
-4-
<PAGE>
issuable upon conversion of each Share of Series C Preferred Stock immediately
prior to each such issuance shall forthwith be adjusted by adding a number of
shares of Common Stock equal to the quotient obtained by dividing (x) that
number of shares of Common Stock which, together with the number of shares of
Common Stock issuable upon conversion of all of the Series C Preferred Stock
outstanding immediately prior to such issuance, would represent the Applicable
Percentage of the Fully Diluted Outstanding Shares (after giving effect to the
issuance of the Newly Issued Securities) by (y) the number of Shares of Series C
Preferred Stock then outstanding. The term "Applicable Percentage" means, as of
any date of determination, 7% as adjusted (A) to give effect to Section
(4)(c)(xiii), (B) to give effect to any conversion or redemption of the Series C
Preferred Stock such that immediately following any such conversion or
redemption, the Applicable Percentage shall be reduced by subtracting (I) the
percentage of the Fully Diluted Outstanding Shares represented by the number of
shares of Common Stock issued upon such conversion (or in the case of
redemption, the number of Shares of Common Stock that would otherwise have been
issuable on conversion of the Shares of Series C Preferred Stock redeemed) from
(II) the Applicable Percentage in effect immediately prior to such conversion or
redemption and (C) to give effect to any issuance of Newly Issued Securities for
a consideration per share equal to or greater than the Trigger Value of such
Newly Issued Securities such that immediately following any such issuance, the
Applicable Percentage shall be equal to (x) the quotient obtained by dividing
(I) the number of shares of Series C Preferred Stock then outstanding by (II)
the number of Fully Diluted Outstanding Shares of Common Stock (after giving
effect to the issuance of the Newly Issued Securities).
(ii) For the purposes of any adjustment of the number of shares
of Common Stock issuable upon conversion of the Series C Preferred Stock as the
result of the issuance of Newly Issued Securities pursuant to clause (i):
(A) With respect to any securities, other than Convertible
Securities, the term "Trigger Value" means as of any date of determination, the
amount determined by dividing (a) the product obtained by multiplying (x) the
quotient obtained by dividing (i) the number of Newly Issued Securities by (ii)
the number of Fully Diluted Outstanding Shares (after giving effect to the
issuance of the Newly Issued Securities) by (y) $20,000,000 by (b) the number of
Newly Issued Securities.
(1) With respect to any securities that are convertible into or
exchangeable or exercisable for shares of Common Stock (the "Convertible
Securities"), (a) Trigger Value shall be determined with respect to the shares
of Common Stock that such Convertible Securities are convertible into or
exchangeable or exercisable for in accordance with clause (1) above and (b) in
case any such Convertible Securities are issued in connection with the issue and
sale of other securities of the Corporation together comprising one integral
transaction in which no specific
-5-
<PAGE>
consideration is allocated to such Convertible Securities by the parties
thereto, the amount of consideration therefor shall be deemed to be the fair
value as determined in good faith by the Board of Directors of the Corporation;
PROVIDED, HOWEVER, that in the case of clause (b) above, the holders of a
majority of the outstanding shares of Series C Preferred Stock may refer the
question of valuation for final settlement to a nationally recognized investment
banking firm designated by the holders of a majority of the outstanding shares
of Series C Preferred Stock, and the cost relating to retaining such investment
banking firm shall be borne by the Corporation.
(B) the aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options to purchase or rights to subscribe for
Common Stock shall be deemed to have been issued at the time such options or
rights were issued;
(C) the aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to have been issued at the time
such securities were issued or such options or rights were issued;
(D) on any change in the number of shares of Common Stock
deliverable upon exercise of any such options or rights or conversions of or
exchange for such convertible or exchangeable securities, other than a change
resulting from the antidilution provisions thereof, the number of shares of
Common Stock issuable upon conversion of the Series C Preferred Stock shall
forthwith be readjusted to such number of shares as would have been obtained had
the adjustment made upon the issuance of such options, rights or securities not
converted prior to such change been made upon the basis of such change;
(E) on the expiration of any such options or rights, the termination
of any such rights to convert or exchange or the expiration of any options or
rights related to such convertible or exchangeable securities, the number of
shares of Common Stock issuable upon conversion of the Series C Preferred Stock
shall forthwith be readjusted to such number of shares as would have been
obtained had such options, rights, securities or options or rights related to
such securities not been issued.
(iii) If the number of shares of Common Stock outstanding at any
time hereafter is increased by a stock dividend payable in shares of Common
Stock or by a subdivision or split-up of shares of Common Stock, then, following
the record date fixed for the determination of holders of Common Stock entitled
to receive such stock dividend, subdivision or split-up, the
-6-
<PAGE>
number of shares of Common Stock issuable on conversion of the Series C
Preferred Stock shall be increased in proportion to such increase in outstanding
shares.
(iv) If at any time hereafter the number of shares of Common
Stock outstanding is decreased by a combination of the outstanding shares of
Common Stock, then, following the record date for such combination, the number
of shares of Common Stock issuable on conversion of the Series C Preferred Stock
shall be decreased in proportion to such decrease in outstanding shares.
(v) If any capital reorganization or reclassification or change
of the outstanding capital stock of the Corporation or any consolidation or
merger of the Corporation with another corporation, or the sale of all or
substantially all of its assets to another corporation, or any other merger or
consolidation no matter how effected, shall be effected in such a way that
holders of Common Stock shall be entitled to receive stock, securities or assets
(other than cash) with respect to or in exchange for Common Stock, then, as a
condition to such reorganization, adequate provision shall be made whereby each
holder of Series C Preferred Stock shall thereafter have the right to receive,
upon conversion of the Series C Preferred Stock, on the basis and upon the terms
and conditions specified herein and in lieu of the shares of the Common Stock of
the Corporation immediately theretofore receivable upon, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of such Common Stock equal to the number of
shares of such stock immediately theretofore so receivable had such
reorganization, reclassification, change, consolidation, merger or sale not
taken place, and in any such case appropriate provision shall be made with
respect to the rights and interests of such holder to the end that the
provisions hereof shall thereafter be applicable, as nearly as may be, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the conversion of the Series C Preferred Stock. The Corporation shall not
effect any such reorganization, reclassification, change, consolidation, merger
or sale, unless prior to the consummation thereof the successor corporation (if
other than the Corporation) resulting from such consolidation or merger or the
corporation purchasing such assets or the corporation issuing the securities
into which such shares of Common Stock shall be changed (if other than the
Corporation) shall assume by written instrument executed and mailed or delivered
to each holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to receive.
(vi) All calculations under this Section (4) shall be made to
the nearest one- tenth of a share.
(vii) Whenever the number of shares of Common Stock issuable
upon conversion of the Series C Preferred Stock shall be adjusted as provided in
this Section (4), the
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Corporation shall forthwith file, at its principal office or at such other place
as may be designated by the Corporation a statement, signed by its president or
chief financial officer and by its treasurer, showing in detail the facts
requiring such adjustment and the number of shares of Common Stock issuable upon
conversion of the Series C Preferred Stock that shall be in effect after such
adjustment. The Corporation shall cause a copy of such statement to be sent by
first-class, certified mail, return receipt requested, postage prepaid, to each
holder of shares of Series C Preferred Stock at such holder's address appearing
in the Corporation's records. Where appropriate, such copy may be given in
advance and may be included as part of a notice required to be mailed under the
provisions of Section (4)(c)(viii).
(viii)In the event the Corporation shall propose to take any
action of the types described in clause (v) above, the Corporation shall give
notice to each holder of shares of Series C Preferred Stock in the manner set
forth in clause (vii) above at such holder's address appearing in the
Corporation's records, which notice shall specify the record date, if any, with
respect to any such action and the date on which such action is to take place.
Such notice shall also set forth such facts with respect thereto as shall be
reasonably necessary to indicate the effect of such action on the shares of
Series C Preferred Stock and the number, kind or class of shares or other
securities or property which shall be deliverable or purchasable upon the
occurrence of such action or deliverable upon conversion of the Series C
Preferred Stock. In the case of any action that would require the fixing of a
record date, such notice shall be given at least 20 days prior to the date so
fixed, and in case of all other action, such notice shall be given at least 30
days prior to the taking of such proposed action. Failure to give such notice,
or any defect therein, shall not affect the legality or validity of any such
action.
(ix) (A) If any event occurs of the type contemplated by the
provisions of this Section 4 but not expressly provided for by such provisions,
the Board of Directors of the Corporation or, at the election of holders of a
majority of the shares of Series C Preferred Stock, an appraiser will make
appropriate adjustments to the terms and conditions of the shares of Series C
Preferred Stock as may be necessary fully to carry out the adjustments
contemplated by this Section (4).
(B) (1) The Corporation will not, by amendment of its Articles
of Incorporation or By-laws or through any reorganization, transfer of assets,
reclassification, merger, dissolution, issue or sale of securities or otherwise,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by the Corporation hereunder but will at all times in good
faith assist in the carrying out of all the necessary or appropriate actions in
order to protect the rights of the holders of the shares of Series C Preferred
Stock against impairment.
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(x) For purposes hereof, the "Fully Diluted Outstanding Shares"
of Common Stock will be the sum (without duplication) of (A) all issued shares
of Common Stock as of such date, plus (B) all Excluded Shares (other than
300,000 of the Excluded Shares described in Section (4)(c)(xi)(C) subject to
adjustment as described in the parenthetical in Section (4)(c)(xi)(C)) plus (C)
all shares of Common Stock issuable with respect to Convertible Securities.
"Convertible Securities" shall mean evidence of indebtedness, shares of stock
and other securities which are convertible into or exchangeable, with or without
payment of additional consideration in cash or property, for shares of Common
Stock (including, without limitation warrants, options and other rights to
purchase) either immediately or upon the occurrence of a specified date or
specified event, except Excluded Shares.
(xi) For purposes hereof, "Excluded Shares" shall mean (A)
shares of Common Stock issued or issuable upon conversion of shares of Series A
Preferred Stock or Series C Preferred Stock, (B) shares of Common Stock issued
or issuable on exercise of the Common Stock Warrant issued to GulfStar
Investments, Ltd. for 113,158 shares, subject to adjustment as provided therein
(the "Gulfstar Warrant") and (C) 600,000 shares of Common Stock, or options to
purchase such shares, issued or issuable to officers, directors, consultants and
employees of the Corporation and its Subsidiaries (such number and amount to be
appropriately adjusted in the event the Common Stock is subdivided into a
greater or combined into a lesser number) pursuant to any equity incentive plan,
agreement, or other arrangement adopted by the Corporation.
(xii) In determining the consideration paid for Newly Issued
Securities, in case at any time Newly Issued Securities shall be issued or sold
for cash, the consideration received therefor shall be deemed to be the amount
received by the Corporation therefor in the form of such cash, without deduction
of any expenses incurred or any underwriting commissions, discounts or
concessions paid or allowed by the Corporation in connection therewith. In case
at any time any Newly Issued Securities shall be issued or sold for a
consideration other than cash, the amount of the consideration other than cash
received by the Corporation shall be deemed to be the fair value of such
consideration at the time of such issuance as determined reasonably and in good
faith by the Board of Directors of the Corporation, without deduction of any
expenses incurred or any underwriting commissions, discounts or concessions paid
or allowed by the Corporation in connection therewith. The holders of greater
than 50% of the outstanding shares of Series C Preferred Stock shall have the
right to demand, upon written notice to the Corporation given within ten (10)
days after receipt of the determination of fair value pursuant to this paragraph
by the Board of Directors of the Corporation, and in lieu thereof, a
determination of fair value of such consideration to be made by appraisal by an
investment bank as described in the definition of Fair Market Value in the
Purchase Agreement.
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(xiii)In the event the Corporation fails to pay the New Senior
Subordinated Notes in full, including the principal amount thereof and any
accrued and unpaid interest or premium thereon, by March 31, 1998 (the
"Percentage Increase Date"), thereafter on the last day of each month following
the Percentage Increase Date and until the New Senior Subordinated Notes,
including the principal amount thereof and accrued and unpaid interest or
premium thereon, shall have been paid in full, the number of shares of Common
Stock issuable upon the conversion of each Share shall be adjusted such that the
aggregate number of shares of Common Stock issuable on conversion of all of the
outstanding shares of Series C Preferred Stock is adjusted to add a number of
shares of Common Stock equal to 1% of the then fully Diluted Outstanding Shares.
d. NO FRACTIONAL SHARES. No fractional shares shall be issued upon
conversion of any shares of any Series of Series C Preferred Stock and the
number of shares of Common Stock to be issued shall be rounded down to the
nearest whole share, and there shall be no payment to a holder of Series C
Preferred Stock for any such rounded fractional share.
e. NOTICES OF RECORD DATE. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Corporation
shall mail to each holder of a share of Series C Preferred Stock, at least 20
days prior to the date specified therein, a notice specifying the date on which
any such record is to be taken for the purpose of such dividend, distribution or
right, and the amount and character of such dividend, distribution or right.
f. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of Series C Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of Series C Preferred Stock, and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Series C Preferred Stock, then
in addition to such other remedies as shall be available to the holder of Series
C Preferred Stock, the Corporation will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes.
g. NOTICES. Any notice required by the provisions of Section (4) to
be given the holders of shares of Series C Preferred Stock shall be deemed given
if sent by facsimile transmission,
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by telex, or if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his, her or its address appearing on the
books of the Corporation.
5. VOTING RIGHTS. a. The holder of each share of Series C Preferred Stock
shall have the right to one vote for each share of Common Stock into which such
share of Series C Preferred Stock could then be converted (with any fractional
share determined on an aggregate conversion basis being rounded down to the
nearest whole share), and with respect to such vote, such holder shall have full
voting rights and powers equal to the voting rights and powers of the holders of
Common Stock and shall be entitled, notwithstanding any provision hereof, to
notice of any stockholders' meeting in accordance with the Bylaws of the
Corporation and applicable law, and shall be entitled to vote, together with
holders of Common Stock, with respect to any question upon which holders of
Common Stock have the right to vote. Subject to Section (5)(b) and Section (10),
holders of Series C Preferred Stock shall not be entitled to vote as a class on
matters submitted to a vote of stockholders of the Corporation.
b. CONTINGENT VOTING RIGHTS. (i) Upon the occurrence of a Majority
Voting Right Event (as defined below), the holders of the Series C Preferred
Stock, voting as a class, shall be entitled to elect the smallest number of
directors which, when combined with the number of directors elected by virtue of
their ownership of, or proxies for, Common Stock, will constitute a majority of
the total authorized number of directors, and the other holders of the Common
Stock and such other of this Corporation's stock shall be entitled to elect the
remaining members of the Board of Directors. At such time as (i) all monies
required to be paid to the holders of the New Senior Subordinated Notes and the
Senior Subordinated Notes have been paid in full, and (ii) no Default or Event
of Default shall have occurred and remain uncured, the contingent rights of the
holders of the Series C Preferred Stock to elect a majority of the Board as
provided in this subsection shall cease, subject to renewal from time to time
upon the same terms and conditions. For purposes of this Section 5(b), "Majority
Voting Right Event" shall mean the failure to pay the New Senior Subordinated
Notes in full, including the principal amount thereof and accrued and unpaid
interest or premium thereon, on January 31, 1998.
(ii). Such right of the holders of the Series C Preferred Stock
to elect a majority of the Board of Directors may be exercised at any annual
meeting or at any special meeting called for such purpose as hereinafter
provided or at any adjournment thereof, or by the written consent, delivered to
the Secretary of the Corporation, of the holders of a majority of the
outstanding shares of Series C Preferred Stock. At any time after the voting
power to elect a majority of the Board of Directors shall have become vested in
the holders of the Series C Preferred Stock as provided in this subsection, the
president or any vice president of this Corporation shall, upon the request of
the record holders of at least twenty percent (20%) of the
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Series C Preferred Stock then outstanding, addressed to any of them at the
principal office of this Corporation, call a special meeting of the holders of
the Series C Preferred Stock, and such other of this Corporation's stock as
shall then have the right to vote for the election of directors, to be held at
the place and upon the notice provided in the bylaws of this Corporation for the
holding of meetings. If such meeting shall not be so called within two days
after personal service of the request, or within five days after mailing of the
same by registered mail within the United States of America, then the record
holders of at least ten percent (10%) of the Series C Preferred Stock, as a
class, then outstanding, may designate in writing one of their number to call
such meeting, and the person so designated may call such meeting at the place
and upon the notice above provided, and for that purpose shall have access to
the stock books of this Corporation. At any meeting so called or at any annual
meeting held while the holders of the Series C Preferred Stock, as a class, have
the voting power to elect a majority of the Board of Directors, the holders of a
majority of the then outstanding Series C Preferred Stock, as a class, present
in person or by proxy, shall be sufficient to constitute a quorum for the
election of directors, the holders of Series C Preferred Stock are entitled to
elect, and the persons so elected as directors, together with such persons, if
any, as may be elected as directors by the holders of the Common Stock and such
other of this Corporation's stock as shall then have the right to vote for
directors, shall constitute the duly elected directors of this Corporation. In
the event the holders of the Common Stock and such other stock fail to elect the
number of authorized directors which they are entitled to elect at such meeting,
such director or directors shall be elected by a majority vote of the holders of
the Series C Preferred Stock.
(iii).When the rights of the holders of Series C Preferred Stock
to vote as provided in this section have ceased, as hereinabove provided, the
term of the office of the persons elected by them as directors as a result of a
Majority Right Voting Event shall terminate and the vacancies shall be filled by
remaining directors elected by the holders of the outstanding stock, regardless
of class, of the Corporation then having the right to vote for directors.
6. REQUIRED REDEMPTION OF SERIES C PREFERRED STOCK.
a. Upon the occurrence of a Change of Control (as defined in the
Purchase Agreement), any holder of Series C Preferred Stock shall have the right
to require the Corporation to redeem at the Option Closing (as defined in the
Purchase Agreement), and the Corporation shall redeem all or any lesser number
of shares of Series C Preferred Stock for a redemption price to be paid at the
Option Closing by certified check or wire transfer of immediately available
funds equal to the greater of (i) the Fair Market Value at the time of the
Change of Control Notice of the Common Stock issuable upon conversion of that
number of shares of Series C Preferred Stock being redeemed by the Corporation,
(ii) the change of control value of the Common Stock issuable upon conversion of
that number of shares of Series C
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Preferred Stock being redeemed by the Corporation determined by applying to such
Common Stock the valuation derived from the purchase price (giving effect to any
and all consideration) paid by the acquiring person or persons in the Change of
Control, or (iii) the product of (A) $600,000 and (B) a fraction, the numerator
of which shall equal the number of shares of Common Stock issuable upon
conversion of that number of shares of Series C Preferred Stock being redeemed
by the Corporation and the denominator of which shall equal the number of shares
of Common Stock issuable upon full conversion of all Series C Preferred Stock.
b. Upon the occurrence of a Change of Control, or the Corporation
acquiring knowledge of a pending Change of Control, the Change of Control Notice
shall (i) refer specifically to this Section (6)(b), (ii) state that the
Corporation may be required to redeem all of the outstanding shares of Series C
Preferred Stock, (iii) contain the Corporation's calculation of the redemption
price for the shares of Series C Preferred Stock to be redeemed (including a
detail of the Fair Market Value of the Common Stock at the time of the Change of
Control Notice), (iv) indicate that the Corporation will redeem the shares of
Series C Preferred Stock as provided in clause (ii) above at the Option Closing
upon written notice of the exercise of an option by a holder of shares of Series
C Preferred Stock, (v) indicate that the Option Closing for such purchase and
sale shall take place on a date specified in the notice, which date shall be a
date occurring not earlier than 30 days nor more than 60 days after the date on
which the notice is delivered, (vi) indicate where the Option Closing shall take
place and (vii) be delivered by certified mail return receipt requested. A
holder of shares of Series C Preferred Stock shall furnish written notice to the
Corporation of the exercise of an option pursuant to this Section (6)(b) within
at least 10 days prior to the Option Closing. At the Option Closing the
Corporation shall pay the redemption price for the securities being redeemed
determined as described in clause (a) above against delivery of the securities
being purchased. No waiver by a holder of any shares of Series C Preferred Stock
of its right under this Section (6) to require the redemption of any or all of
the shares of Series C Preferred Stock held by such holder in respect of a
Change of Control shall affect the rights of such holder under this Section (6)
in respect of any subsequent Change of Control.
c. If any holder of shares of Series C Preferred Stock exercises all
or any part of its right with respect to the event contemplated in clause (a)
above, or converts all or any lesser number of shares of Series C Preferred
Stock in anticipation of such event, but such event does not occur, such
conversion of shares of Series C Preferred Stock shall be rescinded and such
holder of shares of Series C Preferred Stock will be entitled to the same rights
and remedies as if such exercise had never occurred, including, without
limitation, return of any exercise price paid and the reissuance of its shares
of Series C Preferred Stock (subject to return to the Corporation of any
purchase price received) if the same form and to the same extent as prior to
such exercise or conversion.
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7. PUT RIGHT. a. If after June 5, 2002, there is no Liquid Secondary
Market (as defined in the Purchase Agreement), any holder of shares of Series C
Preferred Stock shall have the Put Right (as such term is defined in paragraph
5C-l of the Purchase Agreement) to require the Corporation to redeem at the Put
Option Closing (as such term is defined in paragraph 5D-l of the Purchase
Agreement), and the Corporation shall purchase, all or any lesser number of
shares of Series C Preferred Stock for a purchase price to be paid in accordance
with paragraph 5C-1 of the Purchase Agreement in an amount equal to the Fair
Market Value at the time of the Put Notice of the Common Stock issuable upon
conversion of those shares of Series C Preferred Stock being redeemed by the
Corporation.
b. To exercise its Put Right, any holder of shares of Series C
Preferred Stock shall deliver to the Corporation the Put Notice which shall (i)
refer specifically to this Section (7), (ii) state the number of shares of
Series C Preferred Stock held by such holder that the Corporation is required to
redeem, (iii) contain such holder's request that the Corporation determine the
Fair Market Value at the time of the Put Notice of the Common Stock into which
the shares of Series C Preferred Stock are convertible, (iv) indicate that the
Put Option Closing for such redemption shall take place on a date specified in
the notice, which date shall be a date occurring not earlier than 45 days nor
more than 60 days after the date on which the notice is delivered, (v) indicate
where the Put Option Closing shall take place and (vi) be delivered by certified
mail return receipt requested. The Corporation covenants that it will promptly
(and in any event no later than 25 days after receipt of the Put Notice)
determine, and notify in writing the holders of shares of Series C Preferred
Stock who have delivered a Put Notice of the Fair Market Value at the time of
the Put Notice of the Common Stock, provided, however, that in the event that
any holder of shares of Series C Preferred Stock exercises its right to refer
the question of valuation to an investment banking firm, the Put Option Closing
shall take place on the later of (1) the date specified in the Put Notice and
(2) 5 business days after the determination of the Fair Market Value has been
completed. At the Put Option Closing, the Corporation shall pay the redemption
price for the securities being purchased against delivery of the securities
being redeemed.
8. STATUS OF CONVERTED STOCK. In the event any shares of Series C
Preferred Stock are converted pursuant to Section (4), the shares of Series C
Preferred Stock so converted shall be canceled, retired and eliminated and shall
not be reissued by the Corporation. The Certificate of Incorporation of the
Corporation shall be appropriately amended to effect the corresponding reduction
in the Corporation's authorized capital stock.
9. OPTIONAL REDEMPTION OF SERIES C PREFERRED STOCK. a. Subject to the
rights of holders of shares of Series C Preferred Stock to convert such shares
pursuant to the provisions hereof and
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the rights of holders of shares of Series C Preferred Stock to require the
Corporation to purchase such shares pursuant to Section (6) or (7), the Series C
Preferred Stock shall be subject to redemption at the Corporation's option, in
whole but not in part, at any time on or after a Qualifying Public Offering of
Common Stock.
b. The redemption price for the Series C Preferred Stock shall be
payable immediately upon redemption, by certified or by bank cashier's check,
and shall be in an amount equal to $.001 (subject to appropriate adjustments for
stock splits, combinations, recapitalizations, stock dividends and similar
events) multiplied by the number of shares of Common Stock issuable upon
conversion of the shares of Series C Preferred Stock so redeemed.
c. The Corporation shall give each holder of Series C Preferred
Stock written notice of the redemption pursuant to Section (9)(a) not less than
60 days prior to the redemption date, specifying such redemption date, that all
of the shares of Series C Preferred Stock are to be redeemed on such date and
that such redemption is to be made pursuant to Section (9)(a). Such notice shall
be accompanied by an Officer's Certificate stating that the applicable
conditions set forth in Section (9) have been fulfilled. Notice of redemption
having been given as aforesaid the redemption amount due in respect of all of
the shares of Series C Preferred Stock and as calculated in Section (9)(b),
shall become due and payable on such redemption date unless the holder of such
shares of Series C Preferred Stock (i) shall have converted such shares of
Series C Preferred Stock, in whole or in part, prior to such redemption date
pursuant to the terms hereof, (ii) shall have required the Corporation to redeem
such shares of Series C Preferred Stock pursuant to Section (6) or exercised
their Put Right pursuant to Section (7), or (iii) unless the filing by the
Corporation of a registration statement under the Securities Act relating to the
Common Stock issuable upon conversion of the Series C Preferred Stock shall have
been requested by a holder thereof (either before or after receipt of such
notice) pursuant to the Registration Rights Agreement, in which case the
redemption shall be effected 30 days after the declaration of effectiveness of
such registration statement by the Commission. Should the Series C Preferred
Stock not be redeemed on such redemption date due to the Corporation's failure
to perform its obligations under this Section (9), such redemption may be
effected only after compliance with the provisions of this Section (9) from and
after such redemption date.
10. AMENDMENTS. Notwithstanding anything contained herein to the contrary,
any amendment to the rights, preferences, and limitations of the Series C
Preferred Stock shall, in addition to any approvals required by applicable law,
require the approval of the holders of record of Shares representing 66 2/3% of
the issued and outstanding Shares of Series C Preferred Stock.
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IN WITNESS WHEREOF, Castle Dental Centers, Inc. has caused this
certificate to be signed and attested this 16th day of June, 1997.
CASTLE DENTAL CENTERS, INC.
By: /s/ JACK H. CASTLE, JR.
Jack H. Castle, Jr.
Chairman and Chief Executive Officer
Attest:
/s/ JOHN M. SLACK
John M. Slack
Secretary
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EXHIBIT 4.12
AMENDED AND RESTATED SECURITYHOLDERS AGREEMENT
AMENDED AND RESTATED SECURITYHOLDERS AGREEMENT, dated as of June 16,
1997 among CASTLE DENTAL CENTERS, INC. a Delaware corporation (the "Company"),
Jack H. Castle, D.D.S., P.C, a Texas professional corporation ("New PC"), the
investors listed on Exhibit I.A hereto (the "Investors"), the shareholders of
the Company listed on Exhibit I.B hereto (the "Shareholders") and the
shareholders of New PC listed on Exhibit I.C hereto (the "PC Holders").
RECITALS
WHEREAS, the Company, New PC and JHCDDS, Inc., a Texas professional
corporation ("Old PC") are parties to a Securities Purchase Agreement with the
Investors, dated as of December 18, 1995, as amended by Amendment No. 1 thereto,
dated as of the date hereof (as amended, the "Securities Purchase Agreement"),
authorizing the issuance and delivery of (i) $7,500,000 of 12% Senior
Subordinated Notes (the "Original Notes"), (ii) 1,244,737 shares of the
Company's Series A Convertible Preferred Stock, par value $.001 per share (the
"Series A Convertible Preferred Stock"), (iii) $2,000,000 of 12% New Senior
Subordinated Notes (the "New Notes" and, collectively with the Original Notes,
the "Notes") and (iv) 485,382 shares of Series C Convertible Preferred Stock,
par value $.001 per share (the "Series C Convertible Preferred Stock" and,
collectively with the Series A Convertible Preferred Stock, the "Convertible
Preferred Stock").
WHEREAS, the parties hereto are parties to Securityholders
Agreement, dated as of December 18, 1995 (the "Original Agreement").
WHEREAS, it is a condition to the execution of Amendment No. 1 to
the Securities Purchase Agreement that the parties hereto enter into this
Agreement for the purpose of amending and restating the original Agreement in
its entirety.
NOW, THEREFORE, in consideration of the foregoing premises and
mutual covenants and agreements contained herein, the parties hereto agree to
amend and restate the Original Agreement in its entirety as follows:
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS. Capitalized terms used but not defined
herein shall have the meaning ascribed to them in the Securities Purchase
Agreement. As used herein, the following terms shall have the following
meanings:
"AFFILIATE" shall mean, with respect to any person or entity, (i)
any other person or entity which, directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with such
person or entity, and (ii) in the case of any individual, the spouse, lineal
descendants or ancestors of such individual, any trust for the benefit of such
individual or over which such individual may exercise a power of appointment and
any trust entirely for the benefit of such spouse and/or lineal descendants
and/or such individual. The term "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a person or entity, whether by virtue of the ownership of voting
stock, by contract or otherwise.
"COMPANY" shall have the meaning set forth in the preamble.
"CONVERTIBLE PREFERRED STOCK" shall have the meaning set forth in
the first recital.
"INITIATING SHAREHOLDER" shall have the meaning specified in Section
2.4(a).
"INVESTORS" shall have the meaning set forth in the preamble.
"NOTES" shall have the meaning set forth in the first recital.
"OWNED" as to any Shares or PC Shares, as applicable, shall mean all
Shares as to which any Person would be deemed to be a beneficial owner or PC
Shares, as applicable, within the meaning of Rule 13d-3 of the Exchange Act.
"PC SHARES" shall mean any shares of Capital Stock of New PC.
"PARTICIPATING OFFEREE" shall have the meaning specified in Section
2.4(a).
"PARTICIPATION NOTICE" shall have the meaning specified in Section
2.4(a).
"PARTICIPATION SECURITIES" shall have the meaning specified in
Section 2.4(a).
"PARTICIPATION TRANSFER" shall have the meaning specified in Section
2.4(a).
"SECURITIES" shall mean the Bridge Notes, Notes and the Convertible
Preferred Stock.
"SECURITIES PURCHASE AGREEMENT" shall have the meaning set forth in
the first recital.
"SERIES A CONVERTIBLE PREFERRED STOCK" shall have the meaning set
forth in the first recital.
"SERIES C CONVERTIBLE PREFERRED STOCK" shall have the meaning set
forth in the first recital.
"SHAREHOLDERS" shall have the meaning set forth in the preamble.
"SHARES" shall mean the shares of Common Stock and any other shares
of capital stock of the Company.
"THIRD PARTY" or "THIRD PARTIES" shall mean any person, firm,
corporation or other entity, but, as to any Shareholder, shall not include the
estate of such Shareholder.
"TRANSFER" shall have the meaning set forth in Section 2.1 hereof.
"TRANSFEREE" shall mean any Person acquiring Shares from a
Shareholder and any subsequent transferee of any such Person herein referred to
as a "Transferee" of such Person.
ARTICLE II
RESTRICTIONS ON TRANSFER
Section 2.1 TRANSFER OF SHARES AND PC SHARES. During the term of
this Agreement, no Shareholder or PC Holder shall, directly or indirectly,
offer, sell, assign, transfer, grant a participation interest in, pledge,
encumber or otherwise dispose of, or place in trust (voting or otherwise) (each
such transaction being herein called a "Transfer") to any Third Party any Shares
or PC Shares, as applicable, Owned by such Shareholder or PC Holder unless such
transfer is in accordance with the provisions of this Agreement.
Section 2.2 AGREEMENT TO BE BOUND. No Transfer of Shares or PC
Shares, as applicable, by a Shareholder or PC Holder shall be effective unless
(i) the certificates representing such Shares or PC Shares, as applicable,
issued to the Transferee shall bear the legend provided in Section 2.3 and (ii)
the Transferee (if not already a party hereto) shall have executed and delivered
to each Investor and Shareholder (or PC Holder, as applicable), as a condition
precedent to such Transfer, an instrument or instruments reasonably satisfactory
to such parties confirming that the Transferee agrees to be bound by the terms
of this Agreement in the same manner as such Transferee's transferor, except as
otherwise provided in this Agreement.
Section 2.3 RESTRICTIVE LEGEND. Each certificate evidencing Shares
Owned by each Shareholder or PC Shares Owned by each PC Holder shall be
conspicuously stamped or otherwise imprinted with a legend in substantially the
following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO RESTRICTIONS ON TRANSFER AND CAN BE TRANSFERRED ONLY PURSUANT TO
THE TERMS OF AN AMENDED AND RESTATED SECURITYHOLDERS AGREEMENT DATED
AS OF JUNE 16, 1997 AMONG THE COMPANY AND CERTAIN HOLDERS OF ITS
SECURITIES. A COPY OF SUCH AGREEMENT WILL BE FURNISHED WITHOUT
CHARGE BY THE COMPANY TO THE HOLDER HEREOF UPON WRITTEN REQUEST.
Section 2.4 PARTICIPATION RIGHTS. Except as set forth in Section
2.5, no Shareholder may Transfer any Shares Owned by such Shareholder as long as
any Notes remain outstanding. Thereafter, any Shareholder hereto may Transfer
any shares of Common Stock Owned by such Shareholder if the following terms and
conditions have been satisfied:
(a) Any Shareholder hereto (the "Initiating Shareholder") shall give
notice of any intended Transfer (each, a "Participation Transfer") to each
Investor (each, a "Participating Offeree"). Such notice (the "Participation
Notice") shall set forth the terms and conditions of such proposed Participation
Transfer, including the name of the prospective transferee, the number of Shares
proposed to be Transferred (the "Participation Securities"), the purchase price
per share proposed to be paid therefor, the payment terms and type of
Participation Transfer to be effectuated, and any other material terms and
conditions of such proposed Participation Transfer. Within 20 days following the
delivery of the Participation Notice by the Initiating Shareholder, each
Participating Offeree shall have the right, but not the obligation, to
participate in such Participation Transfer by Transferring (up to the number of
shares of Common Stock Owned by such Participating Offeree), that number of
shares equal to the product obtained by multiplying (i) the total number of
shares of Common Stock proposed to be Transferred in the Participation Transfer
times (ii) a fraction, the numerator of which shall be equal to the aggregate
number of shares of Common Stock Owned by such Participating Offeree (or
issuable upon conversion in full of any Convertible Preferred Stock held
thereby) immediately prior to the Participation Transfer and the denominator of
which is equal to the sum of (x) the aggregate number of shares of Common Stock
Owned by the Initiating Shareholder immediately prior to the Participation
Transfer plus (y) the aggregate number of shares of Common Stock Owned by all
other Participating Offerees (or issuable upon conversion in full of any
Convertible Preferred Stock held thereby) immediately prior to the Participation
Transfer and (z) the aggregate number of shares of Common Stock comprising the
numerator. In the event that a Participating Offeree elects not to participate
in the Participation Transfer, then the other Participating Offerees may sell
additional shares PRO RATA to the extent of such Participating Offeree's
non-participation. Any such Participation Transfers shall be on the same terms
and conditions as the proposed Participation Transfer by the Initiating
Shareholder.
(b) The closing of any proposed Participating Transfer in respect of
which a Participation Notice has been delivered shall occur not earlier than 30
days nor more than 90 days after the date the last Participation Notice has been
given. The closing shall be held at 10:00 a.m., local time, on the date of
closing at the principal office of the Company, or at such other time or place
as the parties to such transaction mutually agree. At the closing, the
Initiating Shareholder, together with all Participating Offerees electing to
transfer shares of Common Stock, shall deliver to the proposed Transferee (i)
certificates evidencing the shares of Common Stock to be transferred pursuant
thereto, free and clear of any lien, claim or encumbrance and (ii) such other
documents, including, without limitation, executed stock powers and evidence of
ownership and authority, as the Transferees shall reasonably request, and shall
receive in exchange therefor the consideration to be paid or delivered by the
proposed Transferee in respect of such shares as described in the Participation
Notice.
(c) Notwithstanding anything contained in this Section 2.4, the
Transfers permitted by this Section 2.4 shall not include pledges or
encumbrances of Shares.
Section 2.5 PERMITTED TRANSFERS. Notwithstanding any provision in
this Article II to the contrary, any individual Shareholder or PC Holder may
Transfer, without compliance with the requirements of Section 2.4, Shares or PC
Shares to (a) the PC Stock Option Agreement or any successor agreement and (b)to
the immediate family members (including grandchildren) or the estate of any such
Shareholder or PC Holder (including, without limitation, any Transfer by such
Shareholder or PC Holder to or among any trust, custodial or other similar
accounts or funds in which such Shareholder or PC Holder or other member of his
immediate family serves as trustee, custodian or a similar fiduciary capacity)
pursuant to a bona fide gift, in each instance, subject always to the terms and
provisions of this Agreement. Any such Transferee shall receive and hold the
Shares so transferred subject to the terms and provisions of this Agreement
(including the restrictions on Transfer in this Article II) and shall be deemed
a Shareholder or PC Holder, as applicable, for purposes hereof.
Section 2.6 IMPROPER TRANSFER. Any attempt to Transfer any Shares or
PC Shares not in compliance with this Agreement shall be null and void and
neither the Company nor New PC, as the case may be, nor any transfer agent shall
give any effect in the Company's or New PC's stock records to such attempted
Transfer.
Section 2.7 ADJUSTMENT OF TIME PERIODS. The closings referred to in
Sections 2.4(b) shall be extended for such amount of time as is necessary for
expiration of all regulatory holding periods and to obtain any governmental and
regulatory consents and approvals necessary in respect of the purchase or sale
of Shares to take place at such closing.
ARTICLE III
MISCELLANEOUS
Section 3.1 BOARD OF DIRECTORS, POLICY BOARD. (a) Subject to the
rights of the holders of the Series C Convertible Preferred Stock to elect a
majority of the Board of Directors of the Company under the circumstances set
forth in the Certificate of Designation, as long as (i) any of the Notes are
outstanding or (ii) the Investors beneficially own at least 4.4 percent of the
Fully Diluted Outstanding Shares, (x) the Company and the Shareholders shall
take all action within their respective power, including, but not limited to,
the voting of capital stock of the Company, required to cause the Board of
Directors of the Company to at all times consist of at least 4 and no more than
7 members, one of whom shall be designated by the Investors (the "Designee") and
(y) New PC and the PC Holders shall take all action within their respective
power, including, but not limited to, the voting of capital stock of New PC,
required to cause the Policy Board (as defined in the Management Agreement) of
New PC to at all times consist of at least 4 and no more than 7 members, one of
whom shall be designated by the Investors (the "PC Designee"). Each of the
Shareholders and the Company agree to vote any of their Shares which are
outstanding at all meetings of stockholders of the Company (or any written
consents in lieu thereof) in which directors are elected in favor of the
Designee. Each of the PC Holders and New PC agree to vote any of their PC Shares
which are outstanding at all meetings of stockholders of New PC (or any written
consents in lieu thereof) in which members of the Policy Board are elected in
favor of the PC Designee.
(b) In the event that the Designee or PC Designee, as applicable,
(the "Withdrawing Member"), designated in the manner set forth in Section 3.1(a)
above is unable to serve, or once having commenced to serve, is removed or
withdraws from the Board of Directors of the Company or the Policy Board of New
PC, as applicable, such Withdrawing Member's replacement (the "Substitute
Member") on the Board of Directors of the Company or the Policy Board of New PC,
as applicable, will be designated by the Investors. The Company and the
Shareholders agree to take all action within their respective power, including,
but not limited to, the voting of outstanding capital stock of the Company or
New PC, as applicable, to cause the election of such Substitute Member as soon
as practicable following his designation.
(c) In the event the Investors entitled to designate a Director or
member of the Policy Board pursuant to this Agreement cease to be so entitled,
the vacancy resulting therefrom shall be filled by the remaining directors or
members of the Policy Board or by the stockholders in the manner provided by
applicable law or the number of directors constituting the Board or members of
the Policy Board shall be reduced. In the event the Investors entitled to
designate a Director or member of the Policy Board pursuant to this Agreement
choose not to designate a Director or member of the Policy Board, such
directorship or membership shall remain vacant.
Section 3.2 TERMINATION OF AGREEMENT. This Agreement shall terminate
as follows:
(i) upon the agreement of the Company, New PC, the
Shareholders, the PC Holders and the Investors; or
(ii) on such date as there are no longer any Notes or
Convertible Preferred Stock (or any securities issued upon
conversion of the Convertible Preferred Stock) outstanding and all
shares of Common Stock which may be issued upon conversion of the
Convertible Preferred Stock shall be free of any restrictions on
transfer, including, but not limited to, any restrictions pursuant
to Rule 144 of the Securities Act, as such rule may be amended from
time to time.
Section 3.3 REPRESENTATIONS. Each party hereto represents that (i)
the execution and delivery of this Agreement and the performance of such party's
obligations hereunder will not violate or conflict with any material agreement
to which such party is a party or any law, rule, license, regulation, judgment,
order, ruling or decree governing or affecting such party; (ii) no consents or
filings with any governmental authority or any other person are required to be
obtained or made in connection with such party's execution, delivery and
performance of this Agreement; and (iii) this Agreement constitutes the valid
and binding obligation of such party, enforceable against such party in
accordance with its terms.
Section 3.4 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
SHAREHOLDERS AND PC HOLDERS. Each Shareholder and PC Holder represents and
warrants to the Investors that all the shareholders of the Company and/or New
PC, as the case may be, who are Affiliates of such Shareholder or PC Holder, as
the case may be, are parties to this Agreement. Each Shareholder and PC Holder
represents and warrants that this Agreement does not violate any material
agreement, instrument, order, writ, judgment or decree to which it is a party,
or by which any of its properties or assets are bound. Each Shareholder and PC
Holder covenants that if after the date hereof any person or entity who is or
becomes a shareholder of the Company or New PC is or becomes an Affiliate of any
Shareholder or PC Holder, then such Shareholder or PC Holder shall cause such
person or entity to become a party to this Agreement.
Section 3.5 SUCCESSORS AND ASSIGNS. All agreements contained herein
by or on behalf of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto whether so expressed or
not, including, without limitation, any Person who acquires any Securities (or
any securities issued in exchange for any of the Notes or upon conversion of any
Convertible Preferred Stock) from any party.
Section 3.6 NOTICES. All communications provided for hereunder shall
be sent by first class mail or overnight courier and, if to any Investor,
addressed to the Investor in the manner in which its address appears on Exhibit
I.A hereto, with a copy to William J. Grant, Jr., Esq., at Willkie Farr &
Gallagher, 153 East 53rd Street, New York, New York 10022; if to any
Shareholder, addressed to the Shareholder at the address set forth below such
Shareholder's name on Exhibit I.B hereto; if to any PC Holder, addressed to the
PC Holder at the address set forth below such PC Holder's name on Exhibit I.C
hereto; and if to the Company, addressed to it at 1360 Post Oak Blvd., Suite
1300, Houston, Texas 77056, Attention: Office of the President, or to such other
address with respect to any party as such party shall notify the other in
writing.
Section 3.7 DESCRIPTIVE HEADINGS. The descriptive headings of the
several paragraphs of this Agreement are inserted for convenience only and do
not constitute a part of this Agreement.
Section 3.8 GOVERNING LAW. The corporate law of the State of
Delaware will govern all issues concerning the relative rights of the Company,
on the one hand, and the Shareholders and the Investors, on the other hand. The
corporate law of the State of Texas will govern all issues concerning the
relative rights of New PC, on the one hand, and the PC Holders and Investors, on
the other hand. All other questions concerning the construction, validity and
interpretation of this Agreement will be governed by, and construed and enforced
in accordance with, the law of the State of New York without regard to the
conflicts of laws principles thereof.
Section 3.9 REMEDIES. In case any one or more of the provisions set
forth in this Agreement shall have been breached by the Company or any
Shareholder or Investor, the Company or the Shareholders or Investors (or any of
them), as applicable, may proceed to protect and enforce its or their rights
either by suit in equity and/or by action at law, including, but not limited to,
an action for damages as a result of any such breach and/or an action for
specific performance of any such provision contained in this Agreement. The
Company, or any Investor acting pursuant to this Section 3.9 shall be
indemnified against all liability, loss or damage, together with all reasonable
costs and expenses related thereto (including reasonable legal and accounting
fees and expenses) in accordance with paragraph 12B of the Securities Purchase
Agreement.
Section 3.10 ENTIRE AGREEMENT. This Agreement, the Securities
Purchase Agreement and the Registration Rights Agreement and the other writings
referred to herein or delivered pursuant hereto contain the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior and contemporaneous arrangements or understandings with respect thereto.
Section 3.11 SEVERABILITY. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
Section 3.12 AMENDMENTS. This Agreement may not be changed orally,
but only by an agreement in writing signed by the party against whom enforcement
of any waiver, change, modification or discharge is sought.
Section 3.13 COUNTERPARTS. This Agreement may be executed 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, and it shall
not be necessary in making proof of this Agreement to produce or account for
more than one such counterpart.
<PAGE>
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:____________________________
Name:
Title:
<PAGE>
SHAREHOLDERS:
---------------------------------
JACK H. CASTLE, JR., AS TRUSTEE
OF THE CASTLE 1995 GIFT TRUST
f/b/o JACK H. CASTLE, JR.
CASTLE INTERESTS, LTD.
By:
Jack H. Castle, Jr.
General Partner
By:
Jack H. Castle, D.D.S.
General Partner
By:
Loretta M. Castle
General Partner
-----------------------------------
LISA G. CASTLE DONNELL, AS TRUSTEE
OF THE CASTLE 1995 GIFT TRUST
f/b/o LISA G. CASTLE DONNELL
-----------------------------------
JACK H. CASTLE, D.D.S.
-----------------------------------
LORETTA M. CASTLE
GULFSTAR INVESTMENTS, LTD.
By:
Name:
Title:
<PAGE>
INVESTORS:
DELAWARE STATE EMPLOYEES'
RETIREMENT FUND
By: Pecks Management Partners Ltd.
Its Investment Advisor
By:
Robert J. Cresci
Managing Director
DECLARATION OF TRUST FOR DEFINED BENEFIT
PLAN OF ICI AMERICAN HOLDING INC.
By: Pecks Management Partners Ltd.
Its Investment Advisor
By:
Robert J. Cresci
Managing Director
DECLARATION OF TRUST FOR DEFINED BENEFIT
PLAN OF ZENECA HOLDING INC.
By: Pecks Management Partners Ltd.
Its Investment Advisor
By:
Robert J. Cresci
Managing Director
<PAGE>
EXHIBIT I.A (INVESTORS)
DELAWARE STATE EMPLOYEES'
RETIREMENT FUND
c/o Pecks Management Partners Ltd.
One Rockefeller Plaza
New York, NY 10020
DECLARATION OF TRUST FOR
DEFINED BENEFIT PLAN OF ICI
AMERICAN HOLDINGS INC.
c/o Pecks Management Partners Ltd.
One Rockefeller Plaza
New York, NY 10020
DECLARATION OF TRUST FOR
DEFINED BENEFIT PLAN OF
ZENECA HOLDINGS INC.
c/o Pecks Management Partners Ltd.
One Rockefeller Plaza
New York, NY 10020
<PAGE>
EXHIBIT I.B (SHAREHOLDERS)
NAME AND ADDRESSES SHARES OWNED OF RECORD
Jack H. Castle, Jr., Trustee 1,428,000
Castle Interests, Ltd. 1,028,000
Lisa G. Castle Donnell, Trustee 116,000
Jack H. Castle 714,000
Loretta Castle 714,000
<PAGE>
EXHIBIT I.C (PC HOLDERS)
NAME AND ADDRESSES SHARES OWNED OF RECORD
Jack H. Castle, D.D.S. 1,000 shares
EXHIBIT 4.13
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT, dated as of June
16, 1997, among CASTLE DENTAL CENTERS, INC., a Delaware corporation (the
"Company"), the purchasers whose names appear under the heading "Purchasers" on
the signature page hereof (the "Purchasers") and the shareholders and investors
whose names appear under the heading "Inside Shareholders" on the signature
pages hereof (the "Inside Shareholders").
WHEREAS, the parties hereto are parties to a Registration Rights
Agreement, dated as of December 18, 1995 (the "Original Agreement"); and
WHEREAS, the parties to the Original Agreement desire to amend and
restate such Original Agreement in its entirety;
NOW, THEREFORE, the parties hereto, based on the premises and
agreements contained herein, hereby agree to amend and restate the Original
Agreement in its entirety as follows:
1. BACKGROUND. The Company is a party to a securities purchase
agreement, dated as of December 18, 1995, as amended by Amendment No. 1 thereto,
dated as of the date hereof, entered into with the Purchasers (as amended, the
"Securities Purchase Agreement"), pursuant to which the Company issued to the
Purchasers (i) $7,500,000 of 12% Senior Subordinated Notes (the "Notes"), (ii)
1,244,737 shares of Series A Convertible Preferred Stock, par value $.001 per
share (the "Series A Convertible Preferred Stock"), (iii) $2,000,000 of 12% New
Senior Subordinated Notes (the "New Notes") and (iv) 485,382 shares of Series C
Convertible Preferred Stock, par value $.001 per share (the "Series C
Convertible Preferred Stock" and, collectively with the Series A Convertible
Preferred Stock, the "Convertible Preferred Stock"). In addition, the Company
issued and delivered to GulfStar Investments, Ltd. a warrant to purchase 113,158
shares of the Company's Common Stock (the "Gulfstar Warrant").
In connection with the Securities Purchase Agreement, the Company
entered into this Amended and Restated Registration Rights Agreement, to which
the Purchasers who received securities under the Securities Purchase Agreement
became parties.
2. REGISTRATION UNDER SECURITIES ACT, ETC.
2.1. REGISTRATION OF REGISTRABLE SECURITIES ON REQUEST. (a) REQUEST.
Up to three times following the Company's initial Public Offering (as defined in
the Securities Purchase Agreement), the holder or holders of in excess of 50% of
the Registrable Securities shall have the right to request in writing that the
Company effect an underwritten registration under the Securities Act of 1933, as
amended (the "Securities Act") of all or part of such holders' Registrable
Securities; PROVIDED that the aggregate Fair Market Value (as defined in the
Securities Purchase Agreement) of the Registrable Securities requested to be so
registered is at least $4,000,000. The Company will promptly give written notice
of such requested registration to all other holders of Registrable Securities
and all holders of Registrable Inside Shareholder Securities, which holders
shall be entitled to include their Registrable Securities in such registration
subject to Sections 2.1(b) and 2.1(g). Thereupon the Company will use its best
efforts to effect the registrations under the Securities Act of:
(i) the Registrable Securities which the Company has been so
requested to register by such holders; and
(ii) subject to Sections 2.1(b) and 2.1(g), all other
Registrable Securities and Registrable Inside Shareholder Securities
which the Company has been requested to register by the holders
thereof by written request given to the Company within 30 days after
the giving of such written notice by the Company (which request
shall specify the intended method of disposition of such Registrable
Securities and Registrable Inside Shareholder Securities) all to the
extent requisite to permit the disposition of the Registrable
Securities and Registrable Inside Shareholder Securities so to be
registered.
(b) REGISTRATION OF OTHER SECURITIES. Whenever the Company shall
effect a registration pursuant to this Section 2.1, no securities other than
Registrable Securities shall be included among the securities covered by such
registration unless (i) the managing underwriter of such offering shall have
advised each holder of Registrable Securities to be covered by such registration
in writing that the inclusion of such other securities would not in the
underwriter's reasonable judgment adversely affect such offering or (ii) the
holders of a majority of Registrable Securities to be covered by such
registration shall have consented in writing to the inclusion of such other
securities. The Company will not grant to any person at any time on or after the
date hereof the right to be included among the securities registered pursuant to
this Section 2.1 that is inconsistent with the provisions of this Section
2.1(b); PROVIDED, HOWEVER, that subject to Section 2.1(g), Registrable Inside
Shareholder Securities may be included in a registration effected pursuant to
this Section 2.1.
(c) REGISTRATION STATEMENT FORM. Registrations under this Section
2.1 shall be on such appropriate registration form or prospectus of the
Commission (i) as shall be selected by the Company and as shall be reasonably
acceptable to the holders of more than 50% (by number of shares) of the
Registrable Securities so to be registered and (ii) as shall permit the
disposition of such Registrable Securities in accordance with the intended
method or methods of disposition specified in their request for such
registration. The Company agrees to include in any such registration statement
all information which holders of Registrable Securities being registered shall
reasonably request.
(d) EXPENSES. The Company will pay all Registration Expenses in
connection with the registration requests made pursuant to this Section 2.1.
(e) EFFECTIVE REGISTRATION STATEMENT. A registration requested
pursuant to this Section 2.1 shall not be deemed to have been effected and shall
not count as a requested registration pursuant to Section 2.1 (a) hereof (i)
unless a registration statement with respect thereto has become effective, (ii)
unless a registration statement has been filed with the Commission and prior to
its becoming effective a majority of holders of the Registrable Securities to be
registered has decided to terminate the registration process, (iii) if after it
has become effective, such registration is interfered with by any stop order,
injunction or other order or requirement of the Commission or other governmental
agency or court for any reason not the fault of a holder of Registrable
Securities and the Registrable Securities covered thereby have not been sold, or
(iv) if the conditions to closing specified in the selling agreement or
underwriting agreement entered into in connection with such registration are not
satisfied or waived by the parties thereto other than a holder of Registrable
Securities.
(f) UNDERWRITERS. Any registration effected pursuant to this Section
2.1 shall at the election of the holders of at least 50% of the Registrable
Securities be an underwritten public offering on a firm commitment basis or a
best efforts basis. The managing underwriter or underwriters thereof shall be
selected by the Company and such underwriter as well as the price, terms and
provisions of the offering shall be subject to the approval of the Company and
the holders of more than 50% (by number of shares) of the Registrable Securities
to be so registered.
(g) APPORTIONMENT IN REGISTRATIONS REQUESTED. If, in connection with
a registration requested pursuant to this Section 2.1, the managing underwriter
shall advise the Company in writing (with a copy to each holder of Registrable
Securities and Registrable Inside Shareholder Securities requesting
registration) that, in its opinion, the number of securities requested to be
included in such registration exceeds the number which can be sold in such
offering within a price range acceptable to the holders of more than 50% (by
number of shares) of the Registrable Securities requested to be included in such
registration, the number of securities that are otherwise entitled to be
included in such registration shall be allocated in the following manner: (i)
all Registrable Inside Shareholder Securities shall be reduced, on a pro rata
basis (based on the number of securities requested to be included in such
registration) and (ii) if, after the exclusion of such securities, further
reductions are still required, the Registrable Securities requested to be
included in such registration shall be reduced pro rata among the holders
thereof requesting such registration on the basis of the percentage of the
Registrable Securities of the Company held by the holders of Registrable
Securities which have requested that such Registrable Securities be included. In
connection with any registration as to which the provisions of this clause (g)
apply, no securities other than Registrable Securities or Registrable Inside
Shareholder Securities shall be covered by such registration and if the pro
ration as aforesaid results in the exclusion of in excess of 15% of the
Registrable Securities originally sought to be registered, the request shall not
be counted for purposes of determining the number of registrations pursuant to
Section 2.1 hereof.
2.2. REGISTRATIONS ON FORM S-3. Following its initial Public
Offering, the Company shall use its best efforts to qualify for registration on
Form S-3 promulgated under the Securities Act or any successor form thereto
("Form S-3") for secondary sales. Anything contained in Section 2.1 to the
contrary notwithstanding, at such time as the Company shall have qualified for
the use of Form S-3, the holder or holders of in excess of 20% of the
Registrable Securities shall have the right to request in writing an unlimited
number of registrations on Form S-3 of Registrable Securities, which request or
requests shall (i) specify the number of Registrable Securities intended to be
sold or disposed of and the holders thereof, (ii) state the intended method of
disposition of such Registrable Securities and (iii) relate to Registrable
Securities having an anticipated aggregate gross offering price (before
underwriting discounts and commissions) of at least $500,000. A requested
registration on Form S-3 form in compliance with this Section 2.2 shall not
count as a registration statement initiated pursuant to Section 2.1 but shall
otherwise be treated as a registration initiated pursuant to, and shall, except
as otherwise expressly provided in this Section 2.2, be subject to Section 2.1.
2.3. "PIGGYBACK" REGISTRATIONS. (a) RIGHT TO INCLUDE REGISTRABLE
SECURITIES AND REGISTRABLE INSIDE SHAREHOLDER SECURITIES. If the Company at any
time prior to an initial Public Offering proposes to register any of its equity
securities, or at any time thereafter proposes to register any of its securities
(including, without limitation, debt or equity securities), 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, and other than pursuant to Section 2.1 or Section 2.2), whether or
not for sale for its own account, it will at each such time give prompt written
notice to all holders of Registrable Securities and Registrable Inside
Shareholder Securities of its intention to do so and of such holders' rights
under this Section 2.3. 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 Registrable Securities and Registrable Inside
Shareholder Securities which the Company has been so requested to register by
the holders thereof, to the extent requisite to permit the disposition of the
Registrable Securities and Registrable Inside Shareholder Securities so to be
registered, PROVIDED that if, at any time after giving written notice of its
intention to register any securities 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 such
securities, the Company may, at its election, give written notice of such
determination to each holder of Registrable Securities and Registrable Inside
Shareholder Securities and, thereupon, (i) in the case of a determination not to
register, shall be relieved of its obligation to register any Registrable
Securities or Registrable Inside Shareholder Securities in connection with such
registration (but not from its obligation to pay the Registration Expenses in
connection therewith), without prejudice, however, to the rights of any holder
or holders of Registrable Securities entitled to do so to request that such
registration be effected as a registration under Section 2.1 or Section 2.2, and
(ii) in the case of a determination to delay registering, shall be permitted to
delay registering any Registrable Securities or Registrable Inside Shareholder
Securities, for the same period as the delay in registering such other
securities. No registration effected under this Section 2.3 shall relieve the
Company of its obligation to effect any registration upon request under Section
2.1 or Section 2.2. The Company will pay all Registration Expenses in connection
with each registration of Registrable Securities and Registrable Inside
Shareholder Securities requested pursuant to this Section 2.3.
(b) APPORTIONMENT IN "PIGGYBACK" REGISTRATIONS. If (i) a
registration pursuant to this Section 2.3 involves an underwritten offering of
the securities being registered, whether or not for sale for the account of the
Company, to be distributed (on a firm commitment basis) by or through one or
more underwriters of recognized national or regional standing under underwriting
terms appropriate for such a transaction, and (ii) the managing underwriter of
such underwritten offering shall inform the Company and the holders of the
Registrable Securities requesting such registration by letter of its belief that
the number of securities requested to be included in such registration 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
securities 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 the number of Registrable Securities, Registrable Inside Shareholder
Securities and other securities of the Company so proposed to be sold and so
requested to be included in such registration (pro rata on the basis of the
percentage of the securities of the Company held by the holders of such
Registrable Securities, Registrable Inside Shareholder Securities and such other
securities) to the extent necessary to reduce the number of securities to be
included in the registration to the level recommended by the managing
underwriter. Notwithstanding the foregoing, if the registration referred to
herein involves an underwritten offering of securities being registered for sale
by holders of securities other than Registrable Securities (pursuant to the
exercise by such holders of demand registration rights or otherwise), the
Company will include in such registration the securities proposed by such
holders to be sold and may decrease the number of Registrable Securities,
Registrable Inside Shareholder Securities and such other securities exercising
"piggyback" registration rights proposed to be sold in such registration (pro
rata on the basis of the percentage of the securities sought to be registered
held by such holders of Registrable Securities and such other securities
exercising "piggyback" registration rights) proposed to be sold in such
registration to the extent necessary to reduce the number of securities to be
included in the registration to the level recommended by the managing
underwriter. In such case, no securities shall be offered for sale by the
Company.
2.4. REGISTRATION PROCEDURES. If and whenever the Company is
required to use its best efforts to effect the registration of any Registrable
Securities or Registrable Inside Shareholder Securities under the Securities Act
as provided in Sections 2.1, 2.2 and 2.3, the Company will as expeditiously as
possible:
(i) prepare and (as soon thereafter as possible or in any
event no later than 45 days after the end of the period within which
requests for registration may be given to the Company) 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 which are
not Registrable Securities or Registrable Inside Shareholder
Securities (and, under the circumstances specified in Section
2.3(a), its securities which are Registrable Securities or
Registrable Inside Shareholder 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 6 months, whichever
period is shorter;
(iii) furnish to each seller of Registrable Securities or
Registrable Inside Shareholder 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
Registrable Securities and other 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.
(v) use its best efforts to cause all Registrable Securities
and Registrable Inside Shareholder 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 Registrable Securities or Registrable Inside Shareholder
Securities;
(vi) furnish to each seller of Registrable Securities or
Registrable Inside Shareholder Securities a signed counterpart,
addressed to such seller, except as provided in (y) below (and the
underwriters, if any), of
(x) an opinion of counsel for the Company, dated the
effective date of such registration statement (and, if such
registration includes an underwritten public offering, dated
the date of the closing under the underwriting agreement),
reasonably satisfactory in form and substance to such seller
or, if such registration includes an underwritten public
offering, to such underwriter, and
(y) a "comfort" letter, dated the effective date of such
registration statement (and, if such registration includes an
underwritten public offering, 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, if any, 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
such holder (or the underwriters, if any) may reasonably
request;
(vii) notify each seller of Registrable Securities and
Registrable Inside Shareholder 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 purchasers 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;
(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
twelve months, but not more than eighteen 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 11(a) of the Securities Act, and, in the case
of a registration requested pursuant to Section 2.1 or 2.2 hereof,
will furnish to each such seller at least two business days prior to
the filing thereof a copy of any amendment or supplement to such
registration statement or prospectus and shall not file any thereof
to which any such seller shall have reasonably objected on the
grounds that such amendment or supplement does not comply in all
material respects with the requirements of the Securities Act or of
the rules or regulations thereunder;
(ix) provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities and Registrable Inside
Shareholder 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 Registrable Securities
and Registrable Inside Shareholder Securities covered by such
registration statement on any securities exchange on which any of
the Registrable Securities is then listed.
Notwithstanding the foregoing, the Company may defer its obligations
under Section 2.1 and, in the case of clause (ii) below only, Section 2.2, for a
period of no more than (i) 90 days in any 365-day period, if the Company's Board
of Directors determines in good faith based upon a written opinion of counsel
that filing such a registration statement would require a public disclosure by
the Company, which disclosure would interfere with a material transaction then
under consideration by the Company, PROVIDED that once such information has been
publicly disclosed, the Company shall promptly proceed to fulfill its
obligations under Section 2.1 and (ii) 180 days from the most recent effective
date of any registration statement of the Company filed under the Securities Act
and pursuant to Section 2.1 occurring prior to the request for registration made
pursuant to Section 2.1.
The Company may require each proposed seller of Registrable
Securities or Registrable Inside Shareholder Securities as to which any
registration is being effected to promptly furnish the Company, as a condition
precedent to including such holder's Registrable Securities or Registrable
Inside Shareholder 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 Registrable Securities and Registrable Inside
Shareholder Securities agrees by acquisition of such Registrable Securities or
Registrable Inside Shareholder 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 2.4, such holder will forthwith discontinue such holder's
disposition of Registrable Securities or Registrable Inside Shareholder
Securities pursuant to the registration statement relating to such Registrable
Securities until such holder's receipt of the copies of the supplemented or
amended prospectus contemplated by subdivision (vii) of this Section 2.4 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 Registrable Securities or
Registrable Inside Shareholder Securities current at the time of receipt of such
notice.
2.4. UNDERWRITTEN OFFERINGS. (a) REQUESTED UNDERWRITTEN OFFERINGS.
If requested by the underwriters for any offering by holders of Registrable
Securities pursuant to a registration requested under Section 2.1, the Company
will enter into an underwriting agreement with such underwriters for such
offering, such agreement to be satisfactory in substance and form to the
Company, to holders of more than 50% of the Registrable Securities included in
such registration and the underwriters and to contain such representations and
warranties by the Company and such other terms as are generally prevailing in
agreements of this type, including, without limitation, indemnities to the
effect and to the extent provided in Section 2.7. The holders of the Registrable
Securities and Registrable Inside Shareholder Securities will cooperate with the
Company in the negotiation of the underwriting agreement and will give
consideration to the reasonable requests of the Company regarding the form
thereof, PROVIDED that nothing herein contained shall diminish the foregoing
obligations of the Company. The holders of Registrable Securities or Registrable
Inside Shareholder Securities to be distributed by such underwriters shall be
parties to such underwriting agreement and may, at their option, require that
any or all of the representations and warranties by, and the other agreements on
the part of, the Company to and for the benefit of such underwriters shall also
be made to and for the benefit of such holders of Registrable Securities and
Registrable Inside Shareholder Securities and that any or all of the conditions
precedent to the obligations of such underwriters under such underwriting
agreement be conditions precedent to the obligations of such holders of
Registrable Securities and Registrable Inside Shareholder Securities. Other than
as required under Section 2.3 hereof, any such holder of Registrable Securities
or Registrable Inside Shareholder 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
Registrable Securities or Registrable Inside Shareholder 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.
(b) INCIDENTAL UNDERWRITTEN OFFERINGS. If the Company at any time
proposes to register any of its securities under the Securities Act as
contemplated by Section 2.3 and such securities are to be distributed by or
through one or more underwriters, the Company will, if requested by any holder
of Registrable Securities as provided in Section 2.3 and subject to the
provisions of Sections 2.3(a), 2.3(b) and 2.4, arrange for such underwriters to
include all the Registrable Securities and Registrable Inside Shareholder
Securities to be offered and sold by such holder among the securities to be
distributed by such underwriters. The holders of Registrable Securities and
Registrable Inside Shareholder Securities to be distributed by such underwriters
shall be parties to the underwriting agreement between the Company and such
underwriters and may, at their option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters shall also be made to and
for the benefit of such holders of Registrable Securities and Registrable Inside
Shareholder Securities and that any or all of the conditions precedent to the
obligations of such underwriters under such underwriting agreement be conditions
precedent to the obligations of such holders of Registrable Securities and
Registrable Inside Shareholder Securities. Other than as required under Section
2.4 hereof, any such holder of Registrable Securities or Registrable Inside
Shareholder 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 Registrable Securities or
Registrable Inside Shareholder 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.
2.6. 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 Registrable
Securities and Registrable Inside Shareholder Securities registered under such
registration statement, their underwriters, if any, and their respective counsel
(such holders' counsel to be appointed by the holders of more than 50% by number
of shares) of the Registrable Securities being registered, 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 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.
2.7. 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, and hereby does, indemnify and hold harmless the seller
of any Registrable Securities or Registrable Inside Shareholder Securities
covered by such registration statement, its directors and officers, each other
Person who participates as an underwriter in the offering or sale of such
securities and such other Person, if any, who controls such seller or any such
underwriter within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, joint or several, to which such seller or any
such director or officer or underwriter or controlling person may become subject
under the Securities Act or otherwise, insofar as such losses, claims, damages
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, underwriter 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 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 Registrable Securities or
Registrable Inside Shareholder 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, under writer or controlling person and shall
survive the transfer of such securities by such seller.
(b) INDEMNIFICATION BY THE PURCHASERS AND INSIDE SHAREHOLDERS. The
Purchasers and the Inside Shareholders will, and hereby do, indemnify and hold
harmless (in the same manner and to the same extent as set forth in subdivision
(a) of this Section 2.7) 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 Purchaser
or Inside Shareholder 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 Purchaser or Inside Shareholder.
(c) NOTICES OF CLAIMS, ETC. 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 2.7, 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 2.7, 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) OTHER INDEMNIFICATION. Indemnification similar to that specified
in the preceding subdivisions of this Section 2.7 (with appropriate
modifications) shall be given by the Company and each seller of Registrable
Securities or Registrable Inside Shareholder Securities with respect to any
required registration or other qualification of securities under any Federal or
state law or regulation of any governmental authority other than the Securities
Act.
(e) INDEMNIFICATION PAYMENTS. The indemnification required by this
Section 2.7 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.
2.8. ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES. The Company will
not effect or permit to occur any combination or subdivision of shares which
would adversely affect the ability of the holders of Registrable Securities to
include such Registrable Securities in any registration of its securities
contemplated by this Section 2 or the marketability of such Registrable
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: All shares now or hereafter authorized and designated as the
Common Stock of the Company and stock of any other class with which such
shares may hereafter have been exchanged or reclassified.
CONVERTIBLE PREFERRED STOCK: As defined in Section 1.
EXCHANGE ACT: The Securities Exchange Act of 1934.
PERSON: A corporation, an association, a partnership, a business, an
individual, a governmental or political subdivision thereof or a
governmental agency.
REGISTRABLE INSIDE SHAREHOLDER SECURITIES: (a) All shares of Common Stock
held by the Inside Shareholders on the date hereof and any shares of
Common Stock issuable upon exercise of the Gulfstar Warrant or (b)
securities issued or issuable with respect to such Warrant or 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 Registrable Inside Shareholder Securities, such
securities shall cease to be Registrable Inside Shareholder 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, or (c) they shall have ceased to be outstanding.
REGISTRABLE SECURITIES: The Common Stock issuable upon the conversion of
Convertible Preferred Stock and any (a) Convertible Preferred Stock or (b)
securities issued or issuable with respect to such Convertible Preferred
Stock or 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 Registrable Securities, such securities shall cease
to be Registrable 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, or (c) they shall have ceased to be
outstanding.
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 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 "cold 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 the Registrable Securities being registered, premiums and other
costs of policies of insurance obtained by the Company against liabilities
arising out of the public offering of the Registrable 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 qualifications 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 the reports required to be filed by it, and in the manner
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 Registrable Securities, make publicly available other information)
and will take such further action as any holder of Registrable Securities may
reasonably request, all to the extent required from time to time to enable such
holder to sell Registrable 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 Registrable 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 66 2/3% or more (by number of shares) of Registrable Securities. Each
holder of any Registrable Securities at the time or thereafter outstanding shall
be bound by any consent authorized by this Section 5, whether or not such
Registrable Securities shall have been marked to indicate such consent.
6. NOMINEES FOR BENEFICIAL OWNERS. In the event that any Registrable
Securities are held by a nominee for the beneficial owner thereof, the
beneficial owner thereof may upon the giving of written notice to the Company,
at its election, be treated as the holder of such Registrable Securities for
purposes of any request or other action by any holder or holders of Registrable
Securities pursuant to this Agreement or any determination of any number or
percentage of shares of Registrable Securities held by any holder or holders of
Registrable Securities contemplated by this Agreement. The Company may require
assurances reasonably satisfactory to it of such owner's beneficial ownership of
such Registrable 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 in the manner set forth in the
Securities Purchase Agreement, 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
Registrable 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
Registrable Securities who has furnished an address to the Company, or (c) if
addressed to the Company, at 1360 Post Oak Blvd., Suite 1300, Houston, Texas
77056, to the attention of its President, or at such other address, or to the
attention of such other officer, as the Company shall have furnished to each
holder of Registrable 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 Registrable Securities, subject
to the provisions respecting the minimum numbers or percentages of shares of
Registrable Securities required in order to be entitled to certain rights, or
take certain actions, contained herein.
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 New York.
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.
<PAGE>
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:
Name:
Title:
<PAGE>
PURCHASERS:
DELAWARE STATE EMPLOYEES'
RETIREMENT FUND
By: Pecks Management Partners Ltd.
Its Investment Advisor
By:
Robert J. Cresci
Managing Director
DECLARATION OF TRUST FOR DEFINED BENEFIT
PLAN OF ICI AMERICAN HOLDINGS INC.
By: Pecks Management Partners Ltd.
Its Investment Advisor
By:
Robert J. Cresci
Managing Director
DECLARATION OF TRUST FOR DEFINED BENEFIT
PLAN OF ZENECA HOLDINGS INC.
By: Pecks Management Partners Ltd.
Its Investment Advisor
By:
Robert J. Cresci
Managing Director
<PAGE>
INSIDE SHAREHOLDERS:
----------------------------------
JACK H. CASTLE, JR., AS TRUSTEE
OF THE CASTLE 1995 GIFT TRUST
f/b/o JACK H. CASTLE, JR.
CASTLE INTERESTS, LTD.
By:
Jack H. Castle, Jr.
General Partner
By:
Jack H. Castle, D.D.S.
General Partner
By:
Loretta M. Castle
General Partner
LISA G. CASTLE DONNELL, AS TRUSTEE
OF THE CASTLE 1995 GIFT TRUST
f/b/o LISA G. CASTLE DONNELL
JACK H. CASTLE, D.D.S.
LORETTA M. CASTLE
GULFSTAR INVESTMENTS, LTD.
By:
Name:
Title:
EXHIBIT 4.14
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of ____________, 1997 (the
"Agreement"), by and between CASTLE DENTAL CENTERS, INC., a Delaware corporation
(the "Company"), and JOHN GOODMAN, D.D.S. (the "Holder").
1. INTRODUCTION. Contemporaneously with the execution and delivery of this
Agreement, the Holder acquired an aggregate of ________ shares of the Series B
Convertible Preferred Stock, $.001 par value per share, of the Company (the
"Preferred Stock"), which will convert in __________ shares of the Company's
Common Stock $.001 par value per share ("Common Stock") on ____________, 1997,
subject to adjustment for stock splits, stock dividends, reclassification and
similar events. The Company has agreed to grant to the Holder certain
registration rights with respect to the shares of Common Stock into which the
Preferred Stock held by the Holder will convert 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), 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
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within 20 days after the date of any such notice given in accordance with
Section 7 hereof, the Company will use its reasonable best efforts to effect the
registration under the Securities Act of all Holder Securities which the Company
has been so 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 or
to include any Holder Securities in subsequent registrations), 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
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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.
2.2 REGISTRATION PROCEDURES. If and whenever the Company is required
to use its reasonable 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
reasonable 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
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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;
(v) use its reasonable 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
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or necessary to make the statements therein not misleading in the light of
the circumstances under which they were made;
(viii) otherwise use its reasonable 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
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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 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, and each
other Person, if any, who controls such seller within the meaning of the
Securities Act, against any losses, claims, damages 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 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 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.
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(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 (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.
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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 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, and the rules and
regulations promulgated thereunder.
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 Preferred
Stock 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 or other
business entity, 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.
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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 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, and the rules and
regulations promulgated thereunder.
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 the reports required to be filed by it, and in the manner 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.
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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 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
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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 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 any
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 270 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.
President
ADDRESS: HOLDER:
___________________________ By:________________________
___________________________ John Goodman, D.D.S.
___________________________
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EXHIBIT 10.2
AMENDMENT NO. 1 TO
SECURITIES PURCHASE AGREEMENT
AMENDMENT NO. 1 TO SECURITIES PURCHASE AGREEMENT, dated as of June
16, 1997 (this "Consent and Amendment"), among Castle Dental Centers, Inc. (the
"Company"), Jack H. Castle, D.D.S., P.C. ("New PC") and each of the Investors
named on the signature pages hereto (the "Investors"). Capitalized terms used
and not otherwise defined herein shall have the meanings ascribed thereto in the
Securities Purchase Agreement, dated as of December 18, 1995, among the Company,
New PC, Old PC and the Investors, as amended by the Waiver and Amendment, dated
as of May 31, 1996, among the Company, New PC, Old PC and the Investors (as
amended, the "Original Purchase Agreement").
RECITALS
WHEREAS, pursuant to the terms and conditions set forth in this
Consent and Amendment, the Company desires to increase the amount of the loans
made to the Company by the Investors under the Senior Subordinated Notes by
amending and rearranging the obligations of the Company under the documents and
agreements creating the obligations under the Senior Subordinated Notes,
including the Original Purchase Agreement and the other Related Documents;
WHEREAS, the Company has requested that the Investors consent to
certain amendments to, and rearrangements of, the Original Purchase Agreement in
order to increase the amount of, and rearrange the obligations under, the Senior
Subordinated Notes and the documents and agreements creating the obligations
thereunder, including the Original Purchase Agreement and the other Related
Documents;
WHEREAS, pursuant to the terms and conditions set forth in this
Consent and Amendment, the Investors desire to increase the amount of the loans
made to the Company by the Investors and to purchase certain securities of the
Company;
WHEREAS, pursuant to paragraph 13C of the Original Purchase
Agreement, the matters to be consented to herein require the consent of the
holders of a majority of the aggregate unpaid principal amount of the Senior
Subordinated Notes; and
WHEREAS, the holders of all of the Senior Subordinated Notes
outstanding on the date hereof are willing to consent to the matters set forth
herein on the terms and conditions specified herein;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements contained herein, the parties hereto agree as follows:
I. VALIDITY OF ORIGINAL PURCHASE AGREEMENT. The Original Purchase
Agreement shall remain in full force and effect except as the provisions thereof
are specifically modified herein. Other than references to "Securities", "Senior
Subordinated Notes", "Convertible Preferred Stock", "Closing" or "Closing Date"
in Sections 1, 2, 3, 4 and 5 and paragraphs 6B and 10Y of the Original Purchase
Agreement which shall not be modified by this Consent and Amendment, references
in the Original Purchase Agreement to (i) "this Agreement" shall be deemed to
refer to such Agreement as amended by this Consent and Amendment, (ii) the other
Related Documents shall be deemed to refer to such Agreements as amended by the
Amended Related Documents (as defined below), (iii) "Securities" shall be deemed
to include the New Securities, (iv) "Senior Subordinated Notes" shall be deemed
to include the New Senior Subordinated Notes, (v) "Convertible Preferred Stock"
shall be deemed to include the Series C Preferred (as defined below) and (vi)
"Closing" or "Closing Date" shall be deemed to include the Closing or Closing
Date, as applicable, under this Consent and Amendment. Notwithstanding anything
to the contrary in this Consent and Amendment, all provisions hereof remain
subject to the subordination and other provisions of Section 8 of the Original
Purchase Agreement.
II. CONSENT. Pursuant to paragraph 13C of the Original Purchase
Agreement and subject to the terms and conditions contained herein, the holders
of all of the Senior Subordinated Notes outstanding on the date hereof hereby
consent, effective on the date when the conditions set forth in Section V below
shall have been satisfied, to the amendments to the Original Purchase Agreement
effected hereby and to the amendments to the other Related Documents effected by
the Amended Related Documents.
III. AMENDMENTS AND SUPPLEMENTS.
1. AUTHORIZATION OF ISSUE OF SECURITIES. Section 1 of the Original
Purchase Agreement is hereby amended and supplemented by adding the following
paragraphs to the end thereof:
"1A-1. NEW SENIOR SUBORDINATED NOTES. In addition to the Senior
Subordinated Notes, the Company will authorize the issuance, sale and delivery
to the Investors of new senior subordinated notes ("NEW SENIOR SUBORDINATED
NOTES" and individually called a "NEW SENIOR SUBORDINATED NOTE") in the
aggregate principal amount of $2,000,000, to be dated the date of issue thereof,
to mature (subject to Section 4 hereof) January 31, 1998 and to bear interest on
the unpaid balances thereof from the date thereof at the rate of 12% per annum
until the principal thereof shall become due and payable. Upon the occurrence
and during the continuation of any payment default (other than a payment default
in respect of any Installment) under paragraph 9A(i) or paragraph 9A(ii), the
rate of interest under this Senior Subordinated Note shall be increased to a
rate per annum from time to time equal to the lower of (a) 16% and (b) the
maximum rate, if any, permitted by applicable law, compounded quarterly. Such
New Senior Subordinated Notes shall be substantially in the form of Exhibit A
attached to Amendment No. 1 hereto. Interest will be payable monthly in arrears
in cash on the last day of each month in each year, commencing on June 30, 1997.
The New Senior Subordinated Notes shall bear a legend on their face, indicating
that the New Senior Subordinated Notes have been issued with original issue
discount and the name and address of the Company's representative who, upon the
request of a holder, can supply information about such original issue discount.
1B-1. CONVERTIBLE PREFERRED STOCK. The Company will also authorize
the issuance, sale and delivery to the Investors of 485,382 shares of its Series
C Convertible Preferred Stock, par value $.001 per share (herein called the
"SERIES C PREFERRED", and the New Senior Subordinated Notes and the Series C
Preferred shall be referred to herein collectively as the "NEW SECURITIES"). The
powers, designations, preferences and relative participating, optional or other
special rights, and the qualifications, limitations or restrictions thereof, of
the Series C Preferred are set forth in the Certificate of Designation of the
Series C Preferred in the form of Exhibit B-1 attached to Amendment No. 1 hereto
(the "CERTIFICATE OF DESIGNATION")."
2. PAYMENTS AND PREPAYMENTS OF THE NEW SENIOR SUBORDINATED NOTES.
Section 4 of the Original Purchase Agreement is hereby amended and supplemented
by adding the following paragraphs to the end thereof:
"4A-1. GENERAL. The New Senior Subordinated Notes shall be subject
to mandatory payments as specified in paragraph 4B-1 and to the optional
prepayments under the circumstances set forth in paragraphs 4C-1 and 4D-1. No
partial prepayment of the New Senior Subordinated Notes pursuant to paragraph
4D-1 shall relieve the Company of its obligations to make any of the required
prepayments pursuant to paragraph 4B-1.
4B-1. MANDATORY PAYMENTS AND PREPAYMENTS OF THE NEW SENIOR
SUBORDINATED NOTES. (a) On January 31, 1998, the principal amount of the New
Senior Subordinated Notes then outstanding, together with all accrued and unpaid
interest thereon to and including such date, shall become immediately due and
payable by the Company and shall be paid by the Company to the Investors.
(b) If the Company or any Subsidiary shall issue any Debt (as
defined in the Bank Debt Agreement), other than Debt permitted by Section 9.01
of the Bank Debt Agreement, or any public or private offering pursuant to which
the Company or any of its Subsidiaries sells its equity securities (the issuance
of such Debt or such public or private offering is hereinafter referred to as a
"REFINANCING"), 100% of the Net Cash Proceeds (as defined in the Bank Debt
Agreement) thereof shall on the first Business Day after receipt be applied:
(i) unless a Default specified in Section 10.01(a) of the Bank
Debt Agreement has occurred and is continuing and unless such Default
would not be cured by the Refinancing, to the outstanding principal and
accrued interest owing on the Revolving Credit Loan (as defined in the
Bank Debt Agreement), Advancing Term Loan (as defined in the Bank Debt
Agreement) and the New Senior Subordinated Notes on a pro rata basis in
proportion to the unpaid principal amounts of the New Senior Subordinated
Notes on the one hand and the Revolving Credit Loans and Advancing Term
Loan on the other hand, and after such loans have been paid in full to the
principal and accrued interest owing on the Term Loan (as defined in the
Bank Debt Agreement); and
(ii) if a Default specified in Section 10.01(a) of the Bank
Debt Agreement exists and is continuing and such Default would not be
cured by the Refinancing, first to Indebtedness owing to the lender under
the Bank Debt Agreement, second to Indebtedness owing under the New Senior
Subordinated Notes and after such Indebtedness has been paid in full to
such other Debt or uses as Borrower may direct.
No later than 30 days prior to any such public or private securities offering or
financing, the Company shall provide written notice to the holders of the New
Senior Subordinated Notes setting forth estimates of the proceeds the Company
will receive therefrom.
4C-1. PREPAYMENTS OF THE NEW SENIOR SUBORDINATED NOTES UPON A CHANGE
OF CONTROL. Upon a Change of Control the principal amount of the New Senior
Subordinated Notes outstanding, together with all accrued and unpaid interest
thereon to the Repayment Date shall become due and payable on the Repayment Date
and shall be paid by the Company to the holders of the New Senior Subordinated
Notes. Upon the occurrence of a Change of Control, or the Company acquiring
knowledge of a pending Change of Control, the notice furnished to each holder of
New Senior Subordinated Notes under paragraph 6N shall (i) refer specifically to
paragraph 4C-1, (ii) state that the Company will prepay the principal amount of
all of the New Senior Subordinated Notes outstanding held by each holder of New
Senior Subordinated Notes, together with all accrued and unpaid interest to the
date of prepayment and (iii) indicate that the Company will prepay the New
Senior Subordinated Notes as provided in clause (ii) above simultaneously with
such Change of Control (the "REPAYMENT DATE"). If a proposed Change of Control
shall not occur, (i) the Company shall have no obligation under this paragraph
4C-1 to prepay any New Senior Subordinated Notes notwithstanding the fact that
the notice required pursuant to Section 6N had previously been delivered in
connection with such proposed Change of Control, (ii) the obligations of the
Company under this paragraph 4C-1 shall not be affected with respect to any
subsequent Change of Control, and (iii) if any holder of Series C Preferred
shall have converted all or any shares of Series C Preferred after receiving the
notice referred to in this paragraph 4C-1, the Company shall be required, at the
election of such holder, to issue new shares of Senior C Preferred in exchange
for the Common Stock issued upon conversion of such shares of Series C
Preferred.
4D-1. OPTIONAL PREPAYMENTS OF THE NEW SENIOR SUBORDINATED NOTES. The
New Senior Subordinated Notes shall be subject to prepayment, in whole or in
part, at the option of the Company at any time and from time to time at a price
equal to (x) the outstanding principal amount of the New Senior Subordinated
Notes to be prepaid PLUS (y) all accrued and unpaid interest thereon up to and
including the date of prepayment.
4E-1. NOTICE OF PREPAYMENTS. In the event of prepayment pursuant to
paragraph 4D-1, written notice of such prepayment shall be given by the Company
by first-class, certified mail, return receipt requested, postage prepaid to the
holders of New Senior Subordinated Notes at their respective addresses as the
same appear on the records of the Company, 30 days prior to the prepayment date,
specifying the prepayment date, the principal amount of the New Senior
Subordinated Notes to be prepaid on such date and that such prepayment is to be
made pursuant to paragraph 4D-1. Notice of prepayment having been given as
aforesaid, the principal amount of the New Senior Subordinated Notes specified
in such notice, together with interest thereon to the prepayment date, shall
become due and payable on such prepayment date.
4F-1. MANDATORY PAYMENTS AND PARTIAL PREPAYMENTS PRO RATA. If there
is more than one holder of the New Senior Subordinated Notes, the aggregate
principal amount of each partial prepayment of the New Senior Subordinated Notes
shall be allocated among the holders of the New Senior Subordinated Notes at the
time outstanding in proportion to the unpaid principal amounts of the New Senior
Subordinated Notes respectively held by each such holder. For purposes of
allocation pursuant to this paragraph 4F-1 only, each New Senior Subordinated
Note (to the extent possible) shall be rounded to the nearest $1,000."
3. REQUIRED REDEMPTION AND OPTIONAL REDEMPTION OF THE SERIES C
PREFERRED. Section 5 of the Original Purchase Agreement is hereby amended and
supplemented by adding the following paragraphs to the end thereof:
"5A-1. OPTION OF HOLDERS TO PUT SERIES C PREFERRED UPON A CHANGE OF
CONTROL. Upon the occurrence of a Change of Control, any holder of shares of
Series C Preferred shall have the right upon written notice as hereinafter
provided in paragraph 5B-1 to require the Company to redeem at the Option
Closing (as hereinafter defined), and the Company agrees to so purchase out of
funds legally available therefor, all or any of the shares of Series C
Preferred. The redemption price for such shares of Series C Preferred shall be
paid by certified check at the Option Closing or by wire transfer of immediately
available funds denominated in U.S. dollars to one or more accounts designated
by the holders of such shares of Series C Preferred to the Company prior to the
Option Closing in an amount equal to the greater of (i) the Fair Market Value at
the time of the Change of Control Notice of the Common Stock into which such
shares of Series C Preferred are then convertible; (ii) the change of control
value of the Common Stock into which such shares of Series C Preferred are
convertible determined by applying to such Common Stock the valuation derived
from the purchase price (giving effect to any and all consideration) paid by the
acquiring Person or Persons in the Change of Control; and (iii) $600,000.
5B-1. EXERCISE OF THE CHANGE OF CONTROL PUT OPTION. Upon the
occurrence of a Change of Control, or the Company acquiring knowledge of a
pending Change of Control, the notice furnished to each holder of New Securities
under clause (iv) of paragraph 6N (the "CHANGE OF CONTROL NOTICE") shall (i)
refer specifically to this paragraph 5B-1, (ii) state that the Company may be
required to redeem all of the outstanding shares of Series C Preferred, (iii)
contain the Company's calculation of the redemption price for the shares of
Series C Preferred to be redeemed (including a detail of the Fair Market Value
of the Common Stock at the time of the Change of Control Notice), (iv) indicate
that the Company will redeem the shares of Series C Preferred as provided in
clause (ii) above at the Option Closing upon written notice of the exercise of
an option by a holder of shares of Series C Preferred, (v) indicate that a
closing (the "OPTION CLOSING") for such purchase and sale shall take place on a
date specified in the notice, which date shall be a date occurring not earlier
than 30 days nor more than 60 days after the date on which the notice is
delivered, (vi) indicate where the Option Closing shall take place and (vii) be
delivered by certified mail return receipt requested. A holder of shares of
Series C Preferred shall furnish written notice to the Company of the exercise
of an option pursuant to paragraph 5B-1 within at least 10 days prior to the
Option Closing. At the Option Closing, the Company shall pay the redemption
price for the securities being redeemed determined as described above against
delivery of the securities being purchased. No waiver by a holder of any shares
of Series C Preferred of its right under this paragraph 5B-1 to require the
redemption of any or all of the shares of Series C Preferred held by such holder
in respect of a Change of Control shall affect the rights of such holder under
this paragraph 5B-1 in respect of any subsequent Change of Control.
5C-1. PUT OPTION OF HOLDERS OF SHARES OF SERIES C PREFERRED UPON THE
ABSENCE OF A LIQUID SECONDARY MARKET. If at any time after June 5, 2002, there
is no Liquid Secondary Market, any holder of shares of Series C Preferred shall
have the right (the "PUT RIGHT") upon delivery of a Put Notice (as hereinafter
defined in paragraph 5D-1), to require the Company to redeem at the Put Option
Closing (as hereinafter defined in paragraph 5D-1), and the Company agrees to so
purchase out of funds legally available therefor, all or any of the shares of
Series C Preferred. The redemption price for the shares of Series C Preferred
shall be paid at the Put Option Closing by certified check or by wire transfer
of immediately available funds denominated in U.S. dollars to one or more
accounts designated by the holders of the shares of Series C Preferred to the
Company prior to the Put Option Closing in an amount equal to the Fair Market
Value at the time of the Put Notice relating to the Common Stock into which the
shares of Series C Preferred subject to the Put Right are convertible. The
redemption price for the Series C Preferred shall bear interest on the unpaid
balances thereof at the rate of 12% per annum from and after the Put Option
Closing until the balance thereof shall have been paid in full.
5D-1. EXERCISE OF THE PUT OPTION. To exercise its Put Right, any
holder of shares of Series C Preferred shall deliver to the Company a written
notice (the "PUT NOTICE") which shall (i) refer specifically to this paragraph
5D-1, (ii) state the number of shares of Series C Preferred held by such holder
that the Company is required to redeem, (iii) contain such holder's request that
the Company determine the Fair Market Value at the time of the Put Notice of the
Common Stock into which the shares of Series C Preferred are convertible, (iv)
indicate that a closing (the "PUT OPTION CLOSING") for such redemption shall
take place on a date specified in the notice, which date shall be a date
occurring not earlier than 45 days nor more than 60 days after the date on which
the notice is delivered, (v) indicate where the Put Option Closing shall take
place and (vi) be delivered by certified mail return receipt requested. The
Company covenants that it will promptly (and in any event no later than 25 days
after receipt of the Put Notice) determine, and notify in writing the holders of
shares of Series C Preferred who have delivered a Put Notice of the Fair Market
Value at the time of the Put Notice of the Common Stock in accordance with
paragraph 5E-1 below; PROVIDED, HOWEVER, that in the event that any holder of
shares of Series C Preferred exercises its right to refer the question of
valuation to an investment banking firm, the Put Option Closing shall take place
on the later of (1) the date specified in the Put Notice and (2) 5 Business Days
after the determination of the Fair Market Value has been completed in
accordance with paragraph 5E-1 below. At the Put Option Closing, the Company
shall pay the redemption price for the securities being purchased determined as
described in paragraph 5E-1 below against delivery of the securities being
redeemed.
5E-1. FAIR MARKET VALUE The term "FAIR MARKET VALUE" means the value
(which shall not take into effect any minority discounts) of the Common Stock as
determined by the price per share of such Common Stock which the Company could
obtain from a willing buyer (not a current employee, officer, consultant or
director or any Affiliate of any such Person) for such shares sold by the
Company, as determined in good faith by the Board of Directors of the Company;
PROVIDED, HOWEVER, that if (i) the Investors' nominee on the Board of Directors
of the Company has not affirmatively voted in favor of such determination made
by the Board of Directors of the Company, or (ii) there is no such nominee, the
Investors may refer the question of valuation (which shall not take into effect
any minority discounts) for final settlement to a nationally recognized
investment banking firm designated by the Investors and reasonably acceptable to
the Company; and provided, further, that if the parties cannot agree on such a
firm, each party shall choose a nationally recognized investment banking firm,
which shall choose a third firm which shall be nationally recognized and that
third firm shall determine the Fair Market Value, which determination shall be
final and binding. The cost relating to retaining any investment banking firm(s)
pursuant to this paragraph 5E-1 shall be borne by the Company.
5F-1. OPTIONAL REDEMPTION OF THE SERIES C PREFERRED. (a) Subject to
the rights of holders of shares of Series C Preferred to convert such shares of
Series C Preferred pursuant to the provisions of the Certificate of Designation
and the rights of holders of shares of Series C Preferred to put such shares of
Series C Preferred pursuant to paragraphs 5A-1 or 5C-1 hereof, the shares of
Series C Preferred shall be subject to redemption at the Company's option, in
whole but not in part, at any time on or after a Qualifying Public Offering of
Common Stock.
(b) The redemption price for the shares of Series C Preferred shall
be payable immediately upon redemption, by certified or bank cashier's check,
and shall be $.001 (subject to appropriate adjustments for stock splits,
combinations, recapitalizations, stock dividends and similar events) multiplied
by the number of shares of Common Stock issuable upon conversion of the shares
of Series C Preferred so redeemed.
5G-1. NOTICE OF REDEMPTION. The Company shall give each holder of
shares of Series C Preferred written notice of the redemption pursuant to
paragraph 5G-1 not less than 60 days prior to the redemption date, specifying
such redemption date, that all of the outstanding shares of Series C Preferred
are to be redeemed on such date and that such redemption is to be made pursuant
to paragraph 5G-1. Such notice shall be accompanied by an Officer's Certificate
stating that the applicable conditions set forth in paragraph 5G-1 have been
fulfilled. Notice of redemption having been given as aforesaid, the redemption
amount due in respect of all of the shares of Series C Preferred and as
calculated in paragraph 5G-1(b), shall become due and payable on such redemption
date unless the holder of such shares of Series C Preferred (i) shall have
converted such shares of Series C Preferred, in whole or in part, prior to such
redemption date pursuant to the terms of the Certificate of Designation, (ii)
shall have put such shares of the Series C Preferred, in whole or in part,
pursuant to paragraph 5A-1 or 5C-1 or (iii) unless the filing by the Company of
a registration statement under the Securities Act relating to the Common Stock
obtainable upon conversion of the shares of Series C Preferred shall have been
requested by a holder thereof (either before or after receipt of such notice)
pursuant to the Registration Rights Agreement, in which case the redemption
shall be effected 30 days after the declaration of effectiveness of such
registration statement by the Commission. Should the shares of Series C
Preferred not be redeemed on such redemption date due to the Company's failure
to perform its obligations under this paragraph 5G-1, such redemption may be
effected only after compliance with the provisions of this Section 5 from and
after such redemption date."
4. AFFIRMATIVE COVENANTS. Section 6 of the Original Purchase
Agreement is hereby amended and supplemented by adding the following paragraph
to the end thereof:
"6B-1. USE OF PROCEEDS. The proceeds of the sale of the New
Securities shall be used (i) for general working capital purposes and (ii) to
fund the option payments required to be made under the Option Agreement for the
Purchase and Sale of Businesses of Southwest Dental Associates, L.C. among
Castle Dental Centers of Texas, Inc., the Company, John Goodman, D.D.S., Harold
Simpson, Jr. and New PC."
5. NEGATIVE COVENANTS. Section 7 of the Original Purchase Agreement
is hereby amended and supplemented by amending paragraphs 7B and 7P thereof in
their entirety to read as follows:
"7B. RESTRICTIONS ON INDEBTEDNESS AND REPAYMENT OF INDEBTEDNESS.
Each of Castle PC and the Company covenants that it will not incur, create,
assume or suffer to exist any Indebtedness or permit any of its Subsidiaries to
do any of the foregoing, other than the following:
(i) Senior Debt;
(ii) Indebtedness represented by the Senior Subordinated Notes
and this Agreement;
(iii) Indebtedness of the Company which by its terms is
subordinated to the Senior Subordinated Notes, provided that no such
Indebtedness is guaranteed or incurred by any Subsidiary of the
Company; and
(iv) Indebtedness secured by Liens permitted pursuant to
paragraph 7C.
In addition, each of Castle PC and the Company covenants that it
will not, and will not permit any Subsidiary to, prepay any Indebtedness junior
to, or pari-passu with, the Senior Subordinated Notes; PROVIDED, HOWEVER, that
the Company may (i) prepay Indebtedness that is pari-passu with the Senior
Subordinated Notes if the Senior Subordinated Notes are prepaid pro-rata with
such pari-passu Indebtedness and (ii) make payments under the Deferred
Compensation Agreement in accordance with the terms thereof."
"7P. COMPENSATION ARRANGEMENTS Except as set forth on Schedule 7P
attached to Amendment No. 1 hereto, each of Castle PC and the Company covenants
that it will not, and will not permit any of its Subsidiaries to, make
compensation payments (whether in the form of salaries, consulting fees,
bonuses, commissions or other supplemental compensation) to any executive
officer of the Company or any Subsidiary."
6. PAYMENT OF INTEREST. Until the earlier to occur of (a) a
Refinancing or (b) Final Maturity Date (as defined in the Bank Debt Agreement),
the Investors hereby agree that in lieu of the cash payment of interest on the
Senior Subordinated Notes (excluding for this purpose the New Senior
Subordinated Notes), the Investors will accept non-cash consideration equivalent
in value, as determined by the mutual agreement of the parties hereto, to the
cash interest payments otherwise due on the Senior Subordinated Notes (excluding
for this purpose the New Senior Subordinated Notes).
7. SUBORDINATION. Section 8A of the Original Agreement is hereby
amended and restated in its entirety to read as follows:
"8A. SUBORDINATED DEBT SUBORDINATE TO SENIOR DEBT. The Senior
Subordinated Notes, the Interest Notes and payments in respect of the redemption
of the Convertible Preferred Stock shall be junior and subordinate to all Senior
Debt (as defined in Section 12) to the extent and in the manner provided in this
Section 8 and each holder of a Senior Subordinated Note, by its acceptance
thereof, agrees to be bound by the provisions of this Section 8. The Senior
Subordinated Notes, the Interest Notes and payments in respect of the redemption
of the Convertible Preferred Stock shall not be junior or subordinate to any
Indebtedness of the Company other than the Senior Debt. For purposes hereof,
Indebtedness evidenced by the Senior Subordinated Notes, the Interest Notes,
including any refinancing, extension or modification thereof, and payments in
respect of the redemption of the Convertible Preferred Stock shall constitute
"SUBORDINATED DEBT"."
8. LEGEND. The certificates evidencing the Convertible Preferred
Stock shall bear the legend set forth below.
"PAYMENTS IN RESPECT OF THE REDEMPTION OF THE CONVERTIBLE PREFERRED STOCK
ARE SUBORDINATED TO OTHER INDEBTEDNESS PURSUANT TO, AND TO THE EXTENT
PROVIDED IN, AND ARE OTHERWISE SUBJECT TO THE TERMS OF SECTION 8 OF THAT
CERTAIN SECURITIES PURCHASE AGREEMENT DATED AS OF DECEMBER 18, 1995 (AS
AMENDED, SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO TIME PURSUANT TO
THE TERMS THEREOF), BETWEEN CASTLE DENTAL CENTERS, INC. AND THE INVESTORS
NAMED ON THE SIGNATURE PAGES THEREOF."
IV. PURCHASE AND SALE OF SECURITIES.
(a) PURCHASE AND SALE. The Company hereby agrees to sell to the
Investors and, subject to the terms and conditions herein set forth, the
Investors severally agree to purchase from the Company, the securities set forth
opposite the name of each of the Investors on the Signature pages hereof. The
parties hereby agree that (a) the aggregate purchase price for the New Senior
Subordinated Notes is $1,999,514.62 and (b) the aggregate purchase price for the
Series C Preferred is $485.38.
(b) CLOSING. The purchase and delivery of the New Securities to be
purchased by the Investors shall take place at a closing (the "CLOSING") at the
offices of Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street,
New York, New York 10022, at 10:00 a.m., local time, on June 16, 1997 (or at
such other time and place or on such other Business Day thereafter as the
parties hereto shall agree) (herein called the "CLOSING DATE"). On the Closing
Date, the Company will deliver the New Securities to be purchased by the
Investors payable to or registered in the names of the Investors and/or the
Investors' nominees or other designees specified on the signatures pages hereof
in the amounts set forth opposite the name of the Investors on the signature
pages hereof, against receipt of the purchase price therefor by wire transfer to
NationsBank Texas, Houston, Texas, ABA #: 111000025, Account #: 2664811824,
Reference: Castle Dental Centers, Inc. If at the Closing, the Company shall, in
breach of this Agreement, fail to tender to the Investors any of the New
Securities to be purchased by them or if any of the conditions specified in
Section V hereof shall not have been satisfied or waived by the Investors, the
Investors shall, at their election, be relieved of all further obligations under
this Agreement without thereby waiving any other rights they may have by reason
of such failure or such non-fulfillment. Notwithstanding anything to the
contrary, the obligation of the Company to deliver any New Securities to any
Investor at the Closing shall be conditioned on its concurrent receipt of the
purchase price of all of the New Securities from the Investors.
V. CONDITIONS TO EFFECTIVENESS OF CONSENT AND AMENDMENT. The
effectiveness of the consent of the Investors provided for in Section II hereof,
the amendments and supplements provided for in Section III hereof, and the
waiver provided for in Section VII hereof and the Investors' obligation to
purchase and pay for the New Securities to be purchased by them hereunder is
subject to the satisfaction, on or before the Closing Date, of all of the
following conditions:
(a) OPINION OF COUNSEL TO THE COMPANY AND CASTLE PC. The Investors
shall have received from Bracewell & Patterson, L.L.P., counsel to the Company
and Castle PC, a legal opinion addressed to the Investors and dated the Closing
Date, substantially in the form of Exhibit C attached hereto. Such opinion shall
also cover such other matters incident to the matters herein contemplated as the
Investors may reasonably request, including the form of all papers and the
validity of all proceedings.
(b) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties contained in Section 10 of the Original Purchase Agreement, as
amended hereby and those otherwise made in writing by or on behalf of the
Company or Castle PC and contained in any document, certificate or other written
statement provided to the Investors, in connection with the transactions
contemplated by this Consent and Amendment shall be true and correct in all
material respects when made and on and as of the Closing Date, except to the
extent of changes caused by the transactions herein contemplated; all of the
covenants and obligations of the Company hereunder or under the Original
Purchase Agreement, as amended hereby to be performed or observed on or prior to
the Closing shall have been duly performed or observed; there shall exist on the
Closing Date and after giving effect to such transactions no Default or Event of
Default; and the Company and Castle PC shall have delivered to the Investors an
Officer's Certificate, dated the Closing Date, to the foregoing effects.
(c) ARTICLES OF INCORPORATION AND BY-LAWS. The Company shall have
amended the Certificate of Incorporation to effect the amendments set forth on
Exhibit B-2 hereto. The Investors shall have received certificates, dated the
Closing Date, of the Secretary of the Company attaching (i) true and complete
copies of the Certificate of Incorporation of the Company as filed with the
appropriate state officials of its jurisdiction of incorporation with all
amendments thereto, (ii) true and complete copies of the By-laws of the Company
in effect as of such date, (iii) certificates of good standing of the
appropriate officials of the jurisdiction of incorporation of the Company, (iv)
resolutions of the Board of Directors of the Company authorizing (a) the
execution, delivery and performance of the Amended Related Documents, (b) the
issuance and delivery of the New Securities and (c) the reservation for issuance
of a sufficient number of shares of Common Stock into which the Series C
Preferred may be exercised to permit such exercise, (v) resolutions of the Board
of Directors of Castle PC authorizing the execution, delivery and performance of
the Amended Related Documents to which it is a party, and (vi) certificate as to
the incumbency of the officers of the Company and Castle PC executing this
Agreement or any other Amended Related Documents.
(d) PURCHASE PERMITTED BY APPLICABLE LAWS. The purchase of and
payment for the New Securities shall not be prohibited by any applicable law or
governmental regulation (including, without limitation, Regulations G, T and X
of the Board of Governors of the Federal Reserve System) and shall not subject
the Investors to any tax, penalty, liability or other onerous condition under or
pursuant to any applicable law or governmental regulation, and the Investors
shall have received such certificates or other evidence as they may request to
establish compliance with this condition.
(e) SECURITYHOLDERS AGREEMENT. The Investors shall have received a
fully executed counterpart of the Amended and Restated Securityholders Agreement
in substantially the form of Exhibit D hereto (the "Amended Securityholders
Agreement") and such Agreement shall be in full force and effect and no term or
condition thereof shall have been amended, modified or waived.
(f) REGISTRATION RIGHTS AGREEMENT. The Investors shall have received
a fully executed counterpart of the Amended and Restated Registration Rights
Agreement in substantially the form of Exhibit E hereto (the "Amended
Registration Rights Agreement" and, collectively with the Amended
Securityholders Agreement, the Certificate of Incorporation, as amended by the
Certificate of Designation, and the Original Purchase Agreement, as amended
hereby, the "Amended Related Documents") and such Agreement shall be in full
force and effect and no term or condition thereof shall have been amended,
modified or waived.
(g) COMPLIANCE WITH SECURITIES LAWS. The offering and sale of the
New Securities under this Consent and Amendment shall have complied with all
applicable requirements of federal and state securities laws, and the Investors
shall have received evidence of such compliance in form and substance
satisfactory to them.
(h) PROCEEDINGS. All required corporate and other proceedings taken
or required to be taken in connection with the transactions contemplated hereby
and all documents incident thereto shall be reasonably satisfactory in form and
substance to the Investors and their counsel, and the Investors and their
counsel shall have received all such counterpart originals or certified or other
copies of such documents as they may reasonably request.
(i) NO ADVERSE U.S. LEGISLATION, ACTION OR DECISION. No legislation,
order, rule, ruling or regulation shall have been enacted or made by or on
behalf of any governmental body, department or agency of the United States, nor
shall any legislation have been introduced and favorably reported for passage to
either House of Congress by any committee of either such House to which such
legislation has been referred for consideration, nor shall any decision of any
court of competent jurisdiction within the United States have been rendered
which, in the Investors' reasonable judgment, would materially and adversely
affect their investment in the New Securities. There shall be no action, suit,
investigation or proceeding, pending or threatened, against or affecting the
Company, its Subsidiaries or any of their respective properties or rights, or
any of their respective affiliates, associates, officers or directors, before
any court, arbitrator or administrative or governmental body which (i) seeks to
restrain, enjoin, prevent the consummation of or otherwise affect the
transactions contemplated by any of the Amended Related Documents or (ii)
questions the validity or legality of any such transaction or seeks to recover
damages or to obtain other relief in connection with any such transaction, and
there shall be no valid basis for any such action, proceeding or investigation.
(j) APPROVAL AND CONSENTS. The Company and Castle PC shall have duly
received all authorizations, consents, approvals, licenses, franchises, permits
and certificates by or of all federal, state and local governmental authorities
necessary or advisable for the issuance of the New Securities and the
consummation of the transactions contemplated hereby and by the Amended Related
Documents, and all thereof shall be in full force and effect at the time of the
Closing. The Company and Castle PC shall have delivered to the Investors an
Officer's Certificate, dated the Closing Date, to such effect.
(k) MATERIAL CHANGES. Since December 31, 1996 there shall not have
been any changes in the business of the Company or any of its Subsidiaries which
have or could reasonably be expected to, individually or in the aggregate, have
a Material Adverse Effect, nor shall there have been any development or
discovery or any material contingency or other liability which could have such
effect. There shall exist no defaults under the provisions of any instrument
evidencing Indebtedness of the Company or any of its Subsidiaries and the
Company and Castle PC shall have delivered to the Investors an Officer's
Certificate, dated the Closing Date, to such effect.
(l) USE OF PROCEEDS. The Investors shall have received evidence in
form and substance reasonably satisfactory to them with respect to the use of
proceeds by the Company in accordance with paragraph 6B-1.
(m) BANK DEBT AGREEMENT. The Company and the other parties to the
Bank Debt Agreement shall have entered into the Second Amendment and Supplement
to Amended and Restated Credit Agreement ("Amendment No. 2"), dated as of the
date hereof, in the form of Exhibit F hereto, which amendment shall include a
consent to the transactions contemplated by the Amended Related Documents
satisfactory in form and substance to the Investors. All of the conditions
precedent to the execution, delivery and performance of Amendment No. 2 to the
Bank Debt Agreement shall have been satisfied or waived in writing by the Bank
and the Bank Debt Agreement, as so amended, shall be in full force and effect.
The Investors shall have received (i) a copy of any waiver referred to in this
clause (m) and (ii) an Officer's Certificate, dated the Closing Date, to the
effect that no default or event of default exists under the Bank Debt Agreement.
(n) CERTIFICATE OF DESIGNATION. The Certificate of Designation shall
have been filed with the Secretary of State of the State of Delaware and the
Investors shall have received a certificate, dated the Closing Date, of the
Secretary of the Company attaching a true and complete copy of the Certificate
of Incorporation as filed with the Secretary of State of the State of Delaware.
(o) PAYMENT OF FEES. The Company shall have paid the fees, expenses
and disbursements of the special counsel of the Investors which are reflected in
statements of such counsel rendered prior to or on the Effective Date; and
thereafter the Company will pay, promptly upon receipt of any supplemental
statements therefor from time to time, additional fees, if any, and
disbursements of such special counsel in connection with the transactions hereby
contemplated (including disbursements that are unposted as of the Effective
Date).
VI. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND CASTLE PC.
Each of the Company and Castle PC represents and warrants to each Investor that
the representations and warranties of the Company and Castle PC contained in the
Original Purchase Agreement are true and correct as of the date hereof except
that:
(a) Paragraph 10B of the Original Purchase Agreement is hereby
amended and restated in its entirety to read as follows:
"10B FINANCIAL STATEMENTS. The Company has furnished the Investors
with (a) the audited balance sheet of the Company and its Subsidiaries as of
December 31, 1996, together with the related statements of income, changes in
stockholders' equity and cash flow of the Company and its Subsidiaries for such
period, (b) the unaudited balance sheet of the Company and its Subsidiaries as
of March 31, 1997, together with the related unaudited statements of income,
changes in stockholders' equity and cash flow of the Company and its
Subsidiaries, for such nine-month period (the "INTERIM FINANCIALS"). Such
financial statements (including any related schedules and notes) have been
prepared in accordance with GAAP consistently applied throughout the period or
periods in question and show all material liabilities, direct or contingent,
required to be shown in accordance with GAAP consistently applied throughout the
period or periods in question and fairly present, in all material respects, the
financial condition of the Company for the periods indicated therein, except for
normal audit adjustments in the case of the Interim Financials. There has been
no material adverse change in the business, condition (financial or other),
assets, properties, rights, operations or prospects of the Company and its
Subsidiaries since December 31, 1996."
(b) Paragraph 10C of the Original Purchase Agreement is hereby
amended and restated in its entirety to read as follows:
"10C CAPITAL STOCK AND RELATED MATTERS. As of the Closing Date, and
after giving effect to the transactions contemplated hereby and pursuant to the
Related Documents, (i) the authorized capital stock of the Company will consist
of a total of 35,000,000 shares as follows: (a) 30,000,000 shares of Common
Stock, par value $.001 per share, of which 4,663,992 shares are issued and
outstanding, the ownership and the consideration paid for such shares is as set
forth on Schedule 10C to Amendment No. 1 hereto and 1,397,238 shares of which
are reserved for issuance upon conversion of the Series A Convertible Preferred
Stock and 485,382 shares of which are reserved for issuance upon conversion of
the Series C Convertible Preferred Stock and (b) 1,244,737 shares of Series A
Convertible Preferred Stock, par value $.001 per share, of which 1,244,737
shares are issued and outstanding and 485,382 shares of Series C Convertible
Preferred Stock, par value $.001 per share, of which 485,382 shares are issued
and outstanding; (ii) all issued and outstanding shares shall have been duly and
validly issued, fully paid and non-assessable; (iii) no shares of Common Stock
or Series A or C Convertible Preferred Stock will be owned or held by or for the
account of the Company or any of its Subsidiaries; (iv) except as set forth on
Schedule 10C to Amendment No. 1 hereto, neither the Company nor any of its
Subsidiaries will have outstanding any securities convertible into or
exchangeable for any shares of capital stock or any rights (either preemptive or
other) to subscribe for or to purchase, or any options for the purchase of, or
any agreements providing for the issuance (contingent or otherwise) of, or any
calls, commitments or claims of any other character relating to the issuance of,
any capital stock, or any stock or securities convertible into or exchangeable
for any capital stock; (v) except as set forth on Schedule 10C to Amendment No.
1 hereto, neither the Company nor any of its Subsidiaries will be subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of its capital stock or warrants or options to purchase shares
of its capital stock; (vi) except as set forth on Schedule 10C to Amendment No.
1 hereto, neither the Company nor any of its Subsidiaries is a party to any
agreement (other than this Agreement and the Securityholders Agreement)
restricting the transfer of any shares of its capital stock; and (vii) neither
the Company nor any of its Subsidiaries will have filed or be required to file,
pursuant to Section 12 of the Exchange Act, a registration statement relating to
any class of debt or equity securities as of the date hereof."
(c) Paragraph 10E of the Original Purchase Agreement is hereby
amended and restated in its entirety to read as follows:
"10E. OUTSTANDING DEBT; DEFAULTS. Neither the Company nor any of its
Subsidiaries (i) has outstanding Indebtedness, except as permitted by paragraph
7B, and there exist no material defaults under the provisions of any instrument
evidencing such Indebtedness or of any agreement relating thereto, (ii) is in
default under its Articles of Incorporation (as amended to date) or By-laws,
(iii) is in violation of or in default under or with respect to any indenture,
mortgage, lease or any other contract or agreement to which it is a party or by
which it or any of its property is bound or affected in any respect which could
have a Material Adverse Effect, (iv) has any material debts, liabilities,
obligations (whether absolute, accrued, contingent or otherwise) of any nature
whatsoever other than (A) liabilities appearing on the financial statements, (B)
liabilities incurred in the ordinary course of business since March 31, 1997,
(C) liabilities under contracts to which the Company is a party and which are
listed on Schedule 10E to Amendment No. 1 hereto or which have an obligation
thereunder of less than $10,000 and which were entered into in the ordinary
course of business or (D) liabilities described on the other schedules hereto or
(v) is in material default with respect to any order, writ, injunction or decree
of any court or any Federal, state, municipal or other domestic or foreign
governmental department, commission, board, bureau, agency or instrumentality,
and there exists no condition, event or act which constitutes, or which after
notice, lapse of time, or both, would constitute, such a violation or default
under any of the foregoing."
(d) Paragraph 10S of the Original Purchase Agreement is hereby
amended and restated in its entirety to read as follows:
"10S. SUBSIDIARIES. The Subsidiaries set forth on Schedule 10S to
Amendment No. 1 hereto are the only Subsidiaries of the Company. All the
outstanding shares of stock of such Subsidiaries have been validly issued and
are fully paid and non-assessable and are owned by the Company (or, in the case
of Castle PC by Dr. Jack Castle) free and clear of any Lien or claim. Except as
set forth in Schedule 10S to Amendment No. 1 hereto, no such Subsidiary has
outstanding stock or securities convertible into or exchangeable or exercisable
for any shares of capital stock, nor does it have outstanding any rights to
subscribe for or to purchase, any options for the purchase of, any agreements
providing for the issuance (contingent or otherwise) of, or any calls,
commitments or claims of any other character relating to the issuance of, any
shares of capital stock or any securities convertible into or exchangeable or
exercisable for any shares of capital stock."
(e) Section 10 of the Original Purchase Agreement is hereby amended
and supplemented to add the following paragraph to the end thereof:
"10Y-1. SERIES C PREFERRED AND EQUITY OF THE COMPANY. As of the
Closing Date, upon conversion of the Series C Preferred held by the Investors,
the shares of Common Stock obtained through such exercise would represent in the
aggregate 7% of the Fully Diluted Outstanding Shares."
VII. WAIVER OF DEFAULTS. It is understood that immediately prior to
the effectiveness of this Consent and Amendment the Company is not in compliance
with respect to certain provisions of the Original Purchase Agreement. Upon the
effectiveness of this Consent and Amendment, the Investors hereby waive for the
periods up to the Closing Date of this Consent and Amendment but not after, any
Defaults or Events of Default created by the aforesaid existing noncompliance.
The foregoing waiver shall not be deemed to be a waiver by the Investors of any
other covenant, condition or obligation on the part of the Company or any
Subsidiary under the Original Purchase Agreement or this Consent and Amendment
or any of the Related Documents or Amended Related Documents.
VIII. MISCELLANEOUS.
(a) LIMITED EFFECT. This Consent and Amendment is limited as
specified and shall not constitute a modification, acceptance or waiver of any
other provision of the Purchase Agreement or any other Related Document.
(b) GOVERNING LAW. THIS CONSENT AND AMENDMENT IS BEING DELIVERED IN
THE STATE OF NEW YORK, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF SUCH STATE.
(c) HEADINGS. The descriptive headings of the several sections of
this Consent and Amendment are inserted for convenience only and do not
constitute a part of this Consent and Amendment.
(d) COUNTERPARTS. This Consent and Amendment may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, and it shall not be necessary in making proof of this Consent and
Amendment to produce or account for more than one such counterpart.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Consent and
Amendment to be executed by their officers thereunto duly authorized as of the
date first above written.
CASTLE DENTAL CENTERS, INC.
By:
Name:
Title:
JACK H. CASTLE, D.D.S., P.C.
By:
Name:
Title:
<PAGE>
INVESTORS:
The foregoing Agreement is hereby accepted as of the date first above written.
DECLARATION OF TRUST
FOR DEFINED BENEFIT PLANS
OF ICI AMERICAN HOLDINGS INC.
c/o Pecks Management Partners Ltd.
One Rockefeller Plaza
New York, New York 10020
Attention: Robert J. Cresci
By: Pecks Management Partners Ltd.,
Its Investment Adviser
By: Principal Amount of New Senior
Robert J. Cresci Subordinated Notes: $386,000
Managing Director 93,841 shares of Series C
Convertible Preferred Stock
Tax ID Number: 043-171-204
Nominee: NORTHMAN & CO.
Bank: State Street Bank & Trust Company
One Enterprise Drive
Solomon Willard Building, 4A
North Quincy, MA 02171
ABA Routing Number: 0110-00028
Account Number: I510 DDA 34758649
for Master Trust/State Street
Boston, MA 02101
BNF: ICI Americas
Physical Delivery State Street Bank & Trust Company
Via Federal Express: 225 Franklin Street
Incoming Securities, Courthouse
Level
Boston, MA 02101
Attn: David Kay
Account Name: ICI Americas
Acct.# I510
2
<PAGE>
The foregoing Agreement is hereby accepted as of the date first above written.
DECLARATION OF TRUST
FOR DEFINED BENEFIT PLANS
OF ZENECA HOLDINGS INC.
c/o Pecks Management Partners Ltd.
One Rockefeller Plaza
New York, New York 10020
Attention: Robert J. Cresci
By: Pecks Management Partners Ltd.,
Its Investment Adviser
By: Principal Amount of New Senior
Robert J. Cresci Subordinated Notes: $267,000
Managing Director 64,718 shares of Series C
Convertible Preferred Stock
Tax ID Number: 042-809861
Nominee: FUELSHIP & COMPANY
Bank: State Street Bank & Trust Company
One Enterprise Drive
Solomon Willard Building, 4A
North Quincy, MA 02171
ABA Routing Number: 0110-00028
Account Number: JG10 DDA 34758508
for Master Trust/State Street
Boston, MA 02101
BNF: Zeneca Holdings
Physical Delivery
Via Federal Express: State Street Bank & Trust Company
225 Franklin Street
Incoming Securities, Courthouse
Level
Boston, MA 02101
Attn: David Kay
Account Name: Zeneca Holdings
Acct.# JG10
3
<PAGE>
The foregoing Agreement is hereby accepted as of the date first above written.
DELAWARE STATE EMPLOYEES'
RETIREMENT FUND
c/o Pecks Management Partners Ltd.
One Rockefeller Plaza
New York, New York 10020
Attention: Robert J. Cresci
By: Pecks Management Partners Ltd.,
Its Investment Adviser
By: Principal Amount of New Senior
Robert J. Cresci Subordinated Notes: $1,347,000
Managing Director 326,823 shares of Series C
Convertible Preferred Stock
Tax ID Number: 516-00-0279
Nominee: NAP & COMPANY
Bank: Mercantile Safe Deposit & Trust Company
2 Hopkins Plaza
Baltimore, MD 21201
Attn: Isabelle Corbett
ABA Routing Number: 052-000618
Account Number: 214380-8 for State of Delaware account.
Physical Delivery: Chemical Bank
A/C State Street Bank and Trust
Company
4 New York Plaza
Ground Floor/Receive Window
New York, New York
Account: Mercantile - Safe
Deposit & Trust
Acct.# QJ25
4
EXHIBIT 10.6
MANAGEMENT SERVICES AGREEMENT
BY AND BETWEEN
CASTLE DENTAL CENTERS, INC.,
A DELAWARE CORPORATION
AND
JACK H. CASTLE, D.D.S., P.C.,
A TEXAS PROFESSIONAL CORPORATION
EFFECTIVE DECEMBER 18, 1995
<PAGE>
TABLE OF CONTENTS
PAGE NO.
ARTICLE I. DEFINITIONS............................................... 1
Section 1.1 Act.............................................. 1
Section 1.2 Adjusted Gross Revenue........................... 2
Section 1.3 Adjustments...................................... 2
Section 1.4 Ancillary Revenue................................ 2
Section 1.5 Base Management Fee.............................. 2
Section 1.6 Budget........................................... 2
Section 1.7 Business Manager................................. 2
Section 1.8 Business Manager Consent......................... 2
Section 1.9 Business Manager Expense......................... 2
Section 1.10 Confidential Information......................... 2
Section 1.11 Center........................................... 3
Section 1.12 Dental Services.................................. 3
Section 1.13 Dentist.......................................... 3
Section 1.14 GAAP............................................. 3
Section 1.15. Licensing Fee.................................... 3
Section 1.16 Management Fee................................... 3
Section 1.17 Management Services.............................. 3
Section 1.18 Management Services Agreement.................... 4
Section 1.19 Office Expense................................... 4
Section 1.20 PC............................................... 5
Section 1.21 PC Account....................................... 5
Section 1.22 PC Consent....................................... 5
Section 1.23 PC Expense....................................... 5
Section 1.24 Performance Fee.................................. 5
Section 1.25 Policy Board..................................... 5
Section 1.26 Practice Territory............................... 5
Section 1.27 Professional Services Revenues................... 5
Section 1.28 Representatives.................................. 5
Section 1.29 State............................................ 5
Section 1.30 Term............................................. 5
ARTICLE II. APPOINTMENT AND AUTHORITY OF BUSINESS MANAGER............ 6
Section 2.1 Appointment...................................... 6
Section 2.2 Authority........................................ 6
Section 2.3 Patient Referrals and Payments................... 6
Section 2.4 Internal Management of PC........................ 6
Section 2.5 Practice of Dentistry............................ 6
ARTICLE III. RESPONSIBILITIES OF THE POLICY BOARD.................... 7
Section 3.1 Formation and Operation of the Policy Board...... 7
Section 3.2 Duties and Responsibilities of the Policy Board.. 7
(a) Capital Improvements and Expansion............... 7
i
<PAGE>
(b) Marketing and Advertising........................ 7
(c) Patient Fees; Collection Policies................ 7
(d) Ancillary Services............................... 7
(e) Provider and Payor Relationships................. 7
(f) Strategic Planning............................... 7
(g) Capital Expenditures............................. 7
(h) Dentist Hiring................................... 8
Section 3.3 Dental Treatment Decisions....................... 8
ARTICLE IV. COVENANTS AND RESPONSIBILITIES OF BUSINESS
MANAGER...................................................... 8
Section 4.1 Centers and Equipment............................ 8
Section 4.2 Dental Supplies.................................. 9
Section 4.3 Support Services................................. 9
Section 4.4 Quality Assurance, Risk Management, and
Utilization Review............................... 9
Section 4.5 Licenses and Permits.............................10
Section 4.6 Personnel........................................10
Section 4.7 Contract ........................................10
Section 4.8 Billing and Collection...........................10
Section 4.9 PC Account.......................................12
Section 4.10 Fiscal Matters...................................12
Section 4.11 Reports and Records..............................14
Section 4.12 Recruitment of PC Dentists.......................14
Section 4.13 Business Manager's Insurance.....................14
Section 4.14 No Warranty......................................14
ARTICLE V. COVENANTS AND RESPONSIBILITIES OF PC......................14
Section 5.1 Organization and Operation.......................14
Section 5.2 PC Personnel.....................................15
Section 5.3 Professional Standards...........................15
Section 5.4 Dental Services..................................15
Section 5.5 Peer Review/Quality Assurance....................16
Section 5.6 PC's Insurance...................................16
Section 5.7 Confidential and Proprietary Information.........16
Section 5.8 Noncompetition...................................17
Section 5.9 Name, Trademark..................................18
Section 5.10 Peer Review......................................18
Section 5.11 Indemnification..................................19
ARTICLE VI. FINANCIAL ARRANGEMENT....................................19
Section 6.1 Definitions......................................19
Section 6.2 Management Fee...................................19
Section 6.3 Adjustments......................................19
Section 6.4 Reasonable Value.................................20
Section 6.5 Payment of Management Fee........................20
Section 6.6 Accounts Receivable..............................20
Section 6.7 Disputes Regarding Fees..........................20
ii
<PAGE>
ARTICLE VII. TERM AND TERMINATION....................................20
Section 7.1 Initial and Renewal Term.........................20
Section 7.2 Termination......................................21
Section 7.3 Effects of Termination...........................22
Section 7.4 Repurchase Obligation............................22
Section 7.5 Repurchase Option................................23
Section 7.6 Closing of Repurchase............................24
ARTICLE VIII. MISCELLANEOUS..........................................24
Section 8.1 Administrative Services Only.....................24
Section 8.2 Status of Contractor; Agency.....................24
Section 8.3 Notices..........................................25
Section 8.4 Governing Law....................................25
Section 8.5 Assignment.......................................25
Section 8.6 Arbitration......................................26
Section 8.7 Waiver of Breach.................................27
Section 8.8 Enforcement......................................27
Section 8.9 Gender and Number................................28
Section 8.10 Additional Assurances............................28
Section 8.11 Consents, Approvals, and Exercise of Discretion..28
Section 8.12 Force Majeure....................................28
Section 8.13 Severability.....................................28
Section 8.14 Divisions and Headings...........................28
Section 8.15 Amendments and Management Services Agreement
Execution........................................28
Section 8.16 Entire Management Services Agreement.............29
iii
<PAGE>
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT is made and entered into effective as
of December 18, 1995, by and between CASTLE DENTAL CENTERS, INC., a Delaware
corporation ("Business Manager"), and JACK H. CASTLE, D.D.S., P.C., a Texas
professional corporation ("PC").
RECITALS
This Management Services Agreement is made with reference to the
following facts:
A. PC is a validly existing Texas professional corporation, formed for
and engaged in the practice of dentistry and the provision of dental services to
the general public in and around the Houston, Texas metropolitan area through
individual dentists who are licensed to practice dentistry in the State of Texas
and who are employed or otherwise retained by PC.
B. Business Manager is a validly existing Delaware 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 developed a formula for 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.
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 Chapter Nine (Art. 4543-4551)
of the Civil Statutes of the State of Texas, as amended.
1
Section 1.2 ADJUSTED GROSS REVENUE. The term "Adjusted Gross Revenue"
shall mean the sum of Professional Services Revenue and Ancillary Revenue.
Section 1.3 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 1.4 ANCILLARY REVENUE. The term "Ancillary Revenue" shall mean
all other revenue actually recorded each month (net of Adjustments) that is not
Professional Services Revenues or Capitation 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 BASE MANAGEMENT FEE. The term "Base Management Fee" shall
mean the amount set forth in Section 6.1.
Section 1.6 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 1.7 BUSINESS MANAGER. The term "Business Manager" shall mean
Castle Dental Centers, Inc., a Delaware corporation, or any entity that succeeds
to the interests of Castle Dental Centers, Inc., a Delaware corporation, and to
whom the obligations of Business Manager are assigned and transferred.
Section 1.8 BUSINESS MANAGER CONSENT. The term "Business Manager
Consent" shall mean the consent granted by Business Manager's representatives to
the Policy Board created pursuant to Article III herein.
Section 1.9 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 1.10 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
2
<PAGE>
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.
Section 1.11 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 1.12 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 1.13 DENTIST. The term "Dentist" shall mean each individually
licensed professional who is employed or otherwise 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.
Section 1.14 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 1.15. LICENSING FEE. The term "Licensing Fee" shall mean the
annual amount of One Hundred Thousand Dollars ($100,000), which amount is
payable to Dr. Jack H. Castle as an Office Expense under the terms of the Budget
as consideration for his taking such actions as may be necessary to cause the
shares of capital stock of PC to be held by a person who is lawfully entitled to
do so. This fee is intended to and shall be solely for the purposes described
herein and in no way shall be construed to constitute fee splitting or the
practice of dentistry under the Act.
Section 1.16 MANAGEMENT FEE. The term "Management Fee" shall mean
Business Manager's compensation established as described in Article VI hereof.
Section 1.17 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 recordkeeping and reporting, and other business office services.
3
<PAGE>
Section 1.18 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 1.19 OFFICE EXPENSE. The term "Office Expense" shall mean all
operating and nonoperating expenses incurred by the Business Manager or PC in
the provision of services to or by PC, including the Licensing Fee. 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, benefits, or other direct costs 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 Policy Board;
(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 Dentists 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 borrowing by
Business Manager from its primary commercial lender as reflected on its most
recent published financial statements) to finance or refinance obligations of
PC, purchase dental or nondental equipment, or finance new ventures of PC;
(g) the Base Management Fee;
(h) the reasonable out-of-pocket travel expenses associated with
attending meetings, conferences, or seminars to benefit PC;
(i) the reasonable costs and expenses associated with marketing,
advertising and promotional activities to benefit PC; and
(j) the cost of dental supplies (including but not limited to drugs,
pharmaceuticals, products, substances, items, or dental devices), office
supplies, inventory, and utilities other than
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those dental supplies or dental inventory owned by PC on the date of this
Management Services Agreement.
Section 1.20 PC. The term "PC" shall mean Jack H. Castle, D.D.S., P.C.,
a Texas professional corporation.
Section 1.21 PC ACCOUNT. The term "PC Account" shall mean the bank
account of PC established as described in Sections 4.8 and 4.9.
Section 1.22 PC CONSENT. The term "PC Consent" shall mean the consent
granted by PC's representative to the Policy Board created pursuant to Article
III herein. When any provision of this Management Services Agreement requires PC
Consent, PC Consent shall not be unreasonably withheld and shall be binding on
PC.
Section 1.23 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 Policy Board 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 1.24 PERFORMANCE FEE. The term "Performance Fee" shall mean the
amount payable to the Business Manager, if any, determined under Section 6.2, as
a Management Fee based upon the Business Manager achieving certain
pre-determined performance criteria.
Section 1.25 POLICY BOARD. The term "Policy Board" shall refer to the
body responsible for developing and implementing management and administrative
policies for the overall operation of PC's facilities.
Section 1.26 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 Texas, representing
the specific geographic boundaries of the dental practice conducted by PC within
its particular urban, metropolitan area.
Section 1.27 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 1.28 REPRESENTATIVES. The term "Representatives" shall mean a
party's officers, directors, employees, or other agents or representatives.
Section 1.29 STATE. The term "State" shall mean the State of Texas.
Section 1.30 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.
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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 requirements of
the business functions of PC. Business Manager is also expressly 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 notice of PC's intent to execute any agreement obligating PC to perform
Dental Services or otherwise creating a binding legal obligation on PC. 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 of PC, tax
planning, and investment planning, shall remain the exclusive 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 Article 4551a 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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ARTICLE III. RESPONSIBILITIES OF THE POLICY BOARD
Section 3.1 FORMATION AND OPERATION OF THE POLICY BOARD. The parties
hereby establish a Policy Board which shall be responsible for developing and
implementing management and administrative policies for the overall operation of
PC's facilities. The Policy Board shall consist of four (4) members. Business
Manager shall designate, in its sole discretion, three (3) members of the Policy
Board. PC shall designate, in its sole discretion, one (1) member of the Policy
Board. The Policy Board member selected by PC shall be a Dentist who holds and
maintains a valid and unrestricted license to practice dentistry in the State. A
majority of each party's representative or representatives to the Policy Board
shall have the authority to make decisions on behalf of the respective party.
Except as may otherwise be provided, the act of a majority of the members of the
Policy Board shall be the act of the Policy Board.
Section 3.2 DUTIES AND RESPONSIBILITIES OF THE POLICY BOARD. The Policy
Board 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 Policy Board 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 Policy Board.
(c) PATIENT FEES; COLLECTION POLICIES. As a part of the Budget process,
in consultation with PC and Business Manager, the Policy Board shall be advised
of the fee schedule determined by the PC representative to the Policy Board and
shall review and approve the related collection policies for all Dental Services
and ancillary services rendered by PC.
(d) ANCILLARY SERVICES. The Policy Board 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 Policy Board. The
Policy Board shall review and approve all proposed reimbursement arrangements
with third party payors.
(f) STRATEGIC PLANNING. The Policy Board 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 Policy Board shall determine the priority
of major capital expenditures.
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(h) DENTIST HIRING. The Policy Board shall recommend to PC the number
and type of Dentists required for the efficient operation of PC's facilities.
The Policy Board shall review and approve any variations to the restrictive
covenants in any dentist employment contract.
Section 3.3 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's representatives to the
Policy Board, but Business Manager's representatives to the Policy Board may
participate in the discussion process. PC's representative to the Policy Board
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) Subject to the Policy Board's authority under Section 3.2(e), fee
schedules; and
(d) Any other function or decision relating to the practice of
dentistry.
The Policy Board meetings shall be held as mutually agreed, but at least
quarterly, in Texas. Meetings shall be open to any shareholder of PC.
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 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.
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(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. 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 employed 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.
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.
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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, employ or otherwise 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. All such personnel
employed by Business Manager at each Center shall be reasonably acceptable to PC
and the Business Manager shall consult with PC on the individual who is hired as
PC's office manager. 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, and the Policy Board shall approve 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.
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
employed or otherwise 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 indemnification 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.
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(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 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 necessary 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.
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Section 4.9 PC ACCOUNT.
(a) ACCESS. Business Manager shall have access to the PC Account solely
for the purposes contemplated hereby. PC shall neither draw checks on the PC
Account nor request Business Manager to do so.
(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; (ii) Office Expenses (other
than the Base Management Fee); (iii) Management Fees (both Base Management Fee
and Performance Fee); and (iv) any other expenditures.
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 before the execution of this
Management Services Agreement. The initial Budget shall include a
provision for payment of the Licensing Fee in equal monthly installments
and an exhibit setting forth the criteria under which Business Manager
shall be entitled to receive the Performance Fee.
(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's representative to the Policy Board,
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 Management Fee and
Performance 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.
(3) SUCCEEDING BUDGETS; SPECIAL RATES. In each succeeding Budget,
unless the parties otherwise mutually agree or are otherwise precluded
by law or regulation, the criteria for the Performance Fee and Business
Manager's right to receive the Performance Fee shall be continued on the
same basis.
(4) 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 (with
the exception of the Base Management Fee and any one-time or
non-recurring expenses included in such prior 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, Houston, Texas area; and (iii) the proportionate increase or
decrease in mutually agreed
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upon personnel costs as measured by the increase or decrease in
full-time-equivalent personnel.
(5) 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 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's representative to the Policy Board
shall review all expenditures related to the operation of PC, but such PC
representative 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.
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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 the property and under 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.
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 individuals. 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 employed 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.
ARTICLE V. COVENANTS AND RESPONSIBILITIES 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
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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.
(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 and maintain with each such
retained Dentist a written employment agreement in a form reasonably
satisfactory to PC and Business Manager and will not commit and permit to remain
outstanding any breach of such employment agreement that would allow the Dentist
to terminate for cause. 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 employ or
retain, 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.
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,
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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 employed personnel, if any, and
professional and comprehensive general liability insurance covering PC and each
of the Dentists PC retains or employs to provide Dental Services. 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 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. The insurance policy or policies 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. 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
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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 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 their full
professional time and attention. PC agrees and acknowledges that the
noncompetition covenants described hereunder are necessary for the protection of
Business Manager, and that Business Manager would not have entered into this
Management Services Agreement without 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
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
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from providing management and administrative services to its or their own dental
practices after the termination of this Management Services Agreement.
(c) The written employment agreements described in Section 5.2 shall
contain covenants of the shareholder employees pursuant to which the
shareholders 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 shall obtain formal written agreements from its dentist employees
in the form of Exhibit 5.2(a), pursuant to which 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 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.
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 "Jack H. Castle, D.D.S., P.C." and that such name is the name
of PC under Texas law, and that to its knowledge PC is the sole and absolute
owner of the name. PC covenants and promises that, without the prior written
consent of the Business Manager, PC will not:
(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.
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Section 5.11 INDEMNIFICATION. PC 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 employees, 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 DEFINITIONS. For purposes of this Article VI, capitalized
terms used herein shall have the meanings ascribed as follows:
(a) BASE MANAGEMENT FEE. The Base Management Fee shall be the amount,
calculated on a monthly basis, that is equal to twelve and one-half percent
(12.5%) of the Adjusted Gross Revenue attributable to the applicable monthly
period.
(b) PERFORMANCE FEE. The Performance Fee shall be the amount, calculated
on a monthly basis, that is calculated in accordance with the Applicable Exhibit
to the Budget.
Section 6.2 MANAGEMENT FEE. PC and Business Manager agree to the
compensation set forth herein as being paid to Business Manager in consideration
of a substantial commitment made by Business Manager hereunder and that such
fees are fair and reasonable. Each month, in the priority established by Section
4.9 (b), Business Manager shall be paid the following:
(i) the amount of all Office Expenses (other than the Base
Management Fee) paid by the Business Manager on behalf
of PC.
(ii) the Base Management Fee.
(iii) the Performance Fee.
Section 6.3 ADJUSTMENTS. If there are not sufficient funds to pay either
or both of the Base Management Fee or the Performance 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. Furthermore, the amount of the Performance Fee paid will be monitored and
reconciled on an annual basis and any overpayments of the Performance Fee shall
be promptly refunded by the Business Manager.
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Section 6.4 REASONABLE VALUE. Payment of the Base Management Fee or
Performance 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 6.5 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
as such fee becomes due and payable during the Term and thereafter as provided
in Section 7.3.
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 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 its Management Fees 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 twenty-five (25) 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
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term, or unless 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;
(ii) PC materially defaults in the performance of any of its
material duties or obligations hereunder, and such default
continues 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 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.
(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
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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 State Board of Dental Examiners issues 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.
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, (ii) obligations, promises, or covenants set
forth herein that are expressly made to extend beyond the Term, including,
without limitation, 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, and (iii) the obligations of PC and
Business Manager described in Section 7.4. 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.
Section 7.4 REPURCHASE OBLIGATION. Upon termination of this Management
Services Agreement by Business Manager for cause or by PC in breach of this
Agreement, Business Manager shall have the option, exercisable at any time
within thirty (30) days of such termination, to require PC to:
(a) Purchase from Business Manager at book value the intangible assets,
deferred charges, and all other amounts on the books of the Business Manager
relating to the Management Services Agreement as adjusted through the last day
of the month most recently ended prior to the date of such termination in
accordance with GAAP to reflect amortization or depreciation of the intangible
assets, deferred charges, or covenants;
(b) Purchase from Business Manager any real estate owned by Business
Manager and used as a Center at the greater of the appraised fair market value
thereof or the then book value thereof. In the event of any repurchase of real
property, the appraised value shall be determined by Business Manager and PC,
each selecting a duly qualified appraiser, who in turn will agree on a third
appraiser. This agreed-upon appraiser shall perform the appraisal which shall be
binding on both parties. In the event either party fails to select an appraiser
within fifteen (15)
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days of the selection of an appraiser by the other party, the appraiser selected
by the other party shall make the selection of the third party appraiser;
(c) Purchase at book value all improvements, additions, or leasehold
improvements that have been made by Business Manager at any Center and that
relate solely to the performance of Business Manager's obligations under this
Management Services Agreement;
(d) Assume all debt, and all contracts, payables, and leases that are
obligations of Business Manager and that relate directly to the performance of
Business Manager's obligations under this Management Services Agreement or the
properties leased or subleased hereunder by Business Manager; and
(e) Purchase from Business Manager at the greater of appraised fair
market value or book value all of the equipment listed as set forth in the
Purchase Agreement or an exhibit thereto, including all replacements and
additions thereto made by Business Manager pursuant to the performance of its
obligations under this Management Services Agreement, and all other assets,
including inventory and supplies, tangibles and intangibles, set forth on the
books of the Business Manager as adjusted through the last day of the month most
recently ended prior to the date of such termination in accordance with GAAP to
reflect operations of each Center, depreciation, amortization, and other
adjustments of assets shown on the books of the Business Manager.
Section 7.5 REPURCHASE OPTION. Upon termination of this Management
Services Agreement by Business Manager in breach of this Agreement or by PC for
cause, PC shall have the option but not the obligation to do all or none of the
following:
(a) Purchase from Business Manager any real estate owned by Business
Manager and used as a Center at book value thereof. In the event of any
repurchase of real property, the appraised value shall be determined by Business
Manager and PC, each selecting a duly qualified appraiser, who in turn will
agree on a third appraiser. This agreed-upon appraiser shall perform the
appraisal which shall be binding on both parties. In the event either party
fails to select an appraiser within fifteen (15) days of the selection of an
appraiser by the other party, the appraiser selected by the other party shall
make the selection of the third party appraiser;
(b) Purchase at book value all improvements, additions, or leasehold
improvements that have been made by Business Manager at any Center and that
relate solely to the performance of Business Manager's obligations under this
Management Services Agreement;
(c) Assume all debt, and all contracts, payables, and leases that are
obligations of Business Manager and that relate directly to the performance of
Business Manager's obligations under this Management Services Agreement or the
properties leased or subleased by Business Manager; and
(d) Purchase from Business Manager at book value all of the equipment
listed as set forth in the Purchase Agreement or an exhibit thereto, including
all replacements and additions thereto made by Business Manager pursuant to the
performance of its obligations under this Management Services Agreement, and all
other tangible assets, including inventory and supplies,
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set forth on the books of the Business Manager as adjusted through the last day
of the month most recently ended prior to the date of such termination in
accordance with GAAP to reflect operations of each Center, depreciation,
amortization, and other adjustments of assets shown on the books of the Business
Manager.
Section 7.6 CLOSING OF REPURCHASE. PC shall pay cash for the repurchased
assets. The amount of the purchase price shall be reduced by the amount of debt
and liabilities of Business Manager, if any, assumed by PC. PC and any Dentist
who is a shareholder of PC shall execute such documents as may be required to
assume the liabilities set forth in Section 7.4(d) or Section 7.5(c) and to
remove or if PC and such Dentist or Dentists can establish in good faith that
such removal is not possible, to indemnify Business Manager from any liability
with respect to such repurchased asset and with respect to any property leased
or subleased by Business Manager. The closing date for the repurchase shall be
determined by Business Manager but shall in no event occur later than one
hundred eighty (180) days from the date of the notice of termination. The
termination of this Management Services Agreement shall become effective upon
the closing of the sale of the assets under Section 7.4 or Section 7.5 (or, if
PC does not exercise its option under Section 7.5, on the date it notifies
Business Manager of such decision). PC shall be released from the restrictive
covenants provided for in Section 5.8 on the closing date. From and after any
termination, each party shall provide the other party with reasonable access of
the books and records then owned by it to permit such requesting party to
satisfy reporting and contractual obligations that may be required of it.
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 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
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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: JACK H. CASTLE, D.D.S., P.C.
1360 Post Oak Boulevard, Ste. 1300
Houston, Texas 77056
ATTN: President
Business Manager: CASTLE DENTAL CENTERS, INC.
1360 Post Oak Boulevard, Ste. 1300
Houston, Texas 77056
ATTN: Jack H. Castle, Jr.
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 Texas applicable to agreements to be
performed wholly within the State. Texas law was chosen by the parties after
negotiation to govern interpretation of this Management Services Agreement
because Harris County, Texas is the seat of management for Business Manager. The
federal and State courts of Harris County, Texas 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 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
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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 party may in writing request the judge of the United States District
Court for the Southern District of Texas 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.
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(d) APPLICABLE RULES.
(i) Each arbitration hearing shall be held at a place in Houston,
Texas 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) 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
set forth in this Section 8.6 for selecting the arbitrators
shall be followed from time to time as necessary.
(iv) 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.
(v) All privileges under Texas 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 Texas 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.
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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 party, 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.
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 similar 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
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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 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: JACK H. CASTLE, D.D.S., P.C.
By:
Jack H. Castle
President
BUSINESS MANAGER: CASTLE DENTAL CENTERS, INC.
By:
Name:
Title:
29
EXHIBIT 10.10
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement") is made and entered into
as of December 18, 1995, by and between Jack H. Castle, D.D.S. (the "Seller")
and Castle Dental Centers, Inc., a Delaware corporation (the "Purchaser").
1. INTRODUCTION. Seller is the sole shareholder of JHCDDS, Inc. (formerly
Jack H. Castle, D.D.S., Inc.), a Texas professional corporation (the "Company"),
owning 1,000 shares of common stock, no par value per share (the "Common
Stock"), constituting all of the issued and outstanding shares of Common Stock
of the Company. The Seller desires to sell to the Purchaser, and the Purchaser
desires to purchase from the Seller such 1,000 shares of Common Stock for the
consideration and on the other terms and conditions contained in this Agreement.
2. SALE AND PURCHASE. In reliance on the representations and warranties
contained in this Agreement and on the terms and conditions contained herein,
the Seller hereby sells, assigns and delivers to the Purchaser 1,000 shares of
Common Stock of the Company. The Seller has delivered to the Purchaser
certificates representing 1,000 shares of Common Stock of the Company in proper
form for transfer, accompanied by a duly executed stock power executed by the
Seller.
3. CONSIDERATION. As consideration for the Common Stock, the Purchaser has
paid to the Seller the sum of $6,000,000 by certified or cashier's check or by
wire transfer of immediately available funds, the receipt and sufficiency of
which is hereby acknowledged.
4. REPRESENTATIONS AND WARRANTIES OF THE SELLER. Seller hereby represents
and warrants to the Purchaser as follows:
4.1. AUTHORITY. Seller has the full legal capacity to execute and
deliver this Agreement and perform its obligations hereunder.
4.2. OWNERSHIP OF STOCK. Immediately before executing and delivering
this Agreement, the Seller was the sole record and beneficial owner of 1,000
shares of Common Stock, constituting all of the issued and outstanding shares of
Common Stock of the Company, and owned such shares of Common Stock free and
clear of all assessments, charges, claims, liens, options, pledges, security
interests and other encumbrances whatsoever. By executing and performing the
obligations of this Agreement, Seller has transferred to Purchaser good and
valid title to the Common Stock, free and clear of all assessments, charges,
claims, liens, options, pledges, security interests and other encumbrances
whatsoever.
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4.3. EXECUTION AND DELIVERY; ENFORCEABILITY. This Agreement as
executed and delivered by the Seller constitutes the legal, valid and binding
obligation of the Seller and is enforceable against the Seller in accordance
with its terms.
4.4. IMPEDIMENTS. Seller's execution and delivery of this Agreement
and performance of its obligations hereunder will not cause a breach or
violation of, or a default or event of default under, any provision of (1) any
agreement, contract or arrangement, oral or written, to which Seller or the
Company is a party or by which Seller or the Company or any shares of Common
Stock are bound; (2) any law, rule or regulation of any governmental authority
applicable to Seller or the Company; or (3) any decree, order, injunction or
other decision of any court, arbitrator, governmental authority or
administrative agency with jurisdiction over the Seller or the Company.
4.5. AUTHORIZED CAPITAL. The authorized capital stock of the Company
consists of 10,000 shares of Common Stock, of which 1,000 shares have been fully
authorized and validly issued, are fully paid and nonassessable, and are
outstanding and owned by Seller. There are no outstanding subscriptions,
options, warrants, calls or other agreements, arrangements, commitments or right
to purchase, convert into, or exchange or otherwise acquire any shares of Common
Stock or other securities of the Company. The Company is a corporation duly
organized, validly existing and in good standing as a professional corporation
under the laws of the State of Texas.
4.6. TAXES. The Company has filed with the proper taxing or other
governmental authority all tax returns and reports and has paid all taxes
required by law for all periods ended before the effective date of this
Agreement. No claim is pending or threatened against the Company based on its
failure to file any tax return or report or to pay any tax when due.
4.7. FINANCIAL STATEMENTS. Seller has delivered to the Purchaser a
financial statement of the Company for the most recent applicable period. The
financial statement is complete for the period indicated, fairly presents the
financial position and the results of operation of the Company and has been
prepared in accordance with generally accepted accounting principles
consistently applied.
4.8. PROPERTIES. The Company has good and valid title to all of its
assets, free and clear of all liens, pledges, security interests, charges,
claims, restrictions and other encumbrances of any nature whatsoever.
4.9. COMPLIANCE WITH THE LAW. The Company has complied in all
material respects with all laws, ordinances, and governmental rules or
regulations to which it or its business, operations, assets or properties is
subject and has not failed to obtain, or to adhere to the requirements of, any
license, permit or other governmental authorization necessary to the ownership
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of its assets and properties or to the conduct of its business, which
noncompliance, violation or failure to obtain or adhere would have a material
adverse effect on its business, operations, assets, properties, prospects or
conditions (financial or otherwise).
4.10. SURVIVAL. The representation and warranties of Seller
hereunder (other than the representations and warranties contained in Sections
4.2 and 4.5) shall expire contemporaneously with the consummation of the
transaction contemplated hereby, and shall not survive the closing of such
transaction.
5. MISCELLANEOUS PROVISIONS.
5.1. ENTIRE AGREEMENT. This Agreement constitutes the full
understanding of the Seller and the Purchaser and a complete and exclusive
statement of the terms and conditions of their agreement relating to the subject
matter hereof and supersedes all prior negotiations, understandings and
agreements, whether written or oral, between the Seller and the Purchaser with
respect thereto.
5.2. AMENDMENTS. No alteration, modification, amendment or change in
this Agreement shall be effective or binding on any party unless the same is in
writing and is executed by the Seller and the Purchaser.
5.3. GOVERNING LAW. This Agreement shall be governed by, construed
under, and enforced in accordance with the laws of the State of Texas without
reference to the conflict-of-laws provisions thereof.
5.4. MULTIPLE COUNTERPARTS. This Agreement may be executed by the
parties hereto in multiple counterparts, each of which shall be deemed an
original for all purposes, and all of which together shall constitute one and
the same instrument.
This Agreement is executed and delivered by the Seller and the Purchaser
on the date first set forth above.
SELLER:
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Jack H. Castle, D.D.S.
PURCHASER:
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Castle Dental Centers, Inc.
By:_________________
Jack H. Castle, Jr.
President
12/18/95--11:10 am
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EXHIBIT 10.19
ASSET PURCHASE AGREEMENT
Dated as of May 19, 1996
By and Among
Castle Dental Centers of Florida, Inc.
as Purchaser,
1st Dental Care, Inc.,
Hernando Dental Center-Lester B. Greenberg, D.D.S., P.A.
and M&B Dental Lab, Inc.
as Seller
and
Lester B. Greenberg, D.D.S. and
Elisa Greenberg
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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..................................................7
2.3 Assumption of Obligations........................................8
2.4 Nonassignable Contracts and Leases...............................8
2.5 Closing..........................................................8
ARTICLE III
PAYMENT OF PURCHASE PRICE..............................................9
3.1 Amount; Allocation; Delivery.....................................9
3.2 Purchase Price Adjustment.......................................10
3.3 Assumption of Accounts Payable..................................11
3.4 Apportionments..................................................12
3.5 Agency Relationship.............................................12
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
AND THE SHAREHOLDERS..................................................12
4.1 Representations and Warranties of Seller and the Shareholders. 12
4.2 Existence and Good Standing.....................................12
4.3 Authorization and Validity of Agreement.........................13
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4.4 Consents and Approvals; No Violations...........................13
4.5 Subsidiaries and Affiliates.....................................14
4.6 Financial Statements; No Material Adverse Change................14
4.7 Books and Records...............................................14
4.8 Title to Properties; Encumbrances; Condition....................14
4.9 Real Property...................................................15
4.10 Leases..........................................................15
4.11 Material Contracts..............................................15
4.12 Permits.........................................................16
4.13 Litigation......................................................16
4.14 Taxes...........................................................16
4.15 Insurance.......................................................17
4.16 Intellectual Properties.........................................17
4.17 Compliance with Laws............................................18
4.18 Employment Relations............................................18
4.19 Employee Benefit Plans..........................................18
4.20 Environmental Laws and Regulations..............................18
4.21 Interests in Customers, Suppliers, Etc..........................19
4.22 Compensation of Employees.......................................19
4.23 Payors. ......................................................19
4.24 Accounts Receivable; Accounts Payable...........................19
4.25 Solvency........................................................19
4.26 Disclosure......................................................20
4.27 Broker's or Finder's Fees.......................................20
4.28 Copies of Documents.............................................21
4.29 Investment Representations......................................21
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF PURCHASER..........................................................22
5.1 Representations and Warranties of Purchaser.....................22
5.2 Existence and Good Standing of Purchaser; Power and Authority...22
5.3 No Violations...................................................22
5.4 Capital Stock...................................................23
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5.5 Litigation......................................................23
5.6 Compliance with Laws............................................23
5.7 Financial Statements............................................23
5.8 Broker's or Finder's Fees.......................................24
ARTICLE VI
CONDITIONS TO SELLER'S OBLIGATIONS....................................24
6.1 Truth of Representations and Warranties.........................24
6.2 Performance of Agreements.......................................24
6.3 No Litigation Threatened........................................24
6.4 Governmental Approvals..........................................24
6.5 Proceedings.....................................................25
6.6 Employment Agreement............................................25
6.7 Registration Rights Agreement...................................25
ARTICLE VII
CONDITIONS TO PURCHASER'S OBLIGATIONS.................................25
7.1 Truth of Representations and Warranties.........................25
7.2 Performance of Agreements.......................................25
7.3 Documents of Conveyance.........................................26
7.4 No Litigation Threatened........................................26
7.5 Governmental Approvals..........................................26
7.6 Consents........................................................26
7.7 Legal Opinion...................................................26
7.8 Proceedings.....................................................26
7.9 New PC..........................................................26
7.10 Execution of Management Services Agreement......................26
7.11 Stockholders Agreement..........................................27
7.12 Lease Agreement.................................................27
7.13 Accounts Payable Calculation....................................27
7.14 Subordination Agreement.........................................27
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ARTICLE VIII
COVENANTS OF SELLER AND THE SHAREHOLDERS..............................27
8.1 Cooperation by Seller...........................................27
8.2 Conduct of Business.............................................28
8.3 Exclusive Dealing...............................................28
8.4 Review of the Assets............................................28
8.5 Further Assurances..............................................28
ARTICLE IX
COVENANTS OF PURCHASER................................................29
9.1 Cooperation by Purchaser........................................29
9.2 Books and Records; Personnel....................................29
9.3 Further Assurances..............................................29
ARTICLE X
TERMINATION...........................................................30
10.1 Termination.....................................................30
10.2 Effect on Obligations...........................................30
ARTICLE XI
SURVIVAL AND INDEMNIFICATION..........................................31
11.1 Indemnification of the Seller...................................31
11.2 Indemnification of the Purchaser................................31
11.3 Demands.........................................................32
11.4 Right to Contest and Defend.....................................32
11.5 Cooperation.....................................................33
11.6 Right to Participate............................................33
11.7 Payment of Damages..............................................33
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ARTICLE XII
MISCELLANEOUS.........................................................34
12.1 Entire Agreement................................................34
12.2 Successors and Assigns..........................................34
12.3 Counterparts....................................................34
12.4 Headings........................................................34
12.5 Modification and Waiver.........................................34
12.6 No Third Party Beneficiary Rights...............................34
12.7 Sales and Transfer Taxes........................................35
12.8 Expenses........................................................35
12.9 Notice..........................................................35
12.10 Governing Law...................................................36
12.11 Confidentiality; Publicity......................................36
12.12 Consent to Jurisdiction.........................................36
12.13 Severability....................................................37
12.14 Enforcement.....................................................37
SCHEDULES
Schedule 2.2 Excluded Assets
Schedule 2.3 Assigned Contracts
Schedule 3.1 Allocation of Purchase Price
Schedule 4.4 Consents
Schedule 4.6 Material Adverse Change
Schedule 4.8 Encumbrances
Schedule 4.9 Real Property
Schedule 4.10 Leased Personal Property
Schedule 4.11 Material Contracts and Proposals
Schedule 4.12 Permits
Schedule 4.13 Litigation
Schedule 4.14 Taxes
Schedule 4.15 Insurance Policies
Schedule 4.16 Intellectual Property
Schedule 4.20 Environmental Matters
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Schedule 4.22 Employee Compensation
Schedule 4.23 Payors
Schedule 4.25 Solvency
Schedule 5.3 Required Notices
Schedule 5.7 Castle Dental Financial Statement
EXHIBITS
Exhibit A-1 Form of Promissory Note
Exhibit A-2 Form of Promissory Note
Exhibit A-3 Form of Promissory Note
Exhibit B Employment Agreement
Exhibit C Legal Opinion
Exhibit D Stockholders Agreement
Exhibit E Registration Rights Agreement
Exhibit F Management Services Agreement
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ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT dated as of May 19, 1996 by and among Castle
Dental Centers of Florida, Inc., a Florida corporation ("Purchaser"), 1st Dental
Care, Inc., a Florida corporation ("1st Dental"), Hernando Dental Center --
Lester B. Greenberg, D.D.S., P.A. a/k/a 1st Dental Care of Florida, a Florida
professional association ("Hernando Dental Center"), M&B Dental Lab, Inc., a
Florida corporation ("M&B Dental Lab") and Lester B. Greenberg, D.D.S. ("Dr.
Greenberg"), and Elisa Greenberg, the sole shareholders of Seller (the
"Shareholders"). 1st Dental, Hernando Dental Center and M&B Dental Lab are
referred to herein collectively as "Seller", and references herein to Seller
refer severally to each of 1st Dental, Hernando Dental Center and M&B Dental
Lab.
W I T N E S S E T H:
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.
"ACCOUNTS PAYABLE": the payables of Seller to trade account and other
creditors as of the Closing Date as shown on Schedule 2.3.
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"ADJUSTED BASE DATE NET ASSET VALUE": as defined in Section 3.2 hereof.
"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.
"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.
"BALANCE SHEET DATE": as defined in Section 3.2 hereof.
"BASE DATE NET ASSET VALUE": as defined in Section 3.2 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
any books, records, files and other data of Seller which relate exclusively to
organizational and corporate governance proceedings of Seller.
"BUSINESS": the practice management of dentistry, including orthodontics
and periodontics and all other management and related activities currently
conducted by Seller.
"CLOSING": as defined in Section 2.6 hereof.
"CLOSING DATE": as defined in Section 2.6 hereof.
"CLOSING DATE BALANCE SHEET": as defined in Section 3.2 hereof.
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"CLOSING DATE NET ASSET VALUE": as defined in Section 3.2 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 B 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 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.
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"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.
"HERNANDO DENTAL CENTER": Hernando Dental Center -- Lester B. Greenberg,
D.D.S., P.A. a/k/a 1st Dental Care of Florida, a professional association
wholly-owned by Lester B. Greenberg.
"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.
"M&B DENTAL LAB": M&B Dental Lab, Inc., a Florida corporation wholly-owned
by Benjamin and Melissa Greenberg.
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"MATERIAL ADVERSE EFFECT": material adverse effect on the assets,
liabilities, Business, condition (financial or otherwise), results or operations
or prospects of the Seller, or its Affiliates.
"NEW PC": Castle 1st Dental Care, P.A., a Florida professional
association.
"PERMITS": as defined in Section 4.12 hereof.
"PERMITTED ENCUMBRANCES": as defined in Section 4.8 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.
"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.
"SELLER PROPERTY": any real property and improvements thereon presently
owned, leased, operated or occupied by Seller.
"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,
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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.
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 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, real, personal and mixed, wheresoever
situated and 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) Seller's title to, interest in or rights under the leases of
real property described in Schedule 4.9 attached hereto together with all
buildings, facilities, fixtures and other leasehold improvements thereon
and all easements, rights-of-way, transferable licenses and permits and
other appurtenances thereof;
(b) plant, machinery, equipment, operating equipment, tools,
supplies, inventories, furniture, fixtures, furnishings, vehicles and
other fixed assets owned or leased by Seller and used or held for use in
the conduct of the Business;
(c) contracts, documents, instruments and general intangibles of
Seller, including the name "1st Dental Care" and derivatives thereof, and
goodwill associated therewith, other than the Excluded Contracts;
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(d) Accounts Receivable as of the Closing Date;
(e) all licenses, permits, registrations and authorizations,
proprietary information, methods, know-how, designs, processes,
procedures, goodwill and all rights held by Seller to other Intellectual
Property;
(f) Books and Records;
(g) any rights of Seller 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; 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
2.2 EXCLUDED ASSETS. The Assets shall not include any of the following
(the "Excluded Assets"):
(a) the real property described on Schedule 2.2;
(b) cash, cash equivalents, deposits, advance payments, securities,
letters of credit naming Seller as account party, certificates of deposit,
notes, drafts, checks and similar instruments;
(c) each contract set forth on Schedule 2.2 (the "Excluded
Contracts");
(d) 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;
(e) minute books and governance documents of the Seller; and
(f) the vehicles described on Schedule 2.2.
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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, (b) Accounts Payable set forth on Schedule 2.3
and (c) the long term debt (including automobile notes) set forth on Schedule
2.3 (collectively, "Assumed Obligations"). Notwithstanding anything contained
herein to the contrary, Purchaser does not assume, and hereby expressly
disclaims responsibility for, any obligation or liability of Seller or the
Shareholders not described on Schedule 2.3.
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 agrees to use
its 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, 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 is unable to
obtain such necessary written consents for the remaining term of such Assigned
Contract, Purchaser shall act as such Seller's agent in the performance of all
obligations and liabilities under such Assigned Contract and such Seller shall
act as Purchaser's agent in the receipt of any benefits, rights or interests
which inure to such Seller 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 Macfarlane Ausley Ferguson & McMullen,
400 Cleveland Street, Clearwater, Florida, 43615, on or before May 22, 1996, or
such other place, date and time as may be mutually agreed upon by the parties
hereto; provided, however that for accounting purposes the Closing Date shall be
May 19, 1996. Such time and date are referred to herein as the "Closing Date."
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ARTICLE III
PAYMENT OF PURCHASE PRICE
3.1 AMOUNT; ALLOCATION; DELIVERY. At the Closing, in addition to
Purchaser's assumption of the Assumed Obligations, Purchaser shall pay to Seller
the sum of $6,054,613 in cash and notes, plus an aggregate of 145,242 shares of
Common Stock, $.001 par value ("Common Stock"), of Castle Dental Centers, Inc
("Castle Dental"), a Delaware corporation (the "Purchase Price"), subject to
adjustment as provided in Section 3.2 hereof, which Purchase Price shall be
remitted by Purchaser to Seller in the following manner:
(a) $3,323,312 less liabilities assumed on Schedule 2.3, 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) a five year subordinated promissory note of Castle Dental
payable to 1st Dental Care, Inc. in the original principal amount of
$1,787,938, payable in equal quarterly installments of principal and
interest at the rate of 10% per annum, convertible in part into Common
Stock substantially in the form of Exhibit A-1 attached hereto;
(c) a four year subordinated convertible promissory note of Castle
Dental payable to 1st Dental Care, Inc. in the original principal amount
of $656,588 with interest accruing quarterly on the unpaid balance at the
rate of 6.36% per annum, convertible in whole or in part into Common
Stock, substantially in the form of Exhibit A-2 attached hereto;
(d) a four year subordinated promissory note of Castle Dental
payable to M&B Dental Lab, Inc. in the original principal amount of
$286,775, with interest accruing quarterly on the unpaid balance at the
rate of 6.36% per annum, substantially in the form of Exhibit A-3 attached
hereto; and
(e) 145,242 shares of Common Stock, $.001 par value, of Castle
Dental, issued in the name of 1st Dental Care, Inc.
Purchaser and Seller hereby agree to allocate the Purchase Price in
accordance with Section 1060 of the Code among the Assets in accordance with
Schedule 3.1 attached hereto (the "Price
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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.
3.2 PURCHASE PRICE ADJUSTMENT.
(a) Seller previously has delivered to Purchaser a combined
unaudited balance sheet of the Seller as of December 31, 1995 (the "Balance
Sheet Date"), (the book value of the Assets included in such balance sheet less
the book value of the Assumed Obligations included in such balance sheet is
hereinafter referred to as the "Base Date Net Asset Value").
(b) Within 60 days following the Closing Date, Seller shall prepare
and deliver to Purchaser a combined balance sheet of the Seller as of the
Closing Date (the "Closing Date Balance Sheet"), together with a calculation of
the book value of the Assets and Assumed Obligations determined on the same
basis as the December 31, 1995 balance sheet (such book value of such Assets
less such book value of such Assumed Obligations is hereinafter referred to as
the "Closing Date Net Asset Value"). Purchaser and its representatives shall
have the right to review all work papers and procedures used to prepare the
Closing Date Balance Sheet and the calculation of the Closing Date Net Asset
Value, and shall have the right to perform any other reasonable procedures
necessary to verify the accuracy thereof. Unless Purchaser, within 20 days after
delivery to Purchaser of the Closing Date Balance Sheet, notifies Seller in
writing that it objects to the Closing Date Balance Sheet or the calculation of
the Closing Date Net Asset Value, and specifies the basis for such objection,
the Closing Date Balance Sheet and the calculation of the Closing Date Net Asset
Value shall become final and binding upon the parties for purposes of this
Agreement. If Purchaser and Seller are unable to resolve such objections within
10 days after any such notification has been given, the dispute shall be
submitted to Coopers & Lybrand, L.L.P. (or, if Coopers & Lybrand, L.L.P. is
unavailable, to another nationally recognized public accounting firm mutually
agreed upon by Purchaser and Seller). Such accounting firm shall make a final
and binding determination as to the matter or matters in dispute. Purchaser and
Seller agree to cooperate with each other and with each other's authorized
representatives in order to resolve any and all matters in dispute as soon as
practicable.
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(c) Seller has covenanted with Purchaser that Seller will generate
not less than $300,000 of pre-tax earnings for the period commencing January 1,
1996 to the Closing Date. The Base Date Net Asset Value, as adjusted to reflect
the additional $300,000 of pre-tax earnings, is hereinafter referred to as the
Adjusted Base Date Net Asset Value.
(d) Within 10 days after the Closing Date Net Asset Value has been
finally determined, the difference, if any, between the Adjusted Base Date Net
Asset Value and the Closing Date Net Asset Value shall be added to the principal
amount of the promissory note described in Section 3.1(b) (if the Closing Date
Net Asset Value exceeds the Adjusted Base Date Net Asset Value) or deducted from
the principal amount of the promissory note described in Section 3.1(b) (if the
Adjusted Base Date Net Asset Value exceeds the Closing Date Net Asset Value).
(e) Purchaser and Seller, in the aggregate, each shall bear one-half
of the fees, costs and expenses of the accounting firm retained under subsection
(c) to resolve any dispute.
3.3 ASSUMPTION OF ACCOUNTS PAYABLE. On the Closing Date, Purchaser, Seller
and the Shareholders will agree as to the projected amount of accounts payable
which are being assumed by Purchaser pursuant to Section 3.1(a). At the same
time as the Purchase Price Adjustment contemplated by Section 3.2 is made,
Purchaser will certify to Seller the actual amount of accounts payable
attributable to periods prior to the Closing Date which have been paid or
accrued by Purchaser. To the extent the actual amount of accounts payable
attributable to periods prior to the Closing Date which have been paid or
accrued by Purchaser exceeds the amount projected to have been assumed by the
Purchaser, the excess will be paid to Purchaser by Seller as a part of the
purchase price adjustment described in Section 3.2. To the extent the actual
amount of accounts payable attributable to periods prior to the Closing Date
which have been paid or accrued by Purchaser is less than the amount projected
to have been assumed by the Purchaser, the shortfall will be paid to Seller by
Purchaser as a part of the purchase price adjustment described in Section 3.2.
3.4 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 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
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account of Purchaser. At the Closing, Seller or Purchaser, as the case may be,
shall deliver to the other a check for the net amount owing under this Section
3.3. If any such item cannot accurately be apportioned at the Closing or
subsequent thereto, such item shall be apportioned or reapportioned, as the case
may be, as soon as practicable after the Closing Date or the date on which the
apportionment error is discovered, as applicable.
3.5 AGENCY RELATIONSHIP. In the event that, following the Closing Date,
Seller receives any funds, documents or instruments which constitute or are
delivered in respect of Assets transferred to Purchaser pursuant to this
Agreement, Seller agrees to hold such funds, documents or instruments in trust
for Purchaser and as Purchaser's agent therefor.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
AND THE SHAREHOLDERS
4.1 REPRESENTATIONS AND WARRANTIES OF SELLER AND THE SHAREHOLDERS. Seller
and the Shareholders, jointly and severally, hereby represent and warrant to
Purchaser as follows:
4.2 EXISTENCE AND GOOD STANDING. Seller is a corporation duly organized
and validly existing under the laws of the State of Florida. Seller 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. Seller is duly qualified or licensed to do business in
each jurisdiction in which the character or location of the properties owned or
leased by Seller or the nature of the business conducted by Seller makes such
qualification necessary and the absence of which would have a Material Adverse
Effect.
4.3 AUTHORIZATION AND VALIDITY OF AGREEMENT. Seller 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 Seller 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 Seller, and no other action on
the part of Seller or its Shareholders is necessary to authorize the execution,
delivery and performance of this Agreement
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by Seller and the consummation of the transactions contemplated hereby. This
Agreement 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 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.
4.4 CONSENTS AND APPROVALS; NO VIOLATIONS. Except as set forth on Schedule
4.4, 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 Seller; (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 Seller or the Shareholders or by which any of Seller's properties
or assets may be bound; (c) 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 4.4 attached hereto; or (d) 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.
4.5 SUBSIDIARIES AND AFFILIATES. Seller has no subsidiaries. Except as set
forth on Schedule 4.5, 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. Purchaser is not
acquiring the assets of Florida Academy of Dental Assistants, Inc. or Bay Area
Dental Supply, Inc., none of which are used in the Business.
4.6 FINANCIAL STATEMENTS; NO MATERIAL ADVERSE CHANGE. Seller has
heretofore furnished Purchaser with the unaudited balance sheet of Seller as of
the Balance Sheet Date and the unaudited statements of operations and cash flows
for the year then ended (the "Financial Statements"). The
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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. Except as set forth in Schedule 4.6
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.
4.7 BOOKS AND RECORDS. 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, to the extent set forth therein.
4.8 TITLE TO PROPERTIES; ENCUMBRANCES; CONDITION. Except as set forth in
Schedule 4.8 or 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 consisting of easements, permits and other
restrictions or limitations on the use of real property or irregularities in
title thereto that do not materially detract from the value of, or materially
impair the use of, such property by Seller in the operation of the Business,
(ii) Encumbrances for current taxes, assessments or governmental charges or
levies on property not yet due or delinquent, (iii) Encumbrances created by
Purchaser, and (iv) Encumbrances relating to Assumed Obligations (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.
4.9 REAL PROPERTY. Schedule 4.9 identifies all leases relating to
properties used by the Seller and includes the name of the record title holder
thereof. 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, except where
such condition or maintenance would not have a Material Adverse Effect. The real
property has adequate rights of ingress and egress for operation of the Business
in the ordinary course. 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.
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4.10 LEASES. Schedule 4.10 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 4.10 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.
4.11 MATERIAL CONTRACTS. Except as set forth in Schedule 4.11, the
Assigned Contracts do not include (a) any agreement, contract or commitment
relating to the employment 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 (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 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 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 4.11. Except where it would not have a Material Adverse
Effect, each contract or agreement set forth in Schedule 4.11 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.
4.12 PERMITS. Schedule 4.12 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
and the conduct of the Business as currently conducted. Seller holds all of the
Permits listed on Schedule 4.12, and none is presently subject to revocation or
challenge.
4.13 LITIGATION. Except as set forth in Schedule 4.13, 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 Seller and the
Shareholders, threatened, against or affecting the properties, rights or
goodwill of
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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. There are no such suits, actions, claims, proceedings or
investigations pending or to the knowledge of Seller and the Shareholders
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 4.13.
4.14 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.
(b) Except as provided in Schedule 4.14 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 4.14, 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.
(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.
4.15 INSURANCE. Set forth in Schedule 4.15 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. Such policies are in full force
and effect and are free from any right of termination on
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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.
4.16 INTELLECTUAL PROPERTIES. Schedule 4.16 sets forth all material
Intellectual Property used in the Business and the name of the Seller which owns
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 4.16 and rights granted to
Seller pursuant to agreements listed on Schedule 4.16. Except as otherwise set
forth in Schedule 4.16, Seller owns all right, title and interest in the
Intellectual Property listed in Schedule 4.16. No litigation is pending or, to
the knowledge of Seller or the Shareholders, 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.
4.17 COMPLIANCE WITH LAWS. Seller is in compliance with all applicable
laws, regulations, orders, judgments and decrees applicable to the Business,
except where any noncompliance would not have a Material Adverse Effect.
4.18 EMPLOYMENT RELATIONS. (a) Seller is not and has not 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 (f) no collective bargaining agreement is currently
being negotiated by Seller.
4.19 EMPLOYEE BENEFIT PLANS. Seller has delivered to Purchaser 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.
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4.20 ENVIRONMENTAL LAWS AND REGULATIONS. Except as set forth in Schedule
4.20, and except where it would not have a Material Adverse Effect (a) 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) 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) 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.
4.21 INTERESTS IN CUSTOMERS, SUPPLIERS, ETC. Except for relationships with
Affiliates, Seller does not possess, directly or indirectly, any financial
interest in, and neither Shareholder is a director, officer or employee of, any
corporation, firm, association or business organization which is a supplier,
customer, lessor, lessee, or competitor of Seller.
4.22 COMPENSATION OF EMPLOYEES. Set forth in Schedule 4.22 is an accurate
and complete list showing the names of all persons 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.
4.23 PAYORS. Schedule 4.23 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 4.23 no significant payor has
canceled or otherwise terminated or, to the knowledge of Seller or the
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Shareholders threatened to cancel or otherwise terminate its relationship with
Seller within the last three years.
4.24 ACCOUNTS RECEIVABLE; ACCOUNTS PAYABLE. Except as set forth on
Schedule 4.24, the Accounts Receivable on the Closing Date Balance Sheet are
collectible in the ordinary course of business, net of the reserves established
with respect thereto. Except as set forth on Schedule 4.24, there has been no
change since the Balance Sheet Date (other than in the ordinary course of
business) in the amount of the Accounts Receivable or other fees or debts due to
Seller or the allowances with respect thereto, or Accounts Payable by Seller,
from that reflected in the Balance Sheet.
4.25 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);
(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
(c) Seller will have sufficient capital with which to conduct its
business, and the property of Seller does not constitute unreasonably
small capital with which to conduct its business.
For purposes of this Section 4.25 "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.
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4.26 DISCLOSURE. 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.
4.27 BROKER'S OR FINDER'S FEES. No agent, broker, Person or firm acting on
behalf of Seller 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.
4.28 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.
4.29 INVESTMENT REPRESENTATIONS.
(a) 1st Dental understands that the Common Stock has not been
registered under the Securities Act of 1933, as amended (the "Securities
Act"). 1st Dental 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) 1st Dental, in consultation with its accountants, attorneys and
financial advisors has, the requisite experience in evaluating and
investing in private placement transactions of securities so that it is
capable of evaluating the merits and risks of its investment in Castle
Dental and has the capacity to protect its own interests. 1st Dental
understands that it 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. 1st Dental
also understands that there is no assurance that any exemption from
registration under the Securities Act will be available and that, even if
available, such exemption may not allow it to transfer all or any portion
of the Common Stock under the circumstances, in the amounts or at the
times it might propose.
(c) 1st Dental is acquiring the Common Stock for its own account for
investment only, and not with a view towards distribution.
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(d) 1st Dental represents that by reason of its business or
financial experience, it has the capacity to protect its own interests in
connection with the transactions contemplated in this Agreement.
(e) 1st Dental represents that it is an accredited investor within
the meaning of Regulation D under the Securities Act.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF PURCHASER
5.1 REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and
warrants to Seller and the Shareholders as follows:
5.2 EXISTENCE AND GOOD STANDING OF PURCHASER; POWER AND AUTHORITY.
Purchaser is a corporation duly organized, validly existing and in good standing
under the laws of the State of Florida. Purchaser has full corporate power and
authority to make, execute, deliver and perform this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
This Agreement has been duly authorized and approved by all required corporate
action of Purchaser. This Agreement has been duly executed and delivered by
Purchaser and is a valid and binding obligation of Purchaser enforceable against
Purchaser 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 NO VIOLATIONS. 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, conflict with, or result in a breach or default
under any provision of the certificate of incorporation or by-laws of Purchaser;
(b) to the knowledge of Purchaser, 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
its properties or assets may be bound; (c) to the knowledge of Purchaser,
require any filing by Purchaser with, or require Purchaser to obtain any permit,
consent
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or approval of, or require Purchaser to give any notice to, any governmental or
regulatory body, agency or authority or any third party other than as set forth
in Schedule 5.3; 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 pursuant to, 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 it or any of its
properties or assets may be bound, except in the case of Subsections 5.3(b),
(c), and (d), for such violations, consents, breaches, defaults, terminations
and accelerations which in the aggregate would not have a Material Adverse
Effect.
5.4 CAPITAL STOCK. The authorized capital stock of Castle Dental consists
solely of 18,755,263 shares of Common Stock of which 4,000,000 shares have been
issued, and 1,244,737 shares of Preferred Stock, $.001 par value per share
("Preferred Stock"), all of which shares have been issued. All of the shares of
Common Stock of Castle Dental 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.
5.5 LITIGATION. Except as set forth in Schedule 5.5 hereto, 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 Castle
Dental, Purchaser or their 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 Castle Dental or
Purchaser, and Purchaser does 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, threatened, seeking to prevent or challenge the
transactions contemplated by this Agreement.
5.6 COMPLIANCE WITH LAWS. To the knowledge of Purchaser, Castle Dental and
Purchaser are 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 Dental or Purchaser.
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5.7 FINANCIAL STATEMENTS. The audited financial statements of Castle as of
December 31, 1995, attached hereto as Schedule 5.7 (to be attached prior to the
Closing Date), are complete and correct in all material respects and present
fairly in accordance with generally accepted accounting principles consistently
applied, the financial condition of Castle Dental and the results of operations
of Castle Dental as of the dates thereof and for the periods indicated.
5.8 BROKER'S OR FINDER'S FEES. Except for The GulfStar Group, no agent,
broker, Person or firm acting on behalf of Purchaser 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.
ARTICLE VI
CONDITIONS TO SELLER'S OBLIGATIONS
The obligations of Seller 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 Seller) on or prior to the
Closing Date of all of the following conditions:
6.1 TRUTH OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Purchaser 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, and Purchaser shall have delivered to Seller on the Closing Date a
certificate of an authorized officer of Purchaser, dated the Closing Date, to
such effect.
6.2 PERFORMANCE OF AGREEMENTS. Each and all of the agreements and
covenants of Purchaser 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 shall have delivered to Seller a certificate of an authorized officer
of Purchaser, 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, dated the Closing Date, to such effect to the best knowledge of
such officer.
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6.4 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.
6.5 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 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.
6.6 EMPLOYMENT AGREEMENT. Dr. Greenberg shall have received an Employment
Agreement, substantially in the form of Exhibit B, executed by the Purchaser.
6.7 REGISTRATION RIGHTS AGREEMENT. 1st Dental Care, Inc. shall have
received a Registration Rights Agreement, substantially in the form of Exhibit E
hereto, executed by Castle Dental.
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; 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.
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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 DOCUMENTS OF CONVEYANCE. Purchaser shall have received from Seller
fully executed documents of conveyance vesting in Purchaser good and valid title
to the Assets, free and clear of any Encumbrances except Permitted Encumbrances.
7.4 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.
7.5 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.
7.6 CONSENTS. Each of the consents referred to in Schedule 4.4 attached
hereto shall have been obtained.
7.7 LEGAL OPINION. Seller shall have delivered to Purchaser the opinion of
Macfarlane Ausley Ferguson & McMullen, their counsel, substantially in the form
of Exhibit C attached hereto.
7.8 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.
7.9 NEW PC. The Shareholders shall have organized New PC and New PC shall
have entered into Employment Agreements with the dentists presently employed by
Seller and Seller shall have duly and validly assigned to New PC all
reimbursement contracts with third party insurance companies, managed care
companies and other reimbursement sources referred to in Section 2.2(f).
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7.10 EXECUTION OF MANAGEMENT SERVICES AGREEMENT. Purchaser and New PC
shall have entered into a Management Services Agreement substantially in the
form of Exhibit F attached hereto.
7.11 STOCKHOLDERS AGREEMENT. 1st Dental Care, Inc. shall have entered into
a Stockholders Agreement with Castle Dental and certain of its other
shareholders, substantially in the form of Exhibit D attached hereto.
7.12 LEASE AGREEMENT. Purchaser and Dr. Greenberg shall have entered into
a Lease Agreement with respect to certain real property owned by Dr. Greenberg
and used in the Business, in form and substance satisfactory to Purchaser and
Dr. Greenberg.
7.13 ACCOUNTS PAYABLE CALCULATION. Purchaser, Seller and the Shareholder
shall have agreed in writing as to the amount of the Assumed Accounts Payable
assumed by Purchaser.
7.14 SUBORDINATION AGREEMENT. Seller shall have executed and delivered a
Subordination Agreement with respect to the promissory notes described in
Sections 3.1(b) and (c) in form and substance satisfactory to the senior and
senior subordinated lenders of Castle Dental.
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. 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
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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.
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 ordinary course, (b) use its reasonable efforts to keep
available the services of its employees and maintain satisfactory relationships
with licensors, suppliers, lessors, distributors, customers, clients and others,
(c) 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, and (d) maintain the Books
and Records in the usual, regular and ordinary manner, on a basis consistent
with past practice.
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, 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. Seller and the Shareholders shall permit Purchaser and its
representatives to have, after the execution of this Agreement, full 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.
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
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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
Purchaser hereby covenants and agrees 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. 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 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.
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.
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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, the Shareholders and
Seller; or
(b) by Purchaser, 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 default or
in breach of this Agreement), if the Closing Date shall not have occurred
on or before May 22, 1996; or
(c) by either Purchaser, 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 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
covenants or agreements contained herein required to be performed prior to
the Closing Date, or (ii) breach or have breached any of its
representations or warranties contained herein.
10.2 EFFECT ON OBLIGATIONS. Termination of this Agreement pursuant to this
Article 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 next succeeding sentence of this Section 10.2. 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.
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ARTICLE XI
SURVIVAL AND INDEMNIFICATION
11.1 INDEMNIFICATION OF THE SELLER. The Purchaser, 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 (including exemplary damages and 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, arising
out of, or in any way relating to (a) any misrepresentation, breach of warranty,
or nonfulfillment of any agreement or covenant on the part of the Purchaser
under this Agreement or any misrepresentation in or omission from any list,
schedule, certificate, or other instrument furnished or to be furnished to the
Seller by the Purchaser pursuant to the terms of this Agreement or (b) any
liability or obligation (other than those for which Purchaser 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.
11.2 INDEMNIFICATION OF THE PURCHASER. Seller and the Shareholders,
jointly and severally, shall indemnify and hold Purchaser and its Affiliates
(the "Purchaser Indemnitees") harmless from and against any and all Damages
suffered by any Purchaser Indemnitee as a result of, caused by, arising out of,
or in any way relating to (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, certificate, or other instrument furnished or to be
furnished to the Purchaser by the Seller pursuant to the terms of this
Agreement, or any misrepresentation, breach of warranty or nonfulfillment of any
agreement or covenant contained in the Hernando Agreement or the M&B Agreement
(b) any liability or obligation (other than those for which Seller and the
Shareholders are being indemnified by Purchaser 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 (including assets
acquired pursuant to the Hernando Agreement or the M&B Agreement) arising from
any acts, omissions, events, conditions or circumstances occurring before the
Closing Date, or (c) the uncollectibility of any Account Receivable, including
accounts receivable acquired pursuant to the Hernando Agreement or the M&B
Agreement (net of applicable reserve), after six months.
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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 in accordance with the provisions of this Agreement in sufficient time
to permit the indemnifying party or its counsel to defend against such matter
and to make 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, only insofar as such
knowing failure to notify the indemnifying party has 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. 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
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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 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.
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<PAGE>
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 or by Purchaser 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.
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.
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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:
if to Purchaser, to:
Castle Dental Centers of Florida, 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:
Lester B. Greenberg, D.D.S.
Elisa Greenberg
1st Dental Care, Inc.
29605 U.S. Highway 19N., Suite 180
Clearwater, Florida 34621
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with a copy to:
Mr. Paul Raymond
Macfarlane Ausley Ferguson & McMullen
400 Cleveland Street
Eighth Floor
Clearwater, Florida 34615
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 Florida 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.
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 Tampa, Florida, 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.
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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.
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 FLORIDA, INC.
By:_____________________________
Name: Jack H. Castle, Jr.
Title: President
1ST DENTAL CARE, INC.
By:_____________________________
Name: Lester B. Greenberg, D.D.S.
Title: President
HERNANDO DENTAL CENTER -- LESTER B.
GREENBERG, D.D.S., P.A.
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By:______________________________
Lester B. Greenberg, D.D.S.
Title: President
M&B DENTAL LAB, INC.
By:______________________________
Elisa Greenberg
President
________________________________
LESTER B. GREENBERG, D.D.S.
________________________________
ELISA GREENBERG
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Exhibit 10.23
MANAGEMENT SERVICES AGREEMENT
BY AND BETWEEN
CASTLE DENTAL CENTERS OF FLORIDA, INC.,
A FLORIDA CORPORATION
AND
CASTLE 1ST DENTAL CARE, P.A.
A FLORIDA PROFESSIONAL ASSOCIATION
EFFECTIVE MAY 19, 1996
<PAGE>
TABLE OF CONTENTS
PAGE NO.
ARTICLE I. DEFINITIONS........................................................2
Section 1.1 Act......................................................2
Section 1.2 Adjusted Gross Revenue...................................2
Section 1.3 Adjustments..............................................2
Section 1.4 Ancillary Revenue........................................2
Section 1.5 Base Management Fee......................................2
Section 1.6 Budget...................................................2
Section 1.7 Business Manager.........................................2
Section 1.8 Business Manager Consent.................................2
Section 1.9 Business Manager Expense.................................3
Section 1.10 Confidential Information.................................3
Section 1.11 Center...................................................3
Section 1.12 Dental Services..........................................3
Section 1.13 Dentist..................................................3
Section 1.14 GAAP.....................................................4
Section 1.15 Management Fee...........................................4
Section 1.16 Management Services......................................4
Section 1.17 Management Services Agreement............................4
Section 1.18 Office Expense...........................................4
Section 1.19 PC.......................................................5
Section 1.20 PC Account...............................................5
Section 1.21 PC Consent...............................................5
Section 1.22 PC Expense...............................................6
Section 1.23 Performance Fee..........................................6
Section 1.24 Policy Board.............................................6
Section 1.25 Practice Territory.......................................6
Section 1.26 Professional Services Revenues...........................6
Section 1.27 Representatives..........................................6
Section 1.28 State....................................................6
Section 1.29 Term.....................................................6
ARTICLE II. APPOINTMENT AND AUTHORITY OF BUSINESS MANAGER.....................7
Section 2.1 Appointment..............................................7
Section 2.2 Authority................................................7
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Section 2.3 Patient Referrals and Payments...........................7
Section 2.4 Internal Management of PC................................8
Section 2.5 Practice of Dentistry....................................8
ARTICLE III. RESPONSIBILITIES OF THE POLICY BOARD.............................8
Section 3.1 Formation and Operation of the Policy Board..............8
Section 3.2 Duties and Responsibilities of the Policy Board..........8
(a) Capital Improvements and Expansion.......................8
(b) Marketing and Advertising................................9
(c) Patient Fees; Collection Policies........................9
(d) Provider and Payor Relationships.........................9
(e) Strategic Planning.......................................9
(f) Capital Expenditures.....................................9
Section 3.3 Dental Treatment Decisions...............................9
ARTICLE IV. COVENANTS AND RESPONSIBILITIES OF BUSINESS MANAGER...............10
Section 4.1 Centers and Equipment...................................10
Section 4.2 Dental Supplies.........................................11
Section 4.3 Support Services........................................11
Section 4.4 Quality Assurance, Risk Management,
and Utilization Review..................................11
Section 4.5 Licenses and Permits....................................12
Section 4.6 Personnel...............................................12
Section 4.7 Contract ...............................................12
Section 4.8 Billing and Collection..................................12
Section 4.9 PC Account..............................................14
Section 4.10 Fiscal Matters..........................................14
Section 4.11 Reports and Records.....................................16
Section 4.12 Recruitment of PC Dentists..............................17
Section 4.13 Business Manager's Insurance............................17
Section 4.14 No Warranty.............................................17
ARTICLE V. COVENANTS AND RESPONSIBILITIES OF PC..............................17
Section 5.1 Organization and Operation..............................17
Section 5.2 PC Personnel and Shareholders...........................18
Section 5.3 Professional Standards..................................18
Section 5.4 Dental Services.........................................19
Section 5.5 Peer Review/Quality Assurance...........................19
Section 5.6 PC's Insurance..........................................19
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Section 5.7 Confidential and Proprietary Information................20
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............................................23
Section 6.1 Definitions.............................................23
Section 6.2 Management Fee..........................................23
Section 6.3 Adjustments.............................................23
Section 6.4 Reasonable Value........................................24
Section 6.5 Payment of Management Fee...............................24
Section 6.6 Accounts Receivable.....................................24
Section 6.7 Disputes Regarding Fees.................................25
ARTICLE VII. TERM AND TERMINATION............................................25
Section 7.1 Initial and Renewal Term................................25
Section 7.2 Termination.............................................25
Section 7.3 Effects of Termination..................................26
Section 7.4 Purchase Obligation.....................................27
Section 7.5 Purchase Option.........................................28
Section 7.6 Closing of Purchase.....................................29
ARTICLE VIII. MISCELLANEOUS..................................................29
Section 8.1 Administrative Services Only............................29
Section 8.2 Status of Contractor; Agency............................29
Section 8.3 Notices.................................................30
Section 8.4 Governing Law...........................................30
Section 8.5 Assignment..............................................31
Section 8.6 Arbitration.............................................31
Section 8.7 Waiver of Breach........................................33
Section 8.8 Enforcement.............................................33
Section 8.9 Gender and Number.......................................33
Section 8.10 Additional Assurances...................................33
Section 8.11 Consents, Approvals, and Exercise of Discretion.........33
Section 8.12 Force Majeure...........................................34
Section 8.13 Severability............................................34
Section 8.14 Divisions and Headings..................................34
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Section 8.15 Amendments and Management Services
Agreement Execution.....................................34
Section 8.16 Entire Management Services Agreement....................35
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<PAGE>
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT is made and entered into effective as
of May 19, 1996, by and between CASTLE DENTAL CENTERS OF FLORIDA, INC., a
Florida corporation ("Business Manager"), and Castle 1st Dental Care, P.A., a
Florida professional association ("PC").
RECITALS
This Management Services Agreement is made with reference to the
following facts:
A. PC is a validly existing Florida professional association, formed for
and engaged in the practice of dentistry and the provision of dental services to
the general public in the State of Florida through individual dentists who are
licensed to practice dentistry in the State of Florida and who are employed or
otherwise retained by PC.
B. Business Manager is a validly existing Florida 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 developed a formula for 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.
NOW, THEREFORE, in consideration of the mutual terms, covenants and
conditions hereinabove and hereinafter set forth, the parties agree as follows:
<PAGE>
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 Chapter 466, Florida
statutes, as amended, and administrative regulations promulgated thereunder.
Section 1.2 ADJUSTED GROSS REVENUE. The term "Adjusted Gross Revenue"
shall mean the sum of Professional Services Revenue and Ancillary Revenue.
Section 1.3 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 1.4 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 BASE MANAGEMENT FEE. The term "Base Management Fee" shall
mean the amount set forth in Section 6.1.
Section 1.6 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 1.7 BUSINESS MANAGER. The term "Business Manager" shall mean
Castle Dental Centers of Florida, Inc., a Florida corporation, or any entity
that succeeds to the interests of Castle Dental Centers of Florida, Inc., a
Florida corporation, and to whom the obligations of Business Manager are
assigned and transferred.
Section 1.8 BUSINESS MANAGER CONSENT. The term "Business Manager
Consent" shall mean the consent granted by Business Manager's representatives to
the Policy Board created pursuant to Article III herein.
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Section 1.9 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 1.10 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.
Section 1.11 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 1.12 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 1.13 DENTIST. The term "Dentist" shall mean each individually
licensed professional who is employed or otherwise 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 1.14 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 1.15 MANAGEMENT FEE. The term "Management Fee" shall mean
Business Manager's compensation established as described in Article VI hereof.
Section 1.16 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 recordkeeping and reporting, and other business office services;
provided, however, that PC shall maintain complete care, custody and control of
the equipment and supplies.
Section 1.17 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 1.18 OFFICE EXPENSE. The term "Office Expense" shall mean all
operating and nonoperating expenses incurred by the Business Manager or PC in
the provision of 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 Policy Board;
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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 Dentists 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 borrowing by
Business Manager from its primary commercial lender as reflected on its most
recent published financial statements) to finance or refinance obligations of
PC, purchase dental or nondental equipment, or finance new ventures of PC;
(g) the Base Management Fee;
(h) the reasonable out-of-pocket travel expenses associated with
attending meetings, conferences, or seminars to benefit PC;
(i) the reasonable costs and expenses associated with marketing,
advertising and promotional activities to benefit PC; and
(j) the cost of dental supplies (including but not limited to drugs,
pharmaceuticals, 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 1.19 PC. The term "PC" shall mean Castle 1st Dental Care, P.A.,
a Florida professional association.
Section 1.20 PC ACCOUNT. The term "PC Account" shall mean the bank
account of PC established as described in Sections 4.8 and 4.9.
Section 1.21 PC CONSENT. The term "PC Consent" shall mean the consent
granted by PC's representative to the Policy Board created pursuant to Article
III herein.
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Section 1.22 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 Policy Board 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 1.23 PERFORMANCE FEE. The term "Performance Fee" shall mean the
amount payable to the Business Manager, if any, determined under Section 6.2, as
a Management Fee based upon the Business Manager achieving certain
pre-determined performance criteria.
Section 1.24 POLICY BOARD. The term "Policy Board" shall refer to the
body responsible for developing management and administrative policies for the
overall operation of PC's facilities, excluding any policies or decisions that
relate directly or indirectly to the practice of dentistry; provided, however
that the Policy Board can make recommendations to the PC that relate directly or
indirectly to the practice of dentistry.
Section 1.25 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 Florida representing
the specific geographic boundaries of the dental practice conducted by PC within
its particular urban metropolitan area.
Section 1.26 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 1.27 REPRESENTATIVES. The term "Representatives" shall mean a
party's officers, directors, employees, or other agents or representatives.
Section 1.28 STATE. The term "State" shall mean the State of Florida.
Section 1.29 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.
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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 requirements of
the business functions of PC. Business Manager is also expressly and exclusively
authorized to negotiate contracts that do not relate to the provision of Dental
Services; provided, however, that Business Manager shall not have authority to
execute any contract pertaining to pricing of dental services, credit, refunds,
warranties, advertising and employees of PC or other personnel of PC providing
services to PC and/or other agreements for the provision of dental services. PC
shall give Business Manager thirty (30) days prior 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.
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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 of PC, tax
planning, office personnel 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 Florida Statutes ss. 466.003(3). 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.
ARTICLE III. RESPONSIBILITIES OF THE POLICY BOARD
Section 3.1 FORMATION AND OPERATION OF THE POLICY BOARD. The parties
hereby establish a Policy Board which shall be responsible for developing
management and administrative policies for the overall operation of PC's
facilities within the terms of this Management Services Agreement. The Policy
Board shall consist of four (4) members. Business Manager shall designate, in
its sole discretion, three (3) members of the Policy Board. PC shall designate,
in its sole discretion, one (1) member of the Policy Board. The Policy Board
member selected by PC shall be a Dentist who holds and maintains a valid and
unrestricted license to practice dentistry in the State. A majority of each
party's representative or representatives to the Policy Board shall have the
authority to make decisions within the terms of this Management Services
Agreement on behalf of the respective party. Except as may otherwise be
provided, the act of a majority of the members of the Policy Board shall be the
act of the Policy Board.
Section 3.2 DUTIES AND RESPONSIBILITIES OF THE POLICY BOARD. The Policy
Board shall have the following duties, obligations, and authority:
(a) CAPITAL IMPROVEMENTS AND EXPANSION. Any renovation and expansion
plans with respect to PC's facilities shall be reviewed and approved by the
Policy Board and shall be based upon economic feasibility, dentist support,
productivity, technological innovations, competitive alternatives and then
current market conditions. The Policy Board shall make recommendations to PC
regarding capital equipment, but PC shall have final authority concerning
equipment.
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(b) MARKETING AND ADVERTISING. To make recommendations to PC concerning
all marketing and other advertising of the services performed at PC's
facilities.
(c) PATIENT FEES; COLLECTION POLICIES. As a part of the Budget process,
in consultation with PC and Business Manager, the Policy Board shall be advised
of the fee schedule determined by the PC representative to the Policy Board and
shall review the related collection policies for all Dental Services rendered by
PC. The Policy Board may make recommendations concerning fee schedules and
collection policies.
(d) PROVIDER AND PAYOR RELATIONSHIPS. To make recommendations regarding
the establishment or maintenance of relationships with institutional health care
providers and third party payors. The Policy Board shall review all proposed
reimbursement arrangements with third party payors. The Policy Board may make
recommendations concerning reimbursement arrangements.
(e) STRATEGIC PLANNING. The Policy Board 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.
(f) CAPITAL EXPENDITURES. The Policy Board shall determine the priority
of major capital expenditures.
Section 3.3 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's representatives to the
Policy Board, but Business Manager's representatives to the Policy Board may
participate in the discussion process. PC's representative to the Policy Board
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, including but not limited to (i) the selection of a course of
treatment for a patient, the procedures or materials to be used as part of such
course of treatment and the manner in which such course of treatment
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is carried out; (ii) the patient records of PC; (iii) policies and decisions
relating to pricing, credit, refunds, warranties and advertising; and (iv)
decisions relating to office personnel and hours of practice.
The Policy Board meetings shall be held as mutually agreed, but at least
quarterly, in Florida. Meetings shall be open to any shareholder of PC.
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 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.
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(d) Business Manager shall provide, finance, or cause to be provided or
financed dental related equipment as required by PC. 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; provided, however, that PC shall maintain complete care,
custody and control of all dental equipment.
(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.
Section 4.2 DENTAL SUPPLIES. After consultation with PC and with PC's
approval, 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.
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; provided, however, that PC shall have complete authority concerning
the provision of professional or Dental Services. Business Manager shall perform
these tasks in
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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. Business Manager shall be entitled to make
recommendations to PC relating to 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 appropriate to enable Business Manager to perform its
duties and obligations under this Management Services Agreement.
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, and the Policy Board shall make recommendations regarding
arrangements between PC and third parties as are 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; provided, however, that PC shall have sole
responsibility for decisions relating to entering into such arrangements.
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 approved by PC, and shall timely bill and
collect all professional and other fees for all Dental Services provided by PC,
or Dentists employed or otherwise 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:
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(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 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.
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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. PC shall neither draw checks on the PC
Account nor request Business Manager to do so.
(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; (ii) Office Expenses (other
than the Base Management Fee); (iii) Management Fees (both Base Management Fee
and Performance Fee); and (iv) any other expenditures.
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 before the execution of this
Management Services Agreement. The initial Budget shall include an
exhibit setting forth the criteria under which Business Manager shall be
entitled to receive the Performance Fee.
(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's representative to the Policy Board,
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 Management Fee and
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Performance 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.
(3) SUCCEEDING BUDGETS; SPECIAL RATES. In each succeeding Budget,
unless the parties otherwise mutually agree or are otherwise precluded
by law or regulation, the criteria for the Performance Fee and Business
Manager's right to receive the Performance Fee shall be continued on the
same basis.
(4) 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 (with
the exception of the Base Management Fee and any one-time or
non-recurring expenses included in such prior 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, Clearwater, Florida 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.
(5) 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 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
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prepare or assist in the preparation of any other financial statements or
records as PC may reasonably request.
(c) REVIEW OF EXPENDITURES. PC's representative to the Policy Board
shall review all expenditures related to the operation of PC, but such PC
representative 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. Subject to PC's prior consent, and
subject to the confidentiality requirements of Florida law, 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 the property and under the sole
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, subject to the
confidentiality requirements of Florida law, use information contained in such
records only for the limited purpose necessary to perform the services set forth
herein; provided,
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however, in no event shall a breach of said confidentiality be deemed a default
under this Agreement.
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 employed 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.
ARTICLE V. COVENANTS AND RESPONSIBILITIES 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.
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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 agreement in a form reasonably
satisfactory to PC and will not commit and permit to remain outstanding any
breach of such employment agreement that would allow the Dentist to terminate
for cause. 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 employ or
retain, as an Office Expense, all non-dentist personnel, including non-dental
care personnel and including 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. Such non-dentist personnel shall be under
PC's control, supervision and direction in the performance of Dental Services
for patients.
(c) OPTION AGREEMENT. Each shareholder of PC shall enter into and comply
with the terms and provisions of an Option Agreement with respect to his or her
ownership interest in PC, in form and substance acceptable to Business Manager.
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
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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. 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 employed personnel, if any, and
professional and comprehensive general liability insurance covering PC and each
of the Dentists PC retains or employs to provide Dental Services. 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 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. The insurance policy or policies 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 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
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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 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,
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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 their full professional time and attention.
PC agrees and acknowledges that the noncompetition covenants described hereunder
are necessary for the protection of Business Manager, and that Business Manager
would not have entered into this Management Services Agreement without 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 three (3) 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 management and administrative
services to its or their own dental practices after the termination of this
Management Services Agreement.
(c) The written employment agreements described in Section 5.2 shall
contain covenants of the shareholder employees pursuant to which the
shareholders 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 shall obtain formal written agreements from its dentist employees
in the form of Exhibit 5.2(a), pursuant to which the employees agree not to
compete with PC within the Noncompetition Territory (as defined in such
employment agreements) for one (1) year after
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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 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.
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 "Castle 1st Dental Care, P.A." 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:
(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 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
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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 employees, 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 DEFINITIONS. For purposes of this Article VI, capitalized
terms used herein shall have the meanings ascribed as follows:
(a) BASE MANAGEMENT FEE. The Base Management Fee shall be the amount,
calculated on a monthly basis, that is equal to twelve and one-half percent
(12.5%) of the Adjusted Gross Revenue attributable to the applicable monthly
period.
(b) PERFORMANCE FEE. The Performance Fee shall be the amount, calculated
on a monthly basis, that is calculated in accordance with the Applicable Exhibit
to the Budget.
Section 6.2 MANAGEMENT FEE. PC and Business Manager agree to the
compensation set forth herein as being paid to Business Manager in consideration
of a substantial commitment made by Business Manager hereunder and that such
fees are fair and reasonable. Each month, in the priority established by Section
4.9 (b), Business Manager shall be paid the following:
(i) the amount of all Office Expenses (other than the Base
Management Fee) paid by the Business Manager on behalf of PC.
(ii) the Base Management Fee.
(iii) the Performance Fee.
Section 6.3 ADJUSTMENTS. If there are not sufficient funds to pay either
or both of the Base Management Fee or the Performance 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
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annum. Furthermore, the amount of the Performance Fee paid will be monitored and
reconciled on an annual basis and any overpayments of the Performance Fee shall
be promptly refunded by the Business Manager.
Section 6.4 REASONABLE VALUE. Payment of the Base Management Fee or
Performance 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 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 6.5 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
as such fee becomes due and payable during the Term and thereafter as provided
in Section 7.3.
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 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; provided, however, that nothing
contained herein shall be construed as PC relinquishing control over credit
extended by PC.
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Section 6.7 DISPUTES REGARDING FEES. PC shall not be entitled to a
set-off or reduction in its Management Fees 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 twenty-five (25) 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;
(ii) PC materially defaults in the performance of any of its
material duties or obligations hereunder, and such default
continues 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;
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(ii) In the event that Business Manager materially defaults in
the performance of any of its material obligations
hereunder and such default continues 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.
(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 Florida
Board of Dentistry or other authorized regulatory body issues 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.
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, (ii) obligations, promises, or covenants set
forth herein that are expressly made to extend beyond the Term, including,
without limitation, 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, and (iii) the obligations of PC and
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Business Manager described in Section 7.4. 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.
Section 7.4 PURCHASE OBLIGATION. Upon termination of this Management
Services Agreement by Business Manager for cause or by PC in breach of this
Agreement or pursuant to Section 7.2(d) hereof, Business Manager shall have the
option, exercisable at any time within thirty (30) days of such termination, to
require PC to:
(a) Purchase from Business Manager at book value the intangible assets,
deferred charges, and all other amounts on the books of the Business Manager
relating to the Management Services Agreement as adjusted through the last day
of the month most recently ended prior to the date of such termination in
accordance with GAAP to reflect amortization or depreciation of the intangible
assets, deferred charges, or covenants;
(b) Purchase from Business Manager any real estate owned by Business
Manager and used as a Center at the greater of the appraised fair market value
thereof or the then book value thereof. In the event of any repurchase of real
property, the appraised value shall be determined by Business Manager and PC,
each selecting a duly qualified appraiser, who in turn will agree on a third
appraiser. This agreed-upon appraiser shall perform the appraisal which shall be
binding on both parties. In the event either party fails to select an appraiser
within fifteen (15) days of the selection of an appraiser by the other party,
the appraiser selected by the other party shall make the selection of the third
party appraiser;
(c) Purchase at book value all improvements, additions, or leasehold
improvements that have been made by Business Manager at any Center and that
relate solely to the performance of Business Manager's obligations under this
Management Services Agreement;
(d) Assume all debt, and all contracts, payables, and leases that are
obligations of Business Manager and that relate directly to the performance of
Business Manager's obligations under this Management Services Agreement or the
properties leased or subleased hereunder by Business Manager; and
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(e) Purchase from Business Manager at the greater of appraised fair
market value or book value all of the equipment listed as set forth in the
Purchase Agreement or an exhibit thereto, including all replacements and
additions thereto made by Business Manager pursuant to the performance of its
obligations under this Management Services Agreement, and all other assets,
including inventory and supplies, tangibles and intangibles, set forth on the
books of the Business Manager as adjusted through the last day of the month most
recently ended prior to the date of such termination in accordance with GAAP to
reflect operations of each Center, depreciation, amortization, and other
adjustments of assets shown on the books of the Business Manager.
Section 7.5 PURCHASE OPTION. Upon termination of this Management
Services Agreement by Business Manager in breach of this Agreement or by PC for
cause, PC shall have the option but not the obligation to do all or none of the
following:
(a) Purchase from Business Manager any real estate owned by Business
Manager and used as a Center at book value thereof. In the event of any
repurchase of real property, the appraised value shall be determined by Business
Manager and PC, each selecting a duly qualified appraiser, who in turn will
agree on a third appraiser. This agreed-upon appraiser shall perform the
appraisal which shall be binding on both parties. In the event either party
fails to select an appraiser within fifteen (15) days of the selection of an
appraiser by the other party, the appraiser selected by the other party shall
make the selection of the third party appraiser;
(b) Purchase at book value all improvements, additions, or leasehold
improvements that have been made by Business Manager at any Center and that
relate solely to the performance of Business Manager's obligations under this
Management Services Agreement;
(c) Assume all debt, and all contracts, payables, and leases that are
obligations of Business Manager and that relate directly to the performance of
Business Manager's obligations under this Management Services Agreement or the
properties leased or subleased by Business Manager; and
(d) Purchase from Business Manager at book value all of the equipment
listed as set forth in the Purchase Agreement or an exhibit thereto, including
all replacements and additions thereto made by Business Manager pursuant to the
performance of its obligations under this Management Services Agreement, and all
other tangible assets, including inventory and supplies, set forth on the books
of the Business Manager as adjusted through the last day of the month most
recently ended prior to the date of such termination in accordance with GAAP to
reflect operations of each Center, depreciation, amortization, and other
adjustments of assets shown on the books of the Business Manager.
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Section 7.6 CLOSING OF PURCHASE. PC shall pay cash for the purchased
assets. The amount of the purchase price shall be reduced by the amount of debt
and liabilities of Business Manager, if any, assumed by PC. PC and any Dentist
who is a shareholder of PC shall execute such documents as may be required to
cause or permit PC to assume the liabilities set forth in Section 7.4(d) or
Section 7.5(c) and to remove or, if PC can establish in good faith that such
removal is not possible, to cause or permit PC to indemnify Business Manager
from any liability with respect to such repurchased asset and with respect to
any property leased or subleased by Business Manager. The closing date for the
repurchase shall be determined by Business Manager but shall in no event occur
later than one hundred eighty (180) days from the date of the notice of
termination. The termination of this Management Services Agreement shall become
effective upon the closing of the sale of the assets under Section 7.4 or
Section 7.5 (or, if PC does not exercise its option under Section 7.5, on the
date it notifies Business Manager of such decision). PC shall be released from
the restrictive covenants provided for in Section 5.8 on the closing date. From
and after any termination, each party shall provide the other party with
reasonable access to the books and records then owned by it to permit such
requesting party to satisfy reporting and contractual obligations that may be
required of it.
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 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
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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: Castle 1st Dental Care, P.A.
29605 U.S. Highway 19N., Suite 180
Clearwater, Florida 34621
Business Manager: CASTLE DENTAL CENTERS OF FLORIDA, 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 Florida applicable to agreements to be
performed wholly within the State. Florida law was chosen by the parties after
negotiation to govern interpretation of this Management Services Agreement
because Pinellas County, Florida is the seat of management for Business Manager.
The federal and State courts of Pinellas County, Florida shall be the exclusive
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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 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
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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 party may in writing request the
judge of the United States District Court for the Middle District of Florida,
Tampa Division, 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 Clearwater,
Florida 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.
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(iii) 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
set forth in this Section 8.6 for selecting the arbitrators shall
be followed from time to time as necessary.
(iv) 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.
(v) All privileges under Florida 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 Florida 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
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<PAGE>
contrary, the parties agree that such consent or approval shall not be
unreasonably withheld or delayed, and that such discretion shall be reasonably
exercised.
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.
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<PAGE>
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 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: CASTLE 1ST DENTAL CARE, P.A.
By: _______________________________
Lester B. Greenberg, D.D.S., President
BUSINESS MANAGER: CASTLE DENTAL CENTERS OF FLORIDA,
INC.
By:
Name:
Title:
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EXHIBIT 10.28
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of May
19, 1996 (the "Effective Date"), by and between Castle Dental Centers of
Florida, Inc., a Florida corporation (the "Company"), and Lester B. Greenberg,
D.D.S. ("Employee").
RECITALS:
Prior to the date hereof, Employee was the owner of 1st Dental Care,
Inc., which along with the Company and the Employee is a party to that certain
Asset Purchase Agreement dated as of May 19, 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 shall perform substantially those services for the Company
that Employee previously performed for 1st Dental Care, Inc. To the extent not
inconsistent therewith, Employee shall participate in the development and
implementation of the strategic plan of the Company for specified markets in
Florida, including, but not be limited to, analyzing markets selected by the
Company and identifying acquisition candidates. The performance of Employee's
role as described herein shall be subject to the supervision of the Company's
senior management.
(c) Employee shall devote such amount of his full business time, efforts
and abilities to the business of the Company as he did for 1st Dental Care, Inc.
Employee shall use his reasonable best efforts to promote the interests of the
Company. To the extent such activities do not interfere
-1-
with his responsibilities to the Company or conflict with the provisions of
Article VI hereof, Employee may engage in other business activities.
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 $150,000 per annum (the "Base
Salary"), through and until the Expiration 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 INCENTIVE BONUS COMPENSATION. The Company hereby establishes the
Castle Dental Centers of Florida, Inc. Incentive Bonus Plan (the "Plan") which
provides for the Company to set aside for grant to certain management employees
selected by a committee consisting of Employee and the chief executive officer
of Castle Dental Centers, Inc., a Delaware corporation ("Castle") with the
approval of the Compensation Committee of the Board of Directors of Castle an
aggregate of ten percent (10%) of the pretax income of the Company in excess of
$710,000 per year, attributable to the operations of the Company under the
direct management of Employee in Florida, computed without general overhead
allocation or charge with respect to the general and administrative expenses of
Castle, but taking into account direct costs incurred by Castle on behalf of the
Company and including a deduction equal to the cost of capital invested
(exclusive of initial acquisition costs) in the Company by Castle. For the
purposes of this Agreement, Castle's cost of capital shall be deemed to be the
prime rate established from time to time by NationsBank of Texas, N.A. plus four
percent, but in no event to be less than 10%. The Employee is hereby granted the
right to participate in the Plan for each year prior to the Expiration Date. The
annual amount which the Employee shall be entitled to receive from the Plan
shall be determined by a committee consisting of Employee and the chief
executive officer of Castle with the approval of the Compensation Committee of
the Board of Directors of Castle.
2.3 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 comparable positions, with comparable service credit and with
comparable duties and responsibilities, which shall include, in the case of
Employee, up to four weeks paid vacation each year during the terms of this
Agreement, plus one week paid leave to the extent such week is devoted to
required continuing dental education. 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
-2-
modification, amendment or revocation in accordance with the terms of such
documents, policies and procedures.
2.4 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 date hereof and ending on May 18,
1999 (the "Expiration Date"), subject to the right of either party to terminate
this agreement as provided below.
3.2 DEATH; DISABILITY. Subject to the provisions of Section 3.5(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. Either the Company or Employee may
terminate this Agreement at any time, without cause, by giving the other thirty
(30) days' written notice of termination.
3.4 TERMINATION WITH 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 or intending to result in personal gain or 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;
-3-
(c) a good faith determination by the Board of Directors of the
Company that Employee has violated this Agreement or committed 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 commission of any felony on the part of Employee which,
in the sole discretion of the Board of Directors of the Company, materially and
adversely, directly or indirectly, affects the name or goodwill of the Company;
or
(e) for so long as Employee is a majority shareholder of New PC,
the termination of the Management Services Agreement by and between the Company
and Castle 1st Dental Care, P.A. pursuant to Section 7.2(d) thereof.
A notice of termination pursuant to this Section 3.4 shall be in writing
and shall state the alleged 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 determines, 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 such inquiry, to relieve Employee of his regular duties.
3.5 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 death
or disability, the Company agrees to offer employment on substantially the same
terms and conditions as are contained herein to Elisa Greenberg for the
employment period remaining in the initial three year term. Elisa Greenberg
shall be under no obligation to accept such offer of employment. In the event
Elisa Greenberg desires to accept the Company's offer of employment, she shall
so advise the Company within 30 days of the Company's offer of employment, and
the Company and Elisa Greenberg shall enter into an Employment Agreement
containing substantially the same terms and conditions as this Agreement as soon
as reasonably practical.
(b) If Employee's employment is terminated by reason of his
disability, and Elisa Greenberg declines to accept the Company's offer of
employment described in Section 3.5(a), 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
-4-
bonus and noncash benefits) the Employee would have earned for the three month
period subsequent to the effective date of termination, payable at such time or
times as would have been paid to Employee had he remained employed by the
Company.
(c) 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 and Elisa Greenberg declines to
accept the Company's offer of employment described in Section 3.5(a), Employee
shall not be entitled to receive any additional salary, bonus or benefits beyond
those earned or accrued as of the effective date of the termination of his
employment.
(d) If Employee's employment hereunder is terminated prior to the
Expiration Date of this Agreement, and such termination is either (i) due to a
breach of this Agreement by the Company, 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 between the effective
date of termination through the Expiration Date, 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 the Expiration Date; provided, however,
prior to the termination of this Agreement as the result of a breach hereof by
the Company, Employee shall give written notice of such breach and a thirty day
period within which to even such breach.
3.6 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 Articles III, IV, V and VI.
3.7 PAYMENTS TO ESTATE. If Employee should die before all amounts
payable to him pursuant to Section 3.5 have been paid, such unpaid amounts shall
be paid to the personal representative of Employee's estate.
ARTICLE IV
4.1 ADDITIONAL ACTS BY EMPLOYEE. Employee further agrees at the request
of the Company (but without additional compensation from the Company during his
employment by the Company) to execute any and all papers and (at the expense of
the Company) perform all lawful acts that the Company deems necessary to realize
the benefits of the transaction contemplated by the Asset Purchase Agreement and
related documents.
-5-
ARTICLE V
5.1 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 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.
5.2 CONFIDENTIAL INFORMATION DEFINED. The term "Confidential
Information" shall mean and include any and all records, computer programs,
data, patent applications, trade secrets, customer lists, customer databases,
video programs and programming, proprietary information, technology, pricing
policies, financial information, methods of doing business, policy and/or
procedure manuals, training and recruiting procedures, accounting procedures,
the status and content of the Company's contracts with its customers, the
Company's business philosophy, and servicing methods and techniques at any time
used, developed, or investigated by the Company, before or during Employee's
tenure of employment, or other information of any kind expressed or recorded on
any medium arising out of, concerning, or acquired in connection with the
research, development, commercialization and other activities of the Company;
but "Confidential Information" does not include information (i) generally known
or available in the industry, through no fault of Employee; or (ii) available
from a third party without violation of any duty of confidentiality by Employee
or others.
5.3 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.
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ARTICLE VI
6.1 NONINTERFERENCE WITH EMPLOYMENT RELATIONSHIPS. 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 1st Dental Care, Inc. 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 1st Dental Care, Inc.
6.2 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 1st
Dental Care, Inc. for the purpose of engaging in the Same or Similar Business
(as defined below) as the Company.
6.3 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 1st Dental Care, Inc. within a ten mile
radius around the city limits of any city in the State of Florida in which the
Company is operating or managing a location providing dental service as of the
date of Employee's employment hereunder.
6.4 SAME OR SIMILAR BUSINESS DEFINED. For purposes of this Article VI,
the "Same or Similar Business" as the Company or 1st Dental Care, Inc. shall be
defined as any business that is engaged to a significant extent in the provision
of 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 or insurance companies.
6.5 REASONABLENESS OF RESTRICTIONS. Employee has carefully read and
considered the provisions of this Article VI 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
-7-
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 Florida law.
ARTICLE VII
7.1 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.
7.2 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.
7.3 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) 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.
7.4 GOVERNING LAW. This Agreement shall be interpreted, construed and
governed in accordance with the laws of the State of Florida without regard to
conflict of laws provision. This Agreement is performable in Pinellas County,
Florida.
7.5 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.
7.6 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.
7.7 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
-8-
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. 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.
7.8 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.
7.9 PRIOR AGREEMENTS SUPERSEDED. This Agreement constitutes the sole and
only Agreement of the parties hereto and supersedes any prior understanding or
written or oral agreements, correspondence or communications between the parties
respecting the subject matter hereof.
7.10 ARBITRATION. EXCEPT FOR THE REMEDY PROVIDED UNDER SECTION 7.11
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 CLEARWATER, FLORIDA 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 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, V OR VI 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.
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7.11 REMEDIES. Employee agrees that the remedy at law for any breach of
any provision of Articles IV, V and VI 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.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement in Clearwater, Florida as of the date first set forth above.
THE COMPANY:
CASTLE DENTAL CENTERS OF FLORIDA, INC.
By:
Name: Jack H. Castle, Jr.
Title: President
Address:
ATTENTION: President
EMPLOYEE:
Lester B. Greenberg, D.D.S.
Address:
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EXHIBIT 10.29
ASSET PURCHASE AGREEMENT
Dated as of April 29, 1996
By and Among
Castle Dental Centers of Tennessee, Inc.
as Purchaser,
Mid-South Dental Center, P.C.
as Seller
and
G. Powell Bilyeu, D.D.S.
<PAGE>
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..................................................7
2.3 Assumption of Obligations........................................8
2.4 Nonassignable Contracts and Leases...............................8
2.5 Closing..........................................................8
ARTICLE III
PAYMENT OF PURCHASE PRICE..............................................9
3.1 Amount; Allocation; Delivery.....................................9
3.2 Purchase Price Adjustment.......................................10
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
AND DR. BILYEU........................................................11
4.1 Representations and Warranties of Seller and Dr. Bilyeu.........11
4.2 Existence and Good Standing.....................................11
4.3 Authorization and Validity of Agreement.........................11
4.4 Consents and Approvals; No Violations...........................12
4.5 No Subsidiaries.................................................12
4.6 Financial Statements; No Material Adverse Change................12
-ii-
4.7 Books and Records...............................................13
4.8 Title to Properties; Encumbrances; Condition....................13
4.9 Real Property...................................................13
4.10 Leases..........................................................14
4.11 Material Contracts..............................................14
4.12 Permits.........................................................14
4.13 Litigation......................................................15
4.14 Taxes...........................................................15
4.15 Insurance.......................................................16
4.16 Intellectual Properties.........................................16
4.17 Compliance with Laws............................................16
4.18 Employment Relations............................................16
4.19 Employee Benefit Plans..........................................17
4.20 Environmental Laws and Regulations..............................17
4.21 Interests in Customers, Suppliers, Etc..........................18
4.22 Compensation of Employees.......................................18
4.23 Payors. ......................................................18
4.24 Accounts Receivable; Accounts Payable...........................18
4.25 Solvency........................................................18
4.26 Disclosure......................................................18
4.27 Broker's or Finder's Fees.......................................19
4.28 Copies of Documents.............................................19
4.29 Investment Representations......................................19
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF PURCHASER..........................................................20
5.1 Representations and Warranties of Purchaser.....................20
5.2 Existence and Good Standing of Purchaser; Power and Authority...20
5.3 Consents and Approvals; No Violations...........................20
5.4 Capital Stock...................................................21
5.5 Litigation......................................................21
5.6 Compliance with Laws............................................21
5.7 Financial Statements............................................22
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5.8 Broker's or Finder's Fees.......................................22
ARTICLE VI
CONDITIONS TO SELLER'S OBLIGATIONS....................................22
6.1 Truth of Representations and Warranties.........................22
6.2 Performance of Agreements.......................................22
6.3 No Litigation Threatened........................................22
6.4 Governmental Approvals..........................................23
6.5 Proceedings.....................................................23
6.6 Employment Agreements...........................................23
6.7 Registration Rights Agreement...................................23
6.8 Consents........................................................23
6.9 Due Diligence...................................................23
ARTICLE VII
CONDITIONS TO PURCHASER'S OBLIGATIONS.................................24
7.1 Truth of Representations and Warranties.........................24
7.2 Performance of Agreements.......................................24
7.3 Documents of Conveyance.........................................24
7.4 No Litigation Threatened........................................24
7.5 Governmental Approvals..........................................24
7.6 Consents........................................................25
7.7 Legal Opinion...................................................25
7.8 Proceedings.....................................................25
7.9 New PC..........................................................25
7.10 Execution of Management Services Agreement......................25
7.11 Stockholders Agreement..........................................25
7.12 Subordination Agreement. ......................................25
ARTICLE VIII
COVENANTS OF SELLER AND DR. BILYEU....................................25
8.1 Cooperation by Seller...........................................26
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8.2 Conduct of Business.............................................26
8.3 Exclusive Dealing...............................................26
8.4 Review of the Assets............................................26
8.5 Further Assurances..............................................27
ARTICLE IX
COVENANTS OF PURCHASER................................................27
9.1 Cooperation by Purchaser........................................27
9.2 Books and Records; Personnel....................................27
9.3 Further Assurances..............................................28
9.4 Due Diligence Investigation.....................................28
ARTICLE X
TERMINATION...........................................................29
10.1 Termination.....................................................29
10.2 Effect on Obligations...........................................29
ARTICLE XI
SURVIVAL AND INDEMNIFICATION..........................................30
11.1 Indemnification of the Seller...................................30
11.2 Indemnification of the Purchaser................................30
11.3 Demands.........................................................31
11.4 Right to Contest and Defend.....................................31
11.5 Cooperation.....................................................32
11.6 Right to Participate............................................32
11.7 Payment of Damages..............................................32
11.8 Limitation on Indemnification...................................32
ARTICLE XII
MISCELLANEOUS.........................................................33
12.1 Entire Agreement................................................33
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12.2 Successors and Assigns..........................................33
12.3 Counterparts....................................................33
12.4 Headings........................................................33
12.5 Modification and Waiver.........................................33
12.6 No Third Party Beneficiary Rights...............................34
12.7 Sales and Transfer Taxes........................................34
12.8 Expenses........................................................34
12.9 Notice..........................................................34
12.10 Governing Law...................................................35
12.11 Confidentiality; Publicity......................................35
12.12 Severability....................................................36
12.13 Enforcement.....................................................36
SCHEDULES
Schedule 2.2 Excluded Contracts
Schedule 2.3 Assigned Contracts
Schedule 3.1 Allocation of Purchase Price
Schedule 3.2 Unaudited Balance Sheet
Schedule 4.4 Consents
Schedule 4.6 Material Adverse Change
Schedule 4.8 Encumbrances
Schedule 4.9 Real Property
Schedule 4.10 Leased Personal Property
Schedule 4.11 Material Contracts and Proposals
Schedule 4.12 Permits
Schedule 4.13 Litigation
Schedule 4.14 Taxes
Schedule 4.15 Insurance Policies
Schedule 4.16 Intellectual Property
Schedule 4.20 Environmental Matters
Schedule 4.22 Employee Compensation
Schedule 4.23 Payors
Schedule 4.25 Solvency
Schedule 5.3 Required Notices
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Schedule 5.7 Castle Financial Statements
EXHIBITS
Exhibit A Form of Promissory Note
Exhibit B-1 Bilyeu Employment Agreement
Exhibit B-2 Hamner Employment Agreement
Exhibit B-3 North Employment Agreement
Exhibit C Legal Opinion
Exhibit D Stockholders Agreement
Exhibit E Registration Rights Agreement
Exhibit F Management Services Agreement
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ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT dated as of April 29, 1996 by and among Castle
Dental Centers of Tennessee, Inc., a Tennessee corporation ("Purchaser"),
Mid-South Dental Center, P.C., a Tennessee professional corporation ("Seller"),
and G. Powell Bilyeu, D.D.S., the sole shareholder of Seller ("Dr. Bilyeu").
W I T N E S S E T H:
WHEREAS, Seller wishes to sell, and Purchaser wishes to purchase,
substantially all of the property and assets 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.
"ACCOUNTS PAYABLE": the payables of Seller to trade account and other
creditors as of the Closing Date as shown on Schedule 2.3.
"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.
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"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.
"BALANCE SHEET DATE": as defined in Section 3.2 hereof.
"BASE DATE NET ASSET VALUE": as defined in Section 3.2 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
any books, records, files and other data of any Seller which relate exclusively
to organizational and corporate governance proceedings of Seller, or patient
records which Seller may not lawfully transfer.
"BUSINESS": the practice of dentistry, including orthodontics and
periodontics and all other activities currently conducted by Seller.
"CLOSING": as defined in Section 2.6 hereof.
"CLOSING DATE": as defined in Section 2.6 hereof.
"CLOSING DATE BALANCE SHEET": as defined in Section 3.2 hereof.
"CLOSING DATE NET ASSET VALUE": as defined in Section 3.2 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.
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"EMPLOYMENT AGREEMENT": each agreement executed pursuant hereto
substantially in the form of Exhibit B 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 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
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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.
"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.
"MATERIAL ADVERSE EFFECT": material adverse effect on the assets,
liabilities, Business, condition (financial or otherwise), results or operations
or prospects of the Seller.
"NEW PC": Castle Mid-South Dental Center, P.C., a newly organized
Tennessee professional corporation organized for the purpose of entering into a
Management Services Agreement with Purchaser.
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"PERMITS": as defined in Section 4.12 hereof.
"PERMITTED ENCUMBRANCES": as defined in Section 4.8 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.
"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.
"SELLER PROPERTY": any real property and improvements thereon leased,
operated or occupied by Seller.
"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.
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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 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, tangible
and intangible, real, personal and mixed, wheresoever situated and 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) Seller's title to, interest in or rights under the leases of
real property described in Schedule 4.9 attached hereto together with all
buildings, facilities, fixtures and other improvements thereon and all
easements, rights-of-way, transferable licenses and permits and other
appurtenances thereof;
(b) plant, machinery, equipment, tools, supplies, inventories,
furniture, fixtures, furnishings, vehicles and other fixed assets owned or
leased by Seller and used or held for use in the conduct of the Business;
(c) cash, cash equivalents, deposits, advance payments, securities,
letters of credit naming Seller as account party, certificates of deposit,
notes, drafts, checks and similar instruments;
(d) contracts, documents, instruments and general intangibles of
Seller, including the name "Mid-South Dental Centers, Inc.", other than
the Excluded Contracts;
(e) Accounts Receivable as of the Closing Date;
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(f) all licenses, permits, registrations and authorizations,
proprietary information, methods, designs, processes, procedures, and all
rights held by Seller to other Intellectual Property;
(g) Books and Records;
(h) any rights of Seller pertaining to any counterclaims, set-offs
or defenses it may have with respect to any Assumed Obligations;
(i) all prepaid claims, prepaid taxes, prepaid insurance premiums
and other prepaid expense items; and
(j) third-party indemnities, policies of insurance identified by
Purchaser, fidelity, surety or similar bonds and the coverages afforded
thereby relating to the Assets.
2.2 EXCLUDED ASSETS. The Assets shall not include any of the following
(the "Excluded Assets"):
(a) each contract set forth on Schedule 2.2(a) (the "Excluded
Contracts");
(b) tax refunds related to the Business or the Assets received or
receivable by Seller or Dr. Bilyeu relating to taxes paid by Seller or Dr.
Bilyeu for all periods prior to the Closing Date;
(c) minute books and governance documents of the Seller;
(d) dentist employment contracts;
(e) reimbursement contracts with third party insurance companies,
managed care contracts and other reimbursement contracts;
(f) office furnishings, described on Schedule 2.2(f); and
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(g) key man life insurance policies currently maintained on the
lives of Philip T. Hamner and David North.
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, (b) the obligations of Seller with respect to
the deposits, advance payments and similar prepayments transferred to Purchaser
pursuant to Section 2.1 hereof, and (c) Accounts Payable set forth prior to the
Closing on Schedule 2.3 (collectively, "Assumed Obligations"). Without limiting
the generality of the foregoing, Purchaser expressly shall not assume or be
deemed to have assumed, without limitation, any liability or obligation relating
to or arising out of any employee benefit plan or arrangement of Seller or any
liabilities or obligations thereunder, including but not limited to accrued
401(k) withholdings with the exception of the self insured portion of health
insurance claims to the maximum extent of the insurance fund maintained by
Seller and acquired by Purchaser (collectively, the "Excluded Liabilities").
2.4 NONASSIGNABLE CONTRACTS AND LEASES. In the case of any Assigned
Contracts which are not by their terms assignable, Seller agrees to use its 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, 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 is unable to obtain such
necessary written consents for the remaining term of such Assigned Contract,
Purchaser shall act as such Seller's agent in the performance of all obligations
and liabilities under such Assigned Contract and such Seller shall act as
Purchaser's agent in the receipt of any benefits, rights or interests which
inure to such Seller 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 Waller Lansden Dortch & Davis, 511 Union
Street, Suite 2100, Nashville, Tennessee 37219, on or before May 31, 1996, or
such other place, date and time as may be mutually agreed upon by the parties
hereto. Such time and date are referred to herein as the "Closing Date."
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ARTICLE III
PAYMENT OF PURCHASE PRICE
3.1 AMOUNT; ALLOCATION; DELIVERY. At the Closing, in addition to
Purchaser's assumption of the Assumed Obligations, Purchaser shall pay to Seller
the sum of $5,500,000 (the "Purchase Price"), subject to adjustment as provided
in Section 3.2 hereof, which Purchase Price shall be remitted by Purchaser to
Seller in the following manner:
(a) $4,000,000 in cash on the Closing Date, which shall be paid by
wire transfer of immediately available funds to an account or accounts of
Seller; and
(b) a five year subordinated promissory note payable in equal
quarterly installments of principal and interest to Seller in the original
principal amount of $750,000, with interest on the unpaid balance at the
rate of 10% per annum, substantially in the form of Exhibit A attached
hereto; and
(c) 150,000 shares of common stock, $.001 par value ("Common
Stock"), of Castle Dental Centers, Inc., a Delaware corporation
("Castle"), issued in the name of MidSouth Dental Center, P.C.
Purchaser and Seller hereby agree to allocate the Purchase Price in
accordance with Section 1060 of the Code among the Assets in accordance with
Schedule 3.1 to be attached hereto prior to the Closing Date (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.
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3.2 PURCHASE PRICE ADJUSTMENT.
(a) Seller previously has delivered to Purchaser unaudited balance
sheet of the Seller as of December 31, 1995 (the "Balance Sheet Date"), which is
attached hereto as Schedule 3.2(a) (the book value of the Assets included in
such balance sheet less the book value of the Assumed Obligations included in
such balance sheet is hereinafter referred to as the "Base Date Net Asset
Value").
(b) Within 45 days following the Closing Date, Seller shall prepare
and deliver to Purchaser a balance sheet of the Seller as of the Closing Date
(the "Closing Date Balance Sheet"), together with a calculation of the book
value of the Assets and Assumed Obligations determined on the same basis as the
December 31, 1995 balance sheet (such book value of such Assets less such book
value of such Assumed Obligations is hereinafter referred to as the "Closing
Date Net Asset Value"). Purchaser and its representatives shall have the right
to review all work papers and procedures used to prepare the December 31, 1995,
balance sheet and the Closing Date Balance Sheet and the calculation of the Base
Date Net Asset Value and Closing Date Net Asset Value and shall have the right
to perform any other reasonable procedures necessary to verify the accuracy
thereof. Unless Purchaser, within 20 days after delivery to Purchaser of the
Closing Date Balance Sheet, notifies Seller in writing that it objects to either
the December 31, 1995, balance sheet or the Closing Date Balance Sheet or the
calculation of Base Date Net Asset Value or the Closing Date Net Asset Value,
and specifies the basis for such objection, the December 31, 1995, balance sheet
and Closing Date Balance Sheet and calculation of the Base Date Net Asset Value
and Closing Date Net Asset Value shall become final and binding upon the parties
for purposes of this Agreement. If Purchaser and Seller are unable to resolve
such objections within 10 days after any such notification has been given, the
dispute shall be submitted to a nationally recognized public accounting firm
mutually agreed upon by Purchaser and Seller). Such accounting firm shall make a
final and binding determination as to the matter or matters in dispute.
Purchaser and Seller agree to cooperate with each other and with each other's
authorized representatives in order to resolve any and all matters in dispute as
soon as practicable.
(c) For the purposes of the comparison of the Base Date Net Asset
Value to the Closing Date Net Asset Value, no effect shall be given to changes
during such period to amounts of depreciation or amortization.
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(d) Within 10 days after the Closing Date Net Asset Value has been
finally determined, to the extent the difference, if any, between the Base Date
Net Asset Value and the Closing Date Net Asset Value exceeds $10,000, such
difference shall be paid by Purchaser to Seller (if the Closing Date Net Asset
Value exceeds the Base Date Net Asset Value) or by Seller to Purchaser (if the
Base Date Net Asset Value exceeds the Closing Date Net Asset Value). Such
payment shall be by certified or bank check, and shall include simple interest
on such amount at a rate per annum equal to 10% commencing on the Closing Date
and continuing until the date of full payment hereunder.
(e) Purchaser and Seller, in the aggregate, each shall bear one-half
of the fees, costs and expenses of the accounting firm retained under subsection
(d) to resolve any dispute.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
AND DR. BILYEU
4.1 REPRESENTATIONS AND WARRANTIES OF SELLER AND DR. BILYEU. Seller and
Dr. Bilyeu, jointly and severally, hereby represent and warrant to Purchaser as
follows:
4.2 EXISTENCE AND GOOD STANDING. Seller is a professional corporation duly
organized and validly existing under the laws of the State of Tennessee. Seller
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. Seller is duly qualified or licensed to do
business in each jurisdiction in which the character or location of the
properties owned or leased by Seller or the nature of the business conducted by
Seller makes such qualification necessary and the absence of which would have a
Material Adverse Effect.
4.3 AUTHORIZATION AND VALIDITY OF AGREEMENT. Seller has full corporate
power and authority, and Dr. Bilyeu has 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 Seller and the consummation by it of the
transactions contemplated hereby, have been or as of the Closing Date will be
duly authorized and approved by the Board of Directors and Dr. Bilyeu as the
sole shareholder of Seller,
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and no other action on the part of Seller or its shareholder is necessary to
authorize the execution, delivery and performance of this Agreement by Seller
and the consummation of the transactions contemplated hereby. This Agreement has
been duly executed and delivered by Seller and Dr. Bilyeu and is a valid and
binding obligation of Seller and Dr. Bilyeu enforceable against each 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.
4.4 CONSENTS AND APPROVALS; NO VIOLATIONS. Except as set forth on Schedule
4.4 hereto, the execution, delivery and performance of this Agreement by Seller
and Dr. Bilyeu and the consummation by Seller and Dr. Bilyeu 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 Seller; (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 Seller
or Dr. Bilyeu or by which any of Seller's properties or assets may be bound; (c)
require any filing by Seller or Dr. Bilyeu with, or require Seller or Dr. Bilyeu
to obtain any permit, consent or approval of, or require Seller or Dr. Bilyeu to
give any notice to, any governmental or regulatory body, agency or authority
other than as set forth in Schedule 4.4 attached hereto; except where the
failure to do so would not have a Material Adverse Effect, or (d) result in a
violation or breach by Seller of, conflict with, constitute (with or without due
notice or lapse of time or both) a default by Seller (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 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 is a party, or by which Seller or
any of its properties or assets may be bound.
4.5 NO SUBSIDIARIES. Seller has no subsidiaries.
4.6 FINANCIAL STATEMENTS; NO MATERIAL ADVERSE CHANGE. Seller has
heretofore furnished Purchaser with the unaudited balance sheet of Seller as of
December 31, 1995 (the "Balance Sheet Date"), and the unaudited statements of
operations and cash flows for the year then ended (the "Financial Statements").
The Financial Statements except as indicated therein, have been prepared in
accordance with the books and records of Seller and in a manner consistent with
prior periods.
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The 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. Except as set forth in Schedule 4.6
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.
4.7 BOOKS AND RECORDS. The minute books of Seller, as previously made
available to Purchaser and its representatives, contain accurate records in all
material respects of all meetings of, and corporate action taken by (including
action taken by written consent) Seller and by the respective shareholders and
Board of Directors of Seller.
4.8 TITLE TO PROPERTIES; ENCUMBRANCES; CONDITION. Except as set forth in
Schedule 4.8 or 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 consisting of easements, permits and other
restrictions or limitations on the use of real property or irregularities in
title thereto that do not materially detract from the value of, or materially
impair the use of, such property by Seller in the operation of the Business,
(ii) Encumbrances for current taxes, assessments or governmental charges or
levies on property not yet due or delinquent, (iii) Encumbrances created by
Purchaser, and (iv) Encumbrances relating to Assumed Obligations (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 schedule which sets forth all fixed assets owned or
held under a capitalized lease by Seller as of the Balance Sheet Date. Each such
asset used in the ordinary course of the Business is in good operating condition
and repair, subject to ordinary wear and tear, except where such condition or
repair would not have a Material Adverse Effect.
4.9 REAL PROPERTY. Seller owns no real property, in whole or in part.
Schedule 4.9 identifies all leasehold interests of Seller and includes the name
of the lessor thereof and a list of all indebtedness of Seller secured by a
lien, mortgage or deed of trust thereon. Except as set forth on Schedule 4.9,
the premises leased by Seller are in good operating condition, and in a state of
good maintenance and repair, subject to ordinary wear and tear, except where
such condition or maintenance would not have a Material Adverse Effect. To the
knowledge of Seller and Dr. Bilyeu, the real property has adequate rights of
ingress and egress for operation of the Business in the
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ordinary course. To the knowledge of Seller and Dr. Bilyeu, no condemnation or
similar proceeding is pending or threatened, which would preclude or impair the
use of any such property, except where such proceeding would not have a Material
Adverse Effect.
4.10 LEASES. Schedule 4.10 contains an accurate and complete list of all
personal property leases to which Seller is a party (as lessee or lessor).
Except where it would not have a Material Adverse Effect, each lease set forth
in Schedule 4.10 is in full force and effect, and to the knowledge of Seller and
Dr. Bilyeu, no event has occurred that with the giving of notice, the passage of
time or both would constitute a default thereunder.
4.11 MATERIAL CONTRACTS. Except as set forth in Schedule 4.11, the
Assigned Contracts do not include (a) any agreement, contract or binding
commitment relating to the employment 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 binding commitment relating to capital expenditures in
excess of $5,000 (d) any loan or advance to, or investment in, any Person or any
agreement, contract or binding 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 or any other similar type contract, (g) any agreement,
contract or binding commitment limiting the freedom of Seller to engage in any
line of business or to compete with any Person, (h) any agreement, contract or
binding commitment which involves $5,000 or more and is not cancelable without
penalty within 30 days, or (i) any other agreement, contract or binding
commitment which is material to the operations of the Business. There are no
proposals which have been submitted by Seller to any third party that, if
accepted by such third party, would require disclosure on Schedule 4.11. Except
where it would not have a Material Adverse Effect, each contract or agreement
set forth in Schedule 4.11 is in full force and effect and to the knowledge of
Seller and Dr. Bilyeu, 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.
4.12 PERMITS. Schedule 4.12 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 Dr.
Bilyeu, in connection with the use, operation or ownership of the Assets and the
conduct of the Business as currently conducted. Seller holds all of
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the Permits listed on Schedule 4.12 (other than the dental licenses of dentists
practicing in the Business), and, to the knowledge of Seller and Dr. Bilyeu,
none is presently subject to revocation or challenge.
4.13 LITIGATION. Except as set forth in Schedule 4.13, 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 (each, a "Proceeding"), pending, or, to the knowledge
of Seller and Dr. Bilyeu, threatened, against or affecting the properties,
rights or goodwill of Seller, Dr. Bilyeu or employees of Seller, except where
such Proceeding would not have a Material Adverse Effect, and Seller and Dr.
Bilyeu do not know of any valid basis for any such Proceeding. There are no
Proceedings pending or to the knowledge of Seller and Dr. Bilyeu threatened,
seeking to prevent or challenge the transactions contemplated by this Agreement.
4.14 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.
(b) Except as provided in Schedule 4.14, there is no material
action, suit, proceeding, investigation, audit or claim now pending or, to the
knowledge of Seller or Dr. Bilyeu, 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
that arose in connection with any failure (or alleged failure) to pay any Taxes.
(d) Except as provided in Schedule 4.14, 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.
4.15 INSURANCE. Set forth in Schedule 4.15 is a complete list of insurance
policies that Seller maintains with respect to its Business, properties or
employees that are included in the Assets. Such policies are in full force and
effect and, to the knowledge of Seller and Dr. Bilyeu, there exists no grounds
on the part of the insurance carriers to cancel or reduce any coverage
thereunder. 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.
4.16 INTELLECTUAL PROPERTIES. Schedule 4.16 sets forth all material
Intellectual Property used in the Business. The operation of the Business as
conducted by Seller as of the Closing Date requires no material rights under
Intellectual Property other than rights under Intellectual Property listed on
Schedule 4.16 and rights granted to Seller pursuant to agreements listed on
Schedule 4.16. Except as otherwise set forth in Schedule 4.16, Seller owns all
right, title and interest in the Intellectual Property listed in Schedule 4.16.
No litigation is pending or, to the knowledge of Seller or Dr. Bilyeu,
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.
4.17 COMPLIANCE WITH LAWS. Seller is in compliance with all applicable
laws, regulations, orders, judgments and decrees applicable to the Business,
except where any noncompliance would not have a Material Adverse Effect.
4.18 EMPLOYMENT RELATIONS. (a) To the knowledge of Seller and Dr. Bilyeu,
Seller is not and has not engaged in any unfair labor practice; (b) to the
knowledge of Seller and Dr. Bilyeu, 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
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of or under any collective bargaining agreement is pending; and (f) no
collective bargaining agreement is currently being negotiated by Seller.
4.19 EMPLOYEE BENEFIT PLANS. Seller has delivered to Purchaser 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 Dr. Bilyeu, 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.
4.20 ENVIRONMENTAL LAWS AND REGULATIONS. Except as set forth in Schedule
4.20, and except where it would not have a Material Adverse Effect (a) 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) 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, to the knowledge of Seller or Dr. Bilyeu, any property
adjoining any Seller Property, except such Releases which do not violate any
Environmental Laws, (c) to the knowledge of Seller and Dr. Bilyeu, Seller is 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) to the knowledge of Seller and Dr. Bilyeu, there are no pending or
threatened Environmental Claims against Seller or any Seller Property, (e) to
the knowledge of Seller and Dr. Bilyeu, there are no facts or circumstances,
conditions, pre-existing conditions or occurrences on any Seller Property 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) 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.
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4.21 INTERESTS IN CUSTOMERS, SUPPLIERS, ETC. Except for relationships with
Affiliates and as set forth on Schedule 4.21 hereto, Seller does not possess,
directly or indirectly, any financial interest in, and Dr. Bilyeu is not a
director, officer or employee of, any corporation, firm, association or business
organization which is a supplier, customer, lessor, lessee or competitor of
Seller.
4.22 COMPENSATION OF EMPLOYEES. Set forth in Schedule 4.22 is an accurate
and complete list showing the names of all persons whose compensation from
Seller collectively for the fiscal year ended on the Balance Sheet Date exceeded
an annualized rate of $25,000 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.
4.23 PAYORS. Schedule 4.23 sets forth the five 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 4.23 no significant
payor has canceled or otherwise terminated or, to the knowledge of Seller or Dr.
Bilyeu threatened to cancel or otherwise terminate, its relationship with Seller
within the last three years.
4.24 ACCOUNTS RECEIVABLE; ACCOUNTS PAYABLE. Except as set forth on
Schedule 4.24, the Accounts Receivable on the Closing Date Balance Sheet are
collectible in the ordinary course of business, net of the reserves set up with
respect thereto. Except as set forth on Schedule 4.24, there has been no change
since the Balance Sheet Date (other than in the ordinary course of business) in
the amount of the Accounts Receivable or other fees or debts due to Seller or
the allowances with respect thereto, or Accounts Payable by Seller, from that
reflected in the Balance Sheet.
4.25 SOLVENCY. Seller is not entering into this Agreement with actual
intent to hinder, delay or defraud creditors.
4.26 DISCLOSURE. 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.
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4.27 BROKER'S OR FINDER'S FEES. No agent, broker, Person or firm acting on
behalf of Seller is, or will be, entitled to any commission or broker's or
finder's or similar fees in connection with this Agreement or any of the
transactions contemplated hereby.
4.28 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.
4.29 INVESTMENT REPRESENTATIONS.
(a) Seller and Dr. Bilyeu understand that the Common Stock has not
been registered under the Securities Act of 1933, as amended (the
"Securities Act"). Seller and Dr. Bilyeu also understand that the Common
Stock is being offered and sold pursuant to an exemption from registration
contained in the Securities Act based in part upon their respective
representations contained in this Agreement.
(b) Seller has, and Dr. Bilyeu, in consultation with his
accountants, attorneys and financial advisors has, substantial experience
in evaluating and investing in private placement transactions of
securities in companies similar to Castle so that he is capable of
evaluating the merits and risks of its investment in Castle and has the
capacity to protect his own interests. Seller and Dr. Bilyeu each
understand that it or 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. Seller and
Dr. Bilyeu understand that Castle has no present intention of registering
the Common Stock. Seller and Dr. Bilyeu also understand that there is no
assurance that any exemption from registration under the Securities Act
will be available and that, even if available, such exemption may not
allow either of them to transfer all or any portion of the Common Stock
under the circumstances, in the amounts or at the times he might propose.
(c) Each of Seller and Dr. Bilyeu is acquiring the Common Stock for
his or its own account for investment only, and not with a view towards
distribution.
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(d) Each of Seller and Dr. Bilyeu represents that by reason of his
or its business or financial experience, he or it has the capacity to
protect his or its own interests in connection with the transactions
contemplated in this Agreement.
(e) Each of Seller and Dr. Bilyeu represents that he or it is an
accredited investor within the meaning of Regulation D under the
Securities Act.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF PURCHASER
5.1 REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and
warrants to Seller and Dr. Bilyeu as follows:
5.2 EXISTENCE AND GOOD STANDING OF PURCHASER; POWER AND AUTHORITY.
Purchaser is a corporation duly organized, validly existing and in good standing
under the laws of the State of Tennessee. Purchaser has full corporate power and
authority to make, execute, deliver and perform this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
This Agreement has been duly authorized and approved by all required corporate
action of Purchaser. This Agreement has been duly executed and delivered by
Purchaser and is a valid and binding obligation of Purchaser enforceable against
Purchaser 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. 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, conflict with, or result in a
breach or default under any provision of the certificate of incorporation or
by-laws 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 Castle or by which any of
their respective properties or assets may be bound; (c) require any filing by
Purchaser with, or require Purchaser to obtain any permit, consent
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or approval of, or require Purchaser to give any notice to, any governmental or
regulatory body, agency or authority or any third party other than as set forth
in Schedule 5.3; 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 pursuant to, 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 it or any of its
properties or assets may be bound, except in the case of Subsections 5.3(b),
(c), and (d), for such violations, consents, breaches, defaults, terminations
and accelerations which in the aggregate would not have a Material Adverse
Effect.
5.4 CAPITAL STOCK. The authorized capital stock of Castle consists solely
of 18,755,263 shares of Common Stock of which 4,000,000 shares have been issued
as of the date of this Agreement, and 1,244,737 shares of Preferred Stock, $.001
par value per share ("Preferred Stock"), all of which shares have been issued.
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.
5.5 LITIGATION. Except as set forth in Schedule 5.5 hereto, 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 Castle,
Purchaser or their 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 Castle or
Purchaser, and Purchaser does 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, threatened, seeking to prevent or challenge the
transactions contemplated by this Agreement.
5.6 COMPLIANCE WITH LAWS. To the knowledge of Purchaser, Castle and
Purchaser are 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 or Purchaser.
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5.7 FINANCIAL STATEMENTS. The audited financial statements of Castle as of
December 31, 1995, attached hereto as Schedule 5.7 (to be attached prior to the
Closing Date), are complete and correct in all material respects and present
fairly in accordance with generally accepted accounting principles consistently
applied, the financial condition of Castle and the results of operations of
Castle as of the dates thereof and for the periods indicated.
5.8 BROKER'S OR FINDER'S FEES. Except for a fee payable by Purchaser to
the GulfStar Group, no agent, broker, Person or firm acting on behalf of
Purchaser 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.
ARTICLE VI
CONDITIONS TO SELLER'S OBLIGATIONS
The obligations of Seller 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 Seller) on or prior to the
Closing Date of all of the following conditions:
6.1 TRUTH OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Purchaser 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, and Purchaser shall have delivered to Seller on the Closing Date a
certificate of an authorized officer of Purchaser, dated the Closing Date, to
such effect.
6.2 PERFORMANCE OF AGREEMENTS. Each and all of the agreements and
covenants of Purchaser 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 shall have delivered to Seller a certificate of an authorized officer
of Purchaser, 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
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authorized officer of Purchaser, dated the Closing Date, to such effect to the
best knowledge of such officer.
6.4 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.
6.5 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 Seller and Dr. Bilyeu
and their counsel, and Seller and Dr. Bilyeu 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.
6.6 EMPLOYMENT AGREEMENTS. Dr. Bilyeu, Philip Hammer and David North shall
have received Employment Agreements, substantially in the form of Exhibits B-1.
B-2 and B-3, respectively, attached hereto, executed by the Purchaser and
Castle.
6.7 REGISTRATION RIGHTS AGREEMENT. Dr. Bilyeu shall have received a
Registration Rights Agreement, substantially in the form of Exhibit E hereto,
executed by Castle Dental Centers, Inc.
6.8 CONSENTS. Each of the consents referred to in Schedule 5.3 hereto
shall have been obtained.
6.9 DUE DILIGENCE. Dr. Bilyeu and Seller shall have satisfactorily
completed their due diligence review of Castle and Buyer, and shall not have
determined, in the exercise of their reasonable discretion, that the information
obtained from such review materially and adversely affects their appraisal of
the business, prospects and financial condition of Castle.
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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 Dr. Bilyeu 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; and Seller and Dr. Bilyeu shall have delivered to Purchaser on the
Closing Date a certificate of an authorized representative of Seller and Dr.
Bilyeu, 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 DOCUMENTS OF CONVEYANCE. Purchaser shall have received from Seller
fully executed documents of conveyance vesting in Purchaser good and valid title
to the Assets, free and clear of any Encumbrances except Permitted Encumbrances.
7.4 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.
7.5 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.
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7.6 CONSENTS. Each of the consents referred to in Schedule 4.4 attached
hereto shall have been obtained.
7.7 LEGAL OPINION. Seller shall have delivered to Purchaser the opinion of
Waller Lansden Dortch & Davis, their counsel, substantially in the form of
Exhibit C attached hereto.
7.8 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.
7.9 NEW PC. Dr. Bilyeu shall have organized New PC and New PC shall have
entered into Employment Agreements with the dentists employed as of the Closing
by Seller and Seller shall have duly and validly assigned to New PC all
reimbursement contracts with third party insurance companies, managed care
companies and other reimbursement sources referred to in Section 2.2(e). Seller
shall have changed its corporate name to a name reasonably acceptable to
Purchaser and New PC shall have changed its corporate name to Castle Mid-South
Dental Center, P.C.
7.10 EXECUTION OF MANAGEMENT SERVICES AGREEMENT. Purchaser and New PC
shall have entered into a Management Services Agreement substantially in the
form of Exhibit F hereto.
7.11 STOCKHOLDERS AGREEMENT. Dr. Bilyeu shall have entered into a
Stockholders Agreement with Castle and certain of its other Stockholders,
substantially in the form of Exhibit D.
7.12 SUBORDINATION AGREEMENT. Seller shall have executed and delivered a
Subordination Agreement with respect to the promissory note described in Section
3.1(b) in form and substance satisfactory to the senior and senior subordinated
lenders of Castle.
ARTICLE VIII
COVENANTS OF SELLER AND DR. BILYEU
Seller and Dr. Bilyeu hereby covenant and agree with Purchaser as follows:
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8.1 COOPERATION BY SELLER. Seller and Dr. Bilyeu 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 Dr. Bilyeu to effect the
transactions contemplated on its or his part hereby, and Seller and Dr. Bilyeu
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. Seller and Dr. Bilyeu 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 Dr. Bilyeu contained herein being untrue in any material respect.
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 ordinary course, (b) use its reasonable efforts to keep
available the services of its employees and maintain satisfactory relationships
with licensors, suppliers, lessors, distributors, customers, clients and others,
(c) 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, and (d) maintain the Books
and Records in the usual, regular and ordinary manner, on a basis consistent
with past practice.
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 Dr. Bilyeu 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 (other than to accountants,
attorneys, employees and other representatives of Seller and Dr. Bilyeu engaged
by them in connection with the transactions contemplated by this Agreement),
concerning any sale of the Assets or any material part thereof or a similar
transaction involving Seller or Dr. Bilyeu.
8.4 REVIEW OF THE ASSETS. Purchaser may, 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
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not, however, affect the representations and warranties made by Seller and Dr.
Bilyeu 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. Seller and Dr. Bilyeu shall
permit Purchaser and its representatives to have, after the execution of this
Agreement, full access to employees of 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.
8.5 FURTHER ASSURANCES. At any time or from time to time after the Closing
Date, Seller and Dr. Bilyeu 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
Purchaser hereby covenants and agrees with Seller and Dr. Bilyeu as
follows:
9.1 COOPERATION BY PURCHASER. Purchaser will use its reasonable best
efforts, and will cooperate with Seller and Dr. Bilyeu, 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. Purchaser further agrees to
deliver to Seller and Dr. Bilyeu 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 which are
transferred to Purchaser in connection herewith, to the extent necessary or
desirable in anticipation of, or preparation for, existing or future litigation,
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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.
9.3 FURTHER ASSURANCES. At any time or from time to time after the Closing
Date, Purchaser shall, at the request of Seller or Dr. Bilyeu 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 DUE DILIGENCE INVESTIGATION. Prior to the Closing Date, Purchaser and
Castle will make available to Seller and Dr. Bilyeu and their respective
attorneys, accountants, consultants and agents, any and all information
regarding Purchaser and Castle and their respective businesses, operations,
financial affairs and management, including but not limited to the information
contained on Schedule 9.4 attached hereto, to the extent such information is in
the possession of Purchaser or Castle or can be obtained without unreasonable
burden or expense, to permit Seller and Dr. Bilyeu to familiarize themselves
with the business of the Purchaser and Castle and to make an informed investment
judgment with respect to the Common Stock of Castle referred to in Section
3.1(c). The Purchaser and Castle agree to make available to Seller and Dr.
Bilyeu and their respective attorneys, accountants, consultants and agents
management members and representatives of Purchaser and Castle to respond to any
questions or inquiries from such parties regarding the Purchaser, Castle and
their respective businesses, operations, financial affairs and management.
The due diligence investigation shall be conducted at the principal offices of
Castle in Houston, Texas, at such time or times during normal business hours as
are reasonably requested by Seller and Dr. Bilyeu, or information will be
delivered, on reasonable request, to the offices of Seller or Dr. Bilyeu or
their representatives. Seller and Dr. Bilyeu agree to complete such
investigation on or before May 17, 1996, or such date not later than May 31,
1996 which is 14 days after the date on which all information reasonably
requested by Seller or Dr. Bilyeu or their representatives within five business
days of the start of the due diligence period is made available to them.
All parties participating in the due diligence review shall be bound by
confidentiality agreements in form and substance satisfactory to the Purchaser
and Castle.
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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, Dr, Bilyeu and
Seller; or
(b) by Purchaser, Dr. Bilyeu, 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 default or in breach
of this Agreement), if the Closing Date shall not have occurred on or
before May 31, 1996; or
(c) by either Purchaser, on the one hand, or Dr. Bilyeu and Seller,
on the other hand, in writing, without liability on the part of the
terminating party on 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 covenants or agreements
contained herein required to be performed prior to the Closing Date, or
(ii) breach or have breached any of its representations or warranties
contained herein.
10.2 EFFECT ON OBLIGATIONS. Termination of this Agreement pursuant to this
Article 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 next succeeding sentence of this Section 10.2. 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.
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ARTICLE XI
SURVIVAL AND INDEMNIFICATION
11.1 INDEMNIFICATION OF THE SELLER. The Purchaser, from and after the
Closing Date, shall indemnify and hold Seller and Dr. Bilyeu and their
respective Affiliates (the "Seller Indemnitees") harmless from and against any
and all damages (including exemplary damages and 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 prior to the first anniversary of
the Closing Date as a result of, caused by, arising out of, or in any way
relating to (a) any misrepresentation, breach of warranty, or nonfulfillment of
any agreement or covenant on the part of the Purchaser under this Agreement or
any misrepresentation in or omission from any list, schedule, certificate, or
other instrument furnished or to be furnished to the Seller by the Purchaser
pursuant to the terms of this Agreement or (b) any liability or obligation
(other than those for which Purchaser are being indemnified by Seller and Dr.
Bilyeu 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.
11.2 INDEMNIFICATION OF THE PURCHASER. Seller and Dr. Bilyeu, jointly and
severally, shall indemnify and hold Purchaser and its Affiliates (the "Purchaser
Indemnitees") harmless from and against any and all Damages suffered by any
Purchaser Indemnitee as a result of, caused by, arising out of, or in any way
relating to (a) any misrepresentation, breach of warranty, or nonfulfillment of
any agreement or covenant on the part of the Seller or Dr. Bilyeu under this
Agreement or any misrepresentation in or omission from any list, schedule,
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 Dr. Bilyeu are being
indemnified by Purchaser 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, or (c) the
uncollectibility of more than $10,000 of Accounts Receivable (net of applicable
reserve) after nine months. The aggregate amount of indemnification which may be
recovered under this Section 11.2 by Purchaser from Dr. Bilyeu and Seller, or
either of them, shall not exceed the amount of the Purchase Price.
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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 in accordance with the provisions of this Agreement in sufficient time
to permit the indemnifying party or its counsel to defend against such matter
and to make 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, only insofar as such
knowing failure to notify the indemnifying party has 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. 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
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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 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.
11.8 LIMITATION ON INDEMNIFICATION.No claim for indemnification under this
Article XI may be made unless and until the party seeking indemnification has
suffered, incurred, sustained or become subject to Damages in excess of $10,000
in the aggregate (except with respect to the Accounts Receivable referred to in
Section 11.2(c) with respect to which no additional threshold in excess of the
$10,000 threshold described in Section 11.2(c) is intended); provided, however,
that (whether or not Damages in excess of $10,000 have been incurred)
indemnification under this Article XI may be claimed for, and full recovery may
be had with respect to, all Damages resulting from any indemnifying party's
intentional, willful or reckless nonfulfillment or breach of any
-32-
covenant or agreement made by such indemnifying party as a part of or contained
in this Agreement. Except as specifically provided in this Section 11.8, all
claims for indemnification under this Article XI for Damages (without regard to
the Accounts Receivable described in Section 11.2(c)) will accumulate until such
time as such claims for indemnification exceed $10,000 in the aggregate, at
which time, all amounts may be recovered as provided herein.
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 Dr. Bilyeu without the
prior written consent of Purchaser or by Purchaser to any Person without the
prior written consent of Seller and Dr. Bilyeu.
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.
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
-33-
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, Dr.
Bilyeu 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:
if to Purchaser, to:
Castle Dental Centers of Tennessee, Inc.
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056
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with a copy to:
William D. Gutermuth
Bracewell & Patterson, L.L.P.
South Tower Pennzoil Place
711 Louisiana, Suite 2900
Houston, Texas 77002-2856
if to Seller or Dr. Bilyeu, to:
G. Powell Bilyeu, D.D.S.
MidSouth Dental Centers, Inc.
1010 Murfreesboro Road
Suite 196
Franklin, Tennessee 37064
with a copy to:
William F. Carpenter III
Waller Lansden Dortch & Davis
511 Union Street
Suite 2100
Nashville, Tennessee 37219-8966
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 Tennessee 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
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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.
12.12 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.
12.13 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 TENNESSEE, INC.
By:_____________________________
Name: Jack H. Castle, Jr.
Title: President
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MID-SOUTH DENTAL CENTER, P.C.
By:_____________________________
Name: G. Powell Bilyeu, D.D.S.
Title: President
G. POWELL BILYEU, D.D.S.
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EXHIBIT 10.32
MANAGEMENT SERVICES AGREEMENT
BY AND BETWEEN
CASTLE DENTAL CENTERS OF TENNESSEE, INC.,
A TENNESSEE CORPORATION
AND
CASTLE MID-SOUTH DENTAL CENTER, P.C.,
A TENNESSEE PROFESSIONAL CORPORATION
EFFECTIVE MAY 31, 1996
<PAGE>
TABLE OF CONTENTS
PAGE NO.
ARTICLE I. DEFINITIONS........................................................2
Section 1.1 Act......................................................2
Section 1.2 Adjusted Gross Revenue...................................2
Section 1.3 Adjustments..............................................2
Section 1.4 Ancillary Revenue........................................2
Section 1.5 Base Management Fee......................................2
Section 1.6 Budget...................................................2
Section 1.7 Business Manager.........................................2
Section 1.8 Business Manager Expense.................................2
Section 1.9 Confidential Information.................................3
Section 1.10 Center...................................................3
Section 1.11 Dental Services..........................................3
Section 1.12 Dentist..................................................3
Section 1.13 GAAP.....................................................3
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...............................................5
Section 1.21 PC Expense...............................................5
Section 1.22 Performance Fee..........................................6
Section 1.23 Practice Territory.......................................6
Section 1.24 Professional Services Revenues...........................6
Section 1.25 Representatives..........................................6
Section 1.26 State....................................................6
Section 1.27 Term.....................................................6
ARTICLE II. APPOINTMENT AND AUTHORITY OF BUSINESS MANAGER.....................6
Section 2.1 Appointment..............................................6
Section 2.2 Authority................................................6
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.....................................8
(h) Dentist Hiring...........................................8
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........................................10
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 ...............................................11
Section 4.8 Billing and Collection..................................11
Section 4.9 PC Account..............................................13
Section 4.10 Fiscal Matters..........................................13
Section 4.11 Reports and Records.....................................15
Section 4.12 Recruitment of PC Dentists..............................16
Section 4.13 Business Manager's Insurance............................16
Section 4.14 No Warranty.............................................16
ARTICLE V. COVENANTS AND RESPONSIBILITIES OF PC..............................16
Section 5.1 Organization and Operation..............................16
Section 5.2 PC Personnel and Shareholders...........................17
Section 5.3 Professional Standards..................................17
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.........................................21
Section 5.10 Peer Review.............................................21
Section 5.11 Indemnification.........................................21
ARTICLE VI. FINANCIAL ARRANGEMENT............................................22
Section 6.1 Definitions.............................................22
Section 6.2 Management Fee..........................................22
Section 6.3 Adjustments.............................................22
Section 6.4 Reasonable Value........................................23
Section 6.5 Payment of Management Fee...............................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..................................25
Section 7.4 Repurchase Obligation...................................26
Section 7.5 Repurchase Option.......................................27
Section 7.6 Closing of Repurchase...................................28
ARTICLE VIII. MISCELLANEOUS..................................................28
Section 8.1 Administrative Services Only............................28
Section 8.2 Status of Contractor; Agency............................28
Section 8.3 Notices.................................................29
Section 8.4 Governing Law...........................................29
Section 8.5 Assignment..............................................30
Section 8.6 Arbitration.............................................30
Section 8.7 Waiver of Breach........................................32
Section 8.8 Enforcement.............................................32
Section 8.9 Gender and Number.......................................32
Section 8.10 Additional Assurances...................................32
Section 8.11 Consents, Approvals, and Exercise of Discretion.........32
Section 8.12 Force Majeure...........................................33
Section 8.13 Severability............................................33
Section 8.14 Divisions and Headings..................................33
Section 8.15 Amendments and Management Services Agreement Execution..33
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Section 8.16 Entire Management Services Agreement....................34
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MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT is made and entered into effective as
of May 31, 1996, by and between CASTLE DENTAL CENTERS OF TENNESSEE, INC., a
Tennessee corporation ("Business Manager"), and CASTLE MID-SOUTH DENTAL CENTER,
P.C., a Tennessee professional corporation ("PC").
RECITALS
This Management Services Agreement is made with reference to the
following facts:
A. PC is a validly existing Tennessee 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 Tennessee through individual
dentists who are licensed to practice dentistry in the State of Tennessee and
who are employed or otherwise retained by PC.
B. Business Manager is a validly existing Tennessee corporation, which
has been duly formed to manage the non-dental 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 non-dental 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 developed a formula for 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.
NOW, THEREFORE, in consideration of the mutual terms, covenants and
conditions hereinabove and hereinafter set forth, the parties agree as follows:
<PAGE>
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 TCA 63-5-101 et. seq., as
amended.
Section 1.2 ADJUSTED GROSS REVENUE. The term "Adjusted Gross Revenue"
shall mean the sum of Professional Services Revenue and Ancillary Revenue.
Section 1.3 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 1.4 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 BASE MANAGEMENT FEE. The term "Base Management Fee" shall
mean the amount set forth in Section 6.1.
Section 1.6 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 1.7 BUSINESS MANAGER. The term "Business Manager" shall mean
Castle Dental Centers of Tennessee, Inc., a Tennessee corporation, or any entity
that succeeds to the interests of Castle Dental Centers of Tennessee, Inc., a
Tennessee corporation, and to whom the obligations of Business Manager are
assigned and transferred.
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.
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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.
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 employed or otherwise retained by or associated
with PC, each of whom shall meet the qualifications described in Section 5.2 and
Section 5.3.
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
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purposes of this Management Services Agreement, GAAP shall be applied 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
as contemplated herein.
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 services to or by PC. Office Expense shall not include 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 non-dental 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;
(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 Dentists 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;
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(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 deemed to be the prime rate established from
time to time by NationsBank of Texas, N.A. plus four percent, but in no event to
be less than 10%.
(g) the Base Management Fee;
(h) the reasonable out-of-pocket travel expenses associated with
attending meetings, conferences, or seminars to benefit PC;
(i) the reasonable costs and expenses associated with marketing,
advertising and promotional activities to benefit PC;
(j) the cost of dental supplies (including but not limited to drugs,
pharmaceuticals, 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; and
(k) federal, state or local taxes of PC, including without limitation,
income, payroll, sales and use, property, franchise and business taxes
Section 1.18 PC. The term "PC" shall mean Mid-South Dental Centers,
P.C., a Tennessee professional corporation.
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 consent
granted by the PC when requested by Business Manager. When any provision of this
Management Services Agreement requires PC Consent, PC Consent shall not be
unreasonably or arbitrarily withheld.
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 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).
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Section 1.22 PERFORMANCE FEE. The term "Performance Fee" shall mean the
amount payable to the Business Manager, if any, determined under Section 6.2, as
a Management Fee based upon the Business Manager achieving certain
pre-determined performance criteria.
Section 1.23 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 Tennessee representing
the specific geographic boundaries of the dental practice conducted by PC within
its particular urban metropolitan area.
Section 1.24 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 1.25 REPRESENTATIVES. The term "Representatives" shall mean a
party's officers, directors, employees, or other agents or representatives.
Section 1.26 STATE. The term "State" shall mean the State of Tennessee.
Section 1.27 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 non-dental
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 in good faith the Management Services in
any reasonable manner Business Manager deems appropriate to meet the day-to-day
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 notice of PC's intent to execute any agreement
obligating PC to perform Dental Services or otherwise
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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 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 Section 63-5-108 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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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 under the control of the PC.
(c) PATIENT FEES; COLLECTION POLICIES. As a part of the Budget process,
in consultation with Business Manager, the PC shall establish the fee schedule
for Dental Services and shall establish 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, in consultation with the Business
Manager, 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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Section 3.2 DENTAL TREATMENT DECISIONS. All decisions relating directly
or indirectly to the practice of dentistry will be made solely by the PC. The PC
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
non-dental 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 and in consultation with 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 written 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 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.
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(c) Business Manager shall provide all non-dental 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. 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 non-dental 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 employed 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, in consultation with PC, 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.
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.
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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, employ or otherwise 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, in consultation
with PC, shall 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.
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
employed or otherwise retained by PC. Business Manager shall advise and consult
with PC regarding the fees for Dental Services provided by PC; it being
understood, however,
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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 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).
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(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. PC shall not draw checks on the PC
Account.
(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; (ii) Office Expenses (other
than the Base Management Fee); (iii) Management Fees (both Base Management Fee
and Performance Fee); and (iv) any other expenditures.
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 before the execution of this
Management Services Agreement. The
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initial Budget shall include an exhibit setting forth the criteria under
which Business Manager shall be entitled to receive the Performance Fee.
(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 Management Fee and Performance 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.
(3) SUCCEEDING BUDGETS; SPECIAL RATES. In each succeeding Budget,
unless the parties otherwise mutually agree or are otherwise precluded
by law or regulation, the criteria for the Performance Fee and Business
Manager's right to receive the Performance Fee shall be continued on the
same basis.
(4) 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 (with
the exception of the Base Management Fee and any one-time or
non-recurring expenses included in such prior 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, Nashville, Tennessee 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.
(5) 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 safekeeping of administrative or financial records and books of
account relating to the business
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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 the 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 the property and under the control of PC and shall
be located at the applicable Center so that they are readily available for
patient
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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.
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 employed 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.
ARTICLE V. COVENANTS AND RESPONSIBILITIES 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
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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 agreement in a form reasonably
satisfactory to PC and Business Manager and will not commit and permit to remain
outstanding any breach of such employment agreement that would allow the Dentist
to terminate for cause. No such employment contract may be amended if the effect
of such amendment would be the waiver of rights held by PC. 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 employ or
retain, 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.
(c) OPTION AGREEMENT. Each shareholder of PC shall enter into and comply
with the terms and provisions of an Option Agreement with respect to his or her
ownership interest in PC, substantially in the form of Exhibit A hereto.
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 in all material respects the code of professional conduct and
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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 in the provision of Dental Services on behalf of PC.
Section 5.4 DENTAL SERVICES. PC shall ensure that Dentists and
non-dentist dental care personnel are available to provide Dental Services to
patients during the normal operating hours of each Center. 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 employed personnel, if any, and
professional and comprehensive general liability insurance covering PC and each
of the Dentists PC retains or employs to provide Dental Services. 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 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. The insurance policy or policies 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 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
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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 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.
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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 their full
professional time and attention. PC agrees and acknowledges that the
noncompetition covenants described hereunder are necessary for the protection of
Business Manager, and that Business Manager would not have entered into this
Management Services Agreement without 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 management and administrative
services to its or their own dental practices after the termination of this
Management Services Agreement.
(c) The written employment agreements described in Section 5.2 shall
contain covenants of the shareholder employees pursuant to which the
shareholders 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 shall obtain formal written agreements from its dentist employees
in the form of Exhibit 5.2(a), pursuant to which the employees agree not to
compete with PC within the
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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 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.
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 "Mid-South Dental Centers, P.C." 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:
(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 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
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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 employees, 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 DEFINITIONS. For purposes of this Article VI, capitalized
terms used herein shall have the meanings ascribed as follows:
(a) BASE MANAGEMENT FEE. The Base Management Fee shall be the amount,
calculated on a monthly basis, that is equal to twelve and one-half percent
(12.5%) of the Adjusted Gross Revenue attributable to the applicable monthly
period.
(b) PERFORMANCE FEE. The Performance Fee shall be the amount, calculated
on a monthly basis, that is calculated in accordance with the Applicable Exhibit
to the Budget.
Section 6.2 MANAGEMENT FEE. PC and Business Manager agree to the
compensation set forth herein as being paid to Business Manager in consideration
of a substantial commitment made by Business Manager hereunder and that such
fees are fair and reasonable. Each month, in the priority established by Section
4.9 (b), Business Manager shall be paid the following:
(i) the amount of all Office Expenses (other than the Base
Management Fee) paid by the Business Manager on behalf
of PC.
(ii) the Base Management Fee.
(iii) the Performance Fee.
Section 6.3 ADJUSTMENTS. If there are not sufficient funds to pay either
or both of the Base Management Fee or the Performance 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
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date of termination. Amounts carried over shall earn interest at the rate of ten
percent (10%) per annum. Furthermore, the amount of the Performance Fee paid
will be monitored and reconciled on an annual basis and any overpayments of the
Performance Fee shall be promptly refunded by the Business Manager.
Section 6.4 REASONABLE VALUE. Payment of the Base Management Fee or
Performance 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 6.5 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
as such fee becomes due and payable during the Term and thereafter as provided
in Section 7.3.
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 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.
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Section 6.7 DISPUTES REGARDING FEES. PC shall not be entitled to a
set-off or reduction in its Management Fees 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 twenty-five (25) 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;
(ii) Upon a good faith determination by Business Manager that
PC has materially defaulted in the performance of any of
its material duties or obligations hereunder, and such
default continues for thirty (30) days after PC receives
notice of the default, and such default has or is
reasonably expected to have a material adverse effect on
the business or affairs of Business Manager.
(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
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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 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.
(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 materially and
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 Tennessee Board of Dentistry issues 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 immediately terminate this Management Services
Agreement.
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, (ii) obligations, promises, or covenants set
forth herein that are expressly made to extend beyond the Term, including,
without limitation, indemnities, which provisions shall survive the expiration
or termination of this Management Services Agreement for any reason, and
noncompetition provisions, which provisions shall
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survive the expiration or termination of this Management Services Agreement by
Business Manager for cause or by PC in breach of this Agreement, and (iii) the
obligations of PC and Business Manager described in Section 7.4. 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.
Section 7.4 REPURCHASE OBLIGATION. Upon termination of this Management
Services Agreement by Business Manager for cause or by PC in breach of this
Agreement or pursuant to Section 7.2(d) hereof, Business Manager shall have the
option, exercisable at any time within thirty (30) days of such termination, to
require PC to:
(a) Purchase from Business Manager at book value the intangible assets,
deferred charges, and all other amounts on the books of the Business Manager
relating to the Management Services Agreement as adjusted through the last day
of the month most recently ended prior to the date of such termination in
accordance with GAAP to reflect amortization or depreciation of the intangible
assets, deferred charges, or covenants. Provided, however, that in the event of
a termination of this Agreement pursuant to Section 7.2(d) hereof, the price at
which the intangible assets of Business Manager shall be purchased by PC shall
be reduced by 20% for each full year that has passed from the date of this
Management Services Agreement as of the date of sale;
(b) Purchase from Business Manager any real estate owned by Business
Manager and used as a Center at the greater of the appraised fair market value
thereof or the then book value thereof. In the event of any repurchase of real
property, the appraised value shall be determined by Business Manager and PC,
each selecting a duly qualified appraiser, who in turn will agree on a third
appraiser. This agreed-upon appraiser shall perform the appraisal which shall be
binding on both parties. In the event either party fails to select an appraiser
within fifteen (15) days of the selection of an appraiser by the other party,
the appraiser selected by the other party shall make the selection of the third
party appraiser;
(c) Purchase at book value all improvements, additions, or leasehold
improvements that have been made by Business Manager at any Center and that
relate solely to the performance of Business Manager's obligations under this
Management Services Agreement;
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(d) Assume all debt, and all contracts, payables, and leases that are
obligations of Business Manager and that relate directly to the performance of
Business Manager's obligations under this Management Services Agreement or the
properties leased or subleased hereunder by Business Manager; and
(e) Purchase from Business Manager at the greater of appraised fair
market value or book value all of the equipment listed as set forth in the
Purchase Agreement or an exhibit thereto, including all replacements and
additions thereto made by Business Manager pursuant to the performance of its
obligations under this Management Services Agreement, and all other assets,
including inventory and supplies, tangibles and intangibles, set forth on the
books of the Business Manager as adjusted through the last day of the month most
recently ended prior to the date of such termination in accordance with GAAP to
reflect operations of each Center, depreciation, amortization, and other
adjustments of assets shown on the books of the Business Manager.
Section 7.5 REPURCHASE OPTION. Upon termination of this Management
Services Agreement by Business Manager in breach of this Agreement or by PC for
cause, PC shall have the option but not the obligation to do all or none of the
following:
(a) Purchase from Business Manager any real estate owned by Business
Manager and used as a Center at the then book value thereof;
(b) Purchase at book value all improvements, additions, or leasehold
improvements that have been made by Business Manager at any Center and that
relate solely to the performance of Business Manager's obligations under this
Management Services Agreement;
(c) Assume all debt, and all contracts, payables, and leases that are
obligations of Business Manager and that relate directly to the performance of
Business Manager's obligations under this Management Services Agreement or the
properties leased or subleased by Business Manager; and
(d) Purchase from Business Manager at book value all of the equipment
listed as set forth in the Purchase Agreement or an exhibit thereto, including
all replacements and additions thereto made by Business Manager pursuant to the
performance of its obligations under this Management Services Agreement, and all
other tangible assets, including inventory and supplies, set forth on the books
of the Business Manager as adjusted through the last day of the month most
recently ended prior to the date of such termination in accordance with GAAP to
reflect operations of each Center, depreciation, amortization, and other
adjustments of assets shown on the books of the Business Manager.
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Section 7.6 CLOSING OF REPURCHASE. PC shall pay cash for the repurchased
assets. The amount of the purchase price shall be reduced by the amount of debt
and liabilities of Business Manager, if any, assumed by PC. PC and any Dentist
who is a shareholder of PC shall execute such documents as may be required to
cause or permit PC to assume the liabilities set forth in Section 7.4(d) or
Section 7.5(c) and to remove or, if PC and such Dentist or Dentists can
establish in good faith that such removal is not possible, to cause or permit PC
to indemnify Business Manager from any liability with respect to such
repurchased asset and with respect to any property leased or subleased by
Business Manager; provided, however, that such Dentist shall not be obligated or
required to guarantee the obligation of PC or otherwise enhance or supplement
the creditworthiness of PC. The closing date for the repurchase shall be
determined by Business Manager but shall in no event occur later than one
hundred eighty (180) days from the date of the notice of termination. The
termination of this Management Services Agreement shall become effective upon
the closing of the sale of the assets under Section 7.4 or Section 7.5 (or, if
PC does not exercise its option under Section 7.5, on the date it notifies
Business Manager of such decision). PC shall be released from the restrictive
covenants provided for in Section 5.8 on the closing date. From and after any
termination, each party shall provide the other party with reasonable access to
the books and records then owned by it to permit such requesting party to
satisfy reporting and contractual obligations that may be required of it.
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 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
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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: CASTLE MID-SOUTH DENTAL CENTERS, P.C.
1010 Murphreesboro Road
Suite 196
Franklin, Tennessee 37064
Business Manager: CASTLE DENTAL CENTERS OF TENNESSEE, 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 Tennessee applicable to agreements to be
performed wholly within the
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State. Tennessee law was chosen by the parties after negotiation to govern
interpretation of this Management Services Agreement because Davidson County,
Tennessee is, or is adjacent to, the seat of management for Business Manager.
The federal and State courts of Davidson County, Tennessee 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 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.
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(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 party may in writing request the judge of the United States District
Court for the Middle District of Tennessee 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 Nashville,
Tennessee 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.
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(iii) 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
set forth in this Section 8.6 for selecting the arbitrators
shall be followed from time to time as necessary.
(iv) 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.
(v) All privileges under Tennessee 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 Tennessee 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,
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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.
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.
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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 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: CASTLE MID-SOUTH DENTAL CENTER, P.C.
By:________________________________
G. Powell Bilyeu
President
BUSINESS MANAGER: CASTLE DENTAL CENTERS OF TENNESSEE,
INC.
By:
Name:
Title:
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EXHIBIT 10.36
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of May
31, 1996 (the "Effective Date"), by and between Castle Dental Centers of
Tennessee, Inc., a Tennessee corporation (the "Company"), and G. Powell Bilyeu,
D.D.S. ("Employee").
RECITALS:
Prior to the date hereof, Employee was the owner of Mid-South Dental
Center, P.C., which along with the Company and the Employee is a party to that
certain Asset Purchase Agreement dated as of April 29, 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 assigned to him from time to time by the Board of
Directors of the Company.
(b) Employee's initial responsibility shall be to participate in the
development and implementation of the strategic plan of the Company for
specified markets in Tennessee, Kentucky, Alabama and portions of northwest
Georgia. Employee's role in the development of the strategic plan shall include,
but not be limited to, an analysis of markets selected by the Company and the
identification of acquisition candidates. Employee's role in the implementation
of the strategic plan, subject to the supervision of the Company's senior
management, shall include, but not be limited to, participating in the
acquisition of dental practices, development of new offices and responsibility
for the management of dental practices in accordance with a management services
agreement to which the Company and such practices are parties.
(c) The Company may reassign Employee from the duties described above
without breaching this Agreement; provided, however, that Employee shall not be
assigned duties inconsistent with his position as an executive of the Company,
and provided further, that no such reassignment shall justify a decrease in the
Base Salary (as herein defined) payable to Employee.
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(d) The duties Employee is to perform hereunder shall be conducted from
the Company's offices in the Nashville, Tennessee metropolitan area. Employee
acknowledges and agrees, however, that, in connection with his employment
hereunder, he may be required to travel to, and to perform his duties hereunder
on a temporary basis at, another place or places as the Board of Directors of
the Company shall designate or as the interests or business opportunities of the
Company may require from time to time. In the event that the duties to be
performed by Employee hereunder are required to be performed on a permanent
basis from a place or places other than the Nashville, Tennessee offices of the
Company, the Company shall be deemed to be in breach of this Agreement and
Employee may elect to terminate this Agreement.
(e) Employee shall devote his business time, efforts and abilities to
the business of the Company in a manner consistent with prior periods. Employee
shall use his reasonable best efforts to promote the interests of the Company.
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 $150,000 per annum (the "Base
Salary"), subject to annual review relative to increase, through and until the
Expiration Date, as herein defined, payable in accordance with the regular
payroll practices of the Company as in effect from time to time, and which
currently provide for payment on a bi-weekly basis. 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 DEFERRED COMPENSATION. Following the Expiration Date, for the three
year period commencing on the Expiration Date, Employee will be entitled to an
aggregate compensation for such period equal to three times the amount of the
Incentive Bonus Plan compensation paid or payable to Employee (computed in
accordance with Section 2.3), during the twelve month period immediately
preceding the Expiration Date (the "Deferred Compensation"). The Deferred
Compensation will be prorated over such three year term, will be paid in
accordance with the regular payroll practices of the Company in effect from time
to time, and will 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.
2.3 INCENTIVE BONUS COMPENSATION. The Company hereby establishes the
Castle Dental Centers of Tennessee, Inc. Incentive Bonus Plan (the "Plan") which
provides for the Company to set aside for grant to the Employee, Philip Hamner
and David North an aggregate of
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ten percent (10%) of the pretax income of the Company in excess of
$[REDACTED] per year. Pre-tax income of the Company shall be computed in
accordance with generally accepted accounting principles, but shall exclude the
periodic change in unbilled patient receivables resulting from the recognition
of orthodontic revenues on the proportional performance method of accounting for
service contracts, and shall be attributable to the operations of the Company in
Kentucky, Alabama, Tennessee and portions of northwest Georgia, as set forth in
Schedule 2.3 hereto, computed without general overhead allocation or charge with
respect to the general and administrative expenses of Castle Dental Center,
Inc., a Delaware corporation ("Castle"), but taking into account direct costs
incurred by Castle on behalf of the Company, and including a deduction equal to
the cost of capital invested (exclusive of initial acquisition costs) in the
Company by Castle. For the purposes of this Agreement, Castle's cost of capital
shall be deemed to be the prime rate established from time to time by
NationsBank of Texas, N.A. plus two percent, until such time as Castle's
subordinated debt described on Schedule 2.3 hereto is paid in full, and
thereafter shall be the prime rate established from time to time by NationsBank
of Texas, N.A. plus one percent. The Employee is hereby granted the right to
participate in the Plan for each year prior to the Expiration Date. Employee,
Mr. Hamner and Mr. North (each, a "Participant") shall be paid 60%, 20% and 20%,
respectively, under the Plan. In the event a Participant shall cease to be
employed by the Company during the term of this Agreement, the amount payable to
such Participant under the Plan shall thereafter be paid pro rata to the
Participants remaining in the employ of the Company. The annual amount payable
under the Plan shall be determined as soon as practicable each year following
the availability of the Company's financial statements for the preceding year,
and shall be paid in cash or other readily available funds to the Participants
within ten days following such determination.
2.4 STOCK OPTIONS.
2.4.1 As a condition to Employee's obligations hereunder,
Employee and Castle shall enter into a Stock Option Agreement in usual and
customary form providing Employee the option to purchase an aggregate of 50,000
shares of Common Stock of Castle (the "Options"), pursuant to the Castle Dental
Centers, Inc. Omnibus Stock and Incentive Plan (the "Stock Option Plan"). The
Options will vest according to a five-year vesting schedule, with twenty percent
(20%) of such shares vesting on the first anniversary of the date hereof, and an
additional twenty percent (20%) vesting at the end of each twelve month period
of continuous employment with the Company thereafter, until full vesting of all
the Options is completed.
2.4.2 The exercise price of the Options will be $5.00 per share,
and shall be subject to the anti-dilution and other provisions contained in the
Stock Option Plan.
2.5 BENEFITS. During the terms of this Agreement, Employee also shall be
entitled to receive such benefits as are made available to other personnel of
the Company in comparable positions, with comparable service credit and with
comparable duties and responsibilities, which
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shall include, in the case of Employee, four weeks paid vacation each year
during the term of this Agreement, plus one week paid leave to the extent such
week is devoted to required continuing dental education. Such benefits, other
than paid vacation and leave, 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.
2.6 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 date hereof and ending on May 30,
2001 (the "Expiration Date"), subject to the right of either party to terminate
this agreement as provided below.
3.2 DEATH; DISABILITY. 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. Either the Company or Employee may
terminate this Agreement at any time, without cause, by giving the other thirty
(30) days' written notice of termination.
3.4 TERMINATION WITH 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 or intending to result in personal gain or enrichment at the expense
of the Company;
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(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) a good faith determination by the Board of Directors of the
Company that Employee has violated this Agreement or committed 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 commission of any felony on the part of Employee which,
in the sole discretion of the Board of Directors of the Company, materially and
adversely, directly or indirectly, affects the name or goodwill of the Company;
or
(e) the termination of the Management Services Agreement (the
"Management Agreement") by and between the Company and Castle Mid-South Dental
Center, P.C. ("New PC") during the period that Employee is the majority
shareholder of New PC pursuant to Section 7.2(a)(ii) of the Management
Agreement.
A notice of termination pursuant to this Section 3.4 shall be in writing
and shall state the alleged reason for termination. With respect to a
termination pursuant to Section 3.4 (a)-(d), 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 determines, 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 such inquiry, to relieve Employee of his regular duties.
3.5 OTHER TERMINATION. This Agreement shall terminate automatically on
the termination of the Management Agreement pursuant to Section 7.2(d) thereof.
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 a
disability, Employee shall be entitled to Severance Pay in an amount equal to
the amount of 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 bonus and noncash benefits) the Employee would have earned
for the three month period subsequent to the effective date of termination,
payable at such time or times as would
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have been paid to Employee had he remained employed by the Company. In addition,
for a three year period commencing on the date of termination, Employee shall be
entitled to a pro rata amount of Deferred Compensation, equal to the product of
(i) the amount of Incentive Bonus Plan compensation payable or paid to Employee
during the twelve months immediately preceding the date of such termination (the
"Bonus Amount"), times (ii) the product (the "Pro-Rata Period Amount") of three
times a fraction, the numerator of which is the total number of months in which
Employee shall have been employed under this Agreement, and the denominator of
which is sixty. Such Deferred Compensation shall be prorated and paid over a
three year term as if it were Deferred Compensation under Section 2.2.
(b) If (i) Employee voluntarily terminates his employment (other
than due to a breach of this Agreement by the Company), (ii) the Company
terminates this Agreement for Cause, (iii) if Employee's employment is
terminated by reason of his death, or (iv) this Agreement is terminated pursuant
to Section 3.5 hereof, Employee shall not be entitled to receive any additional
salary, bonus or benefits beyond those earned or accrued as of the effective
date of the termination of his employment; except that, in the case of
Employee's death or termination of this Agreement pursuant to Section 3.5
hereof, for a three year period commencing as of such termination, Employee or
Employee's estate, as the case may be, shall be entitled to a pro rata amount of
Deferred Compensation equal to the product of (i) the Bonus Amount, times (ii)
the Pro Rata Period Amount. Such Deferred Compensation shall be prorated and
paid over a three year term as if it were Deferred Compensation under Section
2.2.
(c) If Employee's employment hereunder is terminated prior to the
Expiration Date of this Agreement, and such termination is either (i) due to a
breach of this Agreement by the Company, 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 between the effective
date of termination through the Expiration Date, 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 the Expiration Date; provided, however,
prior to the termination of this Agreement as the result of a breach hereof by
the Company, Employee shall give written notice of such breach and a thirty day
period within which to cure such breach. In addition, for a period of three
years commencing as of such termination, Employee shall be entitled to Deferred
Compensation equal to the product of (i) the Bonus Amount, times (ii) three.
Such Deferred Compensation shall be prorated and paid over a three year term as
if it were Deferred Compensation under Section 2.2. Further, the Options granted
to Employee pursuant to Section 2.4.1 hereof shall immediately and fully vest.
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
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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
Articles III, IV, V and VI.
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 ADDITIONAL ACTS BY EMPLOYEE. Employee further agrees at the request
of the Company (but without additional compensation from the Company during his
employment by the Company) to execute any and all papers and (at the expense of
the Company) perform all lawful acts that the Company deems necessary to
consummate and make effective the transactions contemplated by the Asset
Purchase Agreement and related documents.
ARTICLE V
5.1 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 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.
5.2 CONFIDENTIAL INFORMATION DEFINED. The term "Confidential
Information" shall mean and include any and all records, computer programs,
data, patent applications, trade secrets, customer lists, customer databases,
video programs and programming, proprietary information, technology, pricing
policies, financial information, methods of doing business, policy and/or
procedure manuals, training and recruiting procedures, accounting procedures,
the status and content of the Company's contracts with its customers, the
Company's business philosophy, and servicing methods and techniques at any time
used, developed, or investigated by the Company, before or during
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Employee's tenure of employment, or other information of any kind expressed or
recorded on any medium arising out of, concerning, or acquired in connection
with the research, development, commercialization and other activities of the
Company; but "Confidential Information" does not include information (i)
generally known or available in the industry, through no fault of Employee; or
(ii) available from a third party without violation of any duty of
confidentiality by Employee or others.
5.3 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.
ARTICLE VI
6.1 NONINTERFERENCE WITH EMPLOYMENT RELATIONSHIPS. 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 Mid-South Dental Centers, P.C. 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 Mid-South
Dental Centers, P.C.
6.2 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 Mid-
South Dental Centers, P.C. for the purpose of engaging in the Same or Similar
Business (as defined below) as the Company within the Restricted Territory (as
defined below).
6.3 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 Deferred Compensation or Severance Pay
hereunder, 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
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competing in the Same or Similar Business as the Company or Mid-South Dental
Center, P.C. within a ten mile radius around the city limits of any city in the
States of Alabama, Kentucky, Tennessee or Georgia in which the Company is
operating or managing a location providing dental service as of the date of
Employee's employment hereunder (the "Restricted Territory").
6.4 SAME OR SIMILAR BUSINESS DEFINED. For purposes of this Article VI,
the "Same or Similar Business" as the Company or Mid-South Dental Centers, P.C.
shall be defined as any business that is engaged to a significant extent in the
provision of 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 or insurance companies.
6.5 REASONABLENESS OF RESTRICTIONS. Employee has carefully read and
considered the provisions of this Article VI 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 Tennessee law.
ARTICLE VII
7.1 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.
7.2 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.
7.3 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) 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.
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7.4 GOVERNING LAW. This Agreement shall be interpreted, construed and
governed in accordance with the laws of the State of Tennessee, without regard
to conflict of laws provision. This Agreement is performable in Williamson
County, Tennessee.
7.5 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.
7.6 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.
7.7 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. 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.
7.8 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.
7.9 PRIOR AGREEMENTS SUPERSEDED. This Agreement constitutes the sole and
only Agreement of the parties hereto and supersedes any prior understanding or
written or oral agreements, correspondence or communications between the parties
respecting the subject matter hereof.
7.10 ARBITRATION. EXCEPT FOR THE REMEDY PROVIDED UNDER SECTION 7.11
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 NASHVILLE, TENNESSEE 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
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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 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, V OR VI
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.
7.11 REMEDIES. Employee agrees that the remedy at law for any breach of
any provision of Articles IV, V and VI 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.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement in Nashville, Tennessee as of the date first set forth above.
THE COMPANY:
CASTLE DENTAL CENTERS OF TENNESSEE,
INC.
By:
Name:
Title:
Address:
ATTENTION:
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EMPLOYEE:
G. Powell Bilyeu, D.D.S.
Address:
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EXHIBIT 10.37
================================================================================
ASSET PURCHASE AGREEMENT
Dated as of August 9, 1996
By and Among
Castle Dental Centers, Inc.,
Castle Dental Centers of Texas, Inc.,
as Purchaser,
Consolidated Industries, Inc.,
S.A. Dental Services, P.C.,
C.A. Dental Services, P.C.,
S.C.A. Dental Services, P.C., and
Austin Periodontist Associates, Inc.,
as Sellers,
and
Joseph A. Bonola, D.D.S. and
Kristen Bonola,
as Shareholders
================================================================================
<PAGE>
TABLE OF CONTENTS
ARTICLE I.
DEFINITIONS............................................................1
1.1 Definitions.....................................................1
ARTICLE II.
THE TRANSACTION........................................................5
2.1 Purchase and Sale of Assets.....................................5
2.2 Excluded Assets.................................................6
2.3 Assumption of Obligations.......................................6
2.4 Nonassignable Contracts and Leases..............................6
2.5 Closing.........................................................7
ARTICLE III.
PAYMENT OF PURCHASE PRICE..............................................7
3.1 Amount; Allocation; Delivery....................................7
3.2 Purchase Price Adjustment.......................................8
3.3 Agency Relationship.............................................8
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF SELLERS
AND THE SHAREHOLDERS...................................................9
4.1 Representations and Warranties of Sellers and
the Shareholders................................................9
4.2 Existence and Good Standing.....................................9
4.3 Authorization and Validity of Agreement.........................9
4.4 Capital Stock...................................................9
4.5 Consents and Approvals; No Violations..........................10
4.6 Subsidiaries and Affiliates....................................10
4.7 Financial Statements; No Material Adverse Change...............10
4.8 Books and Records..............................................11
4.9 Title to Properties; Encumbrances; Condition...................11
4.10 Real Property..................................................11
4.11 Leases.........................................................11
4.12 Material Contracts.............................................11
4.13 Permits........................................................12
4.14 Litigation.....................................................12
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4.15 Taxes..........................................................12
4.16 Insurance......................................................13
4.17 Intellectual Properties........................................13
4.18 Compliance with Laws...........................................14
4.19 Employment Relations...........................................14
4.20 Employee Benefit Plans.........................................14
4.21 Environmental Laws and Regulations.............................14
4.22 Interests in Customers, Suppliers, Etc.........................15
4.23 Compensation of Employees......................................15
4.24 Payors.........................................................15
4.25 Accounts Receivable; Accounts Payable..........................15
4.26 Solvency.......................................................15
4.27 Disclosure.....................................................16
4.28 Investments....................................................16
4.29 Broker's or Finder's Fees......................................16
4.30 Copies of Documents............................................16
ARTICLE V.
REPRESENTATIONS AND WARRANTIES
OF PURCHASER AND CASTLE DENTAL........................................16
5.1 Existence and Good Standing of Purchaser;
Power and Authority............................................16
5.2 No Violations..................................................16
5.3 Litigation.....................................................17
5.4 Compliance with Laws...........................................17
5.5 Broker's or Finder's Fees......................................17
5.6 Existence and Good Standing of Castle Dental;
Power and Authority............................................17
5.7 Financial Statements...........................................18
5.8 Litigation.....................................................18
ARTICLE VI.
CONDITIONS TO SELLERS' AND THE SHAREHOLDERS' OBLIGATIONS..............18
6.1 Truth of Representations and Warranties........................18
6.2 Performance of Agreements......................................19
6.3 No Litigation Threatened.......................................19
6.4 Consideration..................................................19
6.5 Governmental Approvals.........................................19
6.6 Proceedings....................................................19
6.7 Good Standing Certificates.....................................19
6.8 Due Diligence..................................................19
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ARTICLE VII.
CONDITIONS TO PURCHASER'S OBLIGATIONS.................................19
7.1 Truth of Representations and Warranties........................20
7.2 Performance of Agreements......................................20
7.3 Documents of Conveyance........................................20
7.4 No Litigation Threatened.......................................20
7.5 Governmental Approvals.........................................20
7.6 Consents.......................................................20
7.7 Legal Opinion..................................................20
7.8 Proceedings....................................................20
7.9 JHC............................................................20
7.10 Subordination Agreements.......................................21
7.11 Due Diligence..................................................21
7.12 Sellers Name Change............................................21
7.13 Termination of Agreements......................................21
7.14 Good Standing Certificates.....................................21
7.15 Releases of Liens..............................................21
7.16 Noncompetition Agreement.......................................21
7.17 License Agreement..............................................21
ARTICLE VIII.
COVENANTS OF SELLERS AND THE SHAREHOLDERS.............................22
8.1 Cooperation by Sellers.........................................22
8.2 Conduct of Business............................................22
8.3 Exclusive Dealing..............................................22
8.4 Review of the Assets...........................................22
8.5 Further Assurances.............................................23
8.6 Accounts Payable; Accounts Receivable; Management..............23
ARTICLE IX.
COVENANTS OF PURCHASER................................................23
9.1 Cooperation by Purchaser.......................................23
9.2 Books and Records; Personnel...................................23
9.3 Further Assurances.............................................24
9.4 Due Diligence Investigation....................................24
ARTICLE X.
TERMINATION...........................................................24
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10.1 Termination....................................................24
10.2 Effect on Obligations..........................................25
ARTICLE XI.
SURVIVAL AND INDEMNIFICATION..........................................25
11.1 Indemnification of Sellers.....................................25
11.2 Indemnification of the Purchaser...............................26
11.3 Demands........................................................26
11.4 Right to Contest and Defend....................................26
11.5 Cooperation....................................................27
11.6 Right to Participate...........................................27
11.7 Payment of Damages.............................................27
ARTICLE XII.
MISCELLANEOUS.........................................................27
12.1 Entire Agreement...............................................27
12.2 Successors and Assigns.........................................28
12.3 Counterparts...................................................28
12.4 Headings.......................................................28
12.5 Modification and Waiver........................................28
12.6 No Third-Party Beneficiary Rights..............................28
12.7 Sales and Transfer Taxes.......................................28
12.8 Expenses.......................................................28
12.9 Notice.........................................................28
12.10 Governing Law..................................................29
12.11 Confidentiality; Publicity.....................................29
12.12 Consent to Jurisdiction........................................30
12.13 Severability...................................................30
12.14 Enforcement....................................................30
SCHEDULES
Schedule 2.2(b) Excluded Contracts
Schedule 2.2(e) Excluded Assets
Schedule 2.3 Assumed Obligations
Schedule 3.1 Allocation of Purchase Price
Schedule 4.5 Consents
Schedule 4.6 Asset Owned by Third Parties which are Used
in the Business
Schedule 4.7 Material Adverse Change
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Schedule 4.9 Encumbrances
Schedule 4.10 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 4.23 Employee Compensation
Schedule 4.25 Accounts Receivable
Schedule 5.7 Castle Dental Financial Statements
Schedule 7.13 Agreements to be Terminated
EXHIBITS
Exhibit A Form of Promissory Note
Exhibit B Legal Opinion
Exhibit C-1 Subordination Agreement - NationsBank of Texas, N.A.
Exhibit C-2 Subordination Agreement - Senior Subordinated Notes
Exhibit D Noncompetition Agreement
Exhibit E License Agreement
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ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT dated as of August 9, 1996, by and among Castle
Dental Centers of Texas, Inc., a Texas corporation ("Purchaser"), Consolidated
Industries, Inc., a Texas corporation ("Consolidated"), S. A. Dental Services,
P.C., a Texas professional corporation, C.A. Dental Services, P.C., a Texas
professional corporation, S.C.A. Dental Services, P.C., a Texas professional
corporation, and Austin Periodontist Associates, Inc., a Texas professional
corporation (collectively, the "Dental Centers"), and Joseph A. Bonola, D.D.S.,
the sole shareholder of each of the Dental Centers and a shareholder of
Consolidated, and Kristen Bonola, a shareholder of Consolidated. Joseph A.
Bonola and Kristen Bonola are referred to herein collectively as the
"Shareholders," and Consolidated and the Dental Centers are referred to herein
collectively as the "Sellers."
WITNESSETH:
WHEREAS, Sellers wish to sell, and Purchaser wishes to purchase,
substantially all of the property, assets and business of the Dental Centers and
certain assets of Consolidated, 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 the Dental
Centers.
"ACCOUNTS PAYABLE": the current payables of the Dental Centers to trade
account and other creditors that are not more than thirty (30) days old as of
August 1, 1996.
"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. For purposes of Section 11.1 of this Agreement, the
term "Affiliates" shall include the individuals who have signed lease agreements
as tenant or guarantor on behalf of the Dental Centers, which are being assumed
by Purchaser hereunder.
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"AGREEMENT": this Asset Purchase Agreement, as amended from time to time
as provided herein.
"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.
"BALANCE SHEET DATE": as defined in Section 3.2 hereof.
"BASE DATE NET ASSET VALUE": as defined in Section 3.2 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
any books, records, files and other data of Sellers which relate exclusively to
organizational and corporate governance proceedings of Sellers.
"BUSINESS": the practice management of dentistry, including orthodontics
and periodontics and all other management and related activities currently
conducted by Sellers related to the Business.
"CLOSING": as defined in Section 2.5 hereof.
"CLOSING DATE": as defined in Section 2.5 hereof.
"CLOSING DATE BALANCE SHEET": as defined in Section 3.2 hereof.
"CLOSING DATE NET ASSET VALUE": as defined in Section 3.2 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.
"CONSOLIDATED": as defined in the preamble of this Agreement.
"DENTAL CENTERS": as defined in the preamble of this Agreement.
"ENCUMBRANCES": liens, security interests, options, rights of first
refusal, easements, mortgages, charges, debentures, indentures, deeds of trust,
rights-of-way, restrictions, agreements,
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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 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 CONTRACTS": as defined in Section 2.2(b) hereof.
"FINANCIAL STATEMENTS": as defined in Section 4.7 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
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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.
"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.
"JHC": Jack H. Castle, D.D.S., P.C., a Texas professional corporation.
"MATERIAL ADVERSE EFFECT": material adverse effect on the assets,
liabilities, Business, condition (financial or otherwise), results or operations
or prospects of Sellers, or its Affiliates.
"PERMITS": as defined in Section 4.13 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 4.20 hereof.
"PRE-CLOSING PERIODS": as defined in Section 4.15(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.
"RETURNS": as defined in Section 4.15(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.
"SELLERS": as defined in the preamble of this Agreement.
"SELLERS' PROPERTY": any real property and improvements thereon
presently owned, leased, operated or occupied by Sellers.
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"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.
"TRANSFER DATE": August 1, 1996.
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 Sellers and the Shareholders,
and Sellers and the Shareholders agree 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 Sellers and the
Shareholders 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 Sellers and the
Shareholders in and to the assets used in or relating to the conduct of the
Business on the Closing Date, tangible and intangible, real, personal and mixed,
wheresoever situated and 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 title to, interest in or rights with respect to real
property, including leasehold interests, described in Schedule 4.10 attached
hereto together with all buildings, facilities, fixtures and other leasehold
improvements thereon and all easements, rights-of-way, transferable licenses and
permits and other appurtenances thereof;
(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;
(c) contracts, documents, instruments, insurance and indemnity
policies and general intangibles of Sellers, other than the Excluded Contracts;
(d) Accounts Receivable as of August 1, 1996;
(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;
-5-
(f) Books and Records;
(g) any rights pertaining to any counterclaims, set-offs or
defenses it may have with respect to any Assumed Obligations;
(h) all deposits, advance payments, prepaid claims, prepaid
taxes, prepaid insurance premiums and other prepaid expense items; 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.
2.2 EXCLUDED ASSETS. The Assets shall not include any of the following
(the "Excluded Assets"):
(a) cash, cash equivalents, securities, letters of credit naming
Sellers as account party, certificates of deposit, notes, drafts, checks and
similar instruments;
(b) each dentist employment contract, managed care contract,
insurance or third party reimbursement agreement or other contract set forth on
Schedule 2.2(b) (the "Excluded Contracts");
(c) tax refunds related to the Business or the Assets received or
receivable by Sellers or the Shareholders relating to taxes paid by Sellers or
the Shareholders for all periods prior to the Closing Date;
(d) minute books and governance documents of Sellers; and
(e) any Asset listed on Schedule 2.2(e).
2.3 ASSUMPTION OF OBLIGATIONS. Upon the sale of the Assets by Sellers,
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
Sellers 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) the Accounts Payable (collectively,
"Assumed Obligations"). Notwithstanding anything contained herein to the
contrary, Purchaser does not assume, and hereby expressly disclaims
responsibility for, any obligation or liability of Sellers or the Shareholders
not described on Schedule 2.3.
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, Sellers 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
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benefit thereof. Purchaser shall cooperate with Sellers 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 Sellers and the Shareholders are unable to obtain such necessary
written consents for the remaining term of such Assigned Contract, Purchaser
shall act as such Sellers' and the Shareholders' agent in the performance of all
obligations and liabilities under such Assigned Contract and such Sellers and
the Shareholders shall act as Purchaser's agents in the receipt of any benefits,
rights or interests which inure to such Sellers 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 Bracewell & Patterson, L.L.P., 711
Louisiana, Suite 2900, Houston, Texas 77002, on or before July ___, 1996, or
such other place, date and time as may be mutually agreed upon by the parties.
Such time and date are referred to herein as the "Closing Date."
ARTICLE III.
PAYMENT OF PURCHASE PRICE
3.1 AMOUNT; ALLOCATION; DELIVERY. Sellers and the Shareholders agree and
direct Purchaser to pay the Purchase Price (as defined below) to Joseph A.
Bonola. At the Closing, Purchaser shall pay to Joseph A. Bonola the following
(the "Purchase Price"):
(a) $2,225,000 in cash on the Closing Date, which shall be paid
by wire transfer of immediately available funds to an account or accounts of
Sellers identified by Sellers; and
(b) a five-year subordinated promissory note of Castle Dental
payable to Joseph A. Bonola in the original principal amount of $1,000,000
payable in equal quarterly installments of principal and interest at the rate of
10% per annum substantially in the form of Exhibit A attached hereto.
Purchaser and Sellers hereby agree to allocate the Purchase Price in
accordance with Section 1060 of the Code among the Assets in accordance with
Schedule 3.1 attached hereto (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.
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3.2 PURCHASE PRICE ADJUSTMENT.
(a) Each of the Sellers previously has delivered to Purchaser an
unaudited balance sheet (the "Base Date Balance Sheet") as of March 31, 1996
(the "Balance Sheet Date"), (the book value of the Assets included in such
balance sheet less the book value of the Assumed Obligations included in such
balance sheet is hereinafter referred to as the "Base Date Net Asset Value").
(b) Within 45 days following the Transfer Date, each of the
Sellers shall prepare and deliver to Purchaser a balance sheet as of the
Transfer Date (the "Closing Date Balance Sheet"), together with a calculation of
the book value of the Assets and Assumed Obligations determined on the same
basis as the March 31, 1996, balance sheet (such book value of such Assets less
such book value of such Assumed Obligations is hereinafter referred to as the
"Closing Date Net Asset Value"). Purchaser and its representatives shall have
the right to review all work papers and procedures used to prepare the Base Date
Balance Sheet and the Closing Date Balance Sheet and the calculation of the Base
Date Net Asset Value and the Closing Date Net Asset Value, and shall have the
right to perform any other reasonable procedures necessary to verify the
accuracy thereof. Unless Purchaser, within 20 days after delivery to Purchaser
of the Closing Date Balance Sheet, notifies Sellers in writing that it objects
to the Base Date Balance Sheet or the Closing Date Balance Sheet or the
calculation of the Base Date Net Asset Value or the Closing Date Net Asset
Value, and specifies the basis for such objection, the Base Date Balance Sheet
and the Closing Date Balance Sheet and the calculation of the Base Date Net
Asset Value and the Closing Date Net Asset Value shall become final and binding
upon the parties for purposes of this Agreement. If Purchaser and Sellers are
unable to resolve any objections within 10 days after any such notification has
been given, the dispute shall be submitted to Coopers & Lybrand, L.L.P. (or
another nationally recognized public accounting firm mutually agreed upon by
Purchaser and Sellers). Such accounting firm shall make a final and binding
determination as to the matter or matters in dispute. Purchaser and Sellers
agree to cooperate with each other and with each other's authorized
representatives in order to resolve any and all matters in dispute as soon as
practicable.
(c) Within 10 days after the Closing Date Net Asset Value has
been finally determined, the difference, if any, between the Base Date Net Asset
Value and the Closing Date Net Asset Value shall be added to the principal
amount of the promissory note described in Section 3.1(b) (if the Closing Date
Net Asset Value exceeds the Base Date Net Asset Value) or deducted from the
principal amount of the promissory note described in Section 3.1(b) (if the Base
Date Net Asset Value exceeds the Closing Date Net Asset Value).
(d) Purchaser and Sellers, in the aggregate, each shall bear
one-half of the fees, costs and expenses of the accounting firm retained under
subsection (c) to resolve any dispute.
3.3 AGENCY RELATIONSHIP. In the event that, following the Closing Date,
Sellers 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, Sellers and the Shareholders
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agree to hold such funds, documents or instruments in trust for Purchaser and as
Purchaser's agent therefor.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF SELLERS
AND THE SHAREHOLDERS
4.1 REPRESENTATIONS AND WARRANTIES OF SELLERS AND THE SHAREHOLDERS. As
an inducement to the Purchaser to enter into and perform this Agreement, Sellers
and the Shareholders, jointly and severally, hereby represent and warrant to
Purchaser as follows:
4.2 EXISTENCE AND GOOD STANDING. Each of the Sellers are a corporation
duly organized and validly existing under the laws of the State of Texas. Each
of the Sellers have 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 the Sellers are 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. Sellers have 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 Sellers and the consummation by
them of the transactions contemplated hereby, have been duly authorized and
approved by the Board of Directors and the shareholders of Sellers, and no other
action on the part of Sellers or their shareholders is necessary to authorize
the execution, delivery and performance of this Agreement by Sellers and the
consummation of the transactions contemplated hereby. This Agreement has been
duly executed and delivered by Sellers and the Shareholders and is a valid and
binding obligation of Sellers and the Shareholders enforceable against each 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.
4.4 CAPITAL STOCK. The authorized capital stock of each of the Dental
Centers (except Austin Periodontist Associates, Inc.) consists solely of
1,000,000 shares of common stock, $.01 par value per share, of which 100,000
shares have been issued, and are outstanding, all of which are owned by Joseph
A. Bonola. The authorized capital stock of Austin Periodontist Associates, Inc.
consists solely of 10,000 shares of common stock, $1.50 par value per share, of
which 751 shares have been issued, and are outstanding, all of which are owned
by Joseph A. Bonola. The authorized capital stock of Consolidated consists
solely of 1,000,000 shares of common stock, $.01 par value per share, of which
100,000 shares have been issued, and are outstanding, all of which are owned
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by the Shareholders. All of the shares of common stock of Sellers 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
Sellers and the Shareholders and the consummation by Sellers 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 Sellers; (b) to the knowledge of Sellers and the Shareholders,
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 Sellers or the Shareholders or by which any of Sellers' properties
or assets may be bound; (c) to the knowledge of Sellers and the Shareholders,
require any filing by Sellers or the Shareholders with, or require Sellers or
the Shareholders to obtain any permit, consent or approval of, or require
Sellers 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) result in a violation or breach by Sellers or the
Shareholders of, conflict with, constitute (with or without due notice or lapse
of time or both) a default by Sellers 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 Sellers
or the Shareholders pursuant to, 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 Sellers or
the Shareholders are a party, or by which Sellers or any of their properties or
assets may be bound, except in the case of Subsections 4.5(b), (c) and (d), for
such violations, consents, breaches, defaults, terminations and accelerations
which in the aggregate would not have a Material Adverse Effect.
4.6 SUBSIDIARIES AND AFFILIATES. Sellers have no subsidiaries. Except as
set forth on Schedule 4.6, all of the Assets used in the Business are owned by
Sellers, 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. Each of the
Sellers have heretofore furnished Purchaser with its unaudited balance sheet as
of the Balance Sheet Date and the unaudited statements of operations and cash
flows for the year then ended (the "Financial Statements"). The Financial
Statements fairly present in all material respects the financial position of
Sellers at the date thereof and the results of operations of Sellers and their
respective cash flows for the period indicated. 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 Sellers.
Other than as (a) disclosed on the Financial Statements, (b) incurred
since the Balance Sheet Date in the ordinary course of business or (c) disclosed
on Schedule 4.7 or another Schedule hereto, Sellers have no direct or indirect
indebtedness, liability, claim, deficiency, obligation or
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responsibility, known or unknown, fixed or contingent, liquidated or
unliquidated, accrued, absolute or otherwise.
4.8 BOOKS AND RECORDS. Sellers have previously made available to
Purchaser true, correct and complete copies of their respective articles of
incorporation and bylaws, and all amendments to each. The minute books of
Sellers, 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 Sellers.
4.9 TITLE TO PROPERTIES; ENCUMBRANCES; CONDITION. Except as set forth in
Schedules 4.9 or 4.10, 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, Sellers have
good and valid title to the Assets, in each case subject to no Encumbrances
except for (a) Encumbrances consisting of easements, permits and other
restrictions or limitations on the use of real property or irregularities in
title thereto that do not materially detract from the value of, or materially
impair the use of, such property by Sellers in the operation of the Business,
(b) Encumbrances for current taxes, assessments or governmental charges or
levies on property not yet due or delinquent, (c) Encumbrances created by
Purchaser, and (d) Encumbrances relating to Assumed Obligations (liens of the
type described in clauses (a), (b), (c) and (d) above are hereinafter sometimes
referred to as "Permitted Encumbrances"). Sellers have heretofore furnished
Purchaser with a fixed asset ledger, which sets forth all fixed assets owned by
Sellers as of the Balance Sheet Date. Sellers 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. Schedule 4.10 identifies all interests in real
property used by Sellers in the Business, including leases, and includes the
name of the record title holder thereof. All of the buildings, structures and
appurtenances situated on the real property owned or leased by Sellers are in
good operating condition, and in a state of good maintenance and repair, subject
to ordinary wear and tear. The real property has adequate rights of ingress and
egress for operation of the Business in the ordinary course. No condemnation or
similar proceeding is pending or, to the best knowledge of Sellers 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.
4.11 LEASES. Schedule 4.11 contains an accurate and complete list of all
personal property leases to which Sellers are a party (as lessee or lessor) and
a description of all such leases to which Sellers are 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. Except as set forth in Schedule 4.12, the
Assigned Contracts do not include (a) any agreement, contract or commitment
relating to the employment of any person by
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Sellers, (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, (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 or any other similar type contract, (g) any
agreement, contract or commitment limiting the freedom of Sellers to engage in
any line of business or to compete with any Person, (h) any agreement, contract
or commitment that involves $5,000 or more and is not cancelable without penalty
within 30 days, or (i) any other agreement, contract or commitment which would
have a Material Adverse Effect. Also set forth in Schedule 4.12 is a list of all
proposals submitted by Sellers 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
Sellers and the Shareholders, in connection with the use, operation or ownership
of the Assets and the conduct of the Business as currently conducted. Sellers
hold all of the Permits listed on Schedule 4.13, and none is presently subject
to revocation or challenge. Except as set forth on Schedule, all such Permits
will be assigned to Purchaser, and none of such Permits will be subject to
revocation or termination as a result thereof.
4.14 LITIGATION. Except as set forth in Schedule 4.14, 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 Sellers and
the Shareholders, threatened, against or affecting the properties, rights or
goodwill of Sellers, the Shareholders, or employees of Sellers, and Sellers and
the Shareholders do not know of any valid basis for any such action, proceeding
or investigation. There are no such suits, actions, claims, proceedings or
investigations pending or to the knowledge of Sellers and the Shareholders
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 Texas, or other body regulating the activities of
dentists.
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
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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 Sellers (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, and all such Taxes showed to be due
and owing have been paid.
(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 Sellers or the Shareholders, threatened by any authority regarding
any Taxes relating to Sellers for any Pre-Closing Period.
(c) There are no liens or security interests on any of the assets
of Sellers 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
Sellers for any Pre-Closing Period and Sellers have not been requested to enter
into any such agreement or waiver.
(e) All Taxes relating to Sellers which Sellers are 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) Sellers are not now nor have ever been a party to any Tax
allocation or sharing agreement that could result in any liability to Purchaser.
4.16 INSURANCE. Set forth in Schedule 4.16 is a complete list of
insurance policies that Sellers maintain with respect to their Business and
properties that are included in the Assets or on their employees. 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 Sellers, such policies, with
respect to their amounts and types of coverage, are adequate to insure against
risks to which Sellers and their property and assets are normally exposed in the
operation of the Business, subject to customary deductibles and policy limits.
4.17 INTELLECTUAL PROPERTIES. Schedule 4.17 sets forth all Intellectual
Property used in the Business and the owner of such Intellectual Property. The
operation of the Business as conducted by Sellers 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 Sellers
pursuant to agreements listed on Schedule 4.17. Except as otherwise set forth in
Schedule 4.17, Sellers own all right, title and interest in the Intellectual
Property listed in Schedule 4.17. No litigation is pending or, to the knowledge
of Sellers or the Shareholders, threatened wherein Sellers are accused of
infringing or otherwise violating the Intellectual Property rights of another,
or of breaching a contract conveying rights under Intellectual Property.
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4.18 COMPLIANCE WITH LAWS. To the knowledge of Sellers and the
Shareholders, Sellers are 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 operation
or prospects of Sellers.
4.19 EMPLOYMENT RELATIONS. Sellers are not and have not engaged in any
unfair labor practice; to the knowledge of Sellers and the Shareholders, no
representation question exists respecting the employees of Sellers; Sellers have
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 Sellers.
4.20 EMPLOYEE BENEFIT PLANS. Sellers have delivered to Purchaser 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 Sellers 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 Sellers 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 Hazardous
Materials have not been generated, used, treated or stored on, or transported to
or from, any Sellers Property by Sellers, its authorized agents or its
independent contractors (including suppliers) or any property adjoining any
Sellers Property, Hazardous Materials have not been Released or disposed of by
Sellers, its authorized agents or its independent contractors (including
suppliers) on any Sellers Property or any property adjoining any Sellers
Property except such Releases which do not violate any Environmental Laws,
Sellers are, to its and the Shareholders's knowledge, in compliance with all
applicable Environmental Laws and the requirements of any Permits issued under
such Environmental Laws with respect to any Sellers Property, there are no
pending or, to the knowledge of Sellers and the Shareholders, threatened
Environmental Claims against Sellers or any Sellers Property, (e) there are no
facts or circumstances, conditions, pre-existing conditions or occurrences on
any Sellers Property known to Sellers or the Shareholders that could reasonably
be anticipated (A) to form the basis of an Environmental Claim against Sellers
or any Sellers Property, or (B) to cause such Sellers Property to be subject to
any restrictions on the ownership, occupancy use or transferability of such
Sellers Property under any Environmental Law, (f) there are not now and there
never have been any underground storage tanks located on any Sellers Property,
and (g) Sellers have not in the ordinary course of business transported or
stored Hazardous Materials.
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4.22 INTERESTS IN CUSTOMERS, SUPPLIERS, ETC. Except for relationships
with Affiliates, Sellers do not possess, directly or indirectly, any financial
interest 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 Sellers.
4.23 COMPENSATION OF EMPLOYEES. Set forth in Schedule 4.23 is an
accurate and complete list showing the names of all persons whose compensation
from Sellers 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. No significant payor has canceled or otherwise terminated
or, to the knowledge of Sellers or the Shareholders threatened to cancel or
otherwise terminate its relationship with Sellers within the last three years.
4.25 ACCOUNTS RECEIVABLE; ACCOUNTS PAYABLE. Except as set forth on
Schedule 4.25, the Accounts Receivable on the Closing Date Balance Sheet are
collectible in the ordinary course of business, net of the reserves established
with respect thereto. Except as set forth on Schedule 4.25, there has been no
change since the Balance Sheet Date (other than in the ordinary course of
business) in the amount of the Accounts Receivable or other fees or debts due to
Sellers or the allowances with respect thereto, or Accounts Payable by Sellers,
from that reflected in the Base Date Balance Sheet.
4.26 SOLVENCY. Sellers are 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 Sellers (on a
going concern basis) will exceed the liability of Sellers on its debts
(including its contingent obligations);
(b) Sellers have 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 Sellers 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
(c) Sellers will have sufficient capital with which to conduct
its business, and the property of Sellers do not constitute unreasonably small
capital with which to conduct its business.
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
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to an equitable remedy is reduced to judgment, fixed, contingent, matured,
unmatured, disputed, undisputed, secured, or unsecured.
4.27 DISCLOSURE. 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.
4.28 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.
4.29 BROKER'S OR FINDER'S FEES. No agent, broker, Person or firm acting
on behalf of Sellers 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.
4.30 COPIES OF DOCUMENTS. Sellers have 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.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES
OF PURCHASER AND CASTLE DENTAL
Purchaser represents and warrants to Sellers and the Shareholders as
follows:
5.1 EXISTENCE AND GOOD STANDING OF PURCHASER; POWER AND AUTHORITY.
Purchaser is a corporation duly organized, validly existing and in good standing
under the laws of the State of Texas. Purchaser has full corporate power and
authority to make, execute, deliver and perform this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
This Agreement has been duly authorized and approved by all required corporate
action of Purchaser. This Agreement has been duly executed and delivered by
Purchaser and is a valid and binding obligation of Purchaser enforceable against
Purchaser 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.
5.2 NO VIOLATIONS. 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, conflict with, or result in a
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breach or default under any provision of the certificate of incorporation or
by-laws of Purchaser; (b) to the knowledge of Purchaser, 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 its properties or assets may be bound; (c) to the knowledge of
Purchaser, 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 any third party; 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 pursuant to, 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 Purchaser
is a party, or by which it or any of its properties or assets may be bound,
except in the case of Subsections 5.2(b), (c) and (d), for such violations,
consents, breaches, defaults, terminations and accelerations which in the
aggregate would not have a Material Adverse Effect.
5.3 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 Castle Dental, Purchaser or their 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 Castle Dental or Purchaser, and Purchaser does 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, threatened,
seeking to prevent or challenge the transactions contemplated by this Agreement.
5.4 COMPLIANCE WITH LAWS. To the knowledge of Purchaser, Purchaser are
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.
5.5 BROKER'S OR FINDER'S FEES. Except for a fee payable by or on behalf
of Purchaser to The GulfStar Group, no agent, broker, Person or firm acting on
behalf of Purchaser 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.
Castle Dental represents and warrants to Sellers and Shareholders as
follows:
5.6 EXISTENCE AND GOOD STANDING OF CASTLE DENTAL; POWER AND AUTHORITY.
Castle Dental is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Castle Dental has full
corporate power and authority to make, execute, deliver and
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perform this Agreement, to perform its obligations hereunder and to consummate
the transactions contemplated hereby. This Agreement has been duly authorized
and approved by all required corporate action of Castle Dental. This Agreement
has been duly executed and delivered by Castle Dental and is a valid and binding
obligation of Castle Dental enforceable against Castle Dental 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.
5.7 FINANCIAL STATEMENTS. The audited financial statements of Castle
Dental as of December 31, 1995, attached hereto as Schedule 5.7, are complete
and correct in all material respects and present fairly in accordance with
generally accepted accounting principles consistently applied, the financial
condition of Castle Dental and the results of operations of Castle Dental as of
the dates thereof and for the periods indicated. Since December 31, 1995, 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 Dental.
5.8 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 Castle Dental, threatened, against or affecting the
properties, rights or goodwill of Castle Dental, Castle Dental or their
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 Castle Dental, and Castle Dental does not
know of any valid basis for any such action, proceeding or investigation. There
are no such Proceedings pending or, to the knowledge of Castle Dental,
threatened, seeking to prevent or challenge the transactions contemplated by
this Agreement.
ARTICLE VI.
CONDITIONS TO SELLERS' AND THE SHAREHOLDERS' OBLIGATIONS
The obligations of Sellers 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:
6.1 TRUTH OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Purchaser 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, and Purchaser shall have delivered to Sellers on the Closing Date
a certificate of an authorized officer of Purchaser, dated the Closing Date, to
such effect.
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6.2 PERFORMANCE OF AGREEMENTS. Each and all of the agreements and
covenants of Purchaser 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 shall have delivered to Sellers a certificate of an authorized officer
of Purchaser, 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 Sellers a certificate of an authorized officer
of Purchaser, dated the Closing Date, to such effect to the best knowledge of
such officer.
6.4 CONSIDERATION. Joseph A. Bonola, on behalf of Sellers, shall have
received the consideration described in Section 3.1.
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 in connection with the
transactions contemplated by this Agreement and all documents incident thereto
shall be reasonably satisfactory in form and substance to Sellers and the
Shareholders and their counsel, and Sellers and the Shareholders shall have
received copies of all such documents and other evidence as its or their counsel
may reasonably request in order to establish the consummation of such
transactions and the taking of all proceedings in connection therewith.
6.7 GOOD STANDING CERTIFICATES. Sellers shall have received good
standing and corporate existence certificates respecting Purchaser and Castle
Dental.
6.8 DUE DILIGENCE. Joseph A. Bonola shall have satisfactorily completed
his due diligence review of Castle Dental and Purchaser and shall not have
determined, in the exercise of his reasonable discretion, that the information
obtained from such review materially and adversely affects his appraisal of the
business, prospects and financial condition of Castle Dental.
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:
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7.1 TRUTH OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Sellers 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; and Sellers and the Shareholders shall have delivered to
Purchaser on the Closing Date a certificate of an authorized representative of
Sellers and the Shareholders, dated the Closing Date, to such effect.
7.2 PERFORMANCE OF AGREEMENTS. Each and all of the agreements and
covenants of Sellers to be performed on or before the Closing Date pursuant to
the terms hereof shall have been duly performed in all material respects, and
Sellers shall have delivered to Purchaser a certificate of an authorized
representative of Sellers, dated the Closing Date, to such effect.
7.3 DOCUMENTS OF CONVEYANCE. Purchaser shall have received from Sellers
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.
7.4 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 Sellers
shall have delivered to Purchaser a certificate of an authorized representative
of Sellers, dated the Closing Date, to such effect to the best knowledge of such
officer.
7.5 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.
7.6 CONSENTS. Each of the consents referred to in Schedule 4.5 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.
7.7 LEGAL OPINION. Sellers shall have delivered to Purchaser the opinion
of their counsel, substantially in the form of Exhibit B attached hereto.
7.8 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.
7.9 JHC. Contemporaneous with the Closing, (a) JHC shall have entered
into employment agreements with Drs. Kuhlman, Kubo and Jones, (b) the employment
agreements
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between the other dentists presently employed by the Dental Centers shall have
been duly and validly assigned to JHC, (c) all reimbursement contracts with
third-party insurance companies, managed care companies and other reimbursement
sources shall have been duly and validly assigned to JHC, (d) all patient
records shall have been delivered to JHC and (e) all permits and other Assets as
are required for JHC to perform its obligations under the Management Services
Agreement by and between Purchaser and JHC shall have been duly and validly
assigned to JHC.
7.10 SUBORDINATION AGREEMENTS. Joseph A. Bonola shall have executed and
delivered Subordination Agreements with respect to the promissory note described
in Section 3.1(b), substantially in the forms of Exhibits C-1 and C-2 attached
hereto, which shall also be in form and substance satisfactory to the senior and
senior subordinated lenders of Castle Dental.
7.11 DUE DILIGENCE. Purchaser shall have satisfactorily completed a due
diligence review of Sellers 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 their appraisal of the business,
prospects and financial condition of Sellers or the Business.
7.12 SELLERS NAME CHANGE. Sellers shall have changed their corporate
name and/or any assumed names currently being used by them in connection with
the Business to a name not including the words "Horizon Dental Center."
7.13 TERMINATION OF AGREEMENTS. All agreements, contracts, commitments
and understandings between (a) the Dental Centers and the entities and persons
listed on Schedule 7.13 and (b) the Dental Centers and Consolidated shall be
terminated on or before the Closing Date.
7.14 GOOD STANDING CERTIFICATES. Purchaser shall have received good
standing and corporate existence certificates respecting Sellers.
7.15 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 to Purchaser (other than Permitted
Encumbrances) have been released.
7.16 NONCOMPETITION AGREEMENT. Joseph A. Bonola shall have entered into
a Noncompetition Agreement with Castle Dental, substantially in the form of
Exhibit D attached hereto.
7.17 LICENSE AGREEMENT. Joseph A. Bonola and Purchaser shall have
entered into a License Agreement, whereby Mr. Bonola grants the Purchaser the
right to use the name "Horizon Dental Center" substantially in the form of
Exhibit E attached hereto.
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ARTICLE VIII.
COVENANTS OF SELLERS AND THE SHAREHOLDERS
Sellers and the Shareholders hereby covenant and agree with Purchaser as
follows:
8.1 COOPERATION BY SELLERS. Sellers 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 Sellers and the Shareholders to effect
the transactions contemplated on its or his part hereby, and Sellers 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. Sellers 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 Sellers or the Shareholders contained herein being untrue in any
material respect.
8.2 CONDUCT OF BUSINESS. Except as Purchaser may otherwise consent to in
writing, between the date hereof and the Closing Date, Sellers shall, (a)
conduct the Business only in the ordinary course, (b) use its reasonable efforts
to keep available the services of its employees and maintain satisfactory
relationships with licensors, suppliers, lessors, distributors, customers,
clients and others, (c) 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, and (d)
maintain the Books and Records in the usual, regular and ordinary manner, on a
basis consistent with past practice.
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
Sellers 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 Sellers
or the Shareholders.
8.4 REVIEW OF THE ASSETS. Purchaser may, prior to the Closing Date,
through its representatives, review (a) the Assets, (b) the complete working
papers of Sellers' certified public accountants used in their preparation of
financial statements for Seller and (c) the Books and Records of Sellers and to
otherwise review the financial and legal condition of Sellers 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 Sellers 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. Sellers and the Shareholders shall permit Purchaser and its
representatives to have, after the execution of
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this Agreement, full access to employees of any Sellers 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.
8.5 FURTHER ASSURANCES. At any time or from time to time after the
Closing Date, Sellers 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.
8.6 ACCOUNTS PAYABLE; ACCOUNTS RECEIVABLE; MANAGEMENT. The parties agree
as follows:
(a) From and after the Closing until July 31, 1996, the Dental
Centers shall continue to collect for their account any amounts received by them
in payment of accounts receivable of the Business. Following July 31, 1996, the
Dental Centers shall remit to Purchaser any amounts received by them in payment
of any accounts receivable of the Business.
(b) Purchaser shall assume all Accounts Payable as of August 1,
1996. From and after the Closing until July 31, 1996, Sellers agree to pay all
bills in the normal course of business. In addition, Sellers agree that payroll
respecting any periods in July will be paid by Sellers. With respect to payroll
for the dentists, the Dental Centers agree to pay the dentists' payroll due on
August 5, 1996, and Purchaser agrees to pay the dentists' payroll due on August
20, 1996.
ARTICLE IX.
COVENANTS OF PURCHASER
Purchaser hereby covenants and agrees with Sellers and the Shareholders
as follows:
9.1 COOPERATION BY PURCHASER. Purchaser will use its reasonable best
efforts, and will cooperate with Sellers 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. Purchaser
further agrees to deliver to Sellers 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 Sellers and any agents of any Sellers, upon reasonable
advance notice to Purchaser, access to
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all Books and Records of Sellers 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 Sellers shall have the right, at
Sellers' sole cost, to make copies of any such Books and Records.
9.3 FURTHER ASSURANCES. At any time or from time to time after the
Closing Date, Purchaser shall, at the request of Sellers or the Shareholders and
at such Sellers' expense, execute and deliver any further instruments or
documents and take all such further action as Sellers 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 DUE DILIGENCE INVESTIGATION. Prior to the Closing Date, Purchaser
and Castle Dental will make available to Sellers and the Shareholders and their
respective attorneys, accountants, consultants and agents, any and all
information regarding Purchaser and Castle Dental and their respective
businesses, operations, financial affairs and management, to the extent such
information is in the possession of Purchaser or Castle Dental or can be
obtained without unreasonable burden or expense, to permit Sellers and the
Shareholders to familiarize themselves with the business of the Purchaser and
Castle Dental and to make an informed investment judgment with respect to the
Common Stock of Castle Dental referred to in Section 3.1(c). The Purchaser and
Castle Dental agree to make available to Sellers and the Shareholders and their
respective attorneys, accountants, consultants and agents management members and
representatives of Purchaser and Castle Dental to respond to any questions or
inquiries from such parties regarding the Purchaser, Castle Dental and their
respective businesses, operations, financial affairs and management.
The due diligence investigation shall be conducted at the principal
offices of Castle Dental in Houston, Texas, at such time or times during normal
business hours as are reasonably requested by Sellers and the Shareholders.
Sellers and the Shareholders agree to complete such investigation on or before
July __, 1996.
All parties participating in the due diligence review shall be bound by
confidentiality agreements in form and substance satisfactory to the Purchaser
and Castle Dental.
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, the Shareholders
and Sellers; or
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(b) by Purchaser, the Shareholders, or Sellers in writing without
liability on the part of the terminating party on account of such termination
(provided the terminating party is not otherwise in default or in breach of this
Agreement), if the Closing Date shall not have occurred on or before July 31,
1996; or
(c) by either Purchaser, on the one hand, or the Shareholders and
Sellers, on the other hand, in writing, without liability on the part of the
terminating party on 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 covenants or agreements contained herein
required to be performed prior to the Closing Date, or (ii) breach or have
breached any of its representations or warranties contained herein.
10.2 EFFECT ON OBLIGATIONS. Termination of this Agreement pursuant to
this Article 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 next succeeding sentence of this Section 10.2. 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.
ARTICLE XI.
SURVIVAL AND INDEMNIFICATION
11.1 INDEMNIFICATION OF SELLERS. The Purchaser, from and after the
Closing Date, shall indemnify and hold Sellers and the Shareholders and their
respective Affiliates (the "Sellers Indemnitees") harmless from and against any
and all damages, including exemplary damages and 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 Sellers Indemnitee as a result of, caused by,
arising out of, or in any way relating to (a) any misrepresentation, breach of
warranty, or nonfulfillment of any agreement or covenant on the part of the
Purchaser under this Agreement or any misrepresentation in or omission from any
list, schedule, certificate, or other instrument furnished or to be furnished to
Sellers by the Purchaser pursuant to the terms of this Agreement or (b) any
liability or obligation (other than those for which Purchaser are being
indemnified by Sellers 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. Castle Dental, from and after the Closing Date, shall indemnify and hold
the Sellers Indemnitees harmless from and against any and all Damages suffered
by any Sellers Indemnitee as a result of, caused by, arising out of, or in any
way relating to any breach of warranty of Sections 5.6, 5.7 or 5.8 of this
Agreement.
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11.2 INDEMNIFICATION OF THE PURCHASER. Sellers and the Shareholders,
jointly and severally, shall indemnify and hold Purchaser and its Affiliates
(the "Purchaser Indemnitees") harmless from and against any and all Damages
suffered by any Purchaser Indemnitee as a result of, caused by, arising out of,
or in any way relating to (a) any misrepresentation, breach of warranty, or
nonfulfillment of any agreement or covenant on the part of Sellers or the
Shareholders under this Agreement or any misrepresentation in or omission from
any list, schedule, certificate, or other instrument furnished or to be
furnished to the Purchaser by Sellers pursuant to the terms of this Agreement,
(b) any liability or obligation (other than those for which Sellers and the
Shareholders are being indemnified by Purchaser 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, or (c) the uncollectibility of any Account Receivable (net of applicable
reserve), after six months.
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 in accordance with the provisions of this Agreement in sufficient time
to permit the indemnifying party or its counsel to defend against such matter
and to make 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, only insofar as such
knowing failure to notify the indemnifying party has 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
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any obligation whatsoever, other than the performance of purely ministerial
tasks or obligations not involving material expense. 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 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.
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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 Sellers or the Shareholders
without the prior written consent of Purchaser or by Purchaser to any Person
without the prior written consent of Sellers.
12.3 COUNTERPARTS. This Agreement may be executed in two 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.
12.4 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, Sellers,
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 Texas, 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 Sellers or the Shareholders to:
Dr. Joseph A. Bonola
1109 Smethwick Cove
Keller, Texas 76248
with a copy to:
Mr. David Wright
Heard & Wright
201 Main Street, Suite 1820
Ft. Worth, Texas 76102
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 Texas 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
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the prior approval of the other party hereto to the contents and the manner of
presentation and publication thereof.
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 Houston, Texas, 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.
[The remainder of this page has been intentionally left blank.]
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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, INC.
By:
Name:
Title:
CASTLE DENTAL CENTERS OF TEXAS, INC.
By:
Name:
Title:
CONSOLIDATED INDUSTRIES, INC.
By:
Name:
Title:
S.A. DENTAL SERVICES, P.C.
By:
Name:
Title:
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S.C.A. DENTAL SERVICES, P.C.
By:
Name:
Title:
C.A. DENTAL SERVICES, P.C.
By:
Name:
Title:
AUSTIN PERIODONTIST ASSOCIATES, INC.
By:
Name:
Title:
Joseph A. Bonola, D.D.S.
Kristen Bonola
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EXHIBIT 10.38
- --------------------------------------------------------------------------------
PLAN AND AGREEMENT OF REORGANIZATION
Dated as of August 9, 1996
By and Among
Castle Dental Centers, Inc.,
Castle Dental Centers of Texas, Inc.,
as Purchaser,
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. and
West Ft. Worth Dental Services, P.C.,
as Sellers
and
Joseph A. Bonola, D.D.S.,
Kristen Bonola and Larry Charles Jackson
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS............................................................2
1.1 Definitions.....................................................2
ARTICLE II
THE TRANSACTION........................................................6
2.1 Purchase and Sale of Assets.....................................6
2.2 Excluded Assets.................................................7
2.3 Assumption of Obligations.......................................7
2.4 Nonassignable Contracts and Leases..............................7
2.5 Closing.........................................................8
ARTICLE III
PAYMENT OF PURCHASE PRICE..............................................8
3.1 Amount; Allocation; Delivery....................................8
3.2 Purchase Price Adjustment.......................................9
3.3 Agency Relationship............................................10
3.4 Escrow Arrangement.............................................11
3.5 No Action to Violate Tax-Free Reorganization...................12
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLERS
AND THE SHAREHOLDERS..................................................12
4.1 Representations and Warranties of Sellers and
the Shareholders...............................................12
4.2 Existence and Good Standing....................................12
4.3 Authorization and Validity of Agreement........................12
4.4 Capital Stock..................................................13
4.5 Consents and Approvals; No Violations..........................13
4.6 Subsidiaries and Affiliates....................................14
4.7 Financial Statements; No Material Adverse Change...............14
4.8 Books and Records..............................................14
4.9 Title to Properties; Encumbrances; Condition...................14
4.10 Real Property..................................................15
4.11 Leases.........................................................15
4.12 Material Contracts.............................................15
4.13 Permits........................................................16
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4.14 Litigation.....................................................16
4.15 Taxes..........................................................16
4.16 Insurance......................................................17
4.17 Intellectual Properties........................................17
4.18 Compliance with Laws...........................................17
4.19 Employment Relations...........................................17
4.20 Employee Benefit Plans.........................................18
4.21 Environmental Laws and Regulations.............................18
4.22 Interests in Customers, Suppliers, Etc.........................18
4.23 Compensation of Employees......................................18
4.24 Payors. .......................................................19
4.25 Accounts Receivable; Accounts Payable..........................19
4.26 Solvency.......................................................19
4.27 Disclosure.....................................................19
4.28 Investments....................................................20
4.29 Broker's or Finder's Fees......................................20
4.30 Copies of Documents............................................20
4.31 Investment Representations.....................................20
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF PURCHASER AND CASTLE DENTAL........................................21
5.1 Existence and Good Standing of Purchaser;
Power and Authority............................................21
5.2 No Violations..................................................21
5.3 Litigation.....................................................22
5.4 Compliance with Laws...........................................22
5.5 Broker's or Finder's Fees......................................22
5.6 Existence and Good Standing of Castle Dental;
Power and Authority............................................22
5.7 Financial Statements...........................................22
5.8 Capital Stock..................................................23
5.9 Litigation.....................................................23
ARTICLE VI
CONDITIONS TO SELLERS' AND THE SHAREHOLDERS' OBLIGATIONS..............23
6.1 Truth of Representations and Warranties........................23
6.2 Performance of Agreements......................................23
6.3 No Litigation Threatened.......................................24
6.4 Consideration..................................................24
6.5 Governmental Approvals.........................................24
6.6 Proceedings....................................................24
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6.7 Good Standing Certificates.....................................24
6.8 Registration Rights Agreement..................................24
6.9 Stockholders Agreement.........................................24
6.10 Due Diligence..................................................24
ARTICLE VII
CONDITIONS TO PURCHASER'S OBLIGATIONS.................................24
7.1 Truth of Representations and Warranties........................25
7.2 Performance of Agreements......................................25
7.3 Documents of Conveyance........................................25
7.4 No Litigation Threatened.......................................25
7.5 Governmental Approvals.........................................25
7.6 Consents.......................................................25
7.7 Legal Opinion..................................................25
7.8 Proceedings....................................................25
7.9 JHC............................................................26
7.10 Stockholders Agreement.........................................26
7.11 Due Diligence..................................................26
7.12 Sellers Name Change............................................26
7.13 Termination of Agreements......................................26
7.14 Good Standing Certificates.....................................26
7.15 Releases of Liens..............................................26
7.16 Noncompetition Agreement.......................................26
7.17 License Agreement..............................................27
ARTICLE VIII
COVENANTS OF SELLERS AND THE SHAREHOLDERS.............................27
8.1 Cooperation by Sellers.........................................27
8.2 Conduct of Business............................................27
8.3 Exclusive Dealing..............................................27
8.4 Review of the Assets...........................................27
8.5 Further Assurances.............................................28
8.6 Accounts Payable; Accounts Receivable..........................28
ARTICLE IX
COVENANTS OF PURCHASER................................................28
9.1 Cooperation by Purchaser.......................................28
9.2 Books and Records; Personnel...................................29
9.3 Further Assurances.............................................29
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9.4 Due Diligence Investigation....................................29
ARTICLE X
TERMINATION...........................................................30
10.1 Termination....................................................30
10.2 Effect on Obligations..........................................30
ARTICLE XI
SURVIVAL AND INDEMNIFICATION..........................................30
11.1 Indemnification of Sellers.....................................30
11.2 Indemnification of the Purchaser...............................31
11.3 Demands........................................................31
11.4 Right to Contest and Defend....................................32
11.5 Cooperation....................................................32
11.6 Right to Participate...........................................32
11.7 Payment of Damages.............................................33
ARTICLE XII
MISCELLANEOUS.........................................................33
12.1 Entire Agreement...............................................33
12.2 Successors and Assigns.........................................33
12.3 Counterparts...................................................33
12.4 Headings.......................................................33
12.5 Modification and Waiver........................................33
12.6 No Third-Party Beneficiary Rights..............................34
12.7 Sales and Transfer Taxes.......................................34
12.8 Expenses.......................................................34
12.9 Notice.........................................................34
12.10 Governing Law..................................................35
12.11 Confidentiality; Publicity.....................................35
12.12 Consent to Jurisdiction........................................35
12.13 Severability...................................................35
12.14 Enforcement....................................................36
SCHEDULES
Schedule 2.2(b) Excluded Contracts
Schedule 2.2(e) Excluded Assets
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Schedule 2.3 Assumed Obligations
Schedule 4.5 Consents
Schedule 4.6 Asset Owned by Third Parties which are Used in the
Business
Schedule 4.7 Material Adverse Change
Schedule 4.9 Encumbrances
Schedule 4.10 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 4.23 Employee Compensation
Schedule 4.25 Accounts Receivable
Schedule 5.7 Castle Dental Financial Statements
EXHIBITS
Exhibit A Form of Escrow Agreement
Exhibit B Legal Opinion
Exhibit C Stockholders Agreement
Exhibit D Registration Rights Agreement
Exhibit E Noncompetition Agreement
Exhibit F License Agreement
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PLAN AND AGREEMENT OF REORGANIZATION
PLAN AND AGREEMENT OF REORGANIZATION dated as of August 9, 1996, by and
among Castle Dental Centers, Inc., a Delaware corporation ("Castle Dental"),
Castle Dental Centers of Texas, Inc., a Texas corporation ("Purchaser"),
(hereinafter referred to as the "Agreement"), N.A. Dental Services, P.C., a
Texas professional corporation, EFW Dental Services, P.C., a Texas professional
corporation, HDC Dental Services, P.C., a Texas professional corporation,
Midcities Dental Services, P.C., a Texas professional corporation, NEFW Dental
Services, P.C., a Texas professional corporation and West Ft. Worth Dental
Services, P.C., a Texas professional corporation (collectively, the "Dental
Centers") and Joseph A. Bonola, D.D.S., Kristen Bonola and Larry Charles
Jackson. Joseph A. Bonola, Kristen Bonola and Larry Charles Jackson are referred
to herein collectively as the "Shareholders," and the Dental Centers are
referred to herein collectively as the "Sellers." Kristen Bonola is made a party
hereto solely for her community property interest in the Assets (as defined
below).
PLAN OF REORGANIZATION
This Agreement is intended to be a reorganization within the meaning of
Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended.
Purchaser shall acquire substantially all of the property, assets and
business of the Dental Centers, in exchange solely for a part of the voting
common stock of Castle Dental, all upon the terms and subject to the conditions
set forth below.
As soon as practical after the Closing (as defined below), the Dental
Centers will completely liquidate and dissolve and will cause to be distributed
to their shareholders, on a pro rata basis based on stock ownership, all of
their right, title and interest in and to the shares of Castle Dental's voting
common stock (including the Escrowed Shares (as defined below)) to be received
in exchange for the surrender by such shareholders for cancellation of
certificates representing all of the Dental Centers' outstanding capital stock.
The foregoing shall be referred to as the Plan of Reorganization.
AGREEMENT
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 approve and
adopt the foregoing Plan of Reorganization and covenant and agree as follows:
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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 the Dental
Centers.
"ACCOUNTS PAYABLE": the current payables of the Dental Centers to trade
account and other creditors that are not more than thirty (30) days old as of
August 1, 1996.
"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. For purposes of Section 11.1 of this Agreement, the term
"Affiliates" shall include the individuals who have signed lease agreements as
tenant or guarantor on behalf of the Dental Centers, which are being assumed by
Purchaser hereunder.
"AGREEMENT": this Plan and Agreement of Reorganization, as amended from
time to time as provided herein.
"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.
"BALANCE SHEET DATE": as defined in Section 3.2 hereof.
"BASE DATE NET ASSET VALUE": as defined in Section 3.2 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
any books, records, files and other data of Sellers which relate exclusively to
organizational and corporate governance proceedings of Sellers.
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"BUSINESS": the practice management of dentistry, including orthodontics
and periodontics and all other management and related activities currently
conducted by Sellers related to the Business.
"CASTLE DENTAL": as defined in the preamble to this Agreement.
"CLOSING": as defined in Section 2.5 hereof.
"CLOSING DATE": as defined in Section 2.5 hereof.
"CLOSING DATE BALANCE SHEET": as defined in Section 3.2 hereof.
"CLOSING DATE NET ASSET VALUE": as defined in Section 3.2 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.
"DENTAL CENTERS": as defined in the preamble of this Agreement.
"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
-3-
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 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 CONTRACTS": as defined in Section 2.2(b) hereof.
"FINANCIAL STATEMENTS": as defined in Section 4.7 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.
"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.
"JHC": Jack H. Castle, D.D.S., P.C., a Texas professional corporation.
"MATERIAL ADVERSE EFFECT": material adverse effect on the assets,
liabilities, Business, condition (financial or otherwise), results or operations
or prospects of Sellers, or its Affiliates.
-4-
"PERMITS": as defined in Section 4.13 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 4.20 hereof.
"PRE-CLOSING PERIODS": as defined in Section 4.15(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.
"RETURNS": as defined in Section 4.15(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.
"SELLERS": as defined in the preamble of this Agreement.
"SELLERS' PROPERTY": any real property and improvements thereon
presently owned, leased, operated or occupied by Sellers.
"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.
"TRANSFER DATE": August 1, 1996.
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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 Sellers, and Sellers agree 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 Sellers 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 Sellers and
the Shareholders in and to the assets used in or relating to the conduct of the
Business on the Closing Date, tangible and intangible, real, personal and mixed,
wheresoever situated and 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 title to, interest in or rights with respect to real
property, including leasehold interests, described in Schedule 4.10 attached
hereto together with all buildings, facilities, fixtures and other leasehold
improvements thereon and all easements, rights-of-way, transferable licenses and
permits and other appurtenances thereof;
(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;
(c) contracts, documents, instruments, insurance and indemnity
policies and general intangibles of Sellers, other than the Excluded Contracts;
(d) Accounts Receivable as of August 1, 1996;
(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;
(f) Books and Records;
(g) any rights pertaining to any counterclaims, set-offs or
defenses it may have with respect to any Assumed Obligations;
(h) all deposits, advance payments, prepaid claims, prepaid
taxes, prepaid insurance premiums and other prepaid expense items; and
-6-
(i) third-party indemnities, policies of insurance identified by
Purchaser, fidelity, surety or similar bonds and the coverages afforded thereby
relating to the Assets.
2.2 EXCLUDED ASSETS. The Assets shall not include any of the following
(the "Excluded Assets"):
(a) cash, cash equivalents, securities, letters of credit naming
Sellers as account party, certificates of deposit, notes, drafts, checks and
similar instruments;
(b) each dentist employment contract, managed care contract,
insurance or third-party reimbursement agreement or other contract set forth on
Schedule 2.2(b) (the "Excluded Contracts");
(c) tax refunds related to the Business or the Assets received or
receivable by Sellers or the Shareholders relating to taxes paid by Sellers or
the Shareholders for all periods prior to the Closing Date;
(d) minute books and governance documents of Sellers;
(e) any Asset listed on Schedule 2.2(e); and
(f) the consideration which Purchaser agrees to pay Sellers
hereunder.
2.3 ASSUMPTION OF OBLIGATIONS. Upon the sale of the Assets by Sellers,
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
Sellers 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) the Accounts Payable (collectively,
"Assumed Obligations"). Notwithstanding anything contained herein to the
contrary, Purchaser does not assume, and hereby expressly disclaims
responsibility for, any obligation or liability of Sellers or the Shareholders
not described on Schedule 2.3.
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, Sellers 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 Sellers 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 Sellers and the Shareholders are unable to obtain
such necessary written
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consents for the remaining term of such Assigned Contract, Purchaser shall act
as such Sellers' and the Shareholders' agent in the performance of all
obligations and liabilities under such Assigned Contract and such Sellers and
the Shareholders shall act as Purchaser's agents in the receipt of any benefits,
rights or interests which inure to such Sellers 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 Bracewell & Patterson, L.L.P., 711
Louisiana, Suite 2900, Houston, Texas 77002, on or before July __, 1996, or such
other place, date and time as may be mutually agreed upon by the parties.
Such time and date are referred to herein as the "Closing Date."
ARTICLE III
PAYMENT OF PURCHASE PRICE
3.1 AMOUNT; ALLOCATION; DELIVERY.
(a) In addition to assuming the liabilities set forth in Schedule
2.3, the purchase price (the "Purchase Price") for the Assets shall consist of
three hundred thirty-seven thousand (337,000) shares of common stock of Castle
Dental, $.001 par value per share (the "Common Stock"). The shares of Common
Stock shall be distributed among the Sellers as follows:
Total Number of
Shares of Received at Escrowed
Dental Center Common Stock Closing Shares
- ------------- -------- -------- --------
EFW Dental Centers, P.C ................. 21,315 16,590 4,725
NEFW Dental Centers, P.C ................ 70,280 54,605 15,675
HDC Dental Services, P.C ................ 65,095 50,620 14,475
Midcities Dental Services, P.C .......... 71,432 55,532 15,900
West Ft. Worth Dental Services, P.C ..... 59,912 46,562 13,350
N.A. Dental Services, P.C ............... 48,966 38,091 10,875
-------- -------- --------
TOTALS .................................. 337,000 262,000 75,000
(b) Pursuant to Section 3.4 below, seventy-five (75,000) thousand
shares of Common Stock to be delivered by Purchaser, which will be beneficially
owned by Joseph A. Bonola, will be placed in escrow (the "Escrowed Shares"). The
Escrowed Shares are listed under the column heading "Escrowed Shares" in Section
3.1(a) above.
(c) Once the Dental Centers have liquidated and dissolved
pursuant to the Plan of Reorganization, the Shares of Common Stock shall be
distributed to the shareholders of the Dental Centers, on a pro rata basis based
on stock ownership, as follows:
Shares of Common Stock
to be Received
by Shareholders
----------------------------------
Joseph A. Larry
Joseph A. Bonola Charles
Dental Centers Bonola (In Escrow) Jackson
- -------------- -------- -------- --------
EFW Dental Centers, P.C ................. 16,590 4,725 --
NEFW Dental Centers, P.C ................ 54,605 15,675 --
HDC Dental Services, P.C ................ 50,620 14,475 --
Midcities Dental Services, P.C .......... 50,532 15,900 5,000
West Ft. Worth Dental Services, P.C ..... 46,562 13,350 --
N.A. Dental Services, P.C ............... 38,091 10,875 --
-------- -------- --------
TOTALS .................................. 257,000 75,000 5,000
3.2 PURCHASE PRICE ADJUSTMENT.
(a) Each of the Sellers previously has delivered to Purchaser an
unaudited balance sheet (the "Base Date Balance Sheet") as of March 31, 1996
(the "Balance Sheet Date"), (the book value of the Assets included in such
balance sheet less the book value of the Assumed Obligations included in such
balance sheet is hereinafter referred to as the "Base Date Net Asset Value").
(b) Within 45 days following the Transfer Date, each of the
Sellers shall prepare and deliver to Purchaser a balance sheet as of the
Transfer Date (the "Closing Date Balance Sheet"), together with a calculation of
the book value of the Assets and Assumed Obligations determined on the same
basis as the March 31, 1996, balance sheet (such book value of such Assets less
such book
-8-
value of such Assumed Obligations is hereinafter referred to as the "Closing
Date Net Asset Value"). Purchaser and its representatives shall have the right
to review all work papers and procedures used to prepare the Base Date Balance
Sheet and the Closing Date Balance Sheet and the calculation of the Base Date
Net Asset Value and the Closing Date Net Asset Value, and shall have the right
to perform any other reasonable procedures necessary to verify the accuracy
thereof. Unless Purchaser, within 20 days after delivery to Purchaser of the
Closing Date Balance Sheet, notifies Sellers in writing that it objects to the
Base Date Balance Sheet or the Closing Date Balance Sheet or the calculation of
the Base Date Net Asset Value or the Closing Date Net Asset Value, and specifies
the basis for such objection, the Base Date Balance Sheet and the Closing Date
Balance Sheet and the calculation of the Base Date Net Asset Value and the
Closing Date Net Asset Value shall become final and binding upon the parties for
purposes of this Agreement. If Purchaser and Sellers are unable to resolve any
objections within 10 days after any such notification has been given, the
dispute shall be submitted to Coopers & Lybrand, L.L.P. (or another nationally
recognized public accounting firm mutually agreed upon by Purchaser and
Sellers). Such accounting firm shall make a final and binding determination as
to the matter or matters in dispute. Purchaser and Sellers agree to cooperate
with each other and with each other's authorized representatives in order to
resolve any and all matters in dispute as soon as practicable.
(c) Within 10 days after the Closing Date Net Asset Value has
been finally determined, the difference, if any, between the Base Date Net Asset
Value and the Closing Date Net Asset Value shall be calculated. If the Closing
Date Net Asset Value exceeds the Base Date Net Asset Value, then Purchaser shall
promptly pay to Joseph A. Bonola (for the account of the Sellers) the amount by
which the Closing Date Net Asset Value exceeds the Base Date Net Asset Value. If
the Base Date Net Asset Value exceeds the Closing Date Net Asset Value, then the
Sellers shall promptly join with Purchaser in joint written instructions to the
Escrow Agent (as defined below) to disburse to Purchaser from the Escrowed
Shares (as defined below) the number of shares of Common Stock equal to the
amount by which the Base Date Net Asset Value exceeds the Closing Date Net Asset
Value. For this purpose, the Escrowed Shares will be valued at $9.00 per share.
If the number of Escrowed Shares is not sufficient for Sellers to satisfy its
obligations to Purchaser pursuant to the foregoing sentence, Sellers shall
promptly pay any shortfall to Purchaser in cash.
(d) Purchaser and Sellers, in the aggregate, each shall bear
one-half of the fees, costs and expenses of the accounting firm retained under
subsection (b) to resolve any dispute.
3.3 AGENCY RELATIONSHIP. In the event that, following the Closing Date,
Sellers 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, Sellers and the Shareholders agree to hold such
funds, documents or instruments in trust for Purchaser and as Purchaser's agent
therefor.
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3.4 ESCROW ARRANGEMENT.
(a) At Closing, the Escrowed Shares will be placed in escrow with
NationsBank of Texas, N.A., as escrow agent (the "Escrow Agent") pursuant to an
escrow agreement in the form attached hereto as Exhibit A (the "Escrow
Agreement"). At the end of the first 12 months following the Closing Date,
Purchaser shall calculate (and deliver such calculation to Joseph A. Bonola) the
aggregate pretax income of the practices formerly conducted by EFW Dental
Services, P.C., NEFW Dental Services, P.C., HDC Dental Services, P.C., Midcities
Dental Services, P.C., and West Ft. Worth Dental Services, P.C. (the "Metroplex
Centers"), which shall be computed without general overhead allocation or charge
with respect to the general and administrative expenses of Castle Dental, but
taking into account direct costs incurred by Castle Dental on behalf of the
Metroplex Centers and including a deduction equal to the cost of capital
invested (exclusive of initial acquisition costs) in the Metroplex Centers by
Castle. If the aggregate pretax income as calculated aforesaid equals or exceeds
$520,000, all of the Escrowed Shares shall be released from escrow and delivered
to Joseph A. Bonola. For purposes of calculating "pretax income" pursuant to
this Section 3.4(a), pretax income shall equal gross collections (excluding
collections relating to orthodontics) LESS operating costs (which shall in no
event exceed 76.5% of such gross collection figure). Castle Dental's cost of
capital shall be deemed to be the prime rate established from time to time by
NationsBank of Texas, N.A. plus 4%, but in no event to be, less than 10%. If the
aggregate pretax income of the Metroplex Centers for such period is less than
$320,000, all of the Escrowed Shares shall be returned to Castle Dental for
cancellation. If the aggregate pretax income for such period is between $320,000
and $520,000, the percentage of the Escrowed Shares to be released from escrow
and delivered to Joseph A. Bonola shall be determined by dividing (i) the amount
by which the aggregate pretax income exceeds $320,000, by (ii) $200,000, and
multiplying the result by 75,000, with the balance of said 75,000 shares
returned to Castle Dental for cancellation.
(b) Unless Joseph A. Bonola, within 10 days after delivery to him
of the calculation of aggregate pretax income, notifies Purchaser in writing
that he objects to such calculation, and specifies the basis for such objection,
the calculation shall become final and binding upon the parties for purposes of
this Agreement. If Purchaser and Joseph A. Bonola are unable to resolve any
objections within 10 days after any such notification has been given, the
dispute shall be submitted to Coopers & Lybrand, L.L.P. (or another nationally
recognized public accounting firm mutually agreed upon by Purchaser and Joseph
A. Bonola). Such accounting firm shall make a final and binding determination as
to the matters in dispute. Purchaser and Joseph A. Bonola agree to cooperate
with each other and with each other's authorized representatives in order to
resolve any and all matters in dispute as soon as practicable. Purchaser and
Joseph A. Bonola each shall bear one-half of the costs of the fees, costs and
expenses of the accounting firm retained pursuant to this subsection (b) to
resolve any dispute.
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(c) If Castle shall effect a split of its outstanding Common
Stock or effect a reclassification or combination of its outstanding Common
Stock by way of recapitalization, merger, consolidation or otherwise, or declare
a stock dividend payable to its stockholders of record with respect to its
Common Stock on the date or dates prior to the Escrowed Shares being released
from escrow, the number of shares of Common Stock shall, in the case of a stock
dividend, be increased by the number of shares or, in the case of a stock split,
combination or reclassification, be changed into such number of shares of Common
Stock or other voting stock as Sellers would have been entitled to receive on
account of such dividend, stock split, reclassification or combination.
3.5 NO ACTION TO VIOLATE TAX-FREE REORGANIZATION. Castle Dental and its
Affiliates will not take any action at any time after the Closing Date which
would cause the transactions described herein not to qualify as reorganizations
within the meaning of Section 368 of the Code for failure to satisfy the
"continuity of business enterprise" requirement of Section 1.368-1(d) of the
Income Tax Regulations, the "substantially all the properties" requirement of
Section 368(a)(2)(D) of the Code, both as presently constituted, or if amended
so as to apply to the transactions, as amended at the time any such action might
be taken, or for any other reason. Castle Dental and its Affiliates will file
their federal income tax returns for all periods beginning after or including
the Closing Date on a basis consistent with the treatment of the transactions as
reorganizations within the meaning of Section 368 of the Code.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLERS
AND THE SHAREHOLDERS
4.1 REPRESENTATIONS AND WARRANTIES OF SELLERS AND THE SHAREHOLDERS. As
an inducement to the Purchaser to enter into and perform this Agreement, Sellers
and the Shareholders, jointly and severally, hereby represent and warrant to
Purchaser as follows:
4.2 EXISTENCE AND GOOD STANDING. Each of the Sellers are a corporation
duly organized and validly existing under the laws of the State of Texas. Each
of the Sellers have 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 the Sellers are 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. Sellers have 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
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hereby. The execution, delivery and performance of this Agreement by Sellers and
the consummation by them of the transactions contemplated hereby, have been duly
authorized and approved by the Board of Directors and the shareholders of
Sellers, and no other action on the part of Sellers or their shareholders is
necessary to authorize the execution, delivery and performance of this Agreement
by Sellers and the consummation of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by Sellers and the Shareholders
and is a valid and binding obligation of Sellers and the Shareholders
enforceable against each 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.
4.4 CAPITAL STOCK. Except for Midcities Dental Services, P.C., the
authorized capital stock of each of the Dental Centers consists solely of
1,000,000 shares of Common Stock, $.01 par value per share, of which 100,000
shares have been issued, and are outstanding, all of which are owned by Joseph
A. Bonola. The authorized capital stock of Midcities Dental Services, P.C.
consists solely of 1,000,000 shares of Common Stock, $.01 par value per share,
of which 100,000 shares have been issued, and are outstanding, all of which are
owned by Joseph A. Bonola and Larry Charles Jackson. All of the shares of Common
Stock of Sellers 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
Sellers and the Shareholders and the consummation by Sellers 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 Sellers; (b) to the knowledge of Sellers and the Shareholders,
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 Sellers or the Shareholders or by which any of Sellers' properties
or assets may be bound; (c) to the knowledge of Sellers and the Shareholders,
require any filing by Sellers or the Shareholders with, or require Sellers or
the Shareholders to obtain any permit, consent or approval of, or require
Sellers 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) result in a violation or breach by Sellers or the
Shareholders of, conflict with, constitute (with or without due notice or lapse
of time or both) a default by Sellers 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 Sellers
or the Shareholders pursuant to, 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 Sellers or
the Shareholders are a party, or by which Sellers or any of their properties or
assets may be bound,
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except in the case of Subsections 4.5(b), (c) and (d), for such violations,
consents, breaches, defaults, terminations and accelerations which in the
aggregate would not have a Material Adverse Effect.
4.6 SUBSIDIARIES AND AFFILIATES. Sellers have no subsidiaries. Except as
set forth on Schedule 4.6, all of the Assets used in the Business are owned by
Sellers, 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. Each of the
Sellers have heretofore furnished Purchaser with its unaudited balance sheet as
of the Balance Sheet Date and the unaudited statements of operations and cash
flows for the year then ended (the "Financial Statements"). The Financial
Statements fairly present in all material respects the financial position of
Sellers at the date thereof and the results of operations of Sellers and their
respective cash flows for the period indicated. 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 Sellers.
Other than as (a) disclosed on the Financial Statements, (b) incurred
since the Balance Sheet Date in the ordinary course of business or (c) disclosed
on Schedule 4.7 or another Schedule hereto, Sellers have no direct or indirect
indebtedness, liability, claim, deficiency, obligation or responsibility, known
or unknown, fixed or contingent, liquidated or unliquidated, accrued, absolute
or otherwise.
4.8 BOOKS AND RECORDS. Sellers have previously made available to
Purchaser true, correct and complete copies of their respective articles of
incorporation and bylaws, and all amendments to each. The minute books of
Sellers, 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 Sellers.
4.9 TITLE TO PROPERTIES; ENCUMBRANCES; CONDITION. Except as set forth in
Schedules 4.9 or 4.10, 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, Sellers have
good and valid title to the Assets, in each case subject to no Encumbrances
except for (a) Encumbrances consisting of easements, permits and other
restrictions or limitations on the use of real property or irregularities in
title thereto that do not materially detract from the value of, or materially
impair the use of, such property by Sellers in the operation of the Business,
(b) Encumbrances for current taxes, assessments or governmental charges or
levies on property not yet due or delinquent, (c) Encumbrances created by
Purchaser, and (d) Encumbrances relating to Assumed Obligations (liens of the
type described in clauses (a), (b), (c) and (d) above are hereinafter sometimes
referred to as "Permitted Encumbrances"). Sellers have heretofore furnished
Purchaser
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with a fixed asset ledger, which sets forth all fixed assets owned by Sellers as
of the Balance Sheet Date. Sellers 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. Schedule 4.10 identifies all interests in real
property used by Sellers in the Business, including leases, and includes the
name of the record title holder thereof. All of the buildings, structures and
appurtenances situated on the real property owned or leased by Sellers are in
good operating condition, and in a state of good maintenance and repair, subject
to ordinary wear and tear. The real property has adequate rights of ingress and
egress for operation of the Business in the ordinary course. No condemnation or
similar proceeding is pending or, to the best knowledge of Sellers 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.
4.11 LEASES. Schedule 4.11 contains an accurate and complete list of all
personal property leases to which Sellers are a party (as lessee or lessor) and
a description of all such leases to which Sellers are 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. Except as set forth in Schedule 4.12, the
Assigned Contracts do not include (a) any agreement, contract or commitment
relating to the employment of any person by Sellers, (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, (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 or any other
similar type contract, (g) any agreement, contract or commitment limiting the
freedom of Sellers to engage in any line of business or to compete with any
Person, (h) any agreement, contract or commitment that involves $5,000 or more
and is not cancelable without penalty within 30 days, or (i) any other
agreement, contract or commitment which would have a Material Adverse Effect.
Also set forth in Schedule 4.12 is a list of all proposals submitted by Sellers
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.
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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
Sellers and the Shareholders, in connection with the use, operation or ownership
of the Assets and the conduct of the Business as currently conducted. Sellers
hold all of the Permits listed on Schedule 4.13, and none is presently subject
to revocation or challenge. Except as set forth on Schedule, all such Permits
will be assigned to Purchaser, and none of such Permits will be subject to
revocation or termination as a result thereof.
4.14 LITIGATION. Except as set forth in Schedule 4.14, 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 Sellers and
the Shareholders, threatened, against or affecting the properties, rights or
goodwill of Sellers, the Shareholders, or employees of Sellers, and Sellers and
the Shareholders do not know of any valid basis for any such action, proceeding
or investigation. There are no such suits, actions, claims, proceedings or
investigations pending or to the knowledge of Sellers and the Shareholders
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 Texas, or other body regulating the activities of
dentists.
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
Sellers (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, and all such Taxes showed to be due and owing have been paid.
(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 Sellers or the Shareholders, threatened by any authority regarding
any Taxes relating to Sellers for any Pre-Closing Period.
(c) There are no liens or security interests on any of the assets
of Sellers that arose in connection with any failure (or alleged failure) to pay
any Taxes.
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(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
Sellers for any Pre-Closing Period and Sellers have not been requested to enter
into any such agreement or waiver.
(e) All Taxes relating to Sellers which Sellers are 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) Sellers are not now nor have ever been a party to any Tax
allocation or sharing agreement that could result in any liability to Purchaser.
4.16 INSURANCE. Set forth in Schedule 4.16 is a complete list of
insurance policies that Sellers maintain with respect to their Business and
properties that are included in the Assets or on their employees. 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 Sellers, such policies, with
respect to their amounts and types of coverage, are adequate to insure against
risks to which Sellers and their property and assets are normally exposed in the
operation of the Business, subject to customary deductibles and policy limits.
4.17 INTELLECTUAL PROPERTIES. Schedule 4.17 sets forth all Intellectual
Property used in the Business and the owner of such Intellectual Property. The
operation of the Business as conducted by Sellers 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 Sellers
pursuant to agreements listed on Schedule 4.17. Except as otherwise set forth in
Schedule 4.17, Sellers own all right, title and interest in the Intellectual
Property listed in Schedule 4.17. No litigation is pending or, to the knowledge
of Sellers or the Shareholders, threatened wherein Sellers are 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 knowledge of Sellers and the
Shareholders, Sellers are 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 operation
or prospects of Sellers.
4.19 EMPLOYMENT RELATIONS. (a) Sellers are not and have not engaged in
any unfair labor practice; (b) to the knowledge of Sellers and the Shareholders,
no representation question exists respecting the employees of Sellers; (c)
Sellers have not been notified of any grievance that might have a Material
Adverse Effect and no arbitration proceeding arising out of or under any
collective
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bargaining agreement is pending; and (d) no collective bargaining agreement is
currently being negotiated by Sellers.
4.20 EMPLOYEE BENEFIT PLANS. Sellers have delivered to Purchaser 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 Sellers 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 Sellers 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) Hazardous
Materials have not been generated, used, treated or stored on, or transported to
or from, any Sellers Property by Sellers, its authorized agents or its
independent contractors (including suppliers) or any property adjoining any
Sellers Property, (b) Hazardous Materials have not been Released or disposed of
by Sellers, its authorized agents or its independent contractors (including
suppliers) on any Sellers Property or any property adjoining any Sellers
Property except such Releases which do not violate any Environmental Laws, (c)
Sellers are, to its and the Shareholders's knowledge, in compliance with all
applicable Environmental Laws and the requirements of any Permits issued under
such Environmental Laws with respect to any Sellers Property, (d) there are no
pending or, to the knowledge of Sellers and the Shareholders, threatened
Environmental Claims against Sellers or any Sellers Property, (e) there are no
facts or circumstances, conditions, pre-existing conditions or occurrences on
any Sellers Property known to Sellers or the Shareholders that could reasonably
be anticipated (A) to form the basis of an Environmental Claim against Sellers
or any Sellers Property, or (B) to cause such Sellers Property to be subject to
any restrictions on the ownership, occupancy use or transferability of such
Sellers Property under any Environmental Law, (f) there are not now and there
never have been any underground storage tanks located on any Sellers Property,
and (g) Sellers have not in the ordinary course of business transported or
stored Hazardous Materials.
4.22 INTERESTS IN CUSTOMERS, SUPPLIERS, ETC. Except for relationships
with Affiliates, Sellers do not possess, directly or indirectly, any financial
interest 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 Sellers.
4.23 COMPENSATION OF EMPLOYEES. Set forth in Schedule 4.23 is an
accurate and complete list showing the names of all persons whose compensation
from Sellers collectively for the fiscal year ended on the Balance Sheet Date
exceeded an annualized rate of $20,000, together with a
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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. No significant payor has canceled or otherwise terminated
or, to the knowledge of Sellers or the Shareholders threatened to cancel or
otherwise terminate its relationship with Sellers within the last three years.
4.25 ACCOUNTS RECEIVABLE; ACCOUNTS PAYABLE. Except as set forth on
Schedule 4.25, the Accounts Receivable on the Closing Date Balance Sheet are
collectible in the ordinary course of business, net of the reserves established
with respect thereto. Except as set forth on Schedule 4.25, there has been no
change since the Balance Sheet Date (other than in the ordinary course of
business) in the amount of the Accounts Receivable or other fees or debts due to
Sellers or the allowances with respect thereto, or Accounts Payable by Sellers,
from that reflected in the Base Date Balance Sheet.
4.26 SOLVENCY. Sellers are 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 Sellers (on a
going concern basis) will exceed the liability of Sellers on its debts
(including its contingent obligations);
(b) Sellers have 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 Sellers 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
(c) Sellers will have sufficient capital with which to conduct
its business, and the property of Sellers do not constitute unreasonably small
capital with which to conduct its business.
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 DISCLOSURE. 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
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statements contained herein or therein not misleading in light of the
circumstances under which they were made.
4.28 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.
4.29 BROKER'S OR FINDER'S FEES. No agent, broker, Person or firm acting
on behalf of Sellers 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.
4.30 COPIES OF DOCUMENTS. Sellers have 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.
4.31 INVESTMENT REPRESENTATIONS.
(a) Sellers understand that the Common Stock has not been
registered under the Securities Act of 1933, as amended (the "Securities Act").
Sellers 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 his representations contained in this Agreement.
(b) Sellers, in consultation with their accountants, attorneys
and financial advisers, have the requisite experience in evaluating and
investing in private placement transactions of securities so that they are
capable of evaluating the merits and risks of their investment in Castle Dental
and have the capacity to protect their own interests. Sellers understand that
they 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. Sellers also understand that there is no assurance
that any exemption from registration under the Securities Act will be available
and that, even if available, such exemption may not allow them to transfer all
or any portion of the Common Stock under the circumstances, in the amounts or at
the times they might propose.
(c) Sellers are acquiring the Common Stock for their own account
for investment only, and not with a view towards distribution.
(d) Sellers represent that by reason of their business or
financial experience, they have the capacity to protect their own interests in
connection with the transactions contemplated in this Agreement.
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(e) Sellers represent that they are each an accredited investor
within the meaning of Regulation D under the Securities Act.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF PURCHASER AND CASTLE DENTAL
Purchaser represents and warrants to Sellers and Shareholders as
follows:
5.1 EXISTENCE AND GOOD STANDING OF PURCHASER; POWER AND AUTHORITY.
Purchaser is a corporation duly organized, validly existing and in good standing
under the laws of the State of Texas. Purchaser has full corporate power and
authority to make, execute, deliver and perform this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
This Agreement has been duly authorized and approved by all required corporate
action of Purchaser. This Agreement has been duly executed and delivered by
Purchaser and is a valid and binding obligation of Purchaser enforceable against
Purchaser 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.
5.2 NO VIOLATIONS. 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, conflict with, or result in a breach or default
under any provision of the certificate of incorporation or by-laws of Purchaser;
(b) to the knowledge of Purchaser, 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
its properties or assets may be bound; (c) to the knowledge of Purchaser,
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 any third party; 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 pursuant to, 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 Purchaser
is a party, or by which it or any of its properties or assets may be bound,
except in the case of Subsections 5.2(b), (c), and (d), for such violations,
consents, breaches, defaults, terminations and accelerations which in the
aggregate would not have a Material Adverse Effect.
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5.3 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 their 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, and Purchaser does 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, threatened, seeking to prevent or
challenge 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.
5.5 BROKER'S OR FINDER'S FEES. Except for a fee payable by or on behalf
of Purchaser to The GulfStar Group, no agent, broker, Person or firm acting on
behalf of Purchaser 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.
Castle Dental represents and warrants to Sellers and Shareholders as
follows:
5.6 EXISTENCE AND GOOD STANDING OF CASTLE DENTAL; POWER AND AUTHORITY.
Castle Dental is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Castle Dental has full
corporate power and authority to make, execute, deliver and perform this
Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. This Agreement has been duly authorized and
approved by all required corporate action of Castle Dental. This Agreement has
been duly executed and delivered by Castle Dental and is a valid and binding
obligation of Castle Dental enforceable against Castle Dental 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.
5.7 FINANCIAL STATEMENTS. The audited financial statements of Castle
Dental as of December 31, 1995, attached hereto as Schedule 5.7, are complete
and correct in all material respects and present fairly in accordance with
generally accepted accounting principles consistently applied, the financial
condition of Castle Dental and the results of operations of Castle Dental as of
the dates thereof and for the periods indicated. Since December 31, 1995, there
has been no material adverse
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change in the assets or liabilities, or in the business or condition, financial
or otherwise, or in the results of operations of Castle Dental.
5.8 CAPITAL STOCK. Immediately prior to Closing, the authorized capital
stock of Castle Dental consists solely of 18,755,263 shares of Common Stock of
which 4,275,243 shares have been issued, and 1,244,737 shares of Preferred
Stock, $.001 par value per share. all of which shares have been issued. All of
the shares of Common Stock of Castle Dental 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.
5.9 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 Castle Dental, threatened, against or affecting the
properties, rights or goodwill of Castle Dental, Castle Dental or their
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 Castle Dental, and Castle Dental does not
know of any valid basis for any such action, proceeding or investigation. There
are no such Proceedings pending or, to the knowledge of Castle Dental,
threatened, seeking to prevent or challenge the transactions contemplated by
this Agreement.
ARTICLE VI
CONDITIONS TO SELLERS' AND THE SHAREHOLDERS' OBLIGATIONS
The obligations of Sellers 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:
6.1 TRUTH OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Purchaser 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, and Purchaser shall have delivered to Sellers on the Closing Date
a certificate of an authorized officer of Purchaser, dated the Closing Date, to
such effect.
6.2 PERFORMANCE OF AGREEMENTS. Each and all of the agreements and
covenants of Purchaser 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 shall have delivered to Sellers a certificate of an authorized officer
of Purchaser, dated the Closing Date, to such effect.
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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 Sellers a certificate of an authorized officer
of Purchaser, dated the Closing Date, to such effect to the best knowledge of
such officer.
6.4 CONSIDERATION. Purchaser shall have delivered the Purchase Price in
the manner described in Section 3.1.
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 in connection with the
transactions contemplated by this Agreement and all documents incident thereto
shall be reasonably satisfactory in form and substance to Sellers and the
Shareholders and their counsel, and Sellers and the Shareholders shall have
received copies of all such documents and other evidence as its or their counsel
may reasonably request in order to establish the consummation of such
transactions and the taking of all proceedings in connection therewith.
6.7 GOOD STANDING CERTIFICATES. Sellers shall have received good
standing and corporate existence certificates respecting Purchaser and Castle
Dental.
6.8 REGISTRATION RIGHTS AGREEMENT. Sellers shall have received a
Registration Rights Agreement, substantially in the form of Exhibit D hereto,
executed by Castle Dental.
6.9 STOCKHOLDERS AGREEMENT. Sellers shall have received a Stockholders
Agreement, substantially in the form of Exhibit C, executed by the Purchaser and
the other parties thereto.
6.10 DUE DILIGENCE. Sellers shall have satisfactorily completed his due
diligence review of Castle Dental and Purchaser and shall not have determined,
in the exercise of his reasonable discretion, that the information obtained from
such review materially and adversely affects his appraisal of the business,
prospects and financial condition of Castle Dental.
ARTICLE VII
CONDITIONS TO PURCHASER'S OBLIGATIONS
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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 Sellers 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; and Sellers and the Shareholders shall have delivered to
Purchaser on the Closing Date a certificate of an authorized representative of
Sellers and the Shareholders, dated the Closing Date, to such effect.
7.2 PERFORMANCE OF AGREEMENTS. Each and all of the agreements and
covenants of Sellers to be performed on or before the Closing Date pursuant to
the terms hereof shall have been duly performed in all material respects, and
Sellers shall have delivered to Purchaser a certificate of an authorized
representative of Sellers, dated the Closing Date, to such effect.
7.3 DOCUMENTS OF CONVEYANCE. Purchaser shall have received from Sellers
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.
7.4 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 Sellers
shall have delivered to Purchaser a certificate of an authorized representative
of Sellers, dated the Closing Date, to such effect to the best knowledge of such
officer.
7.5 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.
7.6 CONSENTS. Each of the consents referred to in Schedule 4.5 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.
7.7 LEGAL OPINION. Sellers shall have delivered to Purchaser the opinion
of their counsel, substantially in the form of Exhibit B attached hereto.
7.8 PROCEEDINGS. All proceedings to be taken in connection with the
transactions contemplated by this Agreement and all documents incident thereto
shall be reasonably satisfactory
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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.
7.9 JHC. Contemporaneous with the Closing, (a) JHC shall have entered
into employment agreements with Drs. Atterson, Jackson and Moore, (b) the
employment agreements between the other dentists presently employed by the
Dental Centers shall have been duly and validly assigned to JHC, (c) all
reimbursement contracts with third-party insurance companies, managed care
companies and other reimbursement sources shall have been duly and validly
assigned to JHC, (d) all patient records shall have been delivered to JHC and
(e) all permits and other Assets as are required for JHC to perform its
obligations under the Management Services Agreement by and between Purchaser and
JHC shall have been duly and validly assigned to JHC.
7.10 STOCKHOLDERS AGREEMENT. Sellers shall have entered into a
Stockholders Agreement with Castle Dental and certain of its other shareholders,
substantially in the form of Exhibit C attached hereto.
7.11 DUE DILIGENCE. Purchaser shall have satisfactorily completed a due
diligence review of Sellers 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 their appraisal of the business,
prospects and financial condition of Sellers or the Business.
7.12 SELLERS NAME CHANGE. Sellers shall have changed their corporate
name and/or any assumed names currently being used by them in connection with
the Business to a name not including the words "Horizon Dental Center."
7.13 TERMINATION OF AGREEMENTS. All agreements, contracts, commitments
and understandings between (a) the Dental Centers and the entities and persons
listed on Schedule 7.13 and (b) Consolidated and the entities and persons listed
on Schedule 7.13 shall be terminated on or before the Closing Date.
7.14 GOOD STANDING CERTIFICATES. Purchaser shall have received good
standing and corporate existence certificates respecting Sellers.
7.15 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 to Purchaser (other than Permitted
Encumbrances) have been released.
7.16 NONCOMPETITION AGREEMENT. Joseph A. Bonola shall have entered into
a Noncompetition Agreement with Purchaser, substantially in the form of Exhibit
E attached hereto.
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7.17 LICENSE AGREEMENT. Joseph A. Bonola shall have entered into a
License Agreement with Purchaser, whereby Dr. Bonola grants the Purchaser the
right to use the name "Horizon Dental Center," substantially in the form of
Exhibit F attached hereto.
ARTICLE VIII
COVENANTS OF SELLERS AND THE SHAREHOLDERS
Sellers and the Shareholders hereby covenant and agree with Purchaser as
follows:
8.1 COOPERATION BY SELLERS. Sellers 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 Sellers and the Shareholders to effect
the transactions contemplated on its or his part hereby, and Sellers 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. Sellers 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 Sellers or the Shareholders contained herein being untrue in any
material respect.
8.2 CONDUCT OF BUSINESS. Except as Purchaser may otherwise consent to in
writing, between the date hereof and the Closing Date, Sellers shall, (a)
conduct the Business only in the ordinary course, (b) use its reasonable efforts
to keep available the services of its employees and maintain satisfactory
relationships with licensors, suppliers, lessors, distributors, customers,
clients and others, (c) 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, and (d)
maintain the Books and Records in the usual, regular and ordinary manner, on a
basis consistent with past practice.
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
Sellers 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 Sellers
or the Shareholders.
8.4 REVIEW OF THE ASSETS. Purchaser may, prior to the Closing Date,
through its representatives, review (a) the Assets, (b) the complete working
papers of Sellers' certified public accountants used in their preparation of
financial statements for Seller and (c) the Books and Records
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of Sellers and to otherwise review the financial and legal condition of Sellers
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 Sellers 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. Sellers and the Shareholders shall permit Purchaser and its
representatives to have, after the execution of this Agreement, full access to
employees of any Sellers 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.
8.5 FURTHER ASSURANCES. At any time or from time to time after the
Closing Date, Sellers 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.
8.6 ACCOUNTS PAYABLE; ACCOUNTS RECEIVABLE. The parties agree as follows:
(a) From and after the Closing until July 31, 1996, the Dental
Centers shall continue to collect for their account any amounts received by them
in payment of accounts receivable of the Business. Following July 31, 1996, the
Dental Centers shall remit to Purchaser any amounts received by them in payment
of any accounts receivable of the Business.
(b) Purchaser shall assume all Accounts Payable as of August 1,
1996. From and after the Closing until July 31, 1996, Sellers agree to pay all
bills in the normal course of business. In addition, Sellers agree that payroll
respecting any periods in July will be paid by Sellers. With respect to payroll
for the dentists, the Dental Centers agree to pay the dentists' payroll due on
August 5, 1996, and Purchaser agrees to pay the dentists' payroll due on August
20, 1996.
ARTICLE IX
COVENANTS OF PURCHASER
Purchaser hereby covenants and agrees with Sellers and the Shareholders
as follows:
9.1 COOPERATION BY PURCHASER. Purchaser will use its reasonable best
efforts, and will cooperate with Sellers 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
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the terms and conditions hereof and to cause all conditions contained in this
Agreement over which it has control to be satisfied. Purchaser further agrees to
deliver to Sellers 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 Sellers and any agents of any Sellers, upon reasonable
advance notice to Purchaser, access to all Books and Records of Sellers 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 Sellers shall have the right, at Sellers' sole cost, to make copies of any
such Books and Records.
9.3 FURTHER ASSURANCES. At any time or from time to time after the
Closing Date, Purchaser shall, at the request of Sellers or the Shareholders and
at such Sellers' expense, execute and deliver any further instruments or
documents and take all such further action as Sellers 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 DUE DILIGENCE INVESTIGATION. Prior to the Closing Date, Purchaser
and Castle Dental will make available to Sellers and the Shareholders and their
respective attorneys, accountants, consultants and agents, any and all
information regarding Purchaser and Castle Dental and their respective
businesses, operations, financial affairs and management, to the extent such
information is in the possession of Purchaser or Castle Dental or can be
obtained without unreasonable burden or expense, to permit Sellers and the
Shareholders to familiarize themselves with the business of the Purchaser and
Castle Dental and to make an informed investment judgment with respect to the
Common Stock of Castle Dental referred to in Section 3.1(c). The Purchaser and
Castle Dental agree to make available to Sellers and the Shareholders and their
respective attorneys, accountants, consultants and agents management members and
representatives of Purchaser and Castle Dental to respond to any questions or
inquiries from such parties regarding the Purchaser, Castle Dental and their
respective businesses, operations, financial affairs and management.
The due diligence investigation shall be conducted at the principal
offices of Castle Dental in Houston, Texas, at such time or times during normal
business hours as are reasonably requested by Sellers and the Shareholders.
Sellers and the Shareholders agree to complete such investigation on or before
July __, 1996.
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All parties participating in the due diligence review shall be bound by
confidentiality agreements in form and substance satisfactory to the Purchaser
and Castle Dental.
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, the Shareholders
and Sellers; or
(b) by Purchaser, the Shareholders, or Sellers in writing without
liability on the part of the terminating party on account of such termination
(provided the terminating party is not otherwise in default or in breach of this
Agreement), if the Closing Date shall not have occurred on or before July 31,
1996; or
(c) by either Purchaser, on the one hand, or the Shareholders and
Sellers, on the other hand, in writing, without liability on the part of the
terminating party on 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 covenants or agreements contained herein
required to be performed prior to the Closing Date, or (ii) breach or have
breached any of its representations or warranties contained herein.
10.2 EFFECT ON OBLIGATIONS. Termination of this Agreement pursuant to
this Article 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 next succeeding sentence of this Section 10.2. 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.
ARTICLE XI
SURVIVAL AND INDEMNIFICATION
11.1 INDEMNIFICATION OF SELLERS. The Purchaser, from and after the
Closing Date, shall indemnify and hold Sellers and the Shareholders and their
respective Affiliates (the "Sellers Indemnitees") harmless from and against any
and all damages, including exemplary damages and penalties, losses,
deficiencies, costs, expenses, obligations, fines, expenditures, claims and
liabilities,
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including reasonable counsel fees and reasonable expenses of investigation,
defending and prosecuting litigation (collectively, the "Damages"), suffered by
any Sellers Indemnitee as a result of, caused by, arising out of, or in any way
relating to (a) any misrepresentation, breach of warranty, or nonfulfillment of
any agreement or covenant on the part of the Purchaser under this Agreement or
any misrepresentation in or omission from any list, schedule, certificate, or
other instrument furnished or to be furnished to Sellers by the Purchaser
pursuant to the terms of this Agreement or (b) any liability or obligation
(other than those for which Purchaser are being indemnified by Sellers 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. Castle Dental, from and
after the Closing Date, shall indemnify and hold the Sellers Indemnitees
harmless from and against any and all Damages suffered by any Sellers Indemnitee
as a result of, caused by, arising out of, or in any way relating to any breach
of warranty of Sections 5.6, 5.7, 5.8 or 5.9 of this Agreement.
11.2 INDEMNIFICATION OF THE PURCHASER. Sellers and the Shareholders,
jointly and severally, shall indemnify and hold Purchaser and its Affiliates
(the "Purchaser Indemnitees") harmless from and against any and all Damages
suffered by any Purchaser Indemnitee as a result of, caused by, arising out of,
or in any way relating to (a) any misrepresentation, breach of warranty, or
nonfulfillment of any agreement or covenant on the part of Sellers or the
Shareholders under this Agreement or any misrepresentation in or omission from
any list, schedule, certificate, or other instrument furnished or to be
furnished to the Purchaser by Sellers pursuant to the terms of this Agreement,
(b) any liability or obligation (other than those for which Sellers and the
Shareholders are being indemnified by Purchaser 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, or (c) the uncollectibility of any Account Receivable (net of applicable
reserve), after six months.
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 in accordance with the provisions of this Agreement in sufficient time
to permit the indemnifying party or its counsel to defend against such matter
and to make a timely response thereto including, without limitation, any
responsive
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motion or answer to a complaint, petition, notice or other legal, equitable or
administrative process relating to the Claim, only insofar as such knowing
failure to notify the indemnifying party has 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. 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 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,
-31-
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 Sellers or the Shareholders
without the prior written consent of Purchaser or by Purchaser to any Person
without the prior written consent of Sellers.
12.3 COUNTERPARTS. This Agreement may be executed in two 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.
12.4 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.
-32-
12.6 NO THIRD-PARTY BENEFICIARY RIGHTS. Except as otherwise provided in
Section 11.1, 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, Sellers,
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:
if to Purchaser, to:
Castle Dental Centers of Texas, 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
-33-
if to Sellers or the Shareholders to:
Dr. Joseph A. Bonola
1109 Smethwick Cove
Keller, Texas 76248
with a copy to:
Mr. David Wright
Heard & Wright
201 Main Street, Suite 1820
Ft. Worth, Texas 76102
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 Texas 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.
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 Houston, Texas, 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.
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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.
[The remainder of this page has been intentionally left blank.]
-35-
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, INC.
By:
Name:
Title:
CASTLE DENTAL CENTERS OF TEXAS, INC.
By:
Name:
Title:
N.A. DENTAL SERVICES, P.C.
By:
Name:
Title:
EFW DENTAL SERVICES, P.C.
By:
Name:
Title:
-36-
HDC DENTAL SERVICES, P.C.
By:
Name:
Title:
MIDCITIES DENTAL SERVICES, P.C.
By:
Name:
Title:
NEFW DENTAL SERVICES, P.C.
By:
Name:
Title:
WEST FT. WORTH DENTAL SERVICES, P.C.
By:
Name:
Title:
-37-
Joseph A. Bonola, D.D.S.
Kristen Bonola
Larry Charles Jackson
-38-
EXHIBIT 10.41
JACK H. CASTLE, D.D.S., P.C.
EMPLOYMENT AGREEMENT
This agreement (the "Agreement") is made this ___day of August, 1996, by
and between Jack H. Castle, D.D.S., P.C., a Texas professional corporation
("Castle"), and Joseph A. Bonola, D.D.S., a dentist licensed to practice his/her
profession in the State of Texas ("Employee").
WHEREAS, Employee desires to practice general dentistry as an employee
of Castle, and Castle desires to hire Employee under the terms of this
Agreement;
NOW, THEREFORE, in the mutual agreements of the parties hereinafter set
forth, it is hereby agreed as follows:
ARTICLE I
EMPLOYMENT
1.1 Castle hereby hires Employee and Employee accepts such hiring to
render professional services on behalf of Castle, subject to the rules thereof
and the standards of the dental profession.
1.2 Employee shall at all times be a dental employee subject to the
terms of this Agreement, and nothing contained in this Agreement or in the
relation of Castle and Employee shall be deemed as constituting a partnership,
joint venture or other relationship. Castle and Employee recognize that the
relationship of employer and employee requires Castle to comply with all income
tax laws pertinent to such relationship.
1.3 This Agreement shall commence as of the date first above written,
and shall thereinafter continue until terminated as herein provided, subject to
the terms of this Agreement.
ARTICLE II
TERMINATION
2.1 Termination of this Agreement shall be classified as voluntary or
involuntary.
2.2 Voluntary termination shall be that termination by either Castle or
Employee upon giving not less than thirty (30) days written notice of intent to
terminate to the other party.
<PAGE>
2.3 Involuntary termination shall be termination, in Castle's sole
determination, due to any of the following reasons:
A. Employee fails to perform his/her duties hereunder as a result
of illness or other incapacity and such illness or incapacity
shall continue for a period of more than two (2) months;
B. Employee has been disqualified to practice dentistry by reason
of law or fails to maintain insurance in effect as required by
Article VI;
C. Employee shall willfully violate any law or ethical rule
relating to the practice of dentistry; or
D. Employee engages in alcohol or drug abuse; conducts
himself/herself privately or professionally in a manner
detrimental to Castle, which shall be determined solely within
Castle's discretion, or breaches any of the terms of this
agreement.
2.4 In the event of involuntary termination of this Agreement pursuant
to sub-paragraphs 2.3 A-D, Employee's employment may be immediately terminated
by oral or written notification.
ARTICLE III
DUTIES
3.1 Employee will maintain the highest standard of care of the dental
profession.
3.2 Employee shall not provide dental services of any kind to any person
without the advance written consent of Castle. Concurrently with the execution
of this Agreement, Castle shall provide Employee with a letter, whereby Castle
shall agree to Employee's work schedule for the period from August 1, 1996 to
August 31, 1996. Such letter shall satisfy the requirements of the first
sentence of this Section 3.2. Thereafter, on a monthly basis, Castle will issue
a letter addressing Employee's work schedule.
3.3 Employee shall promote, to the extent permitted by law and the
applicable canons of professional ethics, the professional practice of Castle,
and shall to a reasonable extent attend professional conventions, postgraduate
seminars and participate in continuing education courses, and shall do all
things necessary to maintain and improve his/her professional skills.
-2-
3.4 Employee shall secure the patient's (or legal guardian of the
patient, if the patient is a minor) consent in writing to provide treatment,
prior to starting a dental procedure on the patient, in accordance with Texas
law.
3.5 Employee shall not provide or administer nitrous oxide sedation to
patients unless he/she is certified to do so by the Texas State Board of Dental
Examiners.
3.6 Employee agrees that he/she will become familiar with and remain
familiar with the Occupational Safety and Health Act ("OSHA") requirements
applicable to the dental profession. Employee further agrees that he/she will
ensure compliance with OSHA requirements as to himself/herself and any other
personnel working directly with him/her at Castle. In the event Employee fails
to comply with OSHA requirements applicable to the dental professional and such
failure results in any fine or imposition of penalty upon Castle, Employee
agrees to pay to Castle the amount of such fine and make restitution for any
other penalty imposed.
ARTICLE IV
EMPLOYEE COMPENSATION
During the term of this Agreement, the Company agrees to pay Employee an
annual salary of $1.00 ("Salary"). Salary payments shall be subject to all
applicable federal and state payroll, withholding and other taxes.
ARTICLE V
CONDITIONS DURING EMPLOYMENT
5.1 Employee shall maintain records of all discussions with patients
regarding treatment needs and treatment recommendations, all treatment
procedures, and will remain in compliance with all state regulatory rules
regarding patient records. Castle and Employee agree that Castle will retain all
past, current and future dental records on any patient treated by Employee.
Employee shall have access to such records for inspection and copying. In the
event of termination of this Agreement for any reason, all dental records of
patients treated by Employee shall be maintained by Castle and shall be deemed
owned by Castle and shall continue to be maintained by Castle and Employee shall
retain the right to inspect and copy records of patients treated by Employee.
5.2 Unless required by service of legal process, no dental record shall
be displayed or delivered to, nor any information therefrom disclosed to, any
person not connected with Castle, except in strict accordance with the rules
promulgated by Castle and the state dental examiners.
-3-
5.3 Castle shall schedule the days and times Employee shall perform
his/her duties. Changes by Employee in Employee's schedule are to be submitted
at least thirty (30) days in advance. If it is necessary for Employee to be
absent from regularly scheduled patient care, it is his/her responsibility to
contact another Employee to work in his/her place.
ARTICLE VI
INDEMNITY AND INSURANCE
Employee must be covered by professional liability (malpractice)
insurance through an insurance company acceptable to Castle. Castle agrees to
pay the expense of such insurance during the term of this contract. The
insurance shall have limits of not less than $1,000,000.00 per claim or
occurrence, and $3,000,000.00 in aggregate. Proof of such insurance coverage
shall be provided to Castle by Employee two (2) days before Employee commences
his/her duties under this contract. Employee shall provide to Castle proof of
renewal of said coverage ten (10) days prior to the expiration of such policy.
Employee must maintain the insurance required under this article at all times
during the term of this contract. If Employee's insurance is canceled, Employee
shall notify Castle within twenty-four (24) hours after he/she receives such
notice. At no time shall Employee render professional services pursuant to this
Agreement without insurance coverage and Employee shall not perform any
procedures for which his/her professional liability insurance does not provide
coverage. Employee shall hold harmless and indemnify Castle, its employees,
successors and assigns from and against any and all liabilities, costs, damages,
expenses and attorneys' fees resulting from or attributable in whole or in part
to any and all acts or omissions of Employee while providing professional
services for Castle.
ARTICLE VII
CONFIDENTIALITY
7.1 It is agreed by Employee that all patients referred to him/her will
be seen and treated by Employee exclusively at the offices of Castle.
7.2 Employee further agrees that the forms, brochures, operating policy
and procedural manuals used by Castle and marketing programs and techniques
developed by Castle are of a confidential nature and Employee agrees that he/she
shall in no way copy same; or otherwise use Castle's forms, operating policies
and procedures and marketing techniques except in the furtherance of his/her
duties for Castle.
-4-
ARTICLE VIII
ARBITRATION
Any and all disputes, controversies, claims, and demands arising out of
or relating to this Agreement or any provision hereof, or in any way relating to
the relationship between Castle and Employee, whether in contract, tort, or
otherwise, at law or in equity, for damages or any other relief, shall be
resolved by binding arbitration pursuant to the Federal Arbitration Act in
accordance with the Commercial Arbitration Rules then in effect with the
American Arbitration Association. Any such arbitration proceeding shall be
conducted in Harris County, Texas. This arbitration provision shall be
enforceable in either federal or state court in Harris County, Texas pursuant to
the substantive federal laws established by the Federal Arbitration Act. Any
party to any award rendered in such arbitration proceeding may seek a judgment
upon the award and that judgment may be entered by any federal or state court in
Harris County, Texas having jurisdiction.
ARTICLE IX
MISCELLANEOUS
9.1 This Agreement is made pursuant to, and shall be governed by and
construed in accordance with the laws applicable to contracts made and to be
performed entirely within the State of Texas.
9.2 The services provided under this Agreement may be performed only by
Employee and this Agreement is not assignable by Employee.
9.3 The failure of Castle or Employee to seek redress for a violation or
to insist upon strict performance of any covenant agreement, provision or
condition of this Agreement, shall not constitute a waiver of the terms of such
covenant, agreement, provision or condition.
9.4 This Agreement shall be binding upon and shall inure to the benefit
of the parties hereto and their respective successors and assigns.
9.5 Notices required to be given to any party hereunder shall be in
writing and shall be personally delivered or shall be sent by registered mail,
return receipt requested postage prepaid, addressed to the party at their
respective address set forth below.
9.6 This instrument contains the sole Agreement of the parties hereto
and correctly sets forth the rights, duties and obligations of each to the other
as of this day. Any prior agreements, promises, negotiations, or representations
not expressly set forth in this Agreement are of no force and effect.
-5-
IN WITNESS WHEREOF, the parties have set their hands the day and year
first above written.
JACK H. CASTLE, D.D.S., P.C.
1360 Post Oak Road., Suite 1300
Houston, Texas 77056-3021
By:
Jack H. Castle, D.D.S.
President
Employee
Joseph A. Bonola, D.D.S.
Address:
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EXHIBIT 10.72
Doc. No. 21
OPTION AGREEMENT
This OPTION AGREEMENT ("Option Agreement"), effective as of May 31, 1996,
by and between G. Powell Bilyeu (the "Shareholder") and Castle Dental Centers of
Tennessee, Inc. (the "Optionee").
RECITALS
A. The Shareholder is the sole shareholder of Castle Mid-South Dental
Centers, P.C., a Tennessee 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 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 (the "Management Services Agreement") effective as of May 31,
1996 between New PC and Optionee (the "Expiration Date").
4. EXERCISE OF OPTION. On 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 materially 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
Tennessee relating to the practice of dentistry, and to maintain professional
liability insurance coverage in amounts contemplated by the Management Services
Agreement.
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
-2-
<PAGE>
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: G. Powell Bilyeu, D.D.S.
1010 Murfreesboro Rd., Suite 196
Franklin, TN 37064
If to Optionee: Castle Dental Centers of Tennessee, 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 Tennessee 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.
-3-
<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 TENNESSEE, INC.
By: __________________________
Jack H. Castle, Jr.
President
SHAREHOLDER:
______________________________
G. Powell Bilyeu, D.D.S.
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<PAGE>
CONSENT
Castle Mid-South Dental Centers, P.C., a Tennessee 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 MID-SOUTH DENTAL
CENTERS, P.C., a Tennessee professional
corporation
By: _____________________________
G. Powell Bilyeu, D.D.S.
President
-5-
EXHIBIT 10.73
SECOND AMENDMENT AND SUPPLEMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDMENT AND SUPPLEMENT TO AMENDED AND RESTATED CREDIT
AGREEMENT ("SECOND AMENDMENT") dated as of June 16, 1997, between CASTLE DENTAL
CENTERS, INC. a Delaware Corporation (the "BORROWER"), and NATIONSBANK OF TEXAS,
N.A., a national banking association (the "LENDER").
RECITALS
WHEREAS, the Borrower and the Lender entered into that certain Credit
Agreement dated as of December 19, 1995 (the "PRIOR CREDIT AGREEMENT"); and
WHEREAS, on May 31, 1996, Borrower and Lender amended and restated the
prior Credit Agreement by entering into that certain Amended and Restated Credit
Agreement dated as of May 31, 1996, as amended by First Amendment and Supplement
to Amended and Restated Credit Agreement dated as of August 9, 1996 (such Credit
Agreement as amended is herein called the "CREDIT AGREEMENT") pursuant to which,
upon the terms and conditions stated therein, Lender agreed to make loans to
Borrower; and
WHEREAS, the Borrower and the Lender have agreed, on the terms and
conditions herein set forth, to amend certain aspects of the Credit Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the Borrower and the Lender hereby agree that the Credit
Agreement shall be amended as follows:
SECTION 1. CERTAIN DEFINITIONS. As used in this Second Amendment, the
terms "Borrower", "Credit Agreement", "Second Amendment", and "Lender" shall
have the meanings indicated above; and unless otherwise defined herein, all
terms beginning with a capital letter which are defined in the Credit Agreement
shall have the same meanings herein as therein unless the context hereof
otherwise requires.
SECTION 2. AMENDMENTS TO CREDIT AGREEMENT.
(a) DEFINED TERMS.
(i) The terms "Advancing Term Loan Termination Date",
"Agreement", "Applicable Margin", "Final Maturity Date", and "Revolving Credit
Termination Date", which are defined in Section 1.02 of the Credit Agreement,
are hereby amended to read in their entirety as follows:
"ADVANCING TERM LOAN TERMINATION DATE" shall mean, unless the
Advancing Term Note is sooner prepaid pursuant to Section 2.07
hereunder, January 31, 1998.
- 1 -
<PAGE>
"AGREEMENT" shall mean the Amended and Restated Credit Agreement,
as amended and supplemented by the First Amendment and the Second
Amendment and as the same may from time to time be further amended or
supplemented.
"APPLICABLE MARGIN" shall mean, for Revolving Credit Loans, 1%
per annum and for the Term Loan and the Advancing Term Loan, 1 1/2% per
annum.
"FINAL MATURITY DATE" shall mean, unless the Term Note is sooner
prepaid pursuant to Section 2.07 hereof, January 31, 1998.
"REVOLVING CREDIT TERMINATION DATE" shall mean, unless the
Commitment is sooner terminated pursuant to Sections 2.03(b) or 10.02
hereof, January 31, 1998.
"SECURITIES PURCHASE AGREEMENT" shall mean the Securities
Purchase Agreement dated as of December 19, 1995 among the Borrower and
each of the investors signatory thereto as amended by the Waiver and
Amendment dated as of May 31, 1996 and by Amendment No.
1 dated as of June 16, 1997.
(ii) The proviso at the end of clause (a) of the definition of
"Change of Control" is hereby amended to read as follows:
provided, however, it shall not be deemed a Change of Control for
one or more of the investors under the Securities Purchase
Agreement to own or control legal or beneficial ownership of the
Borrower or JHC PC unless and until such ownership or control in
the aggregate equals or exceeds 40% of the Borrower or JHC PC;
(b) ADDITIONAL DEFINED TERMS. Section 1.02 of the Credit Agreement is
hereby further amended and supplemented by adding the following new definitions,
which read in their entirety as follows:
"EXCESS CASH FLOW" shall mean for any period (i) EBITDA PLUS
lease and rental expense for such period less (ii) the sum of interest
PLUS lease and rental expense PLUS scheduled deferred compensation PLUS
debt service on long-term debt and capital leases PLUS cash taxes for
such period.
"NET CASH PROCEEDS" means in connection with the issuance of any
Debt, capital stock, or other equivalent ownership interest or warrants
or options to purchase any of the foregoing, the cash proceeds received,
net of all reasonable investment banking fees, legal fees, accountant's
fees, underwriting discounts and commissions, and other customary fees
and expenses actually incurred and satisfactorily documented in
connection therewith.
"NEW PECK'S LOAN" shall have the meaning set out in Section
9.01(d) hereof.
- 2 -
<PAGE>
"SECOND AMENDMENT" shall mean that certain Second Amendment and
Supplement to Amended and Restated Credit Agreement dated as of June 5,
1997, between the Lender and the Borrower.
(c) DELETED DEFINED TERMS. Section 1.02 of the Credit Agreement is
hereby further amended by deleting the definition of "Advancing Term Loan
Borrowing Base".
SECTION 3. AMENDMENTS TO THE CREDIT AGREEMENT. The following provisions
of the Credit Agreement shall be amended as follows:
(a) Section 2.01 of the Credit Agreement is hereby amended as
follows:
(i) Section 2.01(c) of the Credit Agreement is hereby
amended by deleting the date "June 30, 1997" and substituting the
words "the date of the Second Amendment" therefor.
(ii) Section 2.01(d) is hereby deleted and restated in its
entirety as follows:
"(d) INTEREST RATE ON ALL LOANS. Notwithstanding
anything to the contrary herein all Loans shall be Base
Rate Loans."
(b) Section 2.07(e) of the Credit Agreement is hereby amended and
restated in its entirety as follows:
"(e) If the Borrower or any Subsidiary shall issue any
Debt with the consent of the Lender, other than Debt permitted by
Section 9.01 hereof, or any public or private offering pursuant
to which the Company or any of its Subsidiaries sells its equity
securities (the issuance of such Debt or such public or private
offering is hereinafter referred to as a "Refinancing"), 100% of
the Net Cash Proceeds thereof shall on the first Business Day
after receipt be applied
(i) unless a Default specified in Section 10.01(a)
has occurred and is continuing and unless such Default
would not be cured by the Refinancing, to the outstanding
principal and accrued interest owing on the Revolving
Credit Loan, Advancing Term Loan and the New Pecks Loan on
a prorata basis in proportion to the unpaid principal
amounts of the New Pecks Loan on the one hand and the
Revolving Credit Loans and Advancing Term Loan on the
other hand, and after such loans have been paid in full to
the principal and accrued interest owing on the Term Loan;
and
(ii) if a Default specified in Section 10.01(a)
exists and is continuing and such Default would not be
cured by the Refinancing, first to Indebtedness owing to
the Lender and after such Indebtedness has been paid in
full to such other Debt or uses as Borrower may direct."
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<PAGE>
(c) Section 2.08 of the Credit Agreement is hereby deleted and
restated in its entirety as follows:
"The Advancing Term Loan Commitment shall at all times be
equal to $5,747,500."
(d) Section 3.01 of the Credit Agreement is hereby deleted and
restated in its entirety as follows:
"Section 3.01 REPAYMENT OF LOANS. Unless otherwise
required pursuant to Section 2.07, the Borrower will pay to the
Lender the principal payments required by this Section 3.01. On
the Revolving Credit Termination Date the Borrower shall repay
the outstanding principal amount of the Revolving Credit Note.
Commencing on July 30, 1997, the outstanding principal amounts of
the Term Note and the Advancing Term Note shall be payable in
four installments, the first of which shall be equal to 50% of
Excess Cash Flow for the quarter ending on June 30, 1997, to be
applied one-half each to said Notes, the next two of which shall
be in the amount of $301,250 on each such Note (being $602,500 in
the aggregate on each installment date) payable on each of the
Quarterly Dates thereafter, with the final installment of the
remaining principal balance on the Term Note and the Advancing
Term Note due on the Final Maturity Date."
(e) Section 6.04(j) of the Credit Agreement is hereby deleted in
its entirety.
(f) Section 8.01 of the Credit Agreement is hereby amended as
follows:
(i) Section 8.01(h) is hereby amended by deleting the
figure "45" and substituting the figure "30" therefor.
(ii) Section 8.01(l) is hereby deleted and restated in
its entirety as follows:
"(l) Promptly becoming available and in any event
within 30 days after the end of each month, (i)
consolidated and consolidating statements of income,
stockholders' equity, changes in financial position and
cash flow of the Borrower and its Consolidated
Subsidiaries for such month and the related consolidated
and consolidating balance sheets as at the end of such
month, and setting forth in each case in comparative form
the corresponding figures for the preceding month,
accompanied by the certificate of a Responsible Officer,
which certificate shall state that said financial
statements fairly present the consolidated and
consolidating financial condition and results of
operations of the Borrower and its Consolidated
Subsidiaries in accordance with GAAP, as at the end of,
and for, such month and (ii) a budget variance report
prepared by a Responsible Officer showing any variance
from the fiscal year budget previously furnished to the
Lender."
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<PAGE>
(iii) The following new Section 8.01(n) is hereby added:
"(n) Promptly upon becoming available and in any
event within 30 days after the end of each fiscal year of
the Borrower, a capital expenditure budget for the next
fiscal year for the Lender's approval setting forth any
permitted capital expenditures and permitted Liens to be
incurred during the period."
(g) Section 9.01 of the Credit Agreement is hereby amended as
follows:
(i) Section 9.01(d) is hereby deleted and restated in its
entirety as follows:
"(d) A loan in the principal amount of $2,000,000
arranged by Pecks Management Partners Ltd. (the "New
Peck's Loan") to fund the Borrower's purchase of a
purchase option for Southwest Dental Associates, L.C.
("Southwest Dental") and for working capital purposes;
PROVIDED that the documentations for such loan shall be in
the form attached as Exhibit A2 to the Second Amendment
PROVIDED FURTHER the Subordinated Debt shall have been
amended to provide that interest payments due thereon
beginning with interest payments due on or after September
30, 1996 have been and will be paid with non-cash
consideration until the earlier of (i) Final Maturity Date
or (ii) the Refinancing."
(ii) Section 9.01(e) is hereby deleted in its entirety:
(h) Sections 9.02(c) and (d) of the Credit Agreement are hereby
deleted in their entirety.
(i) Section 9.03(g) of the Credit Agreement is hereby amended and
restated in its entirety as follows:
"(g) subject to the Lender being satisfied that (i) the
Borrower will have sufficient liquid capital to close the
transaction, (ii) the Borrower is, and will be on a PRO FORMA
basis, in material compliance with the provisions of Article VIII
and Article IX hereof, and (iii) no material adverse change has
occurred in the business or financial condition of Southwest
Dental since March 31, 1997, (A) the Borrower's acquisition of a
purchase option for Southwest Dental for a price not to exceed
$1,000,000, and (B) the Borrower's acquisition of Southwest
Dental for a purchase price of not to exceed $3,650,000."
(j) Section 9.07 of the Credit Agreement is hereby deleted and
restated in its entirety as follows:
"Section 9.07 MERGERS, ETC. Neither the Borrower nor any
Subsidiary will merge into or with or consolidate with any other
Person, or sell, lease or
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<PAGE>
otherwise dispose of any of its Property or assets to any other
Person other than (i) sales of inventory in the ordinary course
of business and (ii) incidental sales of Property no longer
useful in the Borrower's or Subsidiaries' business."
(k) Section 9.11 of the Credit Agreement is hereby deleted in its
entirety.
(l) Section 9.12 of the Credit Agreement is hereby deleted and
restated in its entirety as follows:
"Section 9.12 CURRENT RATIO. The Borrower will not permit
its ratio of (i) consolidated current assets to (ii) consolidated
current liabilities (excluding the current maturities of
long-term debt, deferred compensation pursuant to the Deferred
Compensation Agreement and Subordinated Debt) to be less than
1.25 to 1.0 at any time."
(m) Section 9.15 of the Credit Agreement is hereby amended by
deleting and restating in its entirety the first sentence thereof:
"Section 9.15 LEVERAGE RATIO. The Borrower will not permit
its Leverage Ratio as of the end of any fiscal quarter
(calculated on a rolling four quarter basis; PROVIDED, HOWEVER,
the first quarter test shall be for the quarter ended March 31,
1997 and the following rolling cumulative tests will begin with
such quarter ending March 31, 1997 until a full four quarter test
can be achieved) to be greater than 4.0 to 1.0 through March 31,
1997, 3.5 to 1.0 through June 30, 1997, 3.0 to 1.0 through
September 30, 1997 and 2.75 to 1.0 thereafter."
(n) Section 9.16 of the Credit Agreement is deleted and restated
in its entirety as follows:
"Section 9.16 FIXED CHARGE COVERAGE RATIO. The Borrower
will not permit its Fixed Charge Coverage Ratio as of the end of
any fiscal quarter (calculated on a rolling four quarter basis;
PROVIDED, HOWEVER, the first quarter test shall be for the
quarter ended March 31, 1997 and the following rolling cumulative
tests will begin with such quarter ending March 31, 1997 until a
full four quarter test can be achieved) to be less than 1.20 to
1.0. For any calculation period which would include one or more
quarters prior to the Stock Purchase or Asset Purchase or any
other future acquisition of an entity, the "rolling four
quarters" shall include (i) "pro forma" the EBITDA of the
applicable Old PC for such prior periods adjusted to reflect
costs and expenses which such Old PC would have incurred had a
Management Services Agreement between Borrower and/or any
Subsidiary and such Old PC been in effect (adding back
appropriate executive salaries and non-cash charge offs relating
to such transaction) and (ii) deferred compensation and debt
service on long-term debt and capital lease payments assumed for
such
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<PAGE>
prior periods on the same basis as in effect during the most
current quarterly period. For purposes of this Section 9.16,
"Fixed Charge Coverage Ratio" shall mean the ratio for the
relevant period of (i) EBITDA PLUS lease and rental expense to
(ii) interest PLUS lease and rental expense PLUS deferred
compensation pursuant to Deferred Compensation Agreement PLUS
debt service on long-term debt and capital leases for the subject
period."
(o) Article IX of the Credit Agreement is hereby further amended
as follows:
(i) Section 9.18 is amended by adding the words "New Pecks
Loan documents" in the second line thereof after the word
"Agreements" (the first time it appears) and before the word
"and."
(ii) Section 9.21 is amended by adding the words "New
Pecks Loan documents," in the second line thereof after the words
"modification of the" and before the word "Management".
(iii) Section 9.24 is amended by adding the following
sentence at the end thereof:
"The Borrower shall not make any optional
prepayment of principal or interest on the Subordinated
Debt or the New Pecks Loan or any prepayment under the
Deferred Compensation Agreement. The Borrower will not
amend or modify the Securities Purchase Agreement
(including, without limitation Amendment No. 1 thereto)
without the prior written consent of the Lender.
(iv) A new Section 9.25 is hereby added to read as
follows:
"Section 9.25 MINIMUM EBITDA. The Borrower will not
permit EBITDA to be less than the amounts set forth below:
Period beginning Amount
January 1, 1997
------------------------------ ----------
through March 31, 1997 ....... $ 600,000
through June 30, 1997 ........ $ 800,000
through September 30, 1997 ... $1,000,000
through December 31, 1997 .... $1,000,000
(p) The Credit Agreement is hereby amended by deleting Exhibit J
attached thereto.
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<PAGE>
(q) The Credit Agreement is hereby amended by deleting all of the
schedules attached thereto, being Schedules 7.02, 7.03, 7.09, 7.10,
7.14-1, 7.17, 7.19-1, 7.24-1, 7.25, 9.01, 9.02, and 9.03 and
substituting therefore Schedules 7.02, 7.03, 7.09, 7.10, 7.14, 7.17,
7.19, 7.24, 7.25, 9.01, 9.02, and 9.03 attached hereto.
SECTION 4. WAIVERS.
(a) WAIVER OF CURRENT RATIO, LEVERAGE RATIO AND FIXED CHARGE COVERAGE
RATIO. It is understood that immediately prior to the effective date of this
Second Amendment the Borrower is not in compliance with respect to Sections
9.12, 9.15, and 9.16 of the Credit Agreement. Upon the effective date of this
Second Amendment the Borrower hereby represents that it will be in compliance
with all provisions of the Credit Agreement and accordingly the Lender hereby
waives for the periods up to the effective date of this Second Amendment but not
after, the Event of Default under Section 10.01(d) created by the aforesaid
existing noncompliance.
(b) WAIVER OF GREENBURG NOTE DEFAULT. Borrower is in default in payment
of the note payable to 1st Dental Care, Inc., in the principal amount of
$1,787,938 (the "Greenburg Note"). The Lender hereby waives the Event of Default
under Section 10.01(b) created by the aforesaid default in the Greenburg Note
for the periods up to the effective date of this Second Amendment until the date
which is ninety days from and after the date hereof at which time such waiver
shall terminate and the Greenburg Note must no longer be in default.
(c) EXTENT OF WAIVER. The foregoing waiver shall not be deemed to be a
wavier by the Lender of any other covenant, condition or obligation on the part
of the Borrower or any Subsidiary under the Credit Agreement or any other
Security Instrument except as set forth in Sections 4(a) and 4(b) of this Second
Amendment. In addition, the foregoing waivers shall in no respect evidence any
commitment by the Lender to grant any future waivers of any covenant, condition
or obligation on the part of the Borrower or any Subsidiary under the Credit
Agreement or any other Security Instrument including, without limitation,
Sections 9.12, 9.15, 9.16 and 10.01(b) and (d) of the Credit Agreement. Any
further waivers must be specifically agreed to in writing in accordance with
Section 11.04 of the Credit Agreement.
SECTION 5. CONDITIONS PRECEDENT. This Second Amendment shall become
binding upon the following conditions each of which must be satisfied to the
satisfaction of the Lender:
(a) receipt by the Lender of a satisfactory capital expenditure
budget for the 1997 fiscal year;
(b) funding of the New Peck's Loan on terms as set forth an
Exhibit A2 hereto;
(c) the Borrower shall have renegotiated each of the purchase
money notes described on Exhibit A1 hereto to provide for interest only
payments until January 31, 1998 and the waiver of any and all defaults
existing under such notes and related agreements and otherwise being on
terms satisfactory to the Lender;
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<PAGE>
(d) waiver and deferral of payments under the Deferred
Compensation Agreement and waiver of all existing defaults thereunder;
(e) receipt by the Lender of a restructuring fee equal to 1/2 of
1% of the Commitments;
(f) a certificate of the Secretary of the Borrower setting forth
(i) the resolutions of the Board of Directors of the Borrower adopted in
respect of this Second Amendment, (ii) the officer of the Borrower
authorized to sign this Second Amendment and (iii) the signature of such
authorized officer of the Borrower;
(g) a certificate of the Secretary of each Guarantor and
Subsidiary party hereto setting forth (i) the resolutions of the Board
of Directors of such entity adopted in respect of this Second Amendment,
(ii) the officer of such entity authorized to sign this Second
Amendment, and (iii) the signature of such authorized officer of such
entity;
(h) an opinion of counsel to the Borrower, the Guarantors, and
Subsidiaries party hereto in form and substance satisfactory to the
Lender;
(i) payment by the Borrower of all legal fees and expenses and
all closing costs and expenses in accordance with Section 8 hereof; and
(j) such other documents as the Lender or special counsel to the
Lender may reasonably request.
SECTION 6. REPRESENTATIONS AND WARRANTIES. The Borrower hereby reaffirms
that as of the effective date of this Second Amendment, the representations and
warranties made by the Borrower in Article VII of the Credit Agreement, as
hereby amended, will be true and correct as though made on and as of the
effective date of this Second Amendment.
SECTION 7. LIMITATIONS. The amendments set forth herein are limited
precisely as written and shall not be deemed to (a) be a consent to, or waiver
or modification of, any other term or condition of the Credit Agreement, the
Notes or any of the other Security Instruments, or (b) except as expressly set
forth herein, prejudice any right or rights which the Lender may now have or may
have in the future under or in connection with the Credit Agreement, the Notes,
the Security Instruments, or any of the other documents referred to therein.
Except as expressly supplemented, amended or modified hereby or by express
written amendments thereof, the terms and provisions of the Credit Agreement,
the Notes, any other Security Instruments, or any other documents or instruments
executed in connection with any of the foregoing are and shall remain in full
force and effect. In the event of a conflict between this Second Amendment and
any of the foregoing documents, the terms of this Second Amendment shall be
controlling.
SECTION 8. PAYMENT OF EXPENSES. The Borrower agrees, whether or not the
transactions hereby contemplated shall be consummated, to reimburse and save the
Lender harmless from and against liability for the payment of all reasonable
substantiated out-of-pocket costs and expenses arising in connection with the
preparation, execution, delivery, amendment, modification, waiver
- 9 -
<PAGE>
and enforcement of, or the preservation of any rights under this Second
Amendment, including, without limitation, the reasonable fees and expenses of
any local or other counsel for the Lender, and all stamp taxes (including
interest and penalties, if any), recording taxes and fees, filing taxes and
fees, and other charges which may be payable in respect of, or in respect of any
modification of, the Credit Agreement and the other Security Instruments. The
provisions of this Section shall survive the termination of the Credit Agreement
and the repayment of the Loans.
SECTION 9. GOVERNING LAW. This Second Amendment and the rights and
obligations of the parties hereunder and under the Credit Agreement shall be
construed in accordance with and be governed by the laws of the State of Texas
and the United States of America.
SECTION 10. DESCRIPTIVE HEADINGS, ETC. The descriptive headings of the
several Sections of this Second Amendment are inserted for convenience only and
shall not be deemed to affect the meaning or construction of any of the
provisions hereof.
SECTION 11. COUNTERPARTS. This Second Amendment may be executed in any
number of counterparts and by different parties on separate counterparts and all
of such counterparts shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment
to be duly executed and delivered by their respective duly authorized offices as
of June ___, 1997, and effective as of the date first above written.
NOTICE PURSUANT TO TEX. BUS. & COMM. CODE SS.26.02
THIS SECOND AMENDMENT AND OTHER LOAN DOCUMENTS EXECUTED BY ANY OF THE
PARTIES BEFORE OR SUBSTANTIALLY CONTEMPORANEOUSLY WITH THE EXECUTION HEREOF
TOGETHER CONSTITUTE A WRITTEN LOAN AGREEMENT AND REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NOT
UNWRITTEN ORAL AGREEMENT BETWEEN THE PARTIES.
CASTLE DENTAL CENTERS, INC.
By: _______________________
Jack H. Castle, Jr.
President
NATIONSBANK OF TEXAS, N.A.
By: _______________________
Margaret H. Barradas
Senior Vice President
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<PAGE>
RATIFICATION
Each of the undersigned hereby agrees that its/his respective
liabilities under the Security Instruments to which it/he is a party shall
remain enforceable against it/him in accordance with the terms of Security
Instruments to which it/he is a party and shall not be reduced, altered,
limited, lessened or in any way affected by the execution and delivery of this
Second Amendment and Supplement to Amended and Restated Credit Agreement. Each
of the undersigned hereby confirms and ratifies its/his liabilities under the
Security Instruments to which it/he is a party in all respects.
CASTLE DENTAL CENTERS OF TEXAS,
INC.
By:______________________________
Name:
Title:
JHCDDS, INC.
By:_______________________________
Name:
Title:
CASTLE DENTAL CENTERS OF
TENNESSEE, INC.
By:_______________________________
Name:
Title:
CASTLE DENTAL CENTERS OF
FLORIDA, INC.
By:________________________________
Name:
Title:
-------------------------------------
Jack H. Castle, Jr.
- 11 -
EXHIBIT 10.74
SENIOR SUBORDINATED NOTE
THE SENIOR SUBORDINATED NOTE REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, AND
IT MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR ANY EXEMPTION THEREFROM UNDER SAID ACT AND SUCH LAWS AND THE
RESPECTIVE RULES AND REGULATIONS THEREUNDER.
THE SENIOR SUBORDINATED NOTE REPRESENTED HEREBY IS ISSUED WITH ORIGINAL ISSUE
DISCOUNT. FOR INFORMATION CONCERNING THE ISSUE PRICE, AMOUNT OF ORIGINAL ISSUE
DISCOUNT, ISSUE DATE AND YIELD TO MATURITY OF THIS AGREEMENT, CONTACT CASTLE
DENTAL CENTERS, INC. AT 1360 POST OAK BLVD., SUITE 1300, HOUSTON, TEXAS 77056.
THE INDEBTEDNESS EVIDENCED BY THIS SENIOR SUBORDINATED NOTE IS SUBORDINATED TO
OTHER INDEBTEDNESS PURSUANT TO, AND TO THE EXTENT PROVIDED IN, AND IS OTHERWISE
SUBJECT TO THE TERMS OF SECTION 8 OF THAT CERTAIN SECURITIES PURCHASE AGREEMENT
DATED AS OF DECEMBER 18, 1995 (AS AMENDED, SUPPLEMENTED OR OTHERWISE MODIFIED
FROM TIME TO TIME PURSUANT TO THE TERMS THEREOF), BETWEEN CASTLE DENTAL CENTERS,
INC. AND THE INVESTORS NAMED ON THE SIGNATURE PAGES THEREOF.
CASTLE DENTAL CENTERS, INC.
12% Senior Subordinated Note
due January 31, 1998
No. R-1 January 31, 1998
$1,347,000
FOR VALUE RECEIVED, the undersigned, CASTLE DENTAL CENTERS, INC., a
corporation organized and existing under the laws of the State of Delaware
(herein called the "COMPANY"), promises to pay to NAP & COMPANY or registered
assigns, the principal sum of $1,347,000 on January 31, 1998, with interest
(computed on the basis of a 360-day year of twelve 30-day months) on the unpaid
balance thereof at the rate of 12% per annum from the date hereof, payable
monthly in arrears in cash on the last day of each month in each year,
commencing on June 30, 1997, until the principal hereof (or any portion
thereof), shall have become due and payable (whether at maturity, upon
acceleration, upon notice of prepayment or otherwise) or shall have been paid.
Upon the occurrence and during the continuation of any payment default (other
than a payment default in respect of any Installment) under paragraph 9A(i) or
paragraph 9A(ii) of the Agreement (defined below), the rate of interest under
this Senior Subordinated Note shall be increased to a rate per annum from time
to time equal to the lower of (a) 16% and (b) the maximum rate, if any,
permitted by applicable law, compounded quarterly.
Payments of both principal and interest are to be made at the
address shown on the Company's registry or at such other place as the holder
hereof shall designate to the Company in writing, in lawful money of the United
States of America.
This Senior Subordinated Note is one of the New Senior Subordinated
Notes of the Company made and delivered by the Company pursuant to a Securities
Purchase Agreement dated as of December 18, 1995 (as amended, supplemented or
otherwise modified from time to time pursuant to the terms thereof, the
"AGREEMENT"), between the Company and the Investors named on the signature pages
thereof and is entitled to the benefits and is subject to the provisions of the
Agreement. As provided in the Agreement, this Senior Subordinated Note is
subject to prepayment in whole or in part in certain cases as specified in the
Agreement. Capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Agreement.
This Senior Subordinated Note is a registered Senior Subordinated
Note and, as provided in the Agreement, upon surrender hereof for registration
of transfer, duly endorsed, or accompanied by a written instrument of transfer
duly executed, by the registered holder hereof or his attorney duly authorized
in writing, one or more new Senior Subordinated Notes of like tenor and for a
like aggregate principal amount will be issued to, and registered in the name
of, the transferee. Prior to due presentment for registration of transfer, the
Company and any agent of the Company may treat the person in whose name this
Senior Subordinated Note is registered as the owner hereof for the purpose of
receiving payment and for all other purposes, and the Company shall not be
affected by any notice to the contrary.
The Company has agreed to make prepayments of principal on the
dates and in the amounts specified in the Agreement.
In case an Event of Default, as defined in the Agreement, shall
occur and be continuing, the principal of this Senior Subordinated Note may be
declared due and payable in the manner and with the effect provided in the
Agreement. Upon the terms set forth in the Agreement, the Company has agreed to
pay, and save the holder hereof harmless against any liability for, liabilities,
losses, damages and expenses arising in connection with the enforcement by the
holder hereof of any of its rights under this Senior Subordinated Note, the
Agreement or any other Related Document.
<PAGE>
This Senior Subordinated Note is intended to be performed in the
State of New York, and shall be construed and enforced in accordance with the
law of such State, without giving effect to the conflicts or choice of law
principles of such State.
CASTLE DENTAL CENTERS, INC.
By:
Name:
Title:
ATTEST:
By:
Name:
Title:
EXHIBIT 10.75
SENIOR SUBORDINATED NOTE
THE SENIOR SUBORDINATED NOTE REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, AND
IT MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR ANY EXEMPTION THEREFROM UNDER SAID ACT AND SUCH LAWS AND THE
RESPECTIVE RULES AND REGULATIONS THEREUNDER.
THE SENIOR SUBORDINATED NOTE REPRESENTED HEREBY IS ISSUED WITH ORIGINAL ISSUE
DISCOUNT. FOR INFORMATION CONCERNING THE ISSUE PRICE, AMOUNT OF ORIGINAL ISSUE
DISCOUNT, ISSUE DATE AND YIELD TO MATURITY OF THIS AGREEMENT, CONTACT CASTLE
DENTAL CENTERS, INC. AT 1360 POST OAK BLVD., SUITE 1300, HOUSTON, TEXAS 77056.
THE INDEBTEDNESS EVIDENCED BY THIS SENIOR SUBORDINATED NOTE IS SUBORDINATED TO
OTHER INDEBTEDNESS PURSUANT TO, AND TO THE EXTENT PROVIDED IN, AND IS OTHERWISE
SUBJECT TO THE TERMS OF SECTION 8 OF THAT CERTAIN SECURITIES PURCHASE AGREEMENT
DATED AS OF DECEMBER 18, 1995 (AS AMENDED, SUPPLEMENTED OR OTHERWISE MODIFIED
FROM TIME TO TIME PURSUANT TO THE TERMS THEREOF), BETWEEN CASTLE DENTAL CENTERS,
INC. AND THE INVESTORS NAMED ON THE SIGNATURE PAGES THEREOF.
CASTLE DENTAL CENTERS, INC.
12% Senior Subordinated Note
due January 31, 1998
No. R-2 January 31, 1998
$267,000
FOR VALUE RECEIVED, the undersigned, CASTLE DENTAL CENTERS, INC., a
corporation organized and existing under the laws of the State of Delaware
(herein called the "COMPANY"), promises to pay to FUELSHIP & COMPANY or
registered assigns, the principal sum of $267,000 on January 31, 1998, with
interest (computed on the basis of a 360-day year of twelve 30-day months) on
the unpaid balance thereof at the rate of 12% per annum from the date hereof,
payable monthly in arrears in cash on the last day of each month in each year,
commencing on June 30, 1997, until the principal hereof (or any portion
thereof), shall have become due and payable (whether at maturity, upon
acceleration, upon notice of prepayment or otherwise) or shall have been paid.
Upon the occurrence and during the continuation of any payment default (other
than a payment default in respect of any Installment) under paragraph 9A(i) or
paragraph 9A(ii) of the Agreement (defined below), the rate of interest under
this Senior Subordinated Note shall be increased to a rate per annum from time
to time equal to the lower of (a) 16% and (b) the maximum rate, if any,
permitted by applicable law, compounded quarterly.
Payments of both principal and interest are to be made at the
address shown on the Company's registry or at such other place as the holder
hereof shall designate to the Company in writing, in lawful money of the United
States of America.
This Senior Subordinated Note is one of the New Senior Subordinated
Notes of the Company made and delivered by the Company pursuant to a Securities
Purchase Agreement dated as of December 18, 1995 (as amended, supplemented or
otherwise modified from time to time pursuant to the terms thereof, the
"AGREEMENT"), between the Company and the Investors named on the signature pages
thereof and is entitled to the benefits and is subject to the provisions of the
Agreement. As provided in the Agreement, this Senior Subordinated Note is
subject to prepayment in whole or in part in certain cases as specified in the
Agreement. Capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Agreement.
This Senior Subordinated Note is a registered Senior Subordinated
Note and, as provided in the Agreement, upon surrender hereof for registration
of transfer, duly endorsed, or accompanied by a written instrument of transfer
duly executed, by the registered holder hereof or his attorney duly authorized
in writing, one or more new Senior Subordinated Notes of like tenor and for a
like aggregate principal amount will be issued to, and registered in the name
of, the transferee. Prior to due presentment for registration of transfer, the
Company and any agent of the Company may treat the person in whose name this
Senior Subordinated Note is registered as the owner hereof for the purpose of
receiving payment and for all other purposes, and the Company shall not be
affected by any notice to the contrary.
The Company has agreed to make prepayments of principal on the
dates and in the amounts specified in the Agreement.
In case an Event of Default, as defined in the Agreement, shall
occur and be continuing, the principal of this Senior Subordinated Note may be
declared due and payable in the manner and with the effect provided in the
Agreement. Upon the terms set forth in the Agreement, the Company has agreed to
pay, and save the holder hereof harmless against any liability for, liabilities,
losses, damages and expenses arising in connection with the enforcement by the
holder hereof of any of its rights under this Senior Subordinated Note, the
Agreement or any other Related Document.
<PAGE>
This Senior Subordinated Note is intended to be performed in the
State of New York, and shall be construed and enforced in accordance with the
law of such State, without giving effect to the conflicts or choice of law
principles of such State.
CASTLE DENTAL CENTERS, INC.
By:
Name:
Title:
ATTEST:
By:
Name:
Title:
EXHIBIT 10.76
SENIOR SUBORDINATED NOTE
THE SENIOR SUBORDINATED NOTE REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, AND
IT MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR ANY EXEMPTION THEREFROM UNDER SAID ACT AND SUCH LAWS AND THE
RESPECTIVE RULES AND REGULATIONS THEREUNDER.
THE SENIOR SUBORDINATED NOTE REPRESENTED HEREBY IS ISSUED WITH ORIGINAL ISSUE
DISCOUNT. FOR INFORMATION CONCERNING THE ISSUE PRICE, AMOUNT OF ORIGINAL ISSUE
DISCOUNT, ISSUE DATE AND YIELD TO MATURITY OF THIS AGREEMENT, CONTACT CASTLE
DENTAL CENTERS, INC. AT 1360 POST OAK BLVD., SUITE 1300, HOUSTON, TEXAS 77056.
THE INDEBTEDNESS EVIDENCED BY THIS SENIOR SUBORDINATED NOTE IS SUBORDINATED TO
OTHER INDEBTEDNESS PURSUANT TO, AND TO THE EXTENT PROVIDED IN, AND IS OTHERWISE
SUBJECT TO THE TERMS OF SECTION 8 OF THAT CERTAIN SECURITIES PURCHASE AGREEMENT
DATED AS OF DECEMBER 18, 1995 (AS AMENDED, SUPPLEMENTED OR OTHERWISE MODIFIED
FROM TIME TO TIME PURSUANT TO THE TERMS THEREOF), BETWEEN CASTLE DENTAL CENTERS,
INC. AND THE INVESTORS NAMED ON THE SIGNATURE PAGES THEREOF.
CASTLE DENTAL CENTERS, INC.
12% Senior Subordinated Note
due January 31, 1998
No. R-3 January 31, 1998
$386,000
FOR VALUE RECEIVED, the undersigned, CASTLE DENTAL CENTERS, INC., a
corporation organized and existing under the laws of the State of Delaware
(herein called the "COMPANY"), promises to pay to NORTHMAN & Co. or registered
assigns, the principal sum of $386,000 on January 31, 1998, with interest
(computed on the basis of a 360-day year of twelve 30-day months) on the unpaid
balance thereof at the rate of 12% per annum from the date hereof, payable
monthly in arrears in cash on the last day of each month in each year,
commencing on June 30, 1997, until the principal hereof (or any portion
thereof), shall have become due and payable (whether at maturity, upon
acceleration, upon notice of prepayment or otherwise) or shall have been paid.
Upon the occurrence and during the continuation of any payment default (other
than a payment default in respect of any Installment) under paragraph 9A(i) or
paragraph 9A(ii) of the Agreement (defined below), the rate of interest under
this Senior Subordinated Note shall be increased to a rate per annum from time
to time equal to the lower of (a) 16% and (b) the maximum rate, if any,
permitted by applicable law, compounded quarterly.
Payments of both principal and interest are to be made at the
address shown on the Company's registry or at such other place as the holder
hereof shall designate to the Company in writing, in lawful money of the United
States of America.
This Senior Subordinated Note is one of the New Senior Subordinated
Notes of the Company made and delivered by the Company pursuant to a Securities
Purchase Agreement dated as of December 18, 1995 (as amended, supplemented or
otherwise modified from time to time pursuant to the terms thereof, the
"AGREEMENT"), between the Company and the Investors named on the signature pages
thereof and is entitled to the benefits and is subject to the provisions of the
Agreement. As provided in the Agreement, this Senior Subordinated Note is
subject to prepayment in whole or in part in certain cases as specified in the
Agreement. Capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Agreement.
This Senior Subordinated Note is a registered Senior Subordinated
Note and, as provided in the Agreement, upon surrender hereof for registration
of transfer, duly endorsed, or accompanied by a written instrument of transfer
duly executed, by the registered holder hereof or his attorney duly authorized
in writing, one or more new Senior Subordinated Notes of like tenor and for a
like aggregate principal amount will be issued to, and registered in the name
of, the transferee. Prior to due presentment for registration of transfer, the
Company and any agent of the Company may treat the person in whose name this
Senior Subordinated Note is registered as the owner hereof for the purpose of
receiving payment and for all other purposes, and the Company shall not be
affected by any notice to the contrary.
The Company has agreed to make prepayments of principal on the
dates and in the amounts specified in the Agreement.
In case an Event of Default, as defined in the Agreement, shall
occur and be continuing, the principal of this Senior Subordinated Note may be
declared due and payable in the manner and with the effect provided in the
Agreement. Upon the terms set forth in the Agreement, the Company has agreed to
pay, and save the holder hereof harmless against any liability for, liabilities,
losses, damages and expenses arising in connection with the enforcement by the
holder hereof of any of its rights under this Senior Subordinated Note, the
Agreement or any other Related Document.
<PAGE>
This Senior Subordinated Note is intended to be performed in the
State of New York, and shall be construed and enforced in accordance with the
law of such State, without giving effect to the conflicts or choice of law
principles of such State.
CASTLE DENTAL CENTERS, INC.
By:
Name:
Title:
ATTEST:
By:
Name:
Title:
EXHIBIT 10.77
AMENDMENT NO. 1
TO DEFERRED COMPENSATION AGREEMENT
This Amendment No. 1 to Deferred Compensation Agreement, dated June 16, 1997
(the "Amendment"), by and between Castle Dental Centers, Inc. (the "Company")
and Jack H. Castle, D.D.S. ("Castle") who agree as follows:
1. INTRODUCTION. This Amendment amends the Deferred Compensation Agreement
dated effective December 18, 1995 by and between the Company and Castle (the
"Agreement") and waives any defaults thereunder so that the Company may seek
further credit arrangements.
2. WAIVER.
a. Castle hereby waives any defaults under the Agreement that may
exist on June 12, 1997.
b. The waiver by Castle is limited solely to the purposes and to
the extent provided herein and shall not be construed to be a
waiver of any default that may occur after the date hereof
under the Agreement or a waiver of Castle's right to receive
any payments heretofore due or hereafter due that are deferred
as provided below. Except as provided in this Amendment, the
Agreement will continue in full force and effect.
c. The waiver (i) shall be binding on Castle and his successors
and assigns and shall inure to the benefit of the Company and
its successors and assigns and (ii) constitutes the entire
agreement among the parties with respect to any waiver by
Castle of the terms of the Agreement.
3. POSTPONEMENT OF PAYMENTS UNDER THE AGREEMENT. The parties hereto agree
that, notwithstanding any other provisions of the Agreement, no amounts under
the Agreement shall be payable until the earlier of:
a. the issuance of any indebtedness permitted by the Credit
Agreement, dated as of December 19, 1995, by and between
Castle Dental Centers, Inc. and NationsBank of Texas, N.A., as
amended by the Amended and Restated Credit Agreement dated as
of May 31, 1996, the First Amendment and Supplement to Amended
and Restated Credit Agreement dated as of August 9, 1996 and
the Second Amendment and Supplement to Amended and Restated
Credit Agreement dated as of June 5, 1997 (the "Credit
Agreement") or any public or private offering pursuant to
which the Company or any subsidiary thereof sells its equity
securities the net proceeds of which, in the case of either
such issuance of debt or sale of such equity
<PAGE>
securities, are applied to the Credit Agreement and the
$2,000,000 loan arranged by Pecks Management Partners Ltd.
(the "New Pecks Loan") to fund the Company's purchase of a
purchase option from Southwest Dental Associates L.C.; or
b. January 31, 1998.
After payments are no longer prohibited under the preceding sentence, the
scheduled quarterly deferred compensation payments under the Agreement shall
become payable beginning on the next scheduled payment date.
4. REPAYMENT OF MISSED PAYMENTS.
a. In the event the Company conducts an initial public offering
("IPO") of common stock of the Company the gross proceeds to
the Company of which is not less than Twenty-Five Million
Dollars ($25,000,000), the Company shall pay Castle all
scheduled payments under the Agreement that were not paid on
or before the time of the IPO (including payments not made
prior to the date hereof and payments deferred pursuant to
Section 3 hereof); provided, however, that such payments shall
only be made in the event the Company first pays any amounts
owing under the Credit Agreement and the New Pecks Loan.
b. Any payments under the Agreement that were not paid to Castle
due to Section 3 shall be payable on the earlier of an IPO
satisfying the requirements of the foregoing clause (a) or
December 31, 2000.
5. INTEREST. All payments under the Agreement that were deferred under
Section 3 or were in default as of the date of this Agreement ("Deferred
Payments") shall bear interest at 10% from the date each Deferred Payment was
due under the terms of the Agreement before giving effect to this Amendment to,
but not including, the date such payments are made. Accrued interest on a
Deferred Payment or a portion thereof shall be payable on the date such Deferred
Payment or portion thereof is paid. For purposes of the preceding sentence, all
repayments of Deferred Payments will be credited against Deferred Payments in
the order in which they were initially scheduled to be paid under the terms of
the Agreement.
-2-
<PAGE>
In witness whereof, the parties hereto have caused this Amendment to be executed
as of the date first written above.
CASTLE DENTAL CENTERS, INC.
By:
Name:
Title:
JACK H. CASTLE, D.D.S.
-3-
EXHIBIT 10.78
OPTION AGREEMENT FOR THE PURCHASE AND SALE OF BUSINESSES
This OPTION AGREEMENT FOR THE PURCHASE AND SALE OF BUSINESSES (this
"AGREEMENT"), dated as of June 1, 1997, is entered into by and among Castle
Dental Centers of Texas, Inc., a Texas corporation ("CDC TEXAS"), Castle Dental
Centers, Inc., a Delaware corporation ("CASTLE"), Jack H. Castle, D.D.S., P.C.,
a Texas professional corporation ("CASTLE PC"), SW Dental Associates, LC, a
Texas limited liability company ("SW DENTAL"), John Goodman,D.D.S. ("GOODMAN")
and Harold Simpson, Jr. ("SIMPSON").
W I T N E S S E T H:
WHEREAS, SW Dental and CDC Texas each wish to grant the other an option to
enter into and consummate the transactions contemplated by the Member Interests
Purchase Agreement substantially in the form of EXHIBIT A hereto (the "Purchase
Agreement");
WHEREAS, CDC Texas wishes to grant, and SW Dental wishes to acquire, an
option for SW Dental to enter into and consummate the transactions contemplated
by an Asset Purchase Agreement substantially in the form of EXHIBIT B hereto
(the "HORIZON AGREEMENT"), which agreement contemplates the purchase by SW
Dental of substantially all of the assets of CDC Texas located in Travis County,
Texas, and all counties contiguous thereto (the "TERRITORY"); and
WHEREAS, in connection with the grant of such options the parties are,
contemporaneously herewith, entering into a Management Services Agreement to
facilitate the transition of business operations in the event that any of the
options contemplated herein is exercised;
NOW, THEREFORE, in consideration 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
OPTIONS TO PURCHASE AND SELL BUSINESSES
1.1 CERTAIN DEFINITIONS. As used herein, the following terms shall have
the following meanings ascribed to them:
"EQUITY SECURITIES" shall mean any securities of Castle,
including, without limiting the
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generality of the foregoing, any common or preferred stock,
securities convertible into or exchangeable for such common or
preferred stock and any warrants, options, rights, or any
instruments (including debt instruments or preferred stock)
convertible into or exchangeable for such common stock or
preferred stock of Castle.
"NET CASH PROCEEDS" shall mean the amount obtained by
subtracting (i) the sum of the legal fees of Castle, printing
costs, filing fees paid to any governmental authority
(including blue sky fees), accountant's fees and fees and
allowances paid to any investment banker, broker, underwriter
or finder attributable to sale(s) of Equity Securities after
the date hereof, from (ii) the total gross proceeds received
by Castle from such sale(s) of Equity Securities.
"ROUND ROCK LEASE" means the lease dated as of August 1, 1997,
between Castle Dental Centers of Texas, Inc., as lessee, and
Socrates Retail Joint Venture, as lessor, covering the
premises known as Lot 4C, Block 1, replat of Lot 4, Block 1,
Socrates Addition, Phase II.
"TELECOMMUNICATIONS RIGHTS" shall mean telephone numbers, fax
numbers and e-mail addresses pertaining to the location
covered by the Round Rock Lease.
1.2 GRANT OF OPTIONS. (a) Subject to the terms and conditions of this
Agreement, (i) CDC Texas shall have an exclusive non-transferable option (the
"CDC OPTION"), but not the obligation, to purchase from Goodman and Simpson all
of the outstanding limited liability company interests in and capital stock of
SW Dental, and (ii) upon the exercise of such option by CDC Texas, Goodman and
Simpson shall be obligated to sell such interests to CDC Texas, such purchase
and sale to be on the terms and conditions set forth in the Purchase Agreement.
During the CDC Purchase Option Term (as such term is defined below), any
certificates representing interests in, or capital stock of, SW Dental shall
contain a legend referring to this Agreement.
(b) Subject to the terms and conditions of this Agreement, SW Dental shall
have an exclusive non-transferable option (the "HORIZON OPTION"), but not the
obligation, to purchase from CDC Texas all of the assets of CDC Texas related to
the conduct of business in the Territory, all as set forth in the Horizon
Agreement, and upon the exercise of such option by SW Dental, CDC Texas shall be
obligated to sell such business and assets to SW Dental, such purchase and sale
to be on the terms and conditions further set forth in the Horizon Agreement.
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<PAGE>
(c) During the period commencing three days after the sale for cash by
Castle, whether in one or more private placements or in a public offering, of
any Equity Securities from which Castle receives aggregate Net Cash Proceeds
(including and combined with any other Net Cash Proceeds received after the date
hereof) in excess of $15,000,000, and ending 10 days after such aggregate Net
Cash Proceeds are received, CDC Texas shall exercise the CDC Option and effect
the purchases contemplated in the Purchase Agreement, subject only to the
conditions (if any) set forth in the Purchase Agreement, and the foregoing
promise of CDC Texas shall be subject to enforcement by court ordered specific
performance.
1.3 OPTION TERMS. (a) CDC Texas may exercise the CDC Option during the
period commencing on the date hereof and ending on the earlier of (i) the first
anniversary of the date hereof, and (ii) ten days after the sale for cash by
Castle, whether in a private placement or in a public offering, of any Equity
Securities from which Castle receives Net Cash Proceeds (including and combined
with any other Net Cash Proceeds received after the date hereof) in excess of
$15,000,000. The period during which such option may be exercised by CDC Texas
is referred to herein as the "CDC PURCHASE OPTION TERM." Upon exercise of the
CDC Option, the Horizon Option shall terminate.
(b) SW Dental may exercise the Horizon Option for a period of 60 days,
commencing on the first to occur of (1) the date the CDC Option expires by its
terms or is canceled or terminated by CDC Texas, (2) the date the Management
Services Agreement, dated as of even date herewith (the "MANAGEMENT SERVICES
AGREEMENT"), between CDC Texas and SW Dental, is terminated by CDC Texas. The
period during which such option may be exercised by SW Dental is referred to
herein as the "HORIZON PURCHASE OPTION TERM".
1.4 CONSIDERATION FOR THE OPTIONS. (a) In consideration of the grant by
Goodman to CDC Texas of the CDC Option, CDC Texas shall (i) pay, immediately
upon the execution hereof, to Goodman $1,000,000 (the "NON-REFUNDABLE PAYMENT"),
(ii) pay to SW Dental, upon the exercise of the CDC Option at the closing of the
transactions contemplated in the Purchase Agreement, (A) if the CDC Option is
exercised more than 180 days but less than 270 days after the date hereof, an
amount equal to $170,000, (b) if the CDC Option is exercised at least 270 days
but less than 300 days after the date hereof, an amount equal to $255,000, and
(C) if the CDC Option is exercised at least 300 days after the date hereof but
on or before the one year anniversary of the date hereof, an amount equal to
$340,000.
(b) In the event that CDC Texas does not exercise the CDC Option and
effect the purchase contemplated by the Purchase Agreement and the CDC Option
expires by its terms, then (i) the Non-Refundable Payment shall be and remain
the sole property of Goodman, (ii) no payments, other than the Non-Refundable
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<PAGE>
Payment as contemplated in Section 1.4(a) hereof, shall be paid and delivered to
SW Dental, and (iii) CDC Texas shall, in lieu of the payments (other than the
Non-Refundable Payment) contemplated in Section 1.4(a), (A) assign and transfer
to SW Dental the Round Rock Lease (in the event that SW Dental is not a party to
the Round Rock Lease as lessee thereunder) and the equipment, fixtures, patient
records, computer software, customer lists, Telecommunications Rights, employee
information and all other property or things of value located at the premises
covered by the Round Rock Lease, and (B) permit (and shall not interfere with,
prohibit or restrict) any offer to employ or the hiring by SW Dental of any or
all employees (including administrative staff as well as dental technicians and
dentists) of CDC Texas employed at the location covered by the Round Rock Lease,
and from and after the date of such assignments and transfers, all property and
assets, real or personal, tangible or intangible, shall be the sole property and
assets of SW Dental, and CDC Texas shall execute such bills of sale and
assignments as SW Dental shall reasonably request to further evidence the
foregoing.
(c) The Non-Refundable Payment is and shall hereafter be the sole and
exclusive property of Goodman. Notwithstanding anything contained in this
Agreement or in any other agreement to which Goodman and any person party hereto
are a party, the Non-Refundable Payment is not refundable to any person, for any
reason or circumstance, including without limitation by reason of (i) any events
or conditions that prevent, prohibit, limit or adversely affect in any way the
exercise by CDC Texas of the CDC Option, (ii) the acts of any governmental
authority to enjoin or limit the exercise of the CDC Option, (iii) any changes
in (A) general economic or local business conditions, or (B) any federal, state
or local laws, rules or regulations, that adversely affect the CDC Option or the
potential profitability of the dental care business, (iv) the breach of any
covenant, by SW Dental or Goodman, set forth in any written agreement with CDC
Texas or any affiliate thereof, or (v) any representation or warranty of Goodman
or SW Dental set forth in any written agreement thereof with CDC Texas or any
affiliate thereof, is untrue or incorrect in any respect, whether or not
material. It is the intention of the parties hereto that the Non-Refundable
Payment is permanently and irrevocably transferred by CDC Texas and its
affiliates to Goodman without any recourse against the Non-Refundable Payment,
and without rights to rescind or recapture the Non-Refundable Payment, by action
in quantum meruit, at common law, in equity or otherwise.
(d) SW Dental has executed the Management Services Agreement in
consideration of the valuable services to be provided thereunder and of the
granting by SW Dental to CDC Texas of the CDC Option.
(e) All payments by any party hereto to any other party hereto pursuant to
this Section 1.4 shall be made by wire transfer of immediately available funds.
1.5 REIMBURSEMENT OF EXPENSES BY CDC TEXAS. CDC Texas acknowledges that SW
Dental has incurred, prior to the date hereof, certain expenses on behalf of CDC
Texas in connection with certain services provided by SW Dental for CDC Texas in
the Territory. A schedule of such expenses is set forth on EXHIBIT C hereto. CDC
4
<PAGE>
Texas has reimbursed to SW Dental the total of such expenses in cash on the date
hereof by wire transfer of immediately available funds to an account or accounts
previously identified by SW Dental.
ARTICLE II
EXERCISE OF PURCHASE OPTIONS
2.1 NOTICE OF EXERCISE OF OPTION BY CDC TEXAS. CDC Texas may give notice
in writing (the "CDC PURCHASE NOTICE") to Goodman at any time during the CDC
Purchase Option Term of CDC Texas' intent to exercise the CDC Option. Closing of
the transactions contemplated by the Purchase Agreement (the "Closing") shall be
held within ten days after Goodman's receipt of the CDC Purchase Notice.
2.2 NOTICE OF EXERCISE OF OPTION BY SW DENTAL. SW Dental may give notice
in writing (the "SW PURCHASE NOTICE") to CDC Texas at any time during the
Horizon Purchase Option Term of SW Dental's intent to exercise the Horizon
Option. Closing of the transactions contemplated by the Purchase Agreement shall
be held within ten days after CDC Texas' receipt of the SW Purchase Notice.
ARTICLE III
HORIZON PURCHASE OPTION MATTERS
3.1 NOTICE OF CHANGES TO SCHEDULES. CDC Texas shall, promptly upon
becoming aware that any representation or warranty of CDC Texas in the Horizon
Agreement is not complete or accurate in any material respect, or that it will
be unable to comply in any material respect with any covenant or agreement in
the Horizon Agreement due to changed circumstances, inform SW Dental in writing
(a "HORIZON CHANGE NOTICE"). Each such Horizon Change Notice shall set forth a
description of such change or such inaccurate representation or warranty or
inability to perform such covenant or agreement.
3.2 NOTICE OF EXERCISE OF HORIZON OPTION. SW Dental may give notice in
writing (the "HORIZON NOTICE") to CDC Texas at any time during the Horizon
Purchase Option Term of SW Dental's intent to exercise the Horizon Option.
Closing of the transactions contemplated by the Horizon Agreement (the "HORIZON
CLOSING") shall be held within 30 days after CDC Texas' receipt of the Horizon
Notice, PROVIDED, that SW Dental may decline to close the transactions
contemplated in the Horizon Agreement, whether because of Horizon Change Notices
or for any other reason, it being agreed hereby that the Horizon Option is an
option of SW Dental, and not an obligation.
5
<PAGE>
3.3 NONCOMPETITION AND OTHER PROVISIONS VOID. SW Dental and CDC Texas
acknowledge and agree that, if the CDC Option remains unexercised at the end of
the CDC Purchase Option Term, neither SW Dental, John Goodman, D.D.S., nor
Sheryl Goodman shall be subject to any further employment, noncompetition,
confidentiality, secrecy, hiring limitation or nonsolicitation obligations, or
any other contractual limitations, with respect to CDC Texas or any of CDC
Texas' affiliates, and the Management Services Agreement entered into
contemporaneously herewith shall be terminated, void and without further force
or effect at such time.
3.4 RETENTION OF EMPLOYEES. If SW Dental exercises the Horizon Option, SW
Dental shall be entitled to offer employment to and to employ any and all CDC
Texas employees then employed by CDC Texas in the Territory who are not licensed
dentists, and CDC Texas shall use reasonable efforts to obtain consents to the
assignment to SW Dental of all of CDC Texas' employment contracts with licensed
dentists working in the Territory.
ARTICLE IV
CONDUCT OF BUSINESS
4.1 CONDUCT OF THE BUSINESS OF SW DENTAL DURING THE PURCHASE OPTION TERMS.
SW Dental and Goodman hereby covenant that, from the date hereof to and
including the earlier of (i) the expiration of the CDC Purchase Option Term and
the Horizon Purchase Option Term or (ii) the closing of the transactions
contemplated by the Purchase Agreement, except as contemplated by the Management
Services Agreement or otherwise agreed to in writing by CDC Texas:
(a) the business of SW Dental shall be conducted and the assets
used in the business of SW Dental shall be repaired and
maintained in the ordinary and usual course, in a manner
consistent with past practice;
(b) except in the ordinary course of business consistent with past
practice, SW Dental shall not (i) make any commitment to make
any capital expenditures individually in excess of $75,000 or
in the aggregate in excess of $350,000; (ii) dispose of any
capital assets with a book value, individually or in the
aggregate, in excess of $10,000 or encumber any of its capital
assets or other assets; (iii) incur, or guarantee or otherwise
become liable for, any indebtedness for borrowed money, except
as may be required in connection with the Round Rock Lease;
(iv) amend any of its material contracts; (v) enter into any
new employee benefit plan, program or arrangement or amend any
existing employee benefit plan, program or arrangement; or
(vi) issue any additional equity
6
<PAGE>
securities or transfer any equity securities of SW Dental,
except for transfers to Goodman from Harold Simpson, Jr.;
(c) SW Dental shall use its best efforts to preserve for CDC Texas
the goodwill of all persons dealing with SW Dental;
(d) on receipt of the CDC Purchase Notice, SW Dental and Goodman
shall cooperate fully with CDC Texas to consummate the closing
of the transactions contemplated in the Purchase Agreement in
an orderly fashion;
(e) SW Dental shall promptly notify CDC Texas of (i) any breach or
violation of, default or event of default under, or actual or
threatened termination or cancellation of any material
contract or other material instrument relating to the business
of SW Dental, (ii) any material loss of, damage to, or
disposition of any of the assets of SW Dental (other than the
sale or use of inventories in the ordinary course of
business), and (iii) any claim or litigation, threatened or
instituted, or any other material adverse event or occurrence
involving or affecting the business of SW Dental; and
(f) SW Dental and Goodman shall not sell, dispose of, distribute,
encumber or enter into any agreement or commitment, whether
oral or written for the sale, disposition, distribution or
encumbrance of any portion of the business of SW Dental (other
than (i) the sale or use of inventories in the ordinary course
of business, (ii) the transfer of interests in SW Dental to
Goodman from Harold Simpson, Jr., and (iii) encumbrances
created in connection with debt incurred to finance leasehold
improvements and purchases of equipment for the Round Rock
Lease) or initiate or participate, through agents,
representatives or otherwise, in any discussions or
negotiations with, or otherwise solicit from, any corporation,
business or person any proposals or offers relating to the
disposition of any such portion of the business of SW Dental,
PROVIDED, that SW Dental and Goodman may, within 90 days prior
to the expiration of the CDC Option, engage in discussions
with financial institutions or investors in anticipation of
the exercise of the Horizon Option.
4.2 CONDUCT OF THE BUSINESS OF CDC TEXAS THROUGH THE HORIZON PURCHASE
OPTION TERM. CDC Texas and Castle hereby covenant that, from the date hereof to
and including the earlier of (i) the expiration of the Horizon Purchase Option
Term or (ii) the closing of the transaction contemplated by the Horizon
Agreement, except as agreed to in writing by SW Dental:
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<PAGE>
(a) the business of CDC Texas in the Territory shall be conducted
and the assets used in the business of CDC Texas in the
Territory shall be repaired and maintained in the ordinary and
usual course, in a manner consistent with past practice;
(b) except in the ordinary course of business consistent with past
practice, CDC Texas shall not, with respect to its business in
the Territory, (i) make any commitment to make any capital
expenditures individually in excess of $75,000 or in the
aggregate in excess of 350,000; (ii) dispose of any capital
assets with a book value, individually or in the aggregate, in
excess of $10,000 or encumber any of its capital assets or
other assets; (iii) incur, or guarantee or otherwise become
liable for, any indebtedness for borrowed money; (iv) amend
any of its material contracts; (v) enter into any new employee
benefit plan, program or arrangement or amend any existing
employee benefit plan, program or arrangement or grant any
increases in employee compensation; or (vi) issue any
additional equity securities or transfer any equity securities
of CDC Texas;
(c) CDC Texas shall use its best efforts to preserve for SW Dental
the goodwill of all persons dealing with CDC Texas in the
Territory;
(d) on receipt of the SW Purchase Notice, CDC Texas and Castle
shall cooperate fully with SW Dental to consummate the
exercise of the Horizon Agreement in an orderly fashion;
(e) CDC Texas shall promptly notify SW Dental of (i) any breach or
violation of, default or event of default under, or actual or
threatened termination or cancellation of any material
contract or other material instrument relating to the business
of CDC Texas in the Territory, (ii) any material loss of,
damage to, or disposition of any of the assets of CDC Texas in
the Territory (other than the sale or use of inventories in
the ordinary course of business), and (iii) any claim or
litigation, threatened or instituted, or any other material
adverse event or occurrence involving or affecting the
business of CDC Texas in the Territory;
(f) CDC Texas and Castle shall not sell, dispose of, distribute,
encumber or enter into any agreement or commitment, whether
oral or written for the sale, disposition, distribution or
encumbrance of any portion of the business of CDC Texas in the
Territory (other than the sale or use of inventories in the
ordinary course of business) or initiate or participate,
through agents, representatives or otherwise, in any
discussions or negotiations
8
<PAGE>
with, or otherwise solicit from, any corporation, business or
person any proposals or offers relating to the disposition of
any such portion of the business of CDC Texas in the
Territory.
ARTICLE V
COVENANTS
5.1 CLOSE SW DENTAL FIRST. Until such time as (i) CDC Texas exercises the
CDC Option and closes the transactions contemplated in the Purchase agreement,
or (ii) CDC Texas and Goodman agree in writing to release, extinguish and
terminate the CDC Option, CDC Texas shall not, nor shall it permit its
affiliates Castle or Castle PC to, purchase or acquire for cash, all or
substantially all of the assets or business of any dentist, dental office, oral
or dental surgery center, or multi-site dental or oral care practice
organization; PROVIDED, HOWEVER, that this Section 5.1 shall not prohibit the
construction or lease by CDC Texas of additional dental offices in the Houston,
Texas, area.
5.2 RISK ALLOCATION. CDC Texas shall purchase insurance as CDC Texas may
desire to cover such risks of ownership of SW Dental as CDC Texas may incur in
connection with the ownership thereof after the date hereof arising as a result
of the acquisition of Goodman's capital stock and member interests in CDC Texas.
CDC Texas has agreed under the Purchase Agreement, subject to compliance by SW
Dental with the covenants contained herein, (i) to succeed to the ownership of
SW Dental, and CDC Texas acknowledges the risks inherent therein and the need
for adequate insurance of loss on account of torts, malpractice, workmen's
compensation claims, property damage and other risks of operation of a dental
practice, whether or not similar to any of the foregoing, (ii) that the risks
arising from changes, occurring between the date hereof and the closing date
under the Purchase Agreement, in the business, financial condition,
profitability, prospects, legal and regulatory matters and limitations, asset
condition, and all other risks associated with adverse changes after the date
hereof in the business, financial condition or results of operations of SW
Dental, are risks that have been assumed by CDC Texas as part of the bargain of
the parties hereto, (iii) that CDC Texas has made its decision to purchase the
stock and interests in SW Dental from Goodman based on the representations and
warranties set forth as of the date hereof in the Purchase Agreement (with no
requirement for updates for changes in the relevant facts), and CDC Texas and
its affiliates have agreed to purchase such stock and interests subject only to
the conditions set forth herein, the effect of which is that (A) SW Dental and
its affiliates thereby assume the risk that the business of SW Dental may change
materially and adversely between the date of execution hereof and the date that
CDC Texas purchases such stock and interests pursuant to the Purchase Agreement,
and (B) the representations and warranties of SW Dental, being limited to the
date hereof, may not be true and correct on a subsequent date, but such changes
shall not entitle CDC Texas to refuse to close
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the transactions contemplated by the Purchase Agreement, and (iv) CDC Texas has
agreed hereby, subject only to (A) its ability to raise sufficient funds to pay
the purchase price under the Purchase Agreement, and (B) the conditions (if any)
set forth in the Purchase Agreement, to purchase the outstanding capital stock
and member interests in SW Dental without regard to changes that occur in the
business, financial condition, prospects, results of operations, profitability,
legal or regulatory matters, assets or any other matters pertaining to or
affecting the business of SW Dental between the date hereof and the closing date
under the Purchase Agreement.
5.3 ROUND ROCK LEASE BUILDOUT. SW Dental is expressly permitted hereunder
to incur expenses and indebtedness which have been mutually agreed to by SW
Dental and CDC Texas in order to build out and complete dental care facilities,
including the construction of leasehold improvements, the purchase of needed
office and dental care equipment, and the incurring of marketing and promotional
expenses associated with the opening of a new dental practice office, at the
location that is the subject of the Round Rock Lease. The leasehold
improvements, and all equipment and other property, at the Round Rock Lease
location shall be owned by SW Dental.
ARTICLE VI
MISCELLANEOUS
6.1 CONSENT TO REFERENCES IN REGISTRATION STATEMENT. SW Dental hereby
irrevocably (i) consents to the references that may be made to it and its
business, and the inclusion of the financial statements of SW Dental, in any
Registration Statement filed by Castle under the Securities Act or offering
memorandum relating to the Common Stock of Castle; and (ii) waives any breach of
any confidentiality agreement to which SW Dental has entered into with CDC Texas
or Castle which may be occasioned by such inclusion.
6.2 ENTIRE AGREEMENT. This Agreement (including the Exhibits) and the
Management Services Agreement 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, including that certain letter agreement dated September
11, 1996 (the "SEPTEMBER LETTER"), are merged into and superseded by this
Agreement. There are no unwritten or oral agreements among the parties hereto.
Pursuant to the September Letter, CDC Texas paid to SW Dental $500,000, and (i)
such payment constitutes a nonrefundable part (which does not reduce and is not
a credit against any amounts payable hereunder or in connection with the
exercise of the Purchase Agreement) of the consideration to be paid to Goodman
in connection with the expected exercise by CDC Texas of the CDC Option, (ii)
this Agreement constitutes a restructure of the various terms contemplated by
the September Letter, and (iii) the Non-Refundable Payment is in addition to,
and does not reduce, and is not a credit against, the cash payment to be made by
CDC
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Texas to Goodman pursuant to the Purchase Agreement at the closing contemplated
therein.
6.3 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 may not be assigned by SW
Dental without the prior written consent of CDC Texas, or by CDC Texas without
the prior written consent of SW Dental.
6.4 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.
6.5 HEADINGS. The headings, subheadings and captions 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.
6.6 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.
6.7 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.
6.8 EXPENSES. Except as otherwise provided in that certain letter
agreement, dated December 26, 1996, between SW Dental and CDC Texas, and except
as expressly provided in this Section 6.8, the parties hereto shall each pay all
costs and expenses incurred by them or on their behalf in connection with this
Agreement and the transactions contemplated hereby. Within 30 days after the
execution hereof, CDC Texas shall pay to Fulbright & Jaworski L.L.P. all fees
incurred by SW Dental or Goodman in connection with the execution and delivery
of this Agreement and the Management Services Agreement.
6.9 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 CDC Texas, Castle or Castle PC, to:
Castle Dental Centers of Texas, 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 SW Dental or Goodman, to:
Southwest Dental Associates, L.C.
713 Beardsley Lane
Austin, Texas 78746
Attn.: John Goodman, D.D.S.
with a copy to:
Mr. Roger K. Harris
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010-3095
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.
6.10 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regards to conflict of
law rules thereof.
6.11 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 CDC Texas and SW Dental
may disclose such information as is required to comply with the requirements of
their respective 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,
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without obtaining the prior approval of the other parties hereto to the contents
and the manner of presentation and publication thereof.
6.12 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 Travis County, Texas, 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.
6.13 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.
6.14 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 grant or exercise of the Option 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 TEXAS, INC.
By: _________________________
Name: Jack H. Castle, Jr.
Title: President
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CASTLE DENTAL CENTERS, INC.
By: _________________________
Name: Jack H. Castle, Jr.
Title: President
JACK H. CASTLE, D.D.S., P.C.
By: _________________________
Name: Jack H. Castle, Jr.
Title: President
SW DENTAL ASSOCIATES, LC
By: _________________________
Name: John Goodman, D.D.S.
Title: President
_____________________________
John Goodman, D.D.S.
_____________________________
Harold Simpson, Jr.
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EXHIBIT 10.79
ASSET PURCHASE AGREEMENT
Dated as of ____________ ___, 199__
By and Among
Castle Dental Centers of Texas, Inc.
Jack H. Castle, D.D.S., P.C.
and
SW Dental Associates, LC
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS.............................................. 1
ARTICLE II
THE TRANSACTION
2.1 PURCHASE AND SALE OF ASSETS.............................. 4
2.2 EXCLUDED ASSETS.......................................... 5
2.3 ASSUMPTION OF OBLIGATIONS................................ 6
2.4 NONASSIGNABLE CONTRACTS AND LEASES....................... 6
2.5 USE OF NAME.............................................. 7
2.6 CLOSING.................................................. 7
ARTICLE III
PAYMENT OF PURCHASE PRICE
3.1 AMOUNT; ALLOCATION; DELIVERY............................. 7
3.2 AGENCY RELATIONSHIP...................................... 7
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
4.1 REPRESENTATIONS AND WARRANTIES OF SELLER................. 7
4.2 EXISTENCE AND GOOD STANDING.............................. 8
4.3 AUTHORIZATION AND VALIDITY OF AGREEMENT.................. 8
4.4 CAPITAL STOCK............................................ 8
4.5 CONSENTS AND APPROVALS; NO VIOLATIONS.................... 8
4.6 SUBSIDIARIES AND AFFILIATES.............................. 9
4.7 FINANCIAL STATEMENTS: NO MATERIAL ADVERSE CHANGE......... 9
4.8 BOOKS AND RECORDS........................................ 9
4.9 TITLE TO PROPERTIES; ENCUMBRANCES; CONDITION............. 9
4.10 REAL PROPERTY............................................ 10
4.11 LEASES................................................... 10
4.12 MATERIAL CONTRACTS....................................... 10
4.13 PERMITS.................................................. 10
4.14 LITIGATION............................................... 11
4.15 TAXES.................................................... 11
4.16 INSURANCE................................................ 11
4.17 INTELLECTUAL PROPERTIES.................................. 12
4.18 COMPLIANCE WITH LAWS..................................... 12
4.19 EMPLOYMENT RELATIONS..................................... 12
4.20 EMPLOYEE BENEFIT PLANS................................... 12
4.21 ENVIRONMENTAL LAWS AND REGULATIONS....................... 12
4.22 INTERESTS IN CUSTOMERS, SUPPLIERS, ETC................... 13
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4.23 COMPENSATION OF EMPLOYEES................................ 13
4.24 PAYORS................................................... 13
4.25 ACCOUNTS RECEIVABLE; ACCOUNTS PAYABLE.................... 13
4.26 SOLVENCY................................................. 13
4.27 DISCLOSURE............................................... 14
4.28 INVESTMENTS.............................................. 14
4.29 BROKER'S OR FINDER'S FEES................................ 14
4.30 COPIES OF DOCUMENTS...................................... 14
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASER
5.1 REPRESENTATIONS AND WARRANTIES OF PURCHASER.............. 14
5.2 EXISTENCE AND GOOD STANDING OF PURCHASER; POWER AND
AUTHORITY................................................ 14
5.3 NO VIOLATIONS............................................ 15
5.4 CAPITAL STOCK............................................ 15
5.5 LITIGATION............................................... 15
5.6 COMPLIANCE WITH LAWS..................................... 16
5.7 FINANCIAL STATEMENTS..................................... 16
5.8 BROKER'S OR FINDER'S FEES................................ 16
ARTICLE VI
CONDITIONS TO THE OBLIGATIONS OF SELLER, CASTLE PC AND CASTLE
6.1 TRUTH OF REPRESENTATIONS AND WARRANTIES.................. 16
6.2 PERFORMANCE OF AGREEMENTS................................ 16
6.3 NO LITIGATION THREATENED................................. 17
6.4 CONSIDERATION............................................ 17
6.5 GOVERNMENTAL APPROVALS................................... 17
6.6 PROCEEDINGS.............................................. 17
6.7 GOOD STANDING CERTIFICATES............................... 17
ARTICLE VII
CONDITIONS TO PURCHASER'S OBLIGATIONS
7.1 TRUTH OF REPRESENTATIONS AND WARRANTIES.................. 17
7.2 PERFORMANCE OF AGREEMENTS................................ 17
7.3 DOCUMENTS OF CONVEYANCE.................................. 17
7.4 NO LITIGATION THREATENED................................. 18
7.5 GOVERNMENTAL APPROVALS................................... 18
7.6 PROCEEDINGS.............................................. 18
7.7 GOOD STANDING CERTIFICATES............................... 18
7.8 RELEASES OF LIENS........................................ 18
7.9 CERTAIN TRANSACTIONS WITH JACK H. CASTLE, D.D.S., P.C.... 18
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ARTICLE VIII
COVENANTS OF SELLER, CASTLE PC AND CASTLE
8.1 COOPERATION BY SELLER.................................... 18
8.2 REVIEW OF THE ASSETS..................................... 19
8.3 FURTHER ASSURANCES....................................... 19
ARTICLE IX
COVENANTS OF PURCHASER
9.1 COOPERATION BY PURCHASER................................. 19
9.2 BOOKS AND RECORDS; PERSONNEL............................. 19
9.3 FURTHER ASSURANCES....................................... 20
ARTICLE X
SURVIVAL AND INDEMNIFICATION
10.1 INDEMNIFICATION OF THE SELLER, CASTLE PC AND CASTLE...... 20
10.2 INDEMNIFICATION OF THE PURCHASER......................... 20
10.3 DEMANDS.................................................. 20
10.4 RIGHT TO CONTEST AND DEFEND.............................. 21
10.5 COOPERATION.............................................. 21
10.6 RIGHT TO PARTICIPATE..................................... 22
10.7 PAYMENT OF DAMAGES....................................... 22
ARTICLE XI
MISCELLANEOUS
11.1 ENTIRE AGREEMENT......................................... 22
11.2 SUCCESSORS AND ASSIGNS................................... 22
11.3 COUNTERPARTS............................................. 23
11.4 HEADINGS................................................. 23
11.5 MODIFICATION AND WAIVER.................................. 23
11.6 NO THIRD PARTY BENEFICIARY RIGHTS........................ 23
11.7 SALES AND TRANSFER TAXES................................. 23
11.8 EXPENSES................................................. 23
11.9 NOTICE................................................... 23
11.10 GOVERNING LAW............................................ 24
11.11 CONFIDENTIALITY; PUBLICITY............................... 24
11.12 CONSENT TO JURISDICTION.................................. 24
11.13 SEVERABILITY............................................. 25
11.14 ENFORCEMENT.............................................. 25
SCHEDULES
Schedule 2.1(c) Assigned Contracts
Schedule 2.2(b) Excluded Contracts
Schedule 2.2(g) Excluded Assets
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Schedule 3.1 Allocation of Purchase Price
Schedule 4.6 Asset Owned by Third Parties which are Used in the
Business
Schedule 4.7 Financial Statements
Schedule 4.10 Real Property
Schedule 4.11 Leased Personal Property
Schedule 4.12 Material Contracts and Proposals
Schedule 4.13 Permits
Schedule 4.14 Litigation
Schedule 4.16 Insurance Policies
Schedule 4.17 Intellectual Property
Schedule 4.21 Environmental Matters
Schedule 4.23 Employee Compensation
Schedule 4.24 Payors
Schedule 5.7 SW Dental Financial Statements
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ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT, dated as of ____________ ____, 199__, is
entered into by and among Castle Dental Centers of Texas, Inc., a Texas
corporation ("CDC Texas" or "Seller"), Castle Dental Centers, Inc., a Delaware
corporation ("Castle"), Jack H. Castle D.D.S., P.C., a Texas professional
corporation ("Castle PC"), and SW Dental Associates, LC, a Texas limited
liability company ("Purchaser").
W I T N E S S E T H:
WHEREAS, Seller, Purchaser and Castle have entered into that certain
Option Agreement for the Purchase and Sale of Businesses, dated March ____, 1997
(the "Option Agreement"), pursuant to which Seller granted to Purchaser an
option to purchase substantially all of the assets of Seller located in Travis
County, Texas, and all counties contiguous thereto (the "Option");
WHEREAS, Purchaser wishes to exercise the Option and purchase
substantially all of the property, assets and business of Seller located in
Travis County, Texas, and all counties contiguous thereto which purchase Seller,
Purchaser and Castle have agreed shall be on 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) and, unless otherwise indicated, all
references herein to Seller's or Castle PC's assets, property and business shall
refer to such of Seller's or Castle PC's assets, property and business as are
located in the Territory, as defined herein, and all references to Seller's or
Castle PC's liabilities or obligations shall refer to such of Seller's or Castle
PC's liabilities or obligations as are incurred directly in connection with
Seller's or Castle PC's Business conducted in the Territory:
"ACCOUNTS RECEIVABLE": all notes and accounts receivable of Seller.
"ACCOUNTS PAYABLE": all accounts payable of Seller.
"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.
<PAGE>
"AGREEMENT": this Asset Purchase Agreement, as amended from time to time
as provided herein.
"ASSETS": as defined in Section 2.1 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
patient records or any books, records, files and other data of Seller which
relate exclusively to organizational and corporate governance proceedings of
Seller.
"BUSINESS": the practice management of dentistry, including dental
specialty care and all other management and related activities currently
conducted by Seller and Castle PC in the Territory, but specifically excluding
therefrom the conduct of any activities requiring a license to practice
dentistry.
"CASTLE": means Castle Dental Centers, Inc., a Delaware corporation.
"CASTLE PC": Jack H. Castle, D.D.S., P.C., a Texas professional
corporation.
"CDC TEXAS": means Castle Dental Centers of Texas, Inc., a Texas
corporation.
"CLOSING": as defined in Section 2.5 hereof.
"CLOSING DATE": means the date 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.
"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
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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, in each case as
amended and now in effect, 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 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,
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 substituted therefor.
"EXCLUDED ASSETS": as defined in Section 2.2 hereof.
"EXCLUDED CONTRACTS": as defined in Section 2.2(b) hereof.
"FINANCIAL STATEMENTS": as defined in Section 4.7 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 a
governmental authority.
"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.
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"MATERIAL ADVERSE EFFECT": material adverse effect on the assets,
liabilities, Business, condition (financial or otherwise), results or operations
or prospects of the Seller, or its Affiliates.
"PERMITS": as defined in Section 4.13 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 4.20 hereof.
"PRE-CLOSING PERIODS": as defined in Section 4.15(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.
"RETURNS": as defined in Section 4.15(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.
"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.
"TERRITORY": Travis County, Texas, and all counties contiguous with Travis
County, Texas.
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,
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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 of Seller used in, or used exclusively in connection with, the
conduct of the Business in the Territory on the Closing Date, tangible and
intangible, real, personal and mixed, wheresoever situated and 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) real property, if any, including leasehold interests, described
in Schedule 4.9 attached hereto together with all buildings, facilities,
fixtures and other leasehold improvements thereon and all easements,
rights-of-way, transferable licenses and permits and other appurtenances
thereof;
(b) plant, machinery, equipment, operating equipment, tools,
supplies, inventories, furniture, fixtures, furnishings and other fixed assets
owned or leased and used or held for use in the conduct of the Business;
(c) contracts listed on Schedule 2.1(c) (the "Assigned Contracts"),
documents, instruments, insurance and indemnity policies and general intangibles
of Seller, other than the Excluded Contracts;
(d) Accounts Receivable as of the Closing Date;
(e) except as limited by Sections 2.2(e) and 2.5 hereof, all
licenses and permits (to the extent transferable), registrations and
authorizations, proprietary information, methods, know-how, designs, processes,
procedures, goodwill and all rights to other Intellectual Property used in the
Business;
(f) Books and Records;
(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;
(i) to the extent transferable, third-party indemnities, policies of
insurance [identified by Purchaser], fidelity, surety or similar bonds and the
coverages afforded thereby relating to the Assets; and
(j) cash in the aggregate amount of $60,000.
2.2 EXCLUDED ASSETS. The Assets shall not include any of the following
(the "Excluded Assets"):
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(a) cash, cash equivalents, deposits, advance payments, securities,
letters of credit naming Seller as account party, certificates of deposit,
notes, drafts, checks and similar instruments in excess of an aggregate of
$60,000;
(b) each dentist employment contract, managed care contract,
insurance or third party reimbursement agreement or other contract 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 relating to Taxes paid by Seller for all periods prior to
the Closing Date;
(d) minute books and governance documents of the Seller;
(e) except as set forth in Section 2.5, the name "Castle Dental
Centers" and derivations thereof;
(f) patient records; and
(g) any asset listed on Schedule 2.2(g).
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, the obligations of Seller in
respect of Accounts Payable, accrued liabilities and long term debt (including
automobile notes) in an amount of not more than an aggregate of $250,000
incurred in the ordinary course of business (collectively, "Assumed
Obligations"). Notwithstanding anything contained herein to the contrary,
Purchaser does not assume, and hereby expressly disclaims responsibility for,
any obligation or liability of Seller in excess of an aggregate of $250,000 or
which was not incurred in the ordinary course of business.
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 has not obtained on or before the Closing Date, Seller
agrees to use its best efforts to obtain, or cause to be obtained, after the
Closing Date, any written consents necessary to convey to Purchaser the benefit
thereof. Purchaser shall cooperate with Seller, 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 with respect to
any Assigned Contract. If Seller is unable to obtain such necessary written
consents for the remaining term of any such Assigned Contract, Purchaser shall
act as Seller's agent in the performance of all obligations and liabilities
under such Assigned Contract and Seller shall act as Purchaser's agent in the
receipt of any benefits, rights or interests which inure to Seller under such
Assigned Contract. Purchaser shall indemnify and hold harmless Seller and its
officers, directors, employees and Affiliates from and against any loss, damage,
costs or expenses (including reasonable costs of defense and attorney's fees)
arising out of such Assigned
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Contract as a result of acts or omissions occurring on or after the Closing
Date, or any failure by Purchaser to fulfill its obligations under this Section
2.4.
2.5 USE OF NAME. Seller, Castle PC and Castle hereby grant, and Purchaser
accepts, a nonexclusive, nontransferable license to use the name "Castle Dental
Centers" and derivations thereof in the Territory for a one year period
commencing on the date hereof.
2.6 CLOSING. The closing of the transactions contemplated hereby (the
"Closing") shall take place at the time and place at which this Agreement is
executed, if the conditions to Closing set forth in Articles VI and VII herein
have been satisfied or waived. The Closing shall take place on the Closing Date
at 9:00 a.m. at the offices of Bracewell & Patterson, L.L.P., South Tower
Pennzoil Place, Suite 2900, 711 Louisiana Street, Houston, Texas 77002, or such
other place, date and time as may be mutually agreed upon by the parties.
ARTICLE III
PAYMENT OF PURCHASE PRICE
3.1 AMOUNT; ALLOCATION; DELIVERY. Purchaser agrees to pay to Seller
$3,400,000 (the "Purchase Price") in cash on the Closing Date by wire transfer
of immediately available funds to an account or accounts previously identified
by Seller.
Purchaser and Seller hereby agree to allocate the Purchase Price in
accordance with Section 1060 of the Code among the Assets in accordance with
Schedule 3.1 attached hereto (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.
3.2 AGENCY RELATIONSHIP. In the event that, following the Closing Date,
Seller receives any funds, documents or instruments which constitute or are
delivered in respect of Assets transferred to Purchaser pursuant to this
Agreement, Seller agrees to hold such funds, documents or instruments in trust
for Purchaser and as Purchaser's agent therefor.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
4.1 REPRESENTATIONS AND WARRANTIES OF SELLER. As an inducement to the
Purchaser to enter into and perform this Agreement, CDC Texas, Castle PC and
Castle, jointly and severally, hereby make the following representations and
warranties to Purchaser with respect to the operation of the Business in the
Territory (as used in this Article IV, the term "Seller" shall refer to CDC
Texas and Castle PC, and a
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representation or warranty made by "Seller" shall be deemed to have been made
with respect to each of CDC Texas and Castle PC):
4.2 EXISTENCE AND GOOD STANDING. CDC Texas is a corporation duly organized
and validly existing, and Castle PC is a professional corporation duly organized
and validly existing, under the laws of the State of Texas. Seller has the full
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. Seller is duly qualified or licensed to do business in each jurisdiction
in which the character or location of the properties owned or leased by Seller
or the nature of the business conducted by Seller makes such qualification
necessary and the absence of which would have a Material Adverse Effect.
4.3 AUTHORIZATION AND VALIDITY OF AGREEMENT. Seller has full 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 Seller and the consummation by it
of the transactions contemplated hereby have been duly authorized and approved
by all requisite corporate action of Seller, and no other action on the part of
Seller or its shareholders is necessary to authorize the execution, delivery and
performance of this Agreement by Seller and the consummation of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
Seller and is a valid and binding obligation of Seller 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.
4.4 CAPITAL STOCK. The capital stock of the CDC Texas consists of ________
shares, all of which are owned by Castle. The capital stock of the Castle PC
consists of ________ shares, all of which are owned by __________.
4.5 CONSENTS AND APPROVALS; NO VIOLATIONS. The execution, delivery and
performance of this Agreement by Seller and the consummation by Seller 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 Seller; (b) to
the knowledge of Seller and Castle, 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 by which any of
Seller's properties or assets may be bound; (c) to the knowledge of Seller and
Castle, require any filing by Seller with, or require Seller to obtain, any
permit, consent, or approval of, or require Seller to give any notice to, any
governmental or regulatory body, agency or authority; or (d) result in a
violation or breach by Seller or Castle of, conflict with, constitute (with or
without due notice or lapse of time or both) a default by Seller or 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 Seller 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
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which Seller or Castle is a party, or by which Seller or any of its properties
or assets may be bound, except for such violations, consents, breaches,
defaults, terminations, and accelerations which would not have a Material
Adverse Effect.
4.6 SUBSIDIARIES AND AFFILIATES. Seller has no subsidiaries. Except as set
forth on Schedule 4.6, all of the Assets used in the Business are owned by CDC
Texas or Castle PC, 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 hereto as
Schedule 4.7 is the balance sheet of CDC Texas and Castle PC combined as of the
date shown thereon (the "Balance Sheet Date") and the statements of operations
and cash flows for the year then ended with respect to operations of the
Business in the Territory (collectively, the "Financial Statements"). The
Financial Statements fairly present in all material respects the financial
position of the Business in the Territory at the date thereof and the results of
operations of the Business in the Territory and its cash flows for the period
indicated. 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 the Business in the Territory.
To Seller's or Castle's knowledge, other than as (a) disclosed on
the Financial Statements, or (b) incurred since the Balance Sheet Date in the
ordinary course of business, the Seller has no direct or indirect indebtedness,
liability, claim, deficiency, obligation or responsibility, known or unknown,
fixed or contingent, liquidated or unliquidated, accrued, absolute or otherwise
with respect to Seller's operations in the Territory.
4.8 BOOKS AND RECORDS. The Seller has previously made available to
Purchaser true, correct and complete copies of its charter documents, bylaws and
regulations, 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 board of directors and
shareholders of Seller.
4.9 TITLE TO PROPERTIES; ENCUMBRANCES; CONDITION. 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, CDC Texas and Castle PC have good and valid title to their
respective Assets, in each case subject to no Encumbrances, except for (a)
Encumbrances consisting of easements, permits and other restrictions or
limitations on the use of real property or irregularities in title thereto that
do not materially detract from the value of, or materially impair the use of,
such property by Seller in the operation of the Business, (b) Encumbrances for
current taxes, assessments or governmental charges or levies on property not yet
due or delinquent, (c) Encumbrances created by Purchaser, including but not
limited to Encumbrancees created in accordance with the provisions of this
Agreement; and, (d) Encumbrances relating to Assumed Obligations (liens of the
type described in clauses (a), (b), (c) and (d) above or 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
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is 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. Schedule 4.10 identifies all interests in real
property used by the Seller in the Business, including leases, and includes the
name of the record title holder thereof. To Seller's and Castle's knowledge, all
of the buildings, structures and appurtenances situated on the real property
owned or leased by Seller are in such an operating condition, and in a state of
maintenance and repair, subject to ordinary wear and tear, as is necessary for
the operation of the Assets in the Business. The real property had adequate
rights of ingress and egress for operation of the Business in the ordinary
course. To Seller's and Castle's knowledge, no condemnation or similar
proceeding is pending or threatened which would preclude or impair the use of
any such property, except where such proceeding would not have a Material
Adverse Effect.
4.11 LEASES. 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 by Seller thereunder.
4.12 MATERIAL CONTRACTS. Except as set forth in Schedule 4.12, the
Assigned Contracts do not include (a) any agreement, contract or commitment
relating to the employment 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, (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 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 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 by Seller 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 Castle,
in connection with the use, operation or ownership of the Assets and the conduct
of the Business as currently conducted, except for Permits which, if not
obtained or in effect, would not have a Material Adverse Effect. Seller holds
all of the Permits listed on Schedule 4.13,
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and none is presently subject to revocation or challenge. Except as set forth on
Schedule 4.13, all such Permits will be assigned to Purchaser, and none of such
Permits will be subject to revocation or termination as a result thereof.
4.14 LITIGATION. Except as set forth on Schedule 4.14, 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 Seller and Castle,
threatened, against or affecting the properties, rights or goodwill of Seller,
Castle, or employees of Seller, and Seller and Castle do not know of any valid
basis for any such action, proceeding or investigation. There are no such suits,
actions, claims, proceedings or investigations pending or to the knowledge of
Seller and Castle 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. There have been no
actions, suits, disciplinary proceedings and investigations undertaken by the
Dental Board of the State of Texas or other body regulating the activities of
dentists, against any licensed dentist employed by Seller in the Territory that
could reasonably be expected to have a Material Adverse Effect.
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.
(b) There is no material action, suit, proceeding, investigation,
audit, or claim now pending or, to the knowledge of Seller or Castle, 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) 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;
(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; and,
(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. 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
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included in the Assets or on its employees. 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. Schedule 4.17 sets forth all material
Intellectual Property used in the Business 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. 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 Castle, 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 knowledge of the Seller and Castle,
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.
(a) To the knowledge of Seller and Castle, Seller is not and has not
engaged in any unfair labor practice; (b) to the knowledge of Seller and Castle,
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.
4.20 EMPLOYEE BENEFIT PLANS. Seller has delivered to Purchaser 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 Castle, 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 on Schedule
4.21 and except where it would not have a Material Adverse Effect (a) Hazardous
Materials have not been generated, used, treated or stored on, or transported to
or from, any of Seller's business locations by Seller, its authorized agents or
its independent contractors (including suppliers), (b) Hazardous Materials have
not been Released or disposed of by Seller, its authorized agents or its
independent contractors (including suppliers) on any of Seller's business
locations except such
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Releases which do not violate any Environmental Laws, (c) Seller is, to its and
Castle's knowledge, in compliance with all applicable Environmental Laws and the
requirements of any Permits issued under such Environmental Laws with respect to
any of Seller's business locations, (d) there are no pending or, to the
knowledge of Seller and Castle, threatened Environmental Claims against Seller
or any of Seller's business locations, (e) there are no facts or circumstances,
conditions, pre-existing conditions or occurrences on any of Seller's business
locations known to Seller or Castle that could reasonably be anticipated (e).1
to form the basis of an Environmental Claim against Seller or any of Seller's
business locations, or (e).2 to cause such of Seller's business locations to be
subject to any restrictions on the ownership, occupancy use or transferability
of such of Seller's business locations under any Environmental Law, and (f)
Seller has not in the ordinary course of business transported or stored
Hazardous Materials.
4.22 INTERESTS IN CUSTOMERS, SUPPLIERS, ETC. Except for relationships with
Affiliates, Seller does not possess, directly or indirectly, any financial
interest 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. Set forth in Schedule 4.23 is an accurate
and complete list showing the names of all persons 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 on Schedule 4.24, no significant payor has
canceled or otherwise terminated or, to the knowledge of Seller or Castle
threatened to cancel or otherwise terminate its relationship with Seller within
the last three years.
4.25 ACCOUNTS RECEIVABLE; ACCOUNTS PAYABLE. The Accounts Receivable
reflected on the balance sheet included in the Financial Statements are
collectible in the ordinary course of business, net of the reserves established
with respect thereto. There has been no change since the Balance Sheet Date
(other than in the ordinary course of business) in the amount of the Accounts
Receivable or other fees or debts due to Seller or the allowances with respect
thereto, or Accounts Payable by Seller, from that reflected in the Balance
Sheet.
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);
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(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,
(c) Seller will have sufficient capital with which to conduct its
Business, and the property of Seller does not constitute unreasonably small
capital with which to conduct its Business.
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 DISCLOSURE. 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.
4.28 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.
4.29 BROKER'S OR FINDER'S FEES. No agent, broker, Person or firm acting on
behalf of Seller 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.
4.30 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.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASER
5.1 REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and
warrants to Seller, Castle PC and Castle as follows:
5.2 EXISTENCE AND GOOD STANDING OF PURCHASER; POWER AND AUTHORITY.
Purchaser is a limited liability company duly organized and validly existing
under the laws of the State of Texas. Purchaser has the full power and authority
to make, execute, deliver and perform this Agreement, to perform its obligations
hereunder and
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to consummate the transactions contemplated hereby. This Agreement has been duly
authorized and approved by all required action of Purchaser. This Agreement has
been duly executed and delivered by Purchaser and is a valid and binding
obligation of Purchaser enforceable against Purchaser 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. Purchaser has full 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 Purchaser or the nature of the business conducted
by Purchaser makes such qualification necessary and the absence of which would
have a material adverse effect on Purchaser.
5.3 NO VIOLATIONS. 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, conflict with, or result in a breach or default
under any provision of the organizational documents of Purchaser; (b) to the
knowledge of Purchaser, 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 its properties or
assets may be bound; (c) to the knowledge of Purchaser, 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 any third party; 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
pursuant to, 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 it or any of its properties or assets may be bound, except in the case of
Subsections 5.3(b), (c), and (d), for such violations, consents, breaches,
defaults, terminations and accelerations which in the aggregate would not have a
material adverse effect on Purchaser.
5.4 CAPITAL STOCK. The capital stock of the Purchaser consists of 1,000
shares, 970 of which are owned by John Goodman and 30 of which are owned by
Harold Simpson, Jr. John Goodman and Harold Simpson, Jr. hold licenses to
practice dentistry in the State of Texas.
5.5 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 its 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, and Purchaser does not know of any valid basis for any such
action, proceeding or investigation. There are no such
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proceedings pending or, to the knowledge of Purchaser, threatened, seeking to
prevent or challenge the transactions contemplated by this Agreement.
5.6 COMPLIANCE WITH LAWS. To the knowledge of Purchaser, Purchaser is in
compliance with all applicable laws, regulations, orders, judgments and decrees
applicable to its 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.
5.7 FINANCIAL STATEMENTS. Attached hereto as Schedule 5.7 are the most
recent available audited financial statements of Purchaser as of the date of the
audited balance sheet and for the year then ended, and the most recent available
unaudited financial statements of Purchaser as of the date of the unnaudited
balance sheet and for the year-to-date period then ended (the "Purchaser
Financial Statements"). The Purchaser Financial Statements are complete and
correct in all material respects and present fairly [in accordance with
generally accepted accounting principles consistently applied,] the financial
condition of Purchaser and the results of operations of Purchaser as of the
dates thereof and for the periods indicated. Since the date of the most recent
balance sheet attached hereto as part of Schedule 5.7, 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 Purchaser.
5.8 BROKER'S OR FINDER'S FEES. No agent, broker, Person or firm acting on
behalf of Purchaser 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.
ARTICLE VI
CONDITIONS TO THE OBLIGATIONS OF SELLER, CASTLE PC AND CASTLE
The obligations of Seller, Castle PC and Castle 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:
6.1 TRUTH OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Purchaser 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, and Purchaser shall have delivered to Seller on the Closing Date a
certificate of an authorized officer of Purchaser, dated the Closing Date, to
such effect.
6.2 PERFORMANCE OF AGREEMENTS. Each and all of the agreements and
covenants of Purchaser 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 shall have delivered to Seller a certificate of an authorized officer
of Purchaser, dated the Closing Date, to such effect.
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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, 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.
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 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 Castle and
their counsel, and Seller and Castle 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.
6.7 GOOD STANDING CERTIFICATES. Seller shall have received good standing
and corporate existence certificates respecting Purchaser.
ARTICLE VII
CONDITIONS TO PURCHASER'S OBLIGATIONS
The obligations of the Purchaser under this Agreement are 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, Castle PC and Castle contained herein shall be true and
correct in all material respects on and as of the Closing Date (except with
respect to specific dates) with the same effect as though such representations
and warranties had been made on and as of the Closing Date; and Seller, Castle
PC and Castle shall have delivered to Purchaser on the Closing Date a
certificate of an authorized representative of Seller, Castle PC and Castle,
dated the Closing Date, to such effect.
7.2 PERFORMANCE OF AGREEMENTS. Each and all of the agreements and
covenants of Seller, Castle PC 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 Seller, Castle PC and Castle shall have delivered to
Purchaser certificates of authorized representatives of Seller, Castle PC and
Castle, dated the Closing Date, to such effect.
7.3 DOCUMENTS OF CONVEYANCE. Purchaser shall have received from Seller and
Castle PC fully executed documents of conveyance, in form and substance
reasonably
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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.
7.4 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,
Castle PC and Castle shall have delivered to Purchaser a certificate of
authorized representatives of Seller, Castle PC and Castle, dated the Closing
Date, to such effect to the best knowledge of such officer. If any such action
or proceeding shall have been instituted, Seller, Castle PC and Castle shall
have reasonable opportunity to cure.
7.5 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.
7.6 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.
7.7 GOOD STANDING CERTIFICATES. Purchaser shall have received good
standing and corporate existence certificates respecting the Seller, Castle PC
and Castle.
7.8 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 to Purchaser (other than Permitted Encumbrances)
have been released or arrangements for such releases shall have been made.
7.9 CERTAIN TRANSACTIONS WITH JACK H. CASTLE, D.D.S., P.C. Castle PC shall
have transferred to Purchaser all of the contracts described in Section 2.2(b),
Castle PC's patient records and any other asset currently used by Castle PC in
conducting the Business in the Territory, the ownership or operation of which
requires a license to practice dentistry.
ARTICLE VIII
COVENANTS OF SELLER, CASTLE PC AND CASTLE
Seller, Castle PC and Castle hereby covenant and agree with Purchaser as
follows:
8.1 COOPERATION BY SELLER. Seller, Castle PC and Castle 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, Castle PC and Castle to effect
the transactions contemplated on their part hereby, and Seller, Castle PC and
Castle shall otherwise use their reasonable best efforts to cause the
consummation of such transactions in
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accordance with the terms and conditions hereof and to cause all conditions
contained in this Agreement over which it has control to be satisfied.
8.2 REVIEW OF THE ASSETS. Purchaser acknowledges that it has, prior to the
Closing Date, through its representatives, reviewed (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, Castle PC and Castle hereunder or the remedies of
Purchaser for breaches of those representations and warranties.
8.3 FURTHER ASSURANCES. At any time or from time to time after the Closing
Date, Seller, Castle PC and Castle 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
Purchaser hereby covenants and agrees with Seller, Castle PC and Castle as
follows:
9.1 COOPERATION BY PURCHASER. Purchaser will use its reasonable best
efforts, and will cooperate with Seller, Castle PC and Castle, 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.
9.2 BOOKS AND RECORDS; PERSONNEL. At all times after the Closing Date,
Purchaser shall allow Seller and Castle PC and any agents of Seller and Castle
PC, upon reasonable advance notice to Purchaser, access to all Books and Records
of Seller or Castle PC 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 and Castle PC shall have the
right, at Seller's sole cost, to make copies of any such Books and Records.
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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, Castle PC or Castle and at
Seller's expense, execute and deliver any further instruments or documents and
take all such further action as Seller or Castle PC 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 X
SURVIVAL AND INDEMNIFICATION
10.1 INDEMNIFICATION OF THE SELLER, CASTLE PC AND CASTLE. The Purchaser,
for a period of one year after the Closing Date, shall indemnify and hold
Seller, Castle PC and Castle and their respective Affiliates (the "Seller
Indemnitees") harmless from and against any and all damages (including exemplary
damages and 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, arising
out of, or in any way relating to (a) any misrepresentation, breach of warranty,
or nonfulfillment of any agreement or covenant on the part of the Purchaser
under this Agreement or any misrepresentation in or omission from any list,
schedule, certificate, or other instrument furnished or to be furnished to the
Seller, Castle PC or Castle by the Purchaser pursuant to the terms of this
Agreement or (b) any liability or obligation (other than those for which
Purchaser is being indemnified by Seller, Castle PC and Castle 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; provided, however, that Seller Indemnitees in the
aggregate shall not be entitled to make any recovery by way of indemnification
for the initial $50,000 of Seller Indemnitees' claims for indemnification, and
Seller Indemnitees' aggregate recovery for indemnification shall not in any
event exceed $650,000.
10.2 INDEMNIFICATION OF THE PURCHASER. Seller, Castle PC and Castle,
jointly and severally, shall indemnify and hold Purchaser and its Affiliates
(the "Purchaser Indemnitees") harmless from and against any and all Damages
suffered by any Purchaser Indemnitee as a result of, caused by, arising out of,
or in any way relating to (a) any misrepresentation, breach of warranty, or
nonfulfillment of any agreement or covenant on the part of the Seller, Castle PC
or Castle under this Agreement or any misrepresentation in or omission from any
list, schedule, certificate, or other instrument furnished or to be furnished to
the Purchaser by the Seller, Castle PC or Castle pursuant to the terms of this
Agreement, (b) any liability or obligation (other than those for which Seller,
Castle PC and Castle are being indemnified by Purchaser 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.
10.3 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
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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 in accordance with the provisions of this Agreement in sufficient time
to permit the indemnifying party or its counsel to defend against such matter
and to make 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, only insofar as such
knowing failure to notify the indemnifying party has actually resulted in
prejudice or damage to the indemnifying party. Any claim for indemnification
hereunder shall be made within one year after the Closing Date.
10.4 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. 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.
10.5 COOPERATION. If requested by the indemnifying party, the indemnified
party agrees to cooperate with the indemnifying party and its counsel in
contesting any
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Claim that the indemnifying party elects to contest or, if appropriate, in
making any counterclaim against the person 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.
10.6 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.
10.7 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 XI
MISCELLANEOUS
11.1 ENTIRE AGREEMENT. This Agreement (including the Exhibits and
Schedules hereto), the Option Agreement (including the Exhibits and Schedules
thereto), and the Management Services Agreement, dated March , 1997, between CDC
Texas and Purchaser, 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, including that certain letter agreement dated September 11, 1996 (the
"September Letter"), are merged into and superseded by this Agreement. Pursuant
to the September Letter, CDC Texas paid to Purchaser $500,000 (the
"Non-Refundable Payment"), and (i) such payment is nonrefundable by Purchaser to
CDC Texas (and does not increase and is not an addition to any amounts payable
hereunder or in connection with the exercise of this Agreement), and (ii) the
Option Agreement (including the Exhibits and Schedules thereto) constitutes a
restructure of the various terms contemplated by the September Letter.
11.2 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, Castle PC or Castle
without the prior written consent of Purchaser or by Purchaser to any Person
without the prior written consent of Seller.
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11.3 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.
11.4 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.
11.5 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 any party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof.
11.6 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.
11.7 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.
11.8 EXPENSES. Except as otherwise provided in this Agreement or in that
certain letter agreement, dated December 26, 1996, between Seller and Purchaser,
Seller, Castle PC, Castle 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.
11.9 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:
if to Seller, Castle PC or Castle, to:
Castle Dental Centers of Texas, Inc.
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056-3021
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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 Purchaser to:
John Goodman, D.D.S.
Southwest Dental Associates, L.C.
713 Beardsley Lane
Austin, Texas 78746
with a copy to:
Mr. Roger K. Harris
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010-3095
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.
11.10 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regards to conflict of
law rules thereof.
11.11 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.
11.12 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 Travis County, Texas, 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.
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11.13 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.
11.14 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.
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 TEXAS, INC.
By: ________________________________
Name: Jack H. Castle, Jr.
Title: President
CASTLE DENTAL CENTERS, INC.
By: ________________________________
Name: Jack H. Castle, Jr.
Title: President
JACK H. CASTLE, D.D.S., P.C.
By: ________________________________
Name: Jack H. Castle, Jr.
Title: President
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SW DENTAL ASSOCIATES, LC
By: ________________________________
Name: John Goodman, D.D.S.
Title: President
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EXHIBIT 10.80
MEMBER INTERESTS PURCHASE AGREEMENT
Dated as of ____________ ___, 199__
By and Among
Castle Dental Centers of Texas, Inc.,
Castle Dental Centers, Inc.,
Jack H. Castle, D.D.S., P.C.,
SW Dental Associates, LC,
John Goodman, D.D.S.
and
Harold Simpson, Jr.
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS.............................. 1
1.1 DEFINITIONS.............................................. 1
ARTICLE II
THE TRANSACTION............................ 5
2.1 PURCHASE AND SALE OF MEMBER INTERESTS.................... 5
2.2 EXCLUDED ASSETS.......................................... 5
2.3 ASSUMPTION OF OBLIGATIONS................................ 6
2.4 NONASSIGNABLE CONTRACTS AND LEASES....................... 6
2.5 CLOSING.................................................. 7
ARTICLE III
PAYMENT OF PURCHASE PRICE....................... 7
3.1 AMOUNT; ALLOCATION; DELIVERY............................. 7
3.2 AGENCY RELATIONSHIP...................................... 8
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SWD
AND THE MEMBER............................. 8
4.1 BROKER'S OR FINDER'S FEES................................ 8
4.2 EXISTENCE AND GOOD STANDING.............................. 8
4.3 AUTHORIZATION AND VALIDITY OF AGREEMENT.................. 8
4.4 MEMBER INTERESTS......................................... 9
4.5 CONSENTS AND APPROVALS; NO VIOLATIONS.................... 9
4.6 SUBSIDIARIES AND AFFILIATES.............................. 9
4.7 FINANCIAL STATEMENTS: NO MATERIAL ADVERSE CHANGE......... 9
4.8 BOOKS AND RECORDS........................................ 10
4.9 TITLE TO PROPERTIES; ENCUMBRANCES; CONDITION............. 10
4.10 REAL PROPERTY............................................ 10
4.11 LEASES................................................... 10
4.12 MATERIAL CONTRACTS....................................... 10
4.13 PERMITS.................................................. 11
4.14 LITIGATION............................................... 11
4.15 TAXES.................................................... 11
4.16 INSURANCE................................................ 12
4.17 INTELLECTUAL PROPERTIES.................................. 12
4.18 COMPLIANCE WITH LAWS..................................... 12
4.19 EMPLOYMENT RELATIONS..................................... 13
4.20 EMPLOYEE BENEFIT PLANS................................... 13
4.21 ENVIRONMENTAL LAWS AND REGULATIONS....................... 13
4.22 INTERESTS IN CUSTOMERS, SUPPLIERS, ETC................... 13
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4.23 COMPENSATION OF EMPLOYEES................................ 14
4.24 PAYORS................................................... 14
4.25 ACCOUNTS RECEIVABLE; ACCOUNTS PAYABLE.................... 14
4.26 SOLVENCY................................................. 14
4.27 DISCLOSURE............................................... 15
4.28 INVESTMENTS.............................................. 15
4.29 COPIES OF DOCUMENTS...................................... 15
4.30 INVESTMENT REPRESENTATIONS............................... 15
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
PURCHASER, CASTLE PC AND CASTLE.................... 16
5.1 BROKER'S OR FINDER'S FEES................................ 16
5.2 EXISTENCE AND GOOD STANDING OF THE CASTLE ENTITIES;
POWER AND AUTHORITY...................................... 16
5.3 NO VIOLATIONS............................................ 16
5.4 CAPITAL STOCK............................................ 17
5.5 LITIGATION............................................... 17
5.6 COMPLIANCE WITH LAWS..................................... 17
5.7 FINANCIAL STATEMENTS..................................... 17
ARTICLE VI
CONDITIONS TO SWD'S AND THE MEMBER'S OBLIGATIONS............ 18
6.1 TRUTH OF REPRESENTATIONS AND WARRANTIES.................. 18
6.2 NO LITIGATION THREATENED................................. 18
6.3 CONSIDERATION............................................ 18
6.4 GOVERNMENTAL APPROVALS................................... 18
6.5 PROCEEDINGS.............................................. 18
6.6 GOOD STANDING CERTIFICATES............................... 18
6.7 EMPLOYMENT AGREEMENTS.................................... 18
6.8 PURCHASE OF EQUIPMENT.................................... 19
6.9 REGISTRATION RIGHTS AGREEMENT............................ 19
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF THE CASTLE ENTITIES............ 19
7.1 TRUTH OF REPRESENTATIONS AND WARRANTIES.................. 19
7.2 DOCUMENTS OF CONVEYANCE.................................. 19
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7.3 GOVERNMENTAL APPROVALS................................... 19
7.4 GOOD STANDING CERTIFICATES............................... 19
7.5 TRANSFER OF DENTAL ASSETS................................ 19
7.6 UPDATES TO CERTAIN SCHEDULES............................. 19
ARTICLE VIII
COVENANTS OF SWD AND THE MEMBER.................... 19
8.1 COOPERATION BY SWD....................................... 20
8.2 REVIEW OF THE ASSETS..................................... 20
8.3 FURTHER ASSURANCES....................................... 20
ARTICLE IX
COVENANTS OF THE CASTLE ENTITIES.................... 20
9.1 COOPERATION BY THE CASTLE ENTITIES....................... 20
9.2 BOOKS AND RECORDS; PERSONNEL............................. 20
9.3 FURTHER ASSURANCES....................................... 21
ARTICLE X
SURVIVAL AND INDEMNIFICATION...................... 21
10.1 INDEMNIFICATION OF SWD................................... 21
10.2 INDEMNIFICATION OF THE CASTLE ENTITIES................... 21
10.3 DEMANDS.................................................. 22
10.4 RIGHT TO CONTEST AND DEFEND.............................. 22
10.5 COOPERATION.............................................. 23
10.6 RIGHT TO PARTICIPATE..................................... 23
10.7 PAYMENT OF DAMAGES....................................... 23
10.8 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF SWD AND
THE MEMBER............................................... 23
10.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE CASTLE
ENTITIES................................................. 23
ARTICLE XI
MISCELLANEOUS............................. 23
11.1 ENTIRE AGREEMENT......................................... 23
11.2 SUCCESSORS AND ASSIGNS................................... 24
11.3 COUNTERPARTS............................................. 24
11.4 HEADINGS................................................. 24
11.5 MODIFICATION AND WAIVER.................................. 24
11.6 NO THIRD PARTY BENEFICIARY RIGHTS........................ 24
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11.7 SALES AND TRANSFER TAXES................................. 24
11.8 EXPENSES................................................. 24
11.9 NOTICE................................................... 25
11.10 GOVERNING LAW............................................ 25
11.11 CONFIDENTIALITY; PUBLICITY............................... 25
11.12 CONSENT TO JURISDICTION.................................. 26
11.13 SEVERABILITY............................................. 26
11.14 ENFORCEMENT.............................................. 26
11.15 ALLOCATION OF RISK....................................... 26
SCHEDULES
Schedule A Assets
Schedule B Dental Assets
Schedule 2.2(c) Excluded Contracts
Schedule 4.6 Asset Owned by Third Parties which are Used in the
Business
Schedule 4.7 Financial Statements
Schedule 4.10 Real Property
Schedule 4.11 Leased Personal Property
Schedule 4.12 Material Contracts and Proposals
Schedule 4.13 Permits
Schedule 4.14 Litigation
Schedule 4.16 Insurance Policies
Schedule 4.17 Intellectual Property
Schedule 4.21 Environmental Matters
Schedule 4.23 Employee Compensation
Schedule 4.24 Payors
Schedule 5.7 Castle Dental Financial Statement
EXHIBITS
Exhibit A Form of Employment Agreement
Exhibit B Form of Consulting Agreement
Exhibit C Form of Certificate of Designation of Series B
Convertible Preferred Stock
Exhibit D Registration Rights Agreement
Exhibit E Leased Equipment to be Purchased
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MEMBER INTERESTS PURCHASE AGREEMENT
This MEMBER INTERESTS PURCHASE AGREEMENT, dated as of ____________ ____,
1997, is entered into by and among Castle Dental Centers of Texas, Inc., a Texas
corporation ("Purchaser"), Castle Dental Centers, Inc., a Delaware corporation,
Jack H. Castle, D.D.S., P.C., a Texas professional corporation ("Castle PC"), SW
Dental Associates, LC, a Texas limited liability company ("SWD"), John Goodman,
D.D.S., the majority interest holder of SWD (the "Member"), and Harold Simpson,
Jr., the minority interest holder of SWD ("Simpson").
W I T N E S S E T H:
WHEREAS, the parties hereto have entered into that certain Option
Agreement for the Purchase and Sale of Businesses, dated March __, 1997 (the
"Option Agreement"), pursuant to which the Member and Simpson granted to
Purchaser an option to purchase all of the capital stock and member interests of
SWD (the "Option");
WHEREAS, Purchaser wishes to exercise the Option and purchase all of the
capital stock and member interests business of SWD, which purchase the parties
hereto have agreed shall be on 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 SWD.
"ACCOUNTS PAYABLE": all notes and accounts payable of SWD.
"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 Member Interests Purchase Agreement, as amended from
time to time as provided herein.
"ASSETS": means the assets of SWD, excluding the Dental Assets and the
Excluded Assets, including but not limited to the assets described on Schedule A
attached hereto, which is incorporated herein by reference.
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"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, including personnel records and files.
"BUSINESS": the practice management of dentistry, including dental
specialty care and all other management and related activities currently
conducted by SWD.
"CASTLE": means Castle Dental Centers, Inc., a Delaware corporation.
"CASTLE ENTITIES": means Castle PC, Castle and Purchaser, collectively.
"CASTLE PC": as defined in the preamble of this Agreement.
"CLOSING": as defined in Section 2.5 hereof.
"CLOSING DATE": means the date the Closing occurs, as contemplated 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.
"COMMON STOCK": means the common stock, par value $.001 per share, of
Castle.
"CONVERTIBLE PREFERRED STOCK": means the Series B Convertible Preferred
Stock, par value $.001 per share, of Castle, having substantially the rights and
preferences set forth in Exhibit C hereto.
"DENTAL ASSETS": means the assets described on Schedule B and any and all
other assets of SWD, the ownership or operation of which requires a license to
practice dentistry.
"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
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governmental or regulatory authorities for enforcement, cleanup, removal,
remedial or other actions or for 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, in each case as
amended and now in effect, 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 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,
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 substituted therefor.
"EXCLUDED ASSETS": as defined in Section 2.2 hereof.
"EXCLUDED CONTRACTS": as defined in Schedule A hereto.
"EXECUTION DATE": means the date the Option Agreement was executed.
"FINANCIAL STATEMENTS": as defined in Section 4.7 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 a
governmental authority.
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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.
"MATERIAL ADVERSE EFFECT": material adverse effect on the assets,
liabilities, Business, condition (financial or otherwise), results or operations
or prospects of SWD or its Affiliates.
"MEMBER INTERESTS": means all of the issued and outstanding capital stock
and member interests of SWD.
"PERMITS": as defined in Section 4.13 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 4.20 hereof.
"PRE-CLOSING PERIODS": as defined in Section 4.15(a) hereof.
"PURCHASE PRICE": as defined in Section 3.1 hereof.
"PURCHASER": Castle Dental Centers of Texas, Inc., a Texas corporation.
"RETURNS": as defined in Section 4.15(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.
"ROUND ROCK LEASE": means the lease dated as of August 1, 1997, between
Socrates Retail Joint Venture and Purchaser, covering the premises described as
Lot 4C, Block 1, replat of Lot 4, Block 1, Socrates Addition, Phase II.
"SWD": as defined in the preamble of this Agreement.
"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.
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"WEIGHTED AVERAGE PRICE PER SHARE": means the weighted average price per
share at which Castle issued or sold Common Stock to any person (whether for
cash, for property or on completion for services rendered) between the Execution
Date and the Closing Date, determined by computing the quotient of (A) the
aggregate value of consideration received by Castle from any Common Stock issued
or sold by Castle between the Execution Date and the Closing Date, divided by
(B) the total number of shares of Common Stock issued by Castle in all
transactions occurring between the Execution Date and the Closing Date[,
provided, however, that there shall be excluded from all calculations of the
Weighted Average Price Per Share (i) the first issuance of shares of Common
Stock occurring after the Execution Date to any Person other than an Affiliate
or stockholder of Castle] [or] [delete proviso if the offering has been
completed that was needed to fund the option payment] and (ii) any private
placement of Common Stock to any Affiliate of Castle or to any Person that is a
Castle Stockholder on or before the Execution Date, the gross proceeds of which
do not exceed $2,000,000, and which is effected for the purpose of financing
Castle's initial obligations under the Option Agreement.
ARTICLE II
THE TRANSACTION
2.1 PURCHASE AND SALE OF MEMBER INTERESTS. Subject to the terms and
conditions of this Agreement, Purchaser agrees to purchase from the Member, and
the Member 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 Member of the consideration specified
in Section 3.1 hereof, the Member Interests free and clear of any Encumbrances.
2.2 EXCLUDED ASSETS. Notwithstanding the purchase by Purchaser of the
Member Interests, the following assets shall not constitute a part of the
Business on the Closing Date and shall be transferred by SWD to Member
immediately prior to the Closing (the "Excluded Assets"), or after the Closing
Date by SWD or its successor in interest in the event that (and within 10 days
after) SWD receives possession of the Excluded Assets described in subsections
(b) or (c) below after the Closing Date:
(a) cash, cash equivalents, deposits, advance payments, securities,
letters of credit naming SWD as account party, certificates of deposit, notes,
drafts, checks and similar instruments in excess of an aggregate of $60,000;
(b) Tax refunds related to the Business received or receivable by
SWD or the Member relating to Taxes paid by SWD or the Member for all periods
prior to the Closing Date; and
(c) any asset listed on Schedule 2.2(c).
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2.3 ASSUMPTION OF OBLIGATIONS.
(a) Upon (and when due after) the sale of the Member Interests by
Member to Purchaser, Member shall cause the following liabilities of SWD to be
discharged and satisfied in full: all obligations of SWD arising prior to the
Execution Date for conduct occurring prior to the Execution Date, for (A)
personal injury claims against SWD, (B) liabilities for torts or malpractice,
including without limitation employee claims (if any) for personal injury or
sexual harassment, (C) obligations owed to the Internal Revenue Service or any
other taxing authority, (D) Environmental Claims, and (E) Accounts Payable,
accrued liabilities and long term debt exceeding, in aggregate, $250,000, except
as set forth in Section 2.3(b) hereof.
(b) Notwithstanding the terms of Section 2.3(a) hereof, or any
indemnity or reimbursement obligation contained herein or any other provision
hereof, the parties hereto agree that (i) all liabilities, indebtedness and
obligations incurred by SWD in connection with the completion of the leasehold
improvements and the equipment purchases for the Round Rock Lease as have been
mutually agreed to by SWD and Purchaser as being necessary for the practice of
dentistry, as SWD currently conducts such practice, are liabilities incurred in
the ordinary course of business of SWD that all parties hereto agree constitute
a part of the liabilities to be discharged by SWD (and not by the Member) when
due, including after the Closing Date if so due then, (ii) all liabilities,
indebtedness and obligations under leases of real property to which SWD is a
party before, on or after the date of this Agreement, constitute obligations to
be discharged by SWD (and not Member) on or after the Closing Date, and (iii)
all Accounts Payable, long term debt, and all other liabilities, indebtedness
and obligations, known and unknown, contingent or liquidated, of SWD arising
after the Execution Date on account of conduct of SWD occurring after the
Execution Date, shall constitute obligations to be paid, satisfied and
discharged by SWD (and not by Member) when due, including after the Closing Date
if so due then (collectively, the "Assumed Obligations").
2.4 NONASSIGNABLE CONTRACTS AND LEASES. In the case of any contracts of
SWD with respect to which a consent to assignment is required for a change in
ownership of SWD and such consent has not been obtained on or before the Closing
Date, the Member agrees to use its best efforts to obtain, or cause to be
obtained, after the Closing Date, any written consents necessary to convey to
Purchaser the benefit thereof. The Castle Entities shall cooperate with the
Member, 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 to assignment with respect to any such contract. Purchaser,
Castle, and Castle PC jointly and severally covenant and agree to indemnify and
hold harmless SWD and Member and their officers, directors, employees and
Affiliates from and against any loss, damage, costs or expenses (including
reasonable costs of defense and attorney's fees) arising out of any such
contract as a result of acts or omissions occurring on or after the Closing
Date, or any failure by the Castle Entities to fulfill their obligations under
this Section 2.4.
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2.5 CLOSING. The closing of the transactions contemplated hereby (the
"Closing") shall take place after the execution hereof at the time at which the
conditions to Closing set forth in Articles VI and VII hereof have been
satisfied or waived. The Closing shall take place on the Closing Date at 9:00
a.m. at the offices of Bracewell & Patterson, L.L.P., South Tower Pennzoil
Place, Suite 2900, 711 Louisiana Street, Houston, Texas 77002, or such other
place, date and time as may be mutually agreed upon by the parties.
ARTICLE III
PAYMENT OF PURCHASE PRICE
3.1 AMOUNT; ALLOCATION; DELIVERY. Purchaser, Castle and Castle PC jointly
and severally agree to pay to Member the following (the "Purchase Price"):
(a) a total of $3,650,000 in cash on the Closing Date by wire
transfer of immediately available funds to an account or accounts previously
identified by Member, which reflects total cash consideration of $5,150,000,
credited and reduced by (i) the $1,000,000 paid by Purchaser to Member upon
execution of the Option Agreement, and (ii) the $500,000 paid by Purchaser to
the Member as nonrefundable earnest money pursuant to a letter agreement dated
September 11, 1996, among certain of the parties hereto; and
(b) the number of shares of Convertible Preferred Stock determined
by dividing $1,550,000 by the lower of (i) the Weighted Average Price Per Share
at which Castle has sold Common Stock; PROVIDED, that in the event that Castle
issues or sells Common Stock, to any Affiliate of Castle or to any Person that
is a Castle Stockholder on or before the Execution Date, at any time between the
Execution Date and the Closing Date (other than a private placement of Common
Stock the gross proceeds of which do not exceed $2,000,000, and which is
effected in part for the purpose of financing Castle's initial obligations under
the Option Agreement), then the amount to be used in lieu of the foregoing
Weighted Average Price Per Share in this clause (i) shall instead be the lowest
price per share of Common Stock at which Castle sold or issued Common Stock at
any time between the Execution Date and the Closing Date, or (ii) $8.00. Such
shares shall be issued on the Closing Date in the name of John Goodman, D.D.S.,
or such other name as Member may designate. If Castle has not sold Common Stock
to any Person at any time between the Execution Date and the Closing, the
denominator used in the above computation shall be $8.00.
(c) Computations made in accordance with this Section 3.1 shall be
subject to appropriate adjustments for stock splits, stock dividends or other
recapitalizations of Castle.
(d) Immediately following the Closing, the Member shall deposit a
portion of the Purchase Price equal to $400,000 in a segregated,
interest-bearing bank account, certificate of deposit, treasury bill or other
similar investment grade instrument or account, such instrument or account to be
maintained by the Member for
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one year following the Closing for the satisfaction of valid indemnity claims
(if any) of Purchaser.
3.2 AGENCY RELATIONSHIP. In the event that, following the Closing Date,
the Member receives any funds, documents or instruments which constitute or are
delivered in respect of Assets of SWD, the Member agrees to hold such funds,
documents or instruments in trust for the Castle Entities and as the Castle
Entities' agent therefor.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SWD
AND THE MEMBER
As an inducement to the Purchaser, Castle and Castle PC to enter into and
perform this Agreement, SWD and the Member, jointly and severally, hereby
represent and warrant to Purchaser, Castle and Castle PC as of the Execution
Date (and not as of the Closing Date or as of any other date) as follows:
4.1 BROKER'S OR FINDER'S FEES. No agent, broker, Person or firm acting on
behalf of SWD or the Member 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.
4.2 EXISTENCE AND GOOD STANDING. SWD is a limited liability company duly
organized and validly existing under the laws of the State of Texas. SWD has the
full 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. SWD is duly qualified or licensed to do business in each
jurisdiction in which the character or location of the properties owned or
leased by SWD or the nature of the business conducted by SWD makes such
qualification necessary and the absence of which would have a Material Adverse
Effect.
4.3 AUTHORIZATION AND VALIDITY OF AGREEMENT. SWD and the Member 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 SWD and the
consummation by it of the transactions contemplated hereby, have been duly
authorized and approved by the Managers and the members of SWD, and no other
action on the part of SWD or its members is necessary to authorize the
execution, delivery and performance of this Agreement by SWD and the
consummation of the transactions contemplated hereby. This Agreement has been
duly executed and delivered by SWD and the Member and is a valid and binding
obligation of each of SWD and the Member enforceable against each 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.
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4.4 MEMBER INTERESTS. The member interests of SWD are divided into 1,000
shares, 970 of which are owned by the Member and 30 of which are owned by Harold
Simpson, Jr. The Member and Harold Simpson, Jr. hold licenses to practice
dentistry in the State of Texas.
4.5 CONSENTS AND APPROVALS; NO VIOLATIONS. The execution, delivery and
performance of this Agreement by SWD and the Member and the consummation by SWD
and the Member 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 SWD; (b) to the knowledge of SWD and the Member, 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 SWD or
the Member or by which any of their respective properties or assets may be
bound; (c) to the knowledge of SWD and the Member, require any filing by SWD or
the Member with, or require SWD or the Member to obtain any permit, consent, or
approval of, or require SWD or the Member to give any notice to, any
governmental or regulatory body, agency or authority; or (d) result in a
violation or breach by SWD or the Member of, conflict with, constitute (with or
without due notice or lapse of time or both) a default by SWD or the Member (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 SWD or the Member 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 SWD or the
Member is a party, or by which any of their respective properties or assets may
be bound, except for such violations, consents, breaches, defaults,
terminations, and accelerations which would not have a Material Adverse Effect.
4.6 SUBSIDIARIES AND AFFILIATES. SWD has no subsidiaries. Except as set
forth on Schedule 4.6, all of the Assets used in the Business are owned by SWD.
4.7 FINANCIAL STATEMENTS: NO MATERIAL ADVERSE CHANGE. Attached hereto as
Schedule 4.7 is the balance sheet of SWD as of the date shown thereon (the
"Balance Sheet Date") and the statements of operations and cash flows for the
year then ended (collectively, the "Financial Statements"). The Financial
Statements fairly present in all material respects the financial position of SWD
at the date thereof and the results of operations of SWD and its cash flows for
the period indicated. Between the Balance Sheet Date and the Execution Date
there was 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 SWD.
To SWD's and Member's knowledge, as of the date hereof, other than
as (a) disclosed on the Financial Statements, or (b) incurred since the Balance
Sheet Date in the ordinary course of business, SWD has no direct or indirect
indebtedness, liability, claim, deficiency, obligation or responsibility, known
or unknown, fixed or contingent, liquidated or unliquidated, accrued, absolute
or otherwise.
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4.8 BOOKS AND RECORDS. SWD has previously made available to the Castle
Entities true, correct and complete copies of its articles of organization and
regulations, and all amendments to each. The minute books of SWD, as previously
made available to the Castle Entities and its representatives, contain accurate
records in all material respects of the meetings of the Members and the Managers
of SWD.
4.9 TITLE TO PROPERTIES; ENCUMBRANCES; CONDITION. 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, SWD has good and valid title to the Assets, in each case subject to
no Encumbrances, except for (a) Encumbrances consisting of easements, permits
and other restrictions or limitations on the use of real property or
irregularities in title thereto that do not materially detract from the value
of, or materially impair the use of, such property by SWD in the operation of
the Business, (b) Encumbrances for current taxes, assessments or governmental
charges or levies on property not yet due or delinquent, (c) Encumbrances
created by any of the Castle Entities, including but not limited to Encumbrances
created in accordance with the provisions of this Agreement; and, (d)
Encumbrances relating to Assumed Obligations (liens of the type described in
clauses (a), (b), (c) and (d) above or hereinafter sometimes referred to as
"Permitted Encumbrances"). SWD has heretofore furnished the Castle Entities with
a fixed asset ledger which sets forth all fixed assets owned by SWD as of the
Balance Sheet Date. SWD and the Member are not aware of any defects in such
assets that would have a Material Adverse Effect on the ability of the Castle
Entities to use such assets in the Business, ordinary wear and tear excepted.
4.10 REAL PROPERTY. Schedule 4.10 identifies all interests in real
property used by SWD in the Business, including leases, and includes the name of
the record title holder thereof. To SWD's and the Member's knowledge, all of the
buildings, structures and appurtenances situated on the real property owned or
leased by SWD are in such an operating condition, and in a state of maintenance
and repair, subject to ordinary wear and tear, as is necessary for the operation
of the Assets in the Business. The real property had adequate rights of ingress
and egress for operation of the Business in the ordinary course. To SWD's and
the Member's knowledge, no condemnation or similar proceeding is pending or
threatened which would preclude or impair the use of any such property, except
where such proceeding would not have a Material Adverse Effect.
4.11 LEASES. Schedule 4.11 contains an accurate and complete list of all
personal property leases to which SWD is a party (as lessee or lessor) and a
description of all such leases to which SWD 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 by SWD thereunder.
4.12 MATERIAL CONTRACTS. Except as set forth in Schedule 4.12, the
contracts to which SWD is a party do not include (a) any agreement, contract or
commitment relating to the employment of any person by SWD, (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, (d)
any loan or advance to, or
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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 or any other similar type contract, (g)
any agreement, contract or commitment limiting the freedom of SWD 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
which would have a Material Adverse Effect. Also set forth in Schedule 4.12 is a
list of all proposals submitted by SWD 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 Member Interests 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 by SWD 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 SWD and the Member,
in connection with the use, operation or ownership of the Assets and the conduct
of the Business as currently conducted, except for Permits which, if not
obtained or in effect, would not have a Material Adverse Effect. SWD holds all
of the Permits listed on Schedule 4.13, and none is presently subject to
revocation or challenge. Except as set forth on Schedule 4.13, none of such
Permits will be subject to revocation or termination as a result of the
transactions contemplated hereby.
4.14 LITIGATION. Except as set forth on Schedule 4.14, 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 SWD and the Member,
threatened, against or affecting the properties, rights or goodwill of SWD, the
Member, or employees of SWD, and SWD and the Member do not know of any valid
basis for any such action, proceeding or investigation. There are no such suits,
actions, claims, proceedings or investigations pending or to the knowledge of
SWD and the Member 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. There have been no
actions, suits, disciplinary proceedings and investigations undertaken by the
Dental Board of the State of Texas or other body regulating the activities of
dentists, against Member that could reasonably be expected to have a Material
Adverse Effect.
4.15 TAXES.
(a) All returns and reports for Taxes for all taxable years or
periods that end on or before the Execution Date and, with respect to any
taxable year or period beginning before the Closing Date ("Pre-Closing
Periods"), which are required to be filed by or with respect to SWD
(collectively, the "Returns"), have been or will be
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filed when due in a timely fashion and such Returns as filed are or will be
accurate in all material respects.
(b) There is no material action, suit, proceeding, investigation,
audit, or claim now pending or, to the knowledge of SWD or the Member,
threatened by any authority regarding any Taxes relating to SWD for any
Pre-Closing Period.
(c) There are no liens or security interests on any of the assets of
SWD that arose in connection with any failure (or alleged failure) to pay any
Taxes;
(d) There are no agreements for the extension or waiver of the time
for assessment of any Taxes relating to SWD for any Pre-Execution Date period
and SWD has not been requested to enter into any such agreement or waiver;
(e) All Taxes relating to SWD which SWD 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; and,
(f) SWD is not now nor has ever been a party to any Tax allocation
or sharing agreement that could result in any liability to the Castle Entities.
4.16 INSURANCE. Set forth in Schedule 4.16 is a complete list of insurance
policies that SWD maintains with respect to its Business and properties that are
included in the Assets or on its employees. 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 SWD, such policies, with respect to their amounts
and types of coverage, are adequate to insure against risks to which SWD 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. Schedule 4.17 sets forth all material
Intellectual Property used in the Business and the owner of such Intellectual
Property. The operation of the Business as conducted by SWD 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 SWD pursuant
to agreements listed on Schedule 4.17. SWD owns all right, title and interest in
the Intellectual Property listed in Schedule 4.17. No litigation is pending or,
to the knowledge of SWD or the Member, threatened wherein SWD 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 knowledge of SWD and the Member, SWD is
in compliance in all material respects with all applicable laws, regulations,
orders, judgments and decrees applicable to the Business.
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4.19 EMPLOYMENT RELATIONS.
(a) To the knowledge of SWD and the Member, SWD is not and has not
engaged in any unfair labor practice; (b) to the knowledge of SWD and the
Member, no representation question exists respecting the employees of SWD; (c)
SWD 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 SWD.
4.20 EMPLOYEE BENEFIT PLANS. SWD has delivered to the Castle Entities 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 SWD and the Member, 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 SWD 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 on Schedule
4.21 and except where it would not have a Material Adverse Effect (a) Hazardous
Materials have not been generated, used, treated or stored on, or transported to
or from, any of SWD's business locations by SWD, its authorized agents or its
independent contractors (including suppliers), (b) Hazardous Materials have not
been Released or disposed of by SWD, its authorized agents or its independent
contractors (including suppliers) on any of SWD's business locations except such
Releases which do not violate any Environmental Laws, (c) SWD is, to its and the
Member's knowledge, in compliance with all applicable Environmental Laws and the
requirements of any Permits issued under such Environmental Laws with respect to
any of SWD's business locations, (d) there are no pending or, to the knowledge
of SWD and the Member, threatened Environmental Claims against SWD or any of
SWD's business locations, (e) there are no facts or circumstances, conditions,
pre-existing conditions or occurrences on any of SWD's business locations known
to SWD or the Member that could reasonably be anticipated (1) to form the basis
of an Environmental Claim against SWD or any of SWD's business locations, or (2)
to cause such of SWD's business locations to be subject to any restrictions on
the ownership, occupancy use or transferability of such of SWD's business
locations under any Environmental Law, and (f) SWD has not in the ordinary
course of business transported or stored Hazardous Materials.
4.22 INTERESTS IN CUSTOMERS, SUPPLIERS, ETC. Except for relationships with
Affiliates, SWD does not possess, directly or indirectly, any financial interest
in, and no member of SWD 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 SWD.
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4.23 COMPENSATION OF EMPLOYEES. Set forth in Schedule 4.23 is an accurate
and complete list showing the names of all persons whose compensation from SWD
collectively for the fiscal year ended on the Balance Sheet Date exceeded an
annualized rate of $40,000, together with a statement of the full amount paid or
payable to each such person for services rendered during the current fiscal year
to the Execution Date.
4.24 PAYORS. Schedule 4.24 sets forth the ten largest payors of SWD for
the most recently completed fiscal year. The relationship of SWD with each of
such payors as of the date of this Agreement is a good commercial working
relationship and, except as set forth on Schedule 4.24, no significant payor has
canceled or otherwise terminated or, to the knowledge of SWD or the Member
threatened to cancel or otherwise terminate its relationship with SWD within the
last three years.
4.25 ACCOUNTS RECEIVABLE; ACCOUNTS PAYABLE. The Accounts Receivable
reflected on the balance sheet included in the Financial Statements are
collectible in the ordinary course of business, net of the reserves established
with respect thereto. There has been no change since the Balance Sheet Date
(other than in the ordinary course of business) in the amount of the Accounts
Receivable or other fees or debts due to SWD or the allowances with respect
thereto, or Accounts Payable by SWD, from that reflected in the Balance Sheet.
4.26 SOLVENCY. SWD is not entering into this Agreement with actual intent
to hinder, delay or defraud creditors. Immediately prior to the Execution Date:
(a) the present fair salable value of the Assets of SWD (on a going
concern basis) will exceed the liability of SWD on its debts (including its
contingent obligations);
(b) SWD 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 SWD 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,
(c) SWD will have sufficient capital with which to conduct its
Business, and the property of SWD does not constitute unreasonably small capital
with which to conduct its Business.
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.
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4.27 DISCLOSURE. 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.
4.28 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.
4.29 COPIES OF DOCUMENTS. SWD has caused to be made available for
inspection and copying by the Castle Entities and their advisers, true, complete
and correct copies of all documents referred to in this Article IV or in any
Schedule attached hereto. Any document referred to in this Article IV or in any
Schedule attached hereto that is provided or made available to any Castle Entity
shall be deemed to have been provided to all of the Castle Entities.
4.30 INVESTMENT REPRESENTATIONS.
(a) The Member understands that the Convertible Preferred Stock and
the Common Stock into which shares of Convertible Preferred Stock are
convertible (collectivley, the "Stock") conveyed hereby have not been registered
under the Securities Act of 1933, as amended (the "Securities Act"). The Member
also understands that the 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) The Member, in consultation with its accountants, attorneys and
financial advisors, has the requisite experience in evaluating and investing in
private placement transactions of securities so that it is capable of evaluating
the benefits and risks of its investment in Castle and has the capacity to
protect its own interests. The Member understands that he must bear the economic
risk of this investment indefinitely unless the Stock is registered pursuant to
the Securities Act, or an exemption from registration is available. The Member
also understands that there is no assurance that any exemption from registration
under the Securities Act will be available and that, even if available, such
exemption may not allow it to transfer all or any portion of the Stock under the
circumstances, in the amounts or at the times it might propose.
(c) The Member is acquiring the Stock for his own account for
investment only, and not with a view towards distribution.
(d) The Member represents that by reason of its business or
financial experience, he has the capacity to protect his own interests in
connection with the transactions contemplated in this Agreement.
(e) The Member 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, CASTLE PC AND CASTLE
Purchaser, Castle PC and Castle, jointly and severally, represent and
warrant to SWD and the Member as follows:
5.1 BROKER'S OR FINDER'S FEES. No agent, broker, Person or firm acting on
behalf of the Castle Entities 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.
5.2 EXISTENCE AND GOOD STANDING OF THE CASTLE ENTITIES; POWER AND
AUTHORITY. Purchaser and Castle are corporations duly organized, validly
existing and in good standing under the laws of the States of Texas and
Delaware, respectively. Castle PC is a professional corporation duly organized,
validly existing and in good standing under the laws of the State of Texas. Each
of the Castle Entities has full corporate power and authority to make, execute,
deliver and perform this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. This Agreement has been duly
authorized and approved by all required corporate action of each of the Castle
Entities. This Agreement has been duly executed and delivered by each of the
Castle Entities and is a valid and binding obligation of each of the Castle
Entities enforceable against each of the Castle Entities 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 NO VIOLATIONS. The execution, delivery and performance of this
Agreement by each of the Castle Entities and the consummation by each of the
Castle Entities 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 charter
document or by-laws of any of the Castle Entities; (b) to the knowledge of any
of the Castle Entities, 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 any of the Castle Entities or by which any of
their respective properties or assets may be bound; (c) to the knowledge of any
of the Castle Entities, require any filing by any of the Castle Entities with,
or require any of the Castle Entities to obtain any permit, consent or approval
of, or require any of the Castle Entities to give any notice to, any
governmental or regulatory body, agency or authority or any third party; or (d)
result in a violation or breach by any of the Castle Entities of, conflict with,
constitute (with or without due notice or lapse of time or both) a default by
any of the Castle Entities (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 any of the Castle Entities
pursuant to, 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 any of the Castle Entities
is a party, or by which they
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or any of their respective properties or assets may be bound, except in the case
of Subsections 5.3(b), (c), and (d), for such violations, consents, breaches,
defaults, terminations and accelerations which in the aggregate would not have a
Material Adverse Effect.
5.4 CAPITAL STOCK. The authorized capital stock of Castle consists solely
of 30,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock,
$.001 par value per share ("Preferred Stock"). All of the shares of Convertible
Preferred Stock delivered pursuant to Section 3.1 hereof have been duly and
validly authorized and, following the Closing, will be validly issued, fully
paid, nonassessable and free of any liens or encumbrances.
5.5 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 any of the Castle Entities, threatened, against or
affecting the properties, rights or goodwill of any of the Castle Entities 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 any of the
Castle Entities, and none of the Castle Entities knows of any valid basis for
any such action, proceeding or investigation. There are no such proceedings
pending or, to the knowledge of any of the Castle Entities, threatened, seeking
to prevent or challenge the transactions contemplated by this Agreement.
5.6 COMPLIANCE WITH LAWS. To the knowledge of each of the Castle Entities,
each of the Castle Entities are 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 any of the Castle Entities.
5.7 FINANCIAL STATEMENTS. Attached hereto as Schedule 5.7 are the most
recent available audited financial statements of Castle as of the date of the
audited balance sheet and for the year then ended, and the most recent available
unaudited financial statements of Castle as of the date of the unaudited balance
sheet and for the year-to-date period then ended (the "Castle Financial
Statements"). The Castle Financial Statements are complete and correct in all
material respects and present fairly in accordance with generally accepted
accounting principles consistently applied, the financial condition of Castle
and the results of operations of Castle as of the dates thereof and for the
periods indicated. Since the date of the most recent balance sheet attached
hereto as part of Schedule 5.7, 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.
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ARTICLE VI
CONDITIONS TO SWD'S AND THE MEMBER'S OBLIGATIONS
The obligations of SWD and the Member under this Agreement to sell, or
cause to be sold, the Member Interests 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:
6.1 TRUTH OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Castle Entities 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, and the Castle Entities shall have delivered to SWD and the
Member on the Closing Date a certificate of an authorized officer of each of the
Castle Entities, dated the Closing Date, to such effect.
6.2 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 each of
the Castle Entities shall have delivered to SWD and the Member a certificate of
an authorized officer of each of the Castle Entities, dated the Closing Date, to
such effect to the best knowledge of such officer.
6.3 CONSIDERATION. The Member shall have received the consideration
described in Section 3.1.
6.4 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 by the parties hereto.
6.5 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 SWD and the Member and
their counsel, and SWD and the Member 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.
6.6 GOOD STANDING CERTIFICATES. SWD shall have received good standing and
corporate existence certificates respecting each of the Castle Entities.
6.7 EMPLOYMENT AGREEMENTS. The Member and Mrs. Sheryl Goodman shall have
received an Employment Agreement and a Consulting Agreement, respectively,
substantially in the form of Exhibits A and B, respectively, executed by
Purchaser.
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6.8 PURCHASE OF EQUIPMENT. Purchaser shall have executed and delivered,
simultaneously herewith, an agreement to purchase the equipment owned by Sheryl
Goodman and described on Exhibit E for a purchase price of at least $209,000.
6.9 REGISTRATION RIGHTS AGREEMENT. The Member shall have received a
Registration Rights Agreement, substantially in the form of Exhibit D hereto,
executed by Castle.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF THE CASTLE ENTITIES
The obligations of the Purchaser, Castle and Castle PC under this
Agreement are subject to the satisfaction or waiver by the Castle Entities, 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 SWD and the Member contained herein shall be true and correct in
all material respects on and as of the Execution Date.
7.2 DOCUMENTS OF CONVEYANCE. The Purchaser shall have received from SWD
the Stock certificates evidencing the Member Interests, together with a blank
stock power for same.
7.3 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.
7.4 GOOD STANDING CERTIFICATES. Purchaser shall have received good
standing and corporate existence certificates respecting SWD.
7.5 TRANSFER OF DENTAL ASSETS. SWD shall have transferred good and valid
title to the Dental Assets to Castle PC, free and clear of all Encumbrances
except Permitted Encumbrances.
7.6 UPDATES TO CERTAIN SCHEDULES. SWD shall have provided to Purchaser
updates to Schedules 4.11, 4.12 and 4.14 hereof for the period from the
Execution Date to the Closing Date; PROVIDED HOWEVER, that such updates shall
not be deemed to be representations or warranties of SWD, the Member or Simpson
and shall not change the date as of which the representations and warranties of
SWD and the Member herein are made, which date shall be only on and as of the
Execution Date.
ARTICLE VIII
COVENANTS OF SWD AND THE MEMBER
SWD and the Member hereby covenant and agree with the Castle Entities as
follows:
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8.1 COOPERATION BY SWD. SWD and the Member shall use their reasonable best
efforts to cooperate with the Castle Entities to secure all necessary consents,
approvals, authorizations, exemptions and waivers from third parties as shall be
required in order to enable SWD and the Member to effect the transactions
contemplated on its or his part hereby, and SWD and the Member 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.
8.2 REVIEW OF THE ASSETS. Each of the Castle Entities acknowledges that it
has, prior to the Closing Date, through its representatives or Affiliates,
reviewed (a) the Assets, (b) the complete working papers of SWD's certified
public accountants used in their preparation of financial statements for SWD and
(c) the Books and Records of SWD and to otherwise review the financial and legal
condition of SWD as the Castle Entities deem necessary or advisable to
familiarize themselves with the Business and related matters; such review shall
not, however, affect the representations and warranties made by SWD and the
Member hereunder or the remedies of the Castle Entities for breaches of those
representations and warranties.
8.3 FURTHER ASSURANCES. At any time or from time to time after the Closing
Date, SWD and the Member shall, at the reasonable request of the Castle Entities
and at the Castle Entities' expense, execute and deliver any further instruments
or documents and take all such further action as the Castle Entities may
reasonably request in order to consummate and make effective the sale of the
Member Interests.
ARTICLE IX
COVENANTS OF THE CASTLE ENTITIES
Each of the Castle Entities, jointly and severally, hereby covenants and
agrees with SWD and the Member as follows:
9.1 COOPERATION BY THE CASTLE ENTITIES. Each of the Castle Entities will
use its reasonable best efforts, and will cooperate with SWD and the Member, to
secure all necessary consents, approvals, authorizations, exemptions and waivers
from third parties as shall be required in order to enable the Castle Entities
to effect the transactions contemplated on its part hereby, and each of the
Castle Entities 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.
9.2 BOOKS AND RECORDS; PERSONNEL. At all times after the Closing Date, the
Castle Entities shall allow Member and any agents of Member, upon reasonable
advance notice to the Castle Entities, access to all Books and Records of SWD
which are transferred to the Castle Entities 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 of SWD or the
Member, or reports to or filings with governmental agencies, during normal
working hours at the principal places
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of business of the respective Castle Entities or at any location where such
Books and Records are stored, and Member shall have the right, at Member's sole
cost, to make copies of any such Books and Records.
9.3 FURTHER ASSURANCES. At any time or from time to time after the Closing
Date, the Castle Entities shall, at the request of the Member and at Member's
expense, execute and deliver any further instruments or documents and take all
such further action as Member may reasonably request in order to consummate and
make effective the sale of the Member Interests.
ARTICLE X
SURVIVAL AND INDEMNIFICATION
10.1 INDEMNIFICATION OF SWD. The Castle Entities, jointly and severally,
for a period of one year after the Closing Date, shall indemnify and hold SWD,
the Member and Simpson, and their respective Affiliates (the "SWD Indemnitees"),
harmless from and against any and all damages (including exemplary damages and
including reasonable counsel fees and reasonable expenses of investigation,
defending and prosecuting litigation (collectively, the "Damages"), suffered by
any SWD Indemnitee as a result of, caused by, arising out of, or in any way
relating to (a) any misrepresentation, breach of warranty, or nonfulfillment of
any agreement or covenant on the part of any of the Castle Entities under this
Agreement or any misrepresentation in or omission from any list, schedule,
certificate, or other instrument furnished or to be furnished to SWD or the
Member by any of the Castle Entities pursuant to the terms of this Agreement or
(b) any liability or obligation (other than those for which any of the Castle
Entities is being indemnified by SWD and the Member 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
Execution Date.
10.2 INDEMNIFICATION OF THE CASTLE ENTITIES. The Member shall, for a
period of one year after the Closing Date, indemnify and hold the Castle
Entities and their respective Affiliates (the "Castle Indemnitees") harmless
from and against any and all Damages suffered by any Castle Indemnitee as a
result of, caused by, arising out of, or in any way relating to (a) any
misrepresentation, breach of warranty, or nonfulfillment of any agreement or
covenant on the part of SWD or the Member under this Agreement or any
misrepresentation in or omission from any list, schedule, certificate, or other
instrument furnished or to be furnished to the Castle Entities by SWD or the
Member pursuant to the terms of this Agreement, (b) any liability or obligation
(other than those for which SWD and the Member are being indemnified by the
Castle Entities hereunder) 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 Execution Date; or (c) any Claim (as
hereinafter defined) brought against any Castle Indemnitee by or on behalf of
Monarch Dental, TA Associates or their respective Affiliates, as a result of,
relating to or in any way connected with prior dealings or relationships between
SWD or the Member and Monarch Dental, TA Associates or their respective
Affiliates (a "Monarch Claim"); provided, however, that
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except with respect to a Monarch Claim, the Castle Entities shall not be
entitled to make any recovery by way of indemnification for the initial $50,000
of the Castle Entities' claims for indemnification, and the Castle Entities'
aggregate recovery for indemnification shall never in any event exceed $650,000.
10.3 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 in accordance with the provisions of this Agreement in sufficient time
to permit the indemnifying party or its counsel to defend against such matter
and to make 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, only insofar as such
knowing failure to notify the indemnifying party has actually resulted in
prejudice or damage to the indemnifying party. Any claim for indemnification
hereunder (except with respect to a Monarch Claim, which shall have no
expiration period) shall be made within one year after the Closing Date.
10.4 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. 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
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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.
10.5 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 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.
10.6 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.
10.7 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.
10.8 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF SWD AND THE MEMBER. The
representations and warranties of SWD and the Member which are made as of the
Execution Date pursuant to Article IV hereof shall survive for a period of one
year from the Closing Date, at which time such representations and warranties
shall be without further force and effect. Such survival of such representations
and warranties shall not change the date as of which such representations and
warranties are made, which date shall be only on and as of the Execution Date.
10.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE CASTLE ENTITIES.
The representations and warranties of the Castle Entities shall survive for a
period of one year from the Closing Date, at which time such representations and
warranties shall be without further force and effect.
ARTICLE XI
MISCELLANEOUS
11.1 ENTIRE AGREEMENT. This Agreement (including the Exhibits and
Schedules hereto), the Option Agreement (including the Exhibits and Schedules
thereto), and the Management Services Agreement, dated March __, 1997, between
Purchaser and SWD,
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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, including that
certain letter agreement dated September 11, 1996 (the "September Letter"), are
merged into and superseded by this Agreement. Pursuant to the September Letter,
Purchaser paid to SWD $500,000 (the "Non-Refundable Payment"), and (i) such
payment is nonrefundable by SWD to Purchaser (and decreases and is a credit
against any amounts payable by Purchaser in connection with this Agreement), and
(ii) the Option Agreement (including the Exhibits and Schedules thereto)
constitutes a restructure of the various terms contemplated by the September
Letter.
11.2 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 SWD or the Member without the
prior written consent of Purchaser or by any of the Castle Entities to any
Person without the prior written consent of Member.
11.3 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.
11.4 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.
11.5 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.
11.6 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.
11.7 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.
11.8 EXPENSES. Except as otherwise provided in this Agreement or in that
certain letter agreement, dated December 26, 1996, between SWD and Purchaser,
SWD,
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the Member and the Castle Entities shall each pay all costs and expenses
incurred by them or on their behalf in connection with this Agreement and the
transactions contemplated hereby.
11.9 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:
if to any of the Castle Entities, to:
Castle Dental Centers of Texas, 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 SWD or the Member to:
John Goodman, D.D.S.
Southwest Dental Associates, L.C.
713 Beardsley Lane
Austin, Texas 78746
with a copy to:
Mr. Roger K. Harris
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010-3095
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.
11.10 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without regards to conflict of
law rules thereof.
11.11 CONFIDENTIALITY; PUBLICITY. The terms and conditions of this
Agreement shall not be disclosed by any party hereto without the prior written
consent of the
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other parties; provided, however, that the Castle Entities 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 parties
hereto to the contents and the manner of presentation and publication thereof.
11.12 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 Travis County, Texas, 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.
11.13 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.
11.14 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 Member Interests 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.
11.15 ALLOCATION OF RISK. Purchaser, Castle and Castle PC shall purchase
such insurance as Purchaser, Castle and Castle PC may desire to cover such risks
of ownership of SWD as Purchaser, Castle and Castle PC may incur in connection
with the ownership thereof after the date hereof arising as a result of the
acquisition of Member's capital stock and member interests in SWD. Purchaser,
Castle and Castle PC have agreed hereby (i) to succeed to the ownership of SWD,
and Purchaser, Castle and Castle PC acknowledge the risks inherent therein
(including the risks associated with the purchase of SWD with representations
and warranties that are made as of a date prior to the Closing Date) and the
need for adequate insurance of loss on account of torts, malpractice claims,
workmen's compensation claims, property damage and other risks of operation of a
dental practice, whether or not similar to any of the foregoing, (ii) that the
risks arising from changes, occurring between the Execution Date and the Closing
Date, in the business, financial condition, profitability, prospects, legal and
regulatory matters and limitations, asset condition, and all other risks
associated with adverse changes occurring between the Execution Date and the
Closing
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Date in the business, financial condition or results of operations of SWD, are
risks that have been assumed by the Purchaser, Castle and Castle PC as a
negotiated part of the bargain of the parties hereto, (iii) that the Purchaser,
Castle and Castle PC have decided that the Purchaser is to purchase the stock
and interests in SWD from the Member based on the representations and warranties
set forth in this Agreement as of the Execution Date (with no requirement for
updates to the representations and warranties of the Member or SWD through the
Closing Date for changes in the relevant representations and warranties), and
the Purchaser, Castle and Castle PC and their affiliates have agreed that the
Purchaser is to purchase such stock and interests subject only to the conditions
set forth herein, the effect of which is that (A) the Purchaser, Castle and
Castle PC, and their affiliates, thereby assume the risk that the business,
profitability, prospects, financial condition, asset condition or results of
operations of SWD may change materially and adversely between the Execution Date
and the Closing Date (the date that the Purchaser purchases such stock and
interests pursuant to this Agreement), and (B) the representations and
warranties of SWD, being limited to the Execution Date, may not be true and
correct on a subsequent date, including the Closing Date, but the fact that such
representations and warranties are not true and correct in any respect on the
Closing Date shall not entitle or allow the Purchaser, Castle or Castle PC to
make any claim for damages, rescission, restitution, indemnity, reimbursement or
any other claim, against the Member.
<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 TEXAS, INC.
By:
Name: Jack H. Castle, Jr.
Title: President
CASTLE DENTAL CENTERS, INC.
By:
Name: Jack H. Castle, Jr.
Title: President
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JACK H. CASTLE, D.D.S., P.C.
By:
Name:
Title:
SW DENTAL ASSOCIATES, LC
By:
Name: John Goodman, D.D.S.
Title: President
John Goodman, D.D.S.
Harold Simpson, Jr.
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SCHEDULE A
ASSETS
The Assets shall include but are not limited to the following categories
of assets:
1. real property, if any, including leasehold interests, described
in Schedule 4.10 attached hereto together with all buildings, facilities,
fixtures and other leasehold improvements thereon and all easements,
rights-of-way, transferable licenses and permits and other appurtenances
thereof;
2. plant, machinery, equipment, operating equipment, tools,
supplies, inventories, furniture, fixtures, furnishings and other fixed assets
owned or leased and used or held for use in the conduct of the Business
(including the equipment leased to SWD by Sheryl Goodman listed on Exhibit E
hereto, which equipment shall be purchased by Purchaser from Sheryl Goodman
concurrently herewith by separate conveyance for a purchase price of $209,000);
3. contracts listed on Schedules 4.11 and 4.12, documents,
instruments, insurance and indemnity policies and general intangibles of SWD,
including the name "S W Dental Associates", "Southwest Dental Associates" and
derivatives thereof, and goodwill associated therewith;
4. Accounts Receivable as of the Closing Date;
5. all non-professional licenses and permits (to the extent
transferable), registrations and authorizations, proprietary information,
methods, know- how, designs, processes, procedures, goodwill and all rights to
other Intellectual Property used in the Business;
6. Books and Records;
7. any rights pertaining to any counterclaims, set-offs or defenses
it may have with respect to any Assumed Obligations;
8. all prepaid claims, prepaid taxes, prepaid insurance premiums and
other prepaid expense items;
9. to the extent transferable, third-party indemnities, policies of
insurance, fidelity, surety or similar bonds and the coverage afforded thereby
relating to the Assets; and
10. cash in the aggregate amount of $60,000.
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SCHEDULE B
DENTAL ASSETS
The Dental Assets shall include the following categories of assets:
1. each dentist employment contract, managed care contract,
insurance or third party reimbursement agreement; and
2. all other assets of SWD, the ownership or operation of which
requires a license to practice dentistry.
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EXHIBIT 10.81
MANAGEMENT SERVICES AGREEMENT
BY AND BETWEEN
CASTLE DENTAL CENTERS OF TEXAS, INC.,
A TEXAS CORPORATION
AND
SW DENTAL ASSOCIATES, LC
A TEXAS LIMITED LIABILITY COMPANY
EFFECTIVE JUNE 1, 1997
<PAGE>
TABLE OF CONTENTS
Page No.
ARTICLE I. DEFINITIONS................................................... 2
Section 1.1 Act............................................ 2
Section 1.2 Adjusted Gross Revenue......................... 2
Section 1.3 Adjustments.................................... 2
Section 1.4 Ancillary Revenue.............................. 2
Section 1.5 Base Management Fee............................ 2
Section 1.6 Business Manager............................... 2
Section 1.7 Business Manager Expense....................... 2
Section 1.8 Cash Flow...................................... 2
Section 1.9 Confidential Information....................... 3
Section 1.10 Center......................................... 3
Section 1.11 Dental Services................................ 3
Section 1.12 Dentist........................................ 3
Section 1.13 GAAP........................................... 3
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 Option Agreement............................... 5
Section 1.19 PC............................................. 5
Section 1.20 PC Account..................................... 5
Section 1.21 PC Expense..................................... 5
Section 1.22 Practice Territory............................. 5
Section 1.23 Professional Services Revenues................. 5
Section 1.24 Representatives................................ 5
Section 1.25 State.......................................... 5
Section 1.26 Term........................................... 6
ARTICLE II. APPOINTMENT AND AUTHORITY OF BUSINESS MANAGER................ 6
Section 2.1 Appointment.................................... 6
Section 2.2 Authority...................................... 6
Section 2.3 Patient Referrals and Payments................. 6
Section 2.4 Internal Management of PC...................... 6
Section 2.5 Practice of Dentistry.......................... 7
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ARTICLE III. COVENANTS AND RESPONSIBILITIES OF BUSINESS MANAGER.......... 7
Section 3.1 Support Services............................... 7
Section 3.2 Quality Assurance, Risk Management, and
Utilization Review.......................... 7
Section 3.3 Licenses and Permits........................... 7
Section 3.4 Personnel...................................... 8
Section 3.5 Contract ...................................... 8
Section 3.6 Billing and Collection......................... 8
Section 3.7 PC Account..................................... 9
Section 3.8 Fiscal Matters................................. 9
Section 3.9 Reports and Records............................ 10
Section 3.10 Recruitment of PC Dentists..................... 11
Section 3.11 Business Manager's Insurance................... 11
Section 3.12 Advertising.................................... 11
Section 3.13 No Warranty.................................... 11
ARTICLE IV. COVENANTS AND RESPONSIBILITIES OF PC......................... 11
Section 4.1 Organization and Operation..................... 11
Section 4.2 PC Personnel and Shareholders.................. 12
Section 4.3 Professional Standards......................... 12
Section 4.4 Dental Services................................ 12
Section 4.5 Peer Review/Quality Assurance.................. 13
Section 4.6 PC's Insurance................................. 13
Section 4.7 Confidential and Proprietary Information....... 13
Section 4.8 Noncompetition................................. 14
Section 4.9 Name, Trademark................................ 16
Section 4.10 Peer Review.................................... 16
Section 4.11 Indemnification................................ 16
ARTICLE V. FINANCIAL ARRANGEMENT......................................... 16
Section 5.1 Base Management Fee............................ 16
Section 5.2 Management Fee................................. 17
Section 5.3 Adjustments.................................... 17
Section 5.4 Reasonable Value............................... 17
Section 5.5 Payment of Management Fee...................... 17
ARTICLE VI. TERM AND TERMINATION......................................... 18
Section 6.1 Initial and Renewal Term....................... 18
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<PAGE>
Section 6.2 Termination.................................... 18
Section 6.3 Effects of Termination......................... 19
ARTICLE VII. MISCELLANEOUS............................................... 20
Section 7.1 Administrative Services Only................... 20
Section 7.2 Status of Contractor; Agency................... 20
Section 7.3 Notices........................................ 21
Section 7.4 Governing Law.................................. 21
Section 7.5 Assignment..................................... 22
Section 7.6 Arbitration.................................... 22
Section 7.7 Waiver of Breach............................... 24
Section 7.8 Enforcement.................................... 24
Section 7.9 Gender and Number.............................. 24
Section 7.10 Additional Assurances.......................... 24
Section 7.11 Consents, Approvals, and Exercise of
Discretion.................................. 24
Section 7.12 Force Majeure.................................. 24
Section 7.13 Severability................................... 25
Section 7.14 Divisions and Headings......................... 25
Section 7.15 Amendments and Management Services Agreement
Execution................................... 25
Section 7.16 Entire Management Services Agreement........... 25
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<PAGE>
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT is made and entered into effective
as of June 1, 1997, by and between CASTLE DENTAL CENTERS OF TEXAS, INC., a Texas
corporation ("Business Manager"), and SW DENTAL ASSOCIATES, LC, a Texas limited
liability company ("PC")
RECITALS
This Management Services Agreement is made with reference to the
following facts:
A. PC is a validly existing Texas limited liability company, formed for
and engaged in the practice of dentistry and the provision of dental services to
the general public in the State of Texas through individual dentists who are
licensed to practice dentistry in the State of Texas and who are employed or
otherwise retained by PC.
B. Business Manager is a validly existing Texas corporation, which has
been duly formed to manage the business aspects of the dental practices in the
State of Texas.
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 certain management,
administrative and business services for the administration of certain 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 determined a basis for 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 71, Chapter Nine (Art
4543-4551) of the Civil Statutes of the State of Texas, as amended.
Section 1.2 ADJUSTED GROSS REVENUE. The term "Adjusted Gross Revenue"
shall mean the sum of Professional Services Revenue and Ancillary Revenue.
Section 1.3 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 1.4 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.
Section 1.5 BASE MANAGEMENT FEE. The term "Base Management Fee" shall
mean the amount set forth in Section 5.1.
Section 1.6 BUSINESS MANAGER. The term "Business Manager" shall mean
Castle Dental Centers of Texas, Inc., a Texas corporation, or any entity that
succeeds to the interests of Business Manager and to whom the obligations of
Business Manager are assigned and transferred.
Section 1.7 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.
Section 1.8 CASH FLOW. The term "Cash Flow" shall mean for any period,
earnings before depreciation and amortization, less capital expenditures, all
computed in accordance with
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GAAP. For the purpose of calculating Cash Flow, one-half of the compensation
paid to John Goodman and Sheryl Goodman shall be deemed to be an expense of PC.
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; (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; or (iv) is required to be disclosed by Business Manager in connection
with a financing of its business.
Section 1.10 CENTER. The term "Center" (collectively referred to as
"Centers") shall mean any office space, clinic, facility, including satellite
facilities, owned or leased by PC or which is otherwise used by 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 employed or otherwise retained by or associated
with PC, each of whom shall meet at all times the qualifications described in
Section 4.2 and Section 4.3.
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
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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 V hereof.
Section 1.15 MANAGEMENT SERVICES. The term "Management Services" shall
mean the business, administrative, and management services to be provided for PC
in accordance with Article III hereof.
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 in the
provision of services to 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;
(c) the Base Management Fee;
(d) the reasonable out-of-pocket travel expenses associated with
attending meetings, conferences, or seminars to benefit PC; and
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(e) the reasonable costs and expenses associated with marketing,
advertising and promotional activities to benefit PC.
To the extent, if any, that an Office Expense should properly be
allocated in part to PC and in part to other dental practices managed by
Business Manager, the amount allocated to PC shall be in proportion to the ratio
between PC's total Adjusted Gross Revenue to the total Adjusted Gross Revenue of
dental practices managed by Business Manager attributable to operations in the
Practice Territory.
Section 1.18 OPTION AGREEMENT. The term "Option Agreement" shall mean
that certain Option Agreement of even date herewith by and among PC, Business
Manager, Jack H. Castle D.D.S., P.C. and John G. Goodman, D.D.S.
Section 1.19 PC. The term "PC" shall mean SW Dental Associates, LC, a
Texas limited liability company.
Section 1.20 PC ACCOUNT. The term "PC Account" shall mean the bank
account of PC described in Section 3.6.
Section 1.21 PC EXPENSE. The term "PC Expense" shall mean an expense
incurred by the Business Manager or 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 Travis County, Texas and all counties contiguous thereto.
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 Texas.
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Section 1.26 TERM. The term "Term" shall mean the duration of this
Management Services Agreement as described in Section 6.1.
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 described in Article III hereof, 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 provide to PC the
Management Services set forth in Article III hereof. 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. PC shall give Business Manager thirty (30)
days prior notice of PC's intent to execute any agreement obligating PC to
perform Dental Services or otherwise creating a binding legal obligation on PC.
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 of PC, tax
planning, and investment planning, shall remain the responsibility of PC and the
shareholders of PC.
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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.
ARTICLE III. COVENANTS AND RESPONSIBILITIES OF BUSINESS MANAGER
During the Term, Business Manager shall provide the Management Services
set forth in this Article III in accordance with all laws, rules, regulations
and guidelines applicable to the provision of Management Services; provided,
however, that prior to incurring any obligation on behalf of or for the account
of PC that by its terms extends beyond the Term of this Management Services
Agreement, Business Manager shall obtain the consent of PC, which shall not be
unreasonably withheld.
Section 3.1 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 3.2 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 3.3 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.
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Section 3.4 PERSONNEL. Except as specifically provided in Section
4.2(b) of this Management Services Agreement, Business Manager shall employ or
otherwise 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 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. PC shall reimburse Business Manager on a
semi-monthly basis for all payroll costs incurred in connection with such
personnel.
Section 3.5 CONTRACT NEGOTIATIONS. Business Manager shall, upon request
of PC, advise PC with respect to and negotiate, either directly or on PC's
behalf, as appropriate and allowed by law, contractual arrangements between PC
and third parties 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.
Section 3.6 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
employed or otherwise 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, 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.
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(c) 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.
(d) To deposit all amounts collected under clause (c) 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 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 into the PC Account.
(e) 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.
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 the nature of Business Manager's
relationship with PC as described herein.
Section 3.7 PC ACCOUNT. Business Manager shall have access to the
records regarding the PC Account solely for the purposes contemplated hereby.
Section 3.8 FISCAL MATTERS.
(a) ACCOUNTING AND FINANCIAL RECORDS. Business Manager shall establish
and administer accounting procedures, controls, and systems for the development,
preparation, and 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 ("PC Records"), 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, (i) within 45 days of the end of each month,
and (ii) 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
period, including a detailed description of disbursements made by Business
Manager on behalf of PC, 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. PC and its authorized representatives shall have access,
during normal business hours, to any and all PC
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Records in the possession of Business Manager, and PC shall have the right to
review and copy any such PC Records, including but not limited to the copying of
any PC Records in electronic format.
(b) REVIEW OF EXPENDITURES. Business Manager shall not have any
authority to make any expenditures not consistent with this Management Services
Agreement without PC Consent.
(c) TAX MATTERS.
(1) IN GENERAL. At PC's request, 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 Fee
attributable to such services.
Section 3.9 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 the property and under 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.
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Section 3.10 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 3.11 BUSINESS MANAGER'S INSURANCE. Throughout the Term,
Business Manager shall obtain and maintain with commercial carriers, through
self-insurance or some combination thereof, appropriate worker's compensation
coverage for Business Manager's employed 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.
Section 3.12 ADVERTISING. PC shall reimburse Business Manager on a
monthly basis for PC's pro rata share of advertising expenses incurred in the
Territory determined on the ratio of PC's Adjusted Gross Revenue to the total
Adjusted Gross Revenue of dental practices managed by Business Manager
attributable to operations in the Practice Territory.
Section 3.13 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.
ARTICLE IV. COVENANTS AND RESPONSIBILITIES OF PC
Section 4.1 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.
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Section 4.2 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 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 agreement in a form reasonably satisfactory to PC and
Business Manager. No such employment contract may be amended without the prior
written consent of Business Manager if such amendment is effective beyond the
Term of this Management Services Agreement. 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 employ or
retain, 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.
Section 4.3 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 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.
Section 4.4 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
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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.
Section 4.5 PEER REVIEW/QUALITY ASSURANCE. PC shall adopt a peer
review/quality assessment program to monitor and evaluate the quality of Dental
Services provided by dental personnel of PC. Upon request of PC, Business
Manager shall provide advice and administrative assistance to PC in structuring
and performing its peer review/quality assurance activities, but only if such
advice and 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. PC shall be under no obligation to act in accordance
with any advice provided to PC by Business Manager pursuant to this Section 4.5.
Section 4.6 PC'S INSURANCE. PC shall obtain and maintain with
commercial carriers appropriate worker's compensation coverage for PC's employed
personnel, if any, and professional and comprehensive general liability
insurance covering PC and each of the Dentists PC retains or employs to provide
Dental Services. The comprehensive general liability coverage shall be in the
minimum amount of One Million Dollars ($1,000,000) for each occurrence and Three
Million Dollars ($3,000,000) annual aggregate; and professional 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. With respect to any insurance policies to be
renewed or obtained during the Term of this Management Services Agreement, PC
shall use reasonable efforts to obtain a provision in such policies that
provides 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 shall cause to be issued to Business Manager by such insurer or
insurers a certificate reflecting such coverage and shall provide notice to
Business Manager promptly upon receipt of notice given to Dentist of the
cancellation or proposed cancellation of such insurance for any cause. 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 4.7 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 take reasonable
steps to ensure that its affiliates and advisors who have access to such
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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.
If PC is requested or required by a court of competent jurisdiction (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 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 4.8 NONCOMPETITION. PC hereby recognizes and acknowledges that
Business Manager will incur substantial costs in providing the 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 their full professional time and attention.
PC agrees and acknowledges that the noncompetition covenants described hereunder
are necessary for the protection of Business Manager, and that Business Manager
would not have entered into this Management Services Agreement without the
following covenants.
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(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,
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.
(c) The written employment agreements described in Section 4.2 shall
contain covenants of the shareholder employees pursuant to which the
shareholders agree not to compete with PC within the Practice Territory for the
shorter of (i) the term of the Management Services Agreement or (ii) one (1)
year after termination of the employment agreement in accordance with the terms,
conditions and limitations contained therein.
(d) PC shall obtain formal written agreements from its dentist
employees pursuant to which the employees agree not to compete with PC within
the Practice Territory (as defined in such employment agreements) for the
shorter of (i) the term of the Management Services Agreement or (ii) 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 4.7 and Section 4.8 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 4.7 or Section 4.8, 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.
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Section 4.9 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 "Southwest Dental Associates" and derivatives thereof. PC
covenants and promises that, without the prior written consent of the Business
Manager, PC will not:
(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) conduct the professional practice of PC under any name other than
"SW Dental Associates" or "Castle Dental Centers" or respective derivatives
thereof.
Section 4.10 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 4.11 INDEMNIFICATION. PC 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 employees, 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 V. FINANCIAL ARRANGEMENT
Section 5.1 BASE MANAGEMENT FEE. The Base Management Fee shall be the
amount, calculated on a monthly basis, that is equal to fifteen percent (15%) of
the Adjusted Gross Revenue attributable to the applicable monthly period;
provided, however, that in no event shall
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the aggregate Base Management Fee during the Term exceed the aggregate Cash Flow
of PC for the Term.
Section 5.2 MANAGEMENT FEE. PC and Business Manager agree to the
compensation set forth herein as being paid to Business Manager in consideration
of a substantial commitment made by Business Manager hereunder and that such fee
is fair and reasonable. Each month, Business Manager shall be paid the
following:
(i) the amount of all Office Expenses (other than the
Base Management Fee) paid by the Business Manager on
behalf of PC; and
(ii) the Base Management Fee.
Section 5.3 ADJUSTMENTS. If there are not sufficient funds in any
period to pay the Base 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.
Section 5.4 REASONABLE VALUE. Payment of the Base 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 support services, purchasing, personnel, 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 5.5 PAYMENT OF MANAGEMENT FEE. PC shall pay the Management Fee
with respect to each calendar month by the 15th day of the succeeding calendar
month. If PC fails to pay Business Manager the Management Fee in accordance with
the terms of this Management Services Agreement, and such default continues for
five days after PC receives notice of the default: (i) if Business Manager
elects not to enter into the Member Interests Purchase Agreement referred to in
the Option Agreement, then Business Manager may exercise only such right with
respect to such unpaid Management Fee as Business Manger may have as a creditor
of PC; and (ii) if Business Manager elects to enter into the Member Interests
Purchase Agreement referred to in the Option Agreement, then the purchase price
to be paid in accordance with the terms of the Member Interests Purchase
Agreement shall be reduced by the amount of such unpaid Management Fee.
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ARTICLE VI. TERM AND TERMINATION
Section 6.1 INITIAL AND RENEWAL TERM. The Term of this Management
Services Agreement shall commence effective June 1, 1997 and end on the earlier
of (i) May 31, 1998, and (ii) the closing of the transactions described in the
Member Interests Purchase Agreement referred to in the Option Agreement.
Section 6.2 TERMINATION.
(a) TERMINATION BY BUSINESS MANAGER. Subject to Section 6.2(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;
(ii) PC materially defaults in the performance of any of
its material duties or obligations hereunder, other
than payment to Business Manager of the Management
Fee, and such default continues for thirty (30) days
after PC receives notice of the default; or
(iii) PC fails to pay Business Manager the Management Fee
in accordance with the terms of this Management
Services Agreement, and such default continues for
five (5) days after PC receives notice of the
default.
(b) TERMINATION BY PC. Subject to Section 6.2(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;
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(ii) In the event that Business Manager materially
defaults in the performance of any of its material
obligations hereunder and such default continues for
thirty (30) days after Business Manager receives
notice of the default; or
(iii) In the event that a violation of the Act is asserted
by the Texas State Board of Dental Examiners that
could reasonably be expected to result in the
suspension or revocation of, or the imposition of
penalties or disciplinary action on, the dental
license of John Goodman or any Dentists employed by
PC, on the grounds that PC's entering into and
performing its obligations under this Management
Services Agreement is unlawful or as a result of a
violation of the Act by Business Manager.
(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 7.6; provided however that in the event that a violation
of the Act is asserted by the Texas State Board of Dental Examiners that could
reasonably be expected to result in the suspension or revocation of, or the
imposition of penalties or disciplinary action on, the dental license of John
Goodman or any Dentists employed by PC on the grounds that PC's entering into
and performing its obligations under this Management Services Agreement is
unlawful, or as a result of a violation of the Act by Business Manager, PC may
immediately terminate this Management Services Agreement upon written notice to
Business Manager pursuant to Section 6.2(b)(iii).
Section 6.3 EFFECTS OF TERMINATION. Upon termination of this Management
Services Agreement 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 Manage ment Fee 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, which provisions shall survive the expiration or
termination of this Management Services Agreement for any reason. Without
limiting the generality of the foregoing, upon termination of this Management
Services Agreement for any reason, neither PC, John Goodman, D.D.S. nor Sheryl
Goodman shall be subject to any employment, noncompetition, confidentiality,
secrecy, hiring limitation or nonsolicitation obligations with respect to
Business Manager or any of its affiliates. 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 VII. MISCELLANEOUS
Section 7.1 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 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 7.2 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,
such agency to be strictly limited to the matters set forth herein. 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
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pursuant to any employment related 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 7.3 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: SW DENTAL ASSOCIATES, LC
--------------------------
--------------------------
--------------------------
Business Manager: CASTLE DENTAL CENTERS OF TEXAS, INC.
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056
Fax: (713) 513-1401
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 7.4 GOVERNING LAW. This Management Services Agreement shall be
governed by the laws of the State of Texas 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 Harris County, Texas is the seat of management for Business
Manager. The federal and State courts of Harris County, Texas 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.
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<PAGE>
Section 7.5 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 neither party
hereto may assign this Management Services Agreement without the prior written
consent of the other party, 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 other voting shares to any other person, or
any combination of such transactions 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 7.6 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
7.6.
(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 7.6; provided, however, that the terms and provisions
of this Section 7.6 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 7.3, the parties agree
to select arbitrators to hear and decide all such claims under this Section 7.6.
Each party shall select one arbitrator, and 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
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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 party may in writing request the judge
of the United States District Court for the Southern District of Texas senior in
term of service to appoint the arbitrator or arbitrators and, subject to this
Section 7.6, such arbitrators shall hear all arbitration matters arising under
this Section 7.6, 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 Houston,
Texas 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 7.6. 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) 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 set forth in this Section 7.6 for selecting the
arbitrators shall be followed from time to time as necessary.
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<PAGE>
(iv) 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.
(v) All privileges under Texas 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 Texas law.
Section 7.7 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 7.8 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 7.9 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 7.10 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 7.11 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.
Section 7.12 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
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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 7.13 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 7.14 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 7.15 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 7.16 ENTIRE MANAGEMENT SERVICES AGREEMENT. With respect to the
subject matter of this Management Services Agreement, (i) this Management
Services Agreement, the Option Agreement and the Member Interests Purchase
Agreement referred to in the Option Agreement supersedes all previous contracts
and constitutes the entire agreement between the parties; (ii) neither party
shall be entitled to benefits other than those specified herein; and (iii) no
prior oral statements or contemporaneous negotiations or understandings or prior
written material not specifically incorporated herein shall be of any force and
effect, and no changes in or additions
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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).
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: SW DENTAL ASSOCIATES LC
By: _____________________________
John G. Goodman, D.D.S.
President
BUSINESS MANAGER: CASTLE DENTAL CENTERS OF TEXAS, INC.
_________________________________
Jack H. Castle, Jr.
President
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EXHIBIT 10.82
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of
______________, 1997 (the "Effective Date"), by and between Castle Dental
Centers of Texas, Inc., a Texas corporation (the "Company"), and John Goodman,
D.D.S. ("Employee").
RECITALS:
Prior to the date hereof, Employee was the majority owner of Southwest
Dental Associates, L.C., which along with the Company and the Employee is a
party to that certain Option Agreement dated as of ______________, 1997 (the
"Option Agreement"). As a condition to the consummation of the transactions
contemplated by the Option Agreement and as an inducement for the Company and
Employee to perform their respective obligations under the Option 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. Employee's initial title is Vice
President with responsibility for the Company's operations in and around the
Austin, Texas metropolitan area.
(b) Employee's initial responsibility shall be to manage the Company's
operations, and to participate in the development and implementation of the
strategic plan of the Company, in the
<PAGE>
Austin, Texas metropolitan area. Employee's role in the development of the
strategic plan shall include, but not be limited to, an analysis of markets
selected by the Company and the identification of acquisition candidates.
Employee's role in the implementation of the strategic plan, subject to the
supervision of the Company's senior management, shall include, but not be
limited to, participating in the acquisition of dental practices, development of
new offices and responsibility for the management of dental practices in
accordance with a management services agreement to which the Company and such
practices are parties.
(c) The Company may reassign Employee from the duties described above
without breaching this Agreement; provided, however, that Employee shall not be
assigned duties inconsistent with his position as an executive of the Company or
relocate permanently outside of the city of Austin, Texas, and provided further,
that no such reassignment shall justify a decrease in the Base Salary (as herein
defined) payable to Employee.
(d) Employee shall devote his full business time, efforts and abilities to
the business of the Company for the benefit and advantage of the Company. During
the period of employment, Employee shall devote substantially his entire
business hours to the business of the Company, and shall perform such other
services as shall be reasonably designated, from time to time, by the Board of
Directors or senior executive officers of the Company. Employee shall use his
reasonable best efforts to promote the interests of the Company.
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 $175,000 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 INCENTIVE BONUS COMPENSATION. The Company has established the Castle
Dental Centers of Texas, Inc. Incentive Bonus Plan (the "Plan") which provides
for the Company to set aside for grant to certain management employees selected
by a committee consisting of Employee
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and the chief executive officer of Castle Dental Centers, Inc., a Delaware
corporation ("Castle") with the approval of the Compensation Committee of the
Board of Directors of Castle an aggregate of ten percent (10%) of the earnings
before interest, taxes, depreciation and amortization ("EBITDA") of the Austin
operations of the Company in excess of $1,120,000 per year, (which amount shall
be reduced for 1997 by the amount, if any, that the EBITDA for 1997 of the four
dental offices acquired by the Company and formerly operated by Horizon Dental
Centers in Austin, Texas is less than $520,000) attributable to the operations
of the Company under the direct management of Employee in the Austin, Texas
metropolitan area (the "Austin Operations"), computed without general overhead
allocation or charge with respect to the general and administrative expenses of
Castle, but taking into account direct costs incurred by Castle on behalf of the
Company and including a deduction equal to the cost of capital invested
(exclusive of initial acquisition costs) in the Austin Operations by Castle. For
the purposes of this Agreement, Castle's cost of capital shall be deemed to be
10%. The Employee is hereby granted the right to participate in the Plan for
each year prior to the Termination Date. The annual amount which the Employee
shall be entitled to receive from the Plan shall be determined by a committee
consisting of Employee and the chief executive officer of Castle with the
approval of the Compensation Committee of the Board of Directors of Castle.
2.3 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 comparable positions, with comparable service credit and with
comparable duties and responsibilities. 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.
2.4 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. The term of this Agreement shall commence on the date hereof and
end on _______________, 2000 subject to the right of either party to terminate
this agreement as provided
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below. The date on which this Agreement is terminated is referred to hereunder
as the "Termination Date".
3.2 DEATH; DISABILITY. Subject to the provisions of Section 3.5(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. Either the Company or Employee may
terminate this Agreement at any time, without cause, by giving the other thirty
(30) days' written notice of termination.
3.4 TERMINATION WITH 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 or intending to result in personal gain or 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) a good faith determination by the Board of Directors of the
Company that Employee has violated this Agreement or committed 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; or
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(d) the commission of any felony on the part of Employee which, in
the sole discretion of the Board of Directors of the Company, materially and
adversely, directly or indirectly, affects the name or goodwill of the Company;
A notice of termination pursuant to this Section 3.4 shall be in writing
and shall state the alleged 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 determines, 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 such inquiry, to relieve Employee of his regular duties.
3.5 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 bonus and noncash benefits) the
Employee would have earned for the three month period subsequent to the
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, bonus 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) due
to a breach of this Agreement by the Company, 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 Term described in Section 3.1 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 the term of this
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Agreement; provided, however, prior to the termination of this Agreement as the
result of a breach hereof by the Company, Employee shall give written notice of
such breach and the Company shall have a thirty day period within which to cure
such breach.
3.6 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 Articles III, IV, V and VI.
3.7 PAYMENTS TO ESTATE. If Employee should die before all amounts payable
to him pursuant to Section 3.5 have been paid, such unpaid amounts shall be paid
to 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 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 and include any and all records, computer programs, data, patent
applications, trade secrets, customer lists, customer databases, video programs
and programming, proprietary information, technology, pricing policies,
financial information, methods of doing business, acquisition practices, policy
and/or procedure manuals, training and recruiting procedures, accounting
procedures, the status and
-6-
<PAGE>
content of the Company's contracts with its customers, the Company's business
philosophy, and servicing methods and techniques at any time used, developed, or
investigated by the Company, before or during Employee's tenure of employment,
or other information of any kind expressed or recorded on any medium arising out
of, concerning, or acquired in connection with the research, development,
commercialization and other activities of the Company; but "Confidential
Information" does not include information (i) generally known or available in
the industry, through no fault of Employee; or (ii) available from a third party
without violation of any duty of confidentiality by Employee or others.
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.
ARTICLE V
5.1 NONINTERFERENCE WITH EMPLOYMENT RELATIONSHIPS. 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 Jack H. Castle, D.D.S., P.C. ("Castle 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 Castle 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 of the Company or Castle 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
-7-
<PAGE>
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 Castle PC within a
ten mile radius around the city limits of any city in the State of Texas in
which the Employee has responsibility for the management of locations providing
dental management services as of the date of Employee's employment hereunder;
provided, however, that Employee shall be able to practice dentistry as a sole
practitioner without violating this section.
5.4 SAME OR SIMILAR BUSINESS DEFINED. For purposes of this Article V, the
"Same or Similar Business" as the Company or Castle PC shall be defined as any
business that is engaged to a significant extent in the provision of 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.
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 Texas 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
-8-
<PAGE>
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) 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 Texas without regard to
conflict of laws provision. This Agreement is performable in Travis County,
Texas.
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.
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 any one 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. 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.
-9-
<PAGE>
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 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 AUSTIN, TEXAS 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 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. 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 seek
-10-
<PAGE>
injunctive and equitable relief for any such breach, in addition to all other
remedies permitted by law.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement in ____________, Texas as of the date first set forth above.
THE COMPANY:
CASTLE DENTAL CENTERS OF TEXAS, INC.
By: ________________________________
Name: Jack H. Castle, Jr.
Title: President
Address: __________________________
____________________________________
____________________________________
ATTENTION: President
EMPLOYEE:
____________________________________
John Goodman, D.D.S.
Address: ___________________________
____________________________________
____________________________________
____________________________________
-11-
EXHIBIT 10.83
CONSULTING AGREEMENT
This Consulting Agreement (the "Agreement") is entered into as of
_____________, 1997 (the "Effective Date"), by and between Castle Dental Centers
of Texas, Inc., a Texas corporation (the "Company"), and Sheryl L. Goodman
("Consultant").
RECITALS:
Prior to the date hereof, Consultant was an employee of Southwest Dental
Associates, L.C., which along with the Company is a party to that certain Option
Agreement dated as of ___________, 1997 (the "Option Agreement"). As a condition
to the consummation of the transactions contemplated by the Option Agreement and
as an inducement for the Company and Southwest Dental Associates, L.C. to
perform their respective obligations under the Option Agreement, the Company and
Consultant have entered into this Agreement.
The parties agree as follows:
ARTICLE I
1.1 CONSULTING RELATIONSHIP.
(a) The Company agrees to, and hereby does, retain Consultant, on the
terms and conditions set forth herein, to provide consulting services to the
Company as requested from time to time by the Company's senior management.
(b) Consultant shall devote approximately 100 hours per month in
performing the services contemplated hereby for the benefit and advantage of the
Company, provided, however, that Consultant shall not receive any additional
compensation for devoting more than 100 hours per
<PAGE>
month in such capacity. Consultant shall use her reasonable best efforts to
promote the interests of the Company.
ARTICLE II
2.1 SALARY. As compensation for her service during the term of this
Agreement (or until terminated pursuant to the provisions hereof), the Company
shall pay Consultant a salary at the rate of $50,000 per annum payable
semi-monthly. Such Base Salary shall not be subject to withholding for any
prescribed federal and state income tax, social security or other items, such
matters being the sole responsibility of the Consultant.
2.2 REIMBURSEMENT OF EXPENSES. The Company shall reimburse all reasonable
travel and entertainment expenses incurred by Consultant in connection with the
performance of her duties pursuant to this Agreement, which have been approved
by the Company in advance. Consultant shall provide the Company with written
expense reports of her expenses in accordance with the usual customary practice
of the Company.
ARTICLE III
3.1 TERM. The term of this Agreement shall commence on the date hereof and
end on _______________, 2000 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".
3.2 DEATH; DISABILITY. Subject to the provisions of Section 3.5(a), this
Agreement shall be automatically terminated on the death of Consultant or on the
permanent disability of Consultant if she is no longer able, with reasonable
accommodation, to perform her consulting services to the Company. In the event
of Consultant's disability, this Agreement shall terminate automatically on
written notice of termination by the Company.
3.3 TERMINATION WITHOUT CAUSE. Either the Company or Consultant may
terminate this Agreement at any time, without cause, by giving the other thirty
(30) days' written notice of termination.
-2-
<PAGE>
3.4 TERMINATION WITH 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 Consultant's retention for any of the following grounds:
(a) the commission of any act of fraud on the part of Consultant
resulting or intending to result in personal gain or 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) a good faith determination by the Board of Directors of the
Company that Consultant has violated this Agreement or committed an act of gross
negligence or willful misconduct (in the case of a breach, following notice
thereof to Consultant by the Company and a thirty day period thereafter within
which Consultant 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; or
(d) the commission of any felony on the part of Consultant which, in
the sole discretion of the Board of Directors of the Company, materially and
adversely, directly or indirectly, affects the name or goodwill of the Company.
A notice of termination pursuant to this Section 3.4 shall be in writing
and shall state the alleged reason for termination. Within not less than five
(5) nor more than twenty (20) days after such notice, Consultant 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 determines, by vote of a majority of the directors other
than Consultant (if Consultant is then a director), that one or more grounds
exist for termination of Consultant for Cause, the Company may immediately
terminate Consultant's relationship under this Section 3.4. The Company may
elect, during the pendency of such inquiry, to relieve Consultant of her regular
duties.
3.5 SEVERANCE PAY. In the event of termination, Consultant shall be
entitled to compensation (the "Severance Pay") in accordance with the following:
-3-
<PAGE>
(a) If (i) Consultant voluntarily terminates her consulting
relationship, or (ii) the Company terminates this Agreement for Cause, or (iii)
if Consultant's consulting relationship is terminated by reason of her death or
disability, Consultant shall not be entitled to receive any additional fees
beyond those earned or accrued as of the effective date of the termination of
her consulting relationship.
(b) If Consultant's consulting relationship hereunder is terminated
prior to the expiration of the term of this Agreement, and such termination is
either (i) due to a breach of this Agreement by the Company, or (ii) by the
Company and not for Cause, Consultant shall be entitled to Severance Pay in an
amount equal to the amount of the consulting fees that the Consultant would have
earned for the six months following the effective date of termination (but in no
event to extend beyond the Term described in Section 3.1 hereof), payable at
such time or times as would have been paid to Consultant had she maintained her
consulting relationship with the Company through the term of this Agreement;
provided, however, prior to the termination of this Agreement as the result of a
breach hereof by the Company, Consultant shall give written notice of such
breach and the Company shall have a thirty day period within which to cure such
breach.
3.6 EFFECT OF TERMINATION ON AGREEMENT. Any termination of Consultant's
consulting relationship shall not release either the Company or Consultant 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 Articles III and IV.
3.7 PAYMENTS TO ESTATE. If Consultant should die before all amounts
payable to her pursuant to Section 3.5 have been paid, such unpaid amounts shall
be paid to Consultant's estate.
ARTICLE IV
4.1 NONDISCLOSURE AND NONUSE OF CONFIDENTIAL INFORMATION. Consultant
understands and agrees that her retention by the Company creates a relationship
of confidence and trust between herself and the Company with respect to
Confidential Information (as defined below). Consultant recognizes that she will
have access to and knowledge of Confidential Information. Consultant will not,
during or after the term of her consulting relationship with 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 she make use of any such Confidential Information for her own purposes
or for the purposes of others; provided, however, that nothing in this Article
-4-
<PAGE>
shall be construed to prohibit the disclosure of such Confidential Information
by the Consultant (i) to an officer, director, employee or agent of the Company;
(ii) as is reasonably necessary for the performance of her duties and
responsibilities under this Agreement; or (iii) as otherwise required by law. If
Consultant is required by law to disclose "Confidential Information," Consultant
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 and include any and all records, computer programs, data, patent
applications, trade secrets, customer lists, customer databases, video programs
and programming, proprietary information, technology, pricing policies,
financial information, methods of doing business, acquisition practices, policy
and/or procedure manuals, training and recruiting procedures, accounting
procedures, the status and content of the Company's contracts with its
customers, the Company's business philosophy, and servicing methods and
techniques at any time used, developed, or investigated by the Company, before
or during Consultant's tenure of retention, or other information of any kind
expressed or recorded on any medium arising out of, concerning, or acquired in
connection with the research, development, commercialization and other
activities of the Company; but "Confidential Information" does not include
information (i) generally known or available in the industry, through no fault
of Consultant, or (ii) available from a third party without violation of any
duty of confidentiality by Consultant or others.
4.3 DELIVERY OF MATERIALS. Consultant further agrees to deliver to the
Company at the termination of her retention 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 Consultant, solely or
jointly with others, during the term of her retention and which are in
Consultant'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.
ARTICLE V
5.1 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
-5-
<PAGE>
and be enforceable by its assignee or successor in interest. The rights and
obligations of Consultant under this Agreement are personal to her, and no such
rights, benefits or obligations shall be assignable, except that her personal
representatives and heirs may enforce the obligations of the Company hereunder.
5.2 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.
5.3 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) 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.
5.4 GOVERNING LAW. This Agreement shall be interpreted, construed and
governed in accordance with the laws of the State of Texas without regard to
conflict of laws provision. This Agreement is performable in Travis County,
Texas.
5.5 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.
5.6 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.
5.7 LEGAL CONSTRUCTION. In case any one 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. 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-
<PAGE>
5.8 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.
5.9 PRIOR AGREEMENTS SUPERSEDED. This Agreement constitutes the sole and
only Agreement of the parties hereto and supersedes any prior understanding or
written or oral agreements, correspondence or communications between the parties
respecting the subject matter hereof.
5.10 ARBITRATION. EXCEPT FOR THE REMEDY PROVIDED UNDER SECTION 5.11 BELOW,
ANY CLAIM OR DISPUTE ARISING UNDER OR RELATING TO THIS AGREEMENT OR THE
RETENTION OF CONSULTANT BY THE COMPANY SHALL BE SUBMITTED TO FINAL AND BINDING
ARBITRATION IN AUSTIN, TEXAS 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 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 ARTICLE IV 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 HERSELF OR ITSELF AND THEIR RESPECTIVE SUCCESSORS, HEIRS AND ASSIGNS,
TO SUCH BINDING ARBITRATION IN ACCORDANCE WITH THE TERMS OF THIS SECTION.
5.11 REMEDIES. Consultant agrees that the remedy at law for any breach of
any provision of Article IV will be inadequate and that the Company will be
entitled to seek injunctive and equitable relief for any such breach, in
addition to all other remedies permitted by law.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Consulting
Agreement in ____________, ____________ as of the date first set forth above.
THE COMPANY:
CASTLE DENTAL CENTERS OF TEXAS, INC.
By: ________________________________
Name: Jack H. Castle, Jr.
Title: President
Address: ___________________________
____________________________________
____________________________________
ATTENTION: President
CONSULTANT:
____________________________________
Sheryl L. Goodman
Address: ___________________________
____________________________________
____________________________________
____________________________________
-8-
CASTLE DENTAL CENTERS
EXHIBIT 11.1 -- COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS
ENDED ENDED
YEAR ENDED DECEMBER 31, MARCH 31, MARCH 31,
------------------------------- --------- ---------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PRIMARY:
Weighted average common shares
outstanding........................ 2,000 2,000 2,000 2,000 2,332
Weighted average shares issued for
business acquisitions.............. -- -- 160 -- --
Assumed conversion of preferred stock
issued within one year of initial
public offering.................... 948 948 948 948 948
--------- --------- --------- --------- ---------
Total primary shares................. 2,948 2,948 3,108 2,948 3,280
========= ========= ========= ========= =========
Net income (loss).................... $ 781 $ (2,414) $ (1,086) $ 77 $ 12
========= ========= ========= ========= =========
Net income (loss) per share.......... $ 0.26 $ (0.82) $ (0.35) $ 0.03 $ --
========= ========= ========= ========= =========
FULLY DILUTED:
Weighted average common shares
outstanding........................ 2,000 2,000 2,000 2,000 2,332
Weighted average shares issued for
business acquisitions.............. -- -- 160 -- --
Assumed conversion of preferred stock
issued within one year of initial
public offering.................... 948 948 948 948 948
--------- --------- --------- --------- ---------
Total fully diluted shares........... 2,948 2,948 3,108 2,948 3,280
========= ========= ========= ========= =========
Net income (loss).................... $ 781 $ (2,414) $ (1,086) $ 77 $ 12
========= ========= ========= ========= =========
Net income (loss) per share.......... $ 0.26 $ (0.82) $ (0.35) $ 0.03 $ --
========= ========= ========= ========= =========
</TABLE>
CASTLE DENTAL CENTERS
EXHIBIT 11.2 -- COMPUTATION OF EARNINGS PER SHARE
UNDER SAB NO. 55
(IN THOUSANDS)
THREE
MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------ ---------
1996 1997
------------ ---------
PRIMARY:
Weighted average common shares
outstanding........................ 2,000 2,332
Weighted average shares issued for
business acquisitions.............. 160 --
Assumed conversion of preferred stock
issued within one year of initial
public offering.................... 948 948
Assumed issuance of stock to fund
distribution to owner.............. 545 545
------------ ---------
Total primary shares................. 3,653 3,825
============ =========
Net income (loss).................... $ (1,086) $ 12
============ =========
Net income (loss) per share.......... $ (0.30) $ --
============ =========
FULLY DILUTED:
Weighted average common shares
outstanding........................ 2,000 2,332
Weighted average shares issued for
business acquisitions.............. 160 --
Assumed conversion of preferred stock
issued within one year of initial
public offering.................... 948 948
Assumed issuance of stock to fund
distribution to owner.............. 545 545
------------ ---------
Total fully diluted shares........... 3,653 3,825
============ =========
Net income (loss).................... $ (1,086) $ 12
============ =========
Net income (loss) per share.......... $ (0.30) $ --
============ =========
CASTLE DENTAL CENTERS
EXHIBIT 11.3 -- COMPUTATION OF PRO FORMA EARNINGS PER SHARE
(IN THOUSANDS)
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
PRIMARY:
Weighted average common shares
outstanding........................... 2,000 2,332
Assumed conversion of preferred stock
issued within one year of initial
public offering....................... 948 948
Shares issued for business
acquisitions.......................... 332 --
Net effect of dilutive stock options,
convertible debt, and warrants --
based on the treasury stock method
using average market price............ 6 6
Shares issued in initial public
offering.............................. 2,500 2,500
Less excess shares issued in initial
public offering....................... (33) (33)
----------------- --------------
Total primary shares.................... 5,753 5,753
================= ==============
Pro forma net income.................... $ 718 $ 445
================= ==============
Pro forma net income per share.......... $ 0.12 $ 0.08
================= ==============
FULLY DILUTED:
Weighted average common shares
outstanding........................... 2,000 2,332
Assumed conversion of preferred stock
issued within one year of initial
public offering....................... 948 948
Shares issued for business
acquisitions.......................... 332 --
Net effect of dilutive stock options and
warrants -- based on the treasury
stock method using the year-end market
price, if higher than average market
price................................. 6 6
Shares issued in initial public
offering.............................. 2,500 2,500
Less excess shares issued in initial
public offering....................... (33) (33)
----------------- --------------
Total fully diluted shares.............. 5,753 5,753
================= ==============
Pro forma net Income.................... $ 718 $ 445
================= ==============
Pro forma net income per share.......... $ 0.12 $ 0.08
================= ==============
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 reports dated June 19, 1997, on our audits of the
financial statements and financial statement schedule of Castle Dental Centers,
Inc. and its combined predecessor companies as of December 31, 1995 and 1996 and
for each of the three years in the period ended December 31, 1996, ii) our
report dated June 18, 1997 on our audits of the financial statements of SW
Dental Associates, LC as of December 31, 1995 and 1996 and for each of the two
years in the period ended December 31, 1996, iii) 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, iv) 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, and v) 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. We also consent to the reference to our firm
under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Houston, Texas
June 19, 1997
