AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1997
REGISTRATION NO. 333-11335
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CASTLE DENTAL CENTERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
8021
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
DELAWARE 76-0486898
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) 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 AUGUST 12, 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 $11.00 and $13.00 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>
[LOGO]
CASTLE DENTAL CENTERS, INC.
[GRAPHIC -- MAP OF THE SOUTHERN UNITED STATES SHOWING LOCATIONS OF THE
COMPANY'S REGIONAL OFFICE LOCATIONS AND DENTAL CENTERS UNDER MANAGEMENT.]
CASTLE DENTAL CENTER(TM) AND CASTLE DENTAL CENTERS(TM) 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 $12.00, (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.
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 August 1, 1997, the Company provided
management services to 40 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. According to the Health Care Financing Administration,
Health Care Financing Review (1995), 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 8.1% from
1980 to 1995, and is projected to grow at a compound annual growth rate of
approximately 6.3% 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.
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.
3
<PAGE>
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 on behalf of the affiliated dental
practices. The Company's affiliated dental practices currently maintain an
aggregate of 11 capitated managed care contracts covering approximately 30,000
members, and, upon consummation of the Austin Acquisition, the Company's
affiliated dental practices will have an aggregate of 16 capitated managed care
contracts covering approximately 50,000 members. The Company believes that the
continued development of its networks will assist it in negotiating national and
regional capitated arrangements on behalf of the affiliated dental practices
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
outstanding 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 ______ shares issuable on (i) the exercise of options to
purchase an aggregate of ______ 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 129,166 shares of Series B Convertible Preferred Stock
into 129,166 shares of Common Stock.
4
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- ---------------------------------
PRO FORMA PRO FORMA
(1)(2) (1)(2)
1994 1995 1996 1996 1996 1997 1997
--------- --------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Patient revenues of affiliated dental
practices(3).......................... $ 17,083 $ 18,257 $ 29,601 $ 42,569 $ 10,707 $ 21,327 $ 23,950
Amounts retained by affiliated dental
practices(3).......................... -- -- 9,981 11,851 3,386 6,954 7,605
--------- --------- --------- ---------- --------- --------- ----------
Net revenues(3)......................... 17,083 18,257 19,620 30,718 7,321 14,373 16,345
Expenses:
Dentists' salaries(3)................. 2,853 3,345 -- -- -- -- --
Professional fees and clinic
expenses(4)......................... -- -- -- 1,997 -- -- --
Clinical salaries..................... 1,811 1,879 4,233 7,178 1,359 2,781 3,533
Dental supplies and laboratory fees... 1,907 2,185 3,120 4,231 1,351 1,967 2,313
Rental and lease expense.............. 681 836 1,592 2,266 490 1,258 1,316
Advertising and marketing............. 1,062 959 1,522 2,034 533 1,031 1,120
Depreciation and amortization......... 309 336 1,088 1,780 334 963 1,125
Other operating expenses.............. 2,205 2,260 2,913 3,818 1,045 1,784 1,958
General and administrative(5)......... 5,319 9,109 4,292 5,808 1,200 3,047 3,361
--------- --------- --------- ---------- --------- --------- ----------
Total expenses.................... 16,147 20,909 18,760 29,112 6,312 12,831 14,726
--------- --------- --------- ---------- --------- --------- ----------
Operating income (loss)................. 936 (2,652) 860 1,606 1,009 1,542 1,619
Interest expense........................ 112 87 2,596 635 1,065 1,683 280
Other income(6)......................... -- -- (89) (89) (106) (12) (12)
--------- --------- --------- ---------- --------- --------- ----------
Income (loss) before income taxes....... 824 (2,739) (1,647) 1,060 50 (129) 1,351
Provision (benefit) for income taxes.... 43 (325) (561) 361 19 (49) 513
--------- --------- --------- ---------- --------- --------- ----------
Net income (loss)(7).................... 781 (2,414) (1,086) 699 31 (80) 838
Preferred stock dividends(8)............ -- -- -- -- -- (309) --
--------- --------- --------- ---------- --------- --------- ----------
Net income (loss) attributable to common
stock................................. $ 781 $ (2,414) $ (1,086) $ 699 $ 31 $ (389) $ 838
========= ========= ========= ========== ========= ========= ==========
Net income (loss) per share(9).......... $ (0.30) $ 0.12 $ 0.01 $ (0.10) $ 0.15
========= ========== ========= ========= ==========
Weighted average outstanding
shares(9)............................. 3,626 5,776 3,010 3,798 5,776
SELECTED OPERATING DATA:
(END OF PERIOD)
Number of Dental Centers................ 8 8 35 39 8 35 39
Number of Dentists...................... 35 39 98 112 39 93 108
</TABLE>
JUNE 30, 1997
------------------------
PRO FORMA AS
ACTUAL ADJUSTED(10)
--------- ------------
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 1,488 $ 1,750
Working capital......................... (11,978) 1,532
Total assets............................ 32,167 37,832
Long-term debt and capital lease
obligations, less current portion..... 10,327 4,649
Redeemable preferred stock(11).......... 4,381 1,550
Total stockholders' equity (deficit).... (3,898) 23,406
5
<PAGE>
- ------------
(1) Gives effect to (i) the issuance of $2.0 million of the Company's 12%
Senior Subordinated Notes, and the issuance of 485,382 shares of Series C
Convertible Preferred Stock (collectively, 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 $3.8 million
extraordinary loss on retirement of $9.5 million of the Senior Subordinated
Notes, and an additional $1.5 million non-cash dividend on the Series C
Convertible Preferred Stock, which will be recognized in the period this
offering is completed. (See Note 8 below.)
(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 provided 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) In 1995, the Company expensed $2.6 million of deferred compensation in
connection with the Reorganization.
(6) Represents primarily gain or loss on sale of assets and interest income.
(7) 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 $515,000
and ($1.7 million) for the years ended December 31, 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."
(8) The Company recorded a $309,000 non-cash dividend to accrete the Series A
Convertible Preferred Stock and the Series C Convertible Preferred Stock to
their estimated fair value at their redemption date of December 2001. The
Company anticipates recording an additional $1.5 million non-cash dividend
on the Series C Convertible Preferred Stock and a $3.8 million
extraordinary loss on the Senior Subordinated Notes upon conversion of the
Series A Convertible Preferred Stock and the Series C Convertible Preferred
Stock into the Company's Common Stock and retirement of the Senior
Subordinated Notes in connection with the offering.
(9) Shares used in calculating net income per share for the year ended December
31, 1996 and the six months ended June 30, 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 $6.0 million payment to Jack H. Castle, D.D.S. in
connection with the Reorganization. See "Unaudited Pro Forma Consolidated
Financial Information" and "Certain Transactions."
(10) 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 129,166 shares of Series B Convertible
Preferred Stock, as if each of such transactions had occurred as of June
30, 1997.
(11) Represents 1,244,737 shares of Series A Convertible Preferred Stock,
129,166 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 substantially all 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 and profitability are dependent on revenue generated
by and profitability of 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. 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 "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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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 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
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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's affiliated practices contract with third-party payors, including
self-insured plans, for certain non-fee-for-service arrangements, 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, 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's affiliated dental practices 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 could reduce or eliminate any earnings for the affiliated practices under
these contracts and could adversely affect the profitability of the Company.
RISKS RELATED TO INTANGIBLE ASSETS
As of June 30, 1997, the Company's total pro forma adjusted assets were
approximately $37.8 million, of which approximately $22.6 million, or 60%, were
intangible assets, net of accumulated amortization. The
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intangible assets represent the value assigned to the management services
agreements, 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 June 30, 1997 are related to the Acquisition Transactions (as
hereinafter defined) with $6.5 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 25-year period.
Amortization of the intangible assets on the Company's pro forma adjusted
balance sheet as of June 30, 1997 will produce annual amortization expense of
approximately $930,000. Of this amount, the Austin Acquisition is expected to
produce annual amortization expense of approximately $258,000. 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 June 30, 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 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
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and at a reasonable cost to insure adequately and economically the Company's
operations in the future. A judgment against the Company in excess of such
coverage could have a material adverse effect on the Company.
RISKS ASSOCIATED WITH POTENTIAL LITIGATION
In July and August 1997, a dentist from whom the Company acquired Horizon
Dental Centers in August 1996 asserted claims against the Company contending
that the Company misrepresented the value of the Common Stock issued to him as a
part of the consideration for the acquisition, and demanded the issuance of
approximately 200,000 shares of Common Stock as additional consideration for the
transaction. The Company believes that the asserted claims are without merit and
has denied the demand for the issuance of additional shares of Common Stock. The
Company has been advised that the complainant does not presently intend to
commence litigation against the Company. In the event, however, that litigation
is initiated against the Company, the Company intends to defend itself
vigorously.
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 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 $2.6
million 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 $25.0 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, and if the Underwriters exercise their
over-allotment option in full, the Company intends to prepay the remaining $1.9
million balance due under the Deferred Compensation Agreement. The Company has
obtained the required consents under the Bank Credit Facility to prepay these
amounts.
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."
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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.
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
for a period of 180 days after the date of this Prospectus without the prior
written consent of the Representatives; provided however, that the Company is
permitted to issue shares of Common Stock in connection with acquisitions to
parties that agree to be bound by the same restrictions on offers and sales.
After the 180-day period, these 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 [_____________] 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."
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CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation, 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 $11.85 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 July 1997, the Company expanded to a total of 11
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 11 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, $894,000 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 129,166 shares
of the Company's Series B Convertible Preferred Stock. The Company will also
assume approximately $412,000 of long-term debt and capital lease obligations in
connection with the Austin Acquisition.
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USE OF PROCEEDS
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 $26.6 million
(approximately $30.8 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 $7.5 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 July 31, 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. Included in
the Seller Notes to be retired is an aggregate of $943,363 of the Seller Notes
which are convertible prior to the payment of such Seller Notes at the option of
the holder 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 $25.0
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. 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. In the event the Underwriters exercise their
over-allotment option
17
<PAGE>
in full, the Company intends to prepay the remaining $1.9 million balance due
under the Deferred Compensation Agreement. The Company has obtained the required
consents under the Bank Credit Facility to prepay 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 June 30, 1997, was a deficit
of approximately $(20.0) million, or $(8.57) 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 June 30, 1997 would have been
approximately $851,000 or $0.15 per share. This represents an immediate increase
in pro forma net tangible book value of $8.72 per share to stockholders as of
June 30, 1997, consisting of $9.84 per share attributable to this offering
offset by a decrease of $1.12 per share attributable to the Austin Acquisition.
This results in an immediate dilution in pro forma net tangible book value of
$11.85 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............................ $ 12.00
---------
Net deficit book value per share
as of June 30, 1997............ $ (8.57)
Increase in net tangible book
value per share attributable to
this offering.................. 9.84
Decrease in net tangible book
value per share attributable to
the Austin Acquisition......... (1.12)
---------
Pro forma net tangible book value per
share after this offering.......... 0.15
---------
Dilution per share to purchasers of
Common Stock in this offering...... $ 11.85
=========
The following table shows, on a pro forma basis as of June 30, 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% $ 7,490,000 20.0% $ 2.28
New investors........................ 2,500,000 43.3 30,000,000 80.0 12.00
----------- ------- -------------- -------
Total................................ 5,780,239 100.0% $ 37,490,000 100.0%
=========== ======= ============== =======
</TABLE>
The foregoing tables assume no exercise of outstanding options or warrants.
As of the closing of this offering, there will be approximately [_____________]
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.
18
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
June 30, 1997, and (ii) the pro forma capitalization as of June 30, 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 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 129,166
shares of Series B Convertible Preferred Stock in connection with the Austin
Acquisition as if each of such events had occurred as of June 30, 1997.
JUNE 30, 1997
------------------------
PRO FORMA
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
Current portion of long-term debt and
capital lease obligations.......... $ 12,737 $ 1,280
========= ===========
Long-term debt and capital lease
obligations, less current
portion............................ $ 10,327 $ 4,649
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)........................ 3,228 --
Redeemable Preferred Stock, $0.001
par value, 129,166 shares of Series
B issued and outstanding pro forma
as adjusted(2)..................... -- 1,550
Redeemable Preferred Stock, $0.001
par value, 485,382 shares of Series
C issued and outstanding actual, no
shares issued and outstanding pro
forma, as adjusted(3).............. 1,153 --
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(4)........ 2 6
Additional paid-in capital......... 3,107 34,159
Accumulated deficit(5)............. (7,007) (10,759)
--------- -----------
Total stockholders' equity
(deficit)...................... (3,898) 23,406
--------- -----------
Total capitalization....... $ 10,810 $ 29,605
========= ===========
- ------------
(1) Represents the Series A Convertible Preferred Stock which will be converted
into 705,552 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 129,166 shares of Common Stock, one year after the consummation of this
offering at the option of the holder.
(3) Represents the Series C Convertible Preferred Stock which will be converted
into 242,691 shares of Common Stock upon consummation of this offering. See
"Description of Capital Stock."
(4) Excludes an aggregate of approximately [_____________] shares issuable on
(i) the exercise of options to purchase an aggregate of approximately
[_____________] 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
129,166 shares of Common Stock.
(5) Pro forma deficit has been increased for $3.8 million 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.
19
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected historical financial data of the Company should be read in
conjunction with the related financial statements, notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus. The selected historical
financial data set forth below as of December 31, 1994, 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 June 30, 1997 and for the six months ended June 30, 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 June
30, 1997 and for the year ended December 31, 1996 and for the six months ended
June 30, 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 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," (ii) 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 (iii) the Austin Acquisition and the issuance of 129,166
shares of Series B Convertible Preferred Stock, as if each of such transactions
had occurred as of June 30, 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>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
PRO FORMA
(1)(2)
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- ----------
<S> <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
Amounts retained by affiliated dental
practices(3)........................... -- -- -- -- 9,981 11,851
--------- --------- --------- --------- --------- ----------
Net revenues(3)......................... 13,978 15,053 17,083 18,257 19,620 30,718
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
Dental supplies and laboratory fees... 1,403 1,565 1,907 2,185 3,120 4,231
Rental and lease expense.............. 411 504 681 836 1,592 2,266
Advertising and marketing............. 580 729 1,062 959 1,522 2,034
Depreciation and amortization......... 193 245 309 336 1,088 1,780
Other operating expenses.............. 1,915 1,871 2,205 2,260 2,913 3,818
General and administrative(5)......... 5,085 4,947 5,319 9,109 4,292 5,808
--------- --------- --------- --------- --------- ----------
Total expenses.................... 12,756 14,074 16,147 20,909 18,760 29,112
--------- --------- --------- --------- --------- ----------
Operating income (loss)................. 1,222 979 936 (2,652) 860 1,606
Interest expense........................ 182 130 112 87 2,596 635
Other income(6)......................... -- -- -- -- (89) (89)
--------- --------- --------- --------- --------- ----------
Income (loss) before income taxes....... 1,040 849 824 (2,739) (1,647) 1,060
Provision (benefit) for income taxes.... -- 40 43 (325) (561) 361
--------- --------- --------- --------- --------- ----------
Net income (loss)(7).................... 1,040 809 781 (2,414) (1,086) 699
Preferred stock dividends(8)............ -- -- -- -- -- --
--------- --------- --------- --------- --------- ----------
Net income (loss) attributable to common
stock................................. $ 1,040 $ 809 $ 781 $ (2,414) $ (1,086) $ 699
========= ========= ========= ========= ========= ==========
Net income (loss) per share(9).......... $ (0.30) $ 0.12
========= ==========
Weighted average outstanding
shares(9)............................. 3,626 5,776
</TABLE>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
PRO FORMA
(1)(2)
1996 1997 1997
--------- --------- ----------
STATEMENT OF OPERATIONS DATA:
Patient revenues of affiliated dental
practices(3).......................... $ 10,707 $ 21,327 $ 23,950
Amounts retained by affiliated dental pr
3,386 6,954 7,605
Net revenues(3)......................... --------- --------- ----------
Expenses: 7,321 14,373 16,345
Dentists' salaries(3).................
Professional fees & clinic -- -- --
expenses(4).........................
Clinical salaries..................... -- -- --
Dental supplies and laboratory fees... 1,359 2,781 3,533
Rental and lease expense.............. 1,351 1,967 2,313
Advertising and marketing............. 490 1,258 1,316
Depreciation and amortization......... 533 1,031 1,120
Other operating expenses.............. 334 963 1,125
General and administrative(5)......... 1,045 1,784 1,958
1,200 3,047 3,361
Total expenses.................... --------- --------- ----------
6,312 12,831 14,726
Operating income (loss)................. --------- --------- ----------
Interest expense........................ 1,009 1,542 1,619
Other income(6)......................... 1,065 1,683 280
(106) (12) (12)
Income (loss) before income taxes....... --------- --------- ----------
Provision (benefit) for income taxes.... 50 (129) 1,351
19 (49) 513
Net income (loss)(7).................... --------- --------- ----------
Preferred stock dividends(8)............ 31 (80) 838
-- (309) --
Net income (loss) attributable to common --------- --------- ----------
stock.................................
$ 31 $ (389) $ 838
Net income (loss) per share(9).......... ========= ========= ==========
$ 0.01 (0.10) $ 0.15
Weighted average outstanding ========= ========= ==========
shares(9).............................
3,010 3,798 5,776
20
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1997
DECEMBER 31, ------------------------
----------------------------------------------------- PRO FORMA AS
1992 1993 1994 1995 1996 ACTUAL ADJUSTED(10)
--------- --------- --------- --------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 292 $ 34 $ 22 $ 6,439 $ 79 $ 1,488 $ 1,750
Working capital......................... 2,247 773 1,212 6,208 (3,244) (11,978) 1,532
Total assets............................ 5,087 4,130 4,711 12,677 29,167 32,167 37,832
Long-term debt and capital lease
obligations, less current portion..... 785 496 162 9,462 18,951 10,327 4,649
Redeemable preferred stock(11).......... -- -- -- 2,928 2,928 4,381 1,550
Total stockholders' equity (deficit).... 2,631 1,796 2,577 (5,743) (3,509) (3,898) 23,406
</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 $3.8 million
extraordinary loss on retirement of $9.5 million of the Senior Subordinated
Notes, and an additional $1.5 million non-cash dividend on the Series C
Convertible Preferred Stock, which will be recognized in the period this
offering is completed. (See Note 8 below)
(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 provided 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) In 1995, the Company expensed $2.6 million of deferred compensation in
connection with the Reorganization.
(6) Represents primarily gain or loss on sale of assets and interest income.
(7) 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 ($1.7 million) 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."
(8) The Company recorded a $309,000 non-cash dividend to accrete the Series A
Convertible Preferred Stock and the Series C Convertible Preferred Stock to
their estimated fair value at their redemption date of 2001. The Company
anticipates recording an additional $1.5 million non-cash dividend on the
Series C Convertible Preferred Stock and a $3.8 million extraordinary loss
on the Senior Subordinated Notes upon conversion of the Series A
Convertible Preferred Stock and the Series C Convertible Preferred Stock
into the Company's Common Stock and retirement of the Senior Subordinated
Notes in connection with the offering.
(9) Shares used in calculating net income per share for the year ended December
31, 1996 and the six months ended June 30, 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 $6.0 million payment to Jack H. Castle, D.D.S. in connection with the
Reorganization. See "Unaudited Pro Forma Consolidated Financial
Information" and "Certain Transactions."
(10) 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 129,166 shares of Series B Convertible
Preferred Stock, as if such transactions had occurred as of June 30, 1997.
(11) Represents 1,244,737 shares of Series A Convertible Preferred Stock,
129,166 shares of Series B Convertible Preferred Stock and 485,382 shares
of Series C Convertible Preferred Stock.
21
<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 August 1, 1997,
the Company managed 40 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 129,166 shares of Series B Convertible
Preferred Stock. See "Description of Capital Stock -- Preferred Stock." The
Company will also assume debt obligations of $412,000 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.
22
<PAGE>
The aggregate consideration for the Completed Acquisitions consisted of
approximately $9.3 million in cash, $894,000 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 three components: (i) the costs incurred by it on
behalf of the affiliated practice; (ii) a base management fee in an amount
ranging from 12.5% to 15.0% of adjusted gross revenues; and (iii) a performance
fee equal to the patient revenues of the affiliated dental practice less (a) the
expenses of the affiliated dental practice and (b) the sum of (i) and (ii).
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.
23
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
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 31.6 32.6
--------- --------- --------- --------- ---------
Net revenues......................... 100.0 100.0 66.3 68.4 67.4
Expenses:
Dentists' salaries................. 16.7 18.3 -- -- --
Clinical salaries.................. 10.6 10.3 14.3 12.7 13.1
Dental supplies and laboratory
fees............................ 11.2 12.0 10.5 12.6 9.2
Rental and lease expense........... 4.0 4.6 5.4 4.6 5.9
Advertising and marketing.......... 6.2 5.3 5.1 5.0 4.8
Depreciation and amortization...... 1.8 1.8 3.7 3.1 4.5
Other operating expenses........... 12.9 12.4 9.8 9.8 8.4
General and administrative......... 31.1 49.9 14.6 11.2 14.3
--------- --------- --------- --------- ---------
Total expenses............. 94.5 114.6 63.4 59.0 60.2
--------- --------- --------- --------- ---------
Operating income (loss).............. 5.5 (14.6) 2.9 9.4 7.2
Interest expense..................... 0.7 0.5 8.8 9.9 7.9
Other expense (income)............... -- -- (0.3) (1.0) (0.1)
--------- --------- --------- --------- ---------
Income (loss) before income taxes.... 4.8 (15.1) (5.6) 0.5 (0.6)
Provision (benefit) for income
taxes.............................. 0.3 (1.8) (1.9) 0.2 (0.2)
--------- --------- --------- --------- ---------
Net income (loss).................... 4.5% (13.3)% (3.7)% 0.3% (0.4)%
========= ========= ========= ========= =========
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 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 six-month
period ended June 30, 1997 compared to the six-month period ended June 30, 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 $10.7 million for the six months
ended June 30, 1996 to $21.3 million for the six months ended June 30, 1997, an
increase of $10.6 million or 99.2%. Approximately $10.2 million of the increase
was attributable to the Completed Acquisitions. Patient revenues in Houston
increased from $9.3 million in the first half of 1996 to $9.8 million in the
first six months 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 six months ended
June 30, 1997, amounts retained by affiliated dental practices were $7.0
million, an increase of $3.6 million, or 105.4%, 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 31.6% to 32.6% for the six month periods ended
June 30, 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.
NET REVENUES -- For the six months ended June 30, 1997, net revenues were
$14.4 million, an increase of $7.1 million, or 96.3%, from the six-month period
ended June 30, 1996. The increase is attributable to net revenues of the
Completed Acquisitions.
CLINICAL SALARIES -- Clinical salaries increased from $1.4 million for the
six months ended June 30, 1996 to $2.8 million for the six months ended June 30,
1997, an increase of $1.4 million or 105%. The
24
<PAGE>
Completed Acquisitions accounted for all of the increase in clinical employee
salaries. Expressed as a percentage of patient revenues, clinical salaries
increased from 12.7% to 13.1% for the six-month periods ended June 30, 1996 and
1997, respectively.
DENTAL SUPPLIES AND LABORATORY FEES -- Dental supplies and laboratory fees
increased from $1.4 million for the six months ended June 30, 1996 to $2.0
million for the six months ended June 30, 1997, an increase of $616,000 or
45.5%. This increase was attributed to the Completed Acquisitions, which
accounted for $1.0 million in dental supplies and laboratory expenses. Dental
supplies and laboratory expenses in the Houston market decreased from $1.2
million to $943,000 in the first six 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 12.6% in
the first six months of 1996 to 9.2% in the first six months of 1997.
RENTAL AND LEASE EXPENSE -- Rental and lease expense increased from
$490,000 for the six months ended June 30, 1996 to $1.3 million for the six
months ended June 30, 1997, an increase of $768,000, or 156.7%. Rental expense
from the acquisitions in Florida, Tennessee and Texas accounted for $629,000 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 4.6% in the first half of 1996 to 5.9% in the first
half 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 $533,000 for the six months ended June 30, 1996 to $1.0 million for the six
months ended June 30, 1997, an increase of $498,000, or 93%. The Completed
Acquisitions accounted for $466,000 of the increase. Expressed as a percentage
of patient revenues, advertising and marketing costs decreased from 5.0% to 4.8%
for the six-month periods ended June 30, 1996 and 1997, respectively.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization increased
from $334,000 for the six months ended June 30, 1996 to $963,000 for the six
months ended June 30, 1997, an increase of approximately $629,000, 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
$336,000 in the first six months of 1997. As a percentage of patient revenues,
depreciation and amortization increased from 3.1% to 4.5% for the six-month
periods ended June 30, 1996 and 1997, respectively.
OTHER OPERATING EXPENSES -- Other operating expenses increased from $1.0
million for the six months ended June 30, 1996 to $1.8 million for the six
months ended June 30, 1997, an increase of approximately $739,000 or 70.7%.
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 approximately $600,000 of the increase in other
operating expenses. Expressed as a percentage of patient revenues, other
operating expenses decreased from 9.8% to 8.4% for the six-month periods ended
June 30, 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 $1.2 million for the six months ended June 30, 1996 to $3.0 million for the
six months ended June 30, 1997, an increase of approximately $1.8 million or
153.9%. 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 11.2% to 14.3% for the six-month periods ended June 30, 1996 and 1997,
respectively.
INTEREST EXPENSE -- Interest expense increased from $1.1 million for the
six months ended June 30, 1996 to $1.7 million for the six months ended June 30,
1997, an increase of $618,000 or 58.0%. Increased
25
<PAGE>
borrowings related to the Completed Acquisitions resulted in higher interest
expense. Expressed as a percentage of patient revenues, however, interest
expense decreased from 9.9% to 7.9% for the six-month periods ended June 30,
1996 and 1997, respectively, primarily resulting from the relatively greater
percentage increase in patient revenues from the prior year period.
INCOME TAXES -- For the six months ended June 30, 1997, the Company
recorded a benefit for income taxes of $49,000 resulting from the loss before
taxes of $129,000 for the period. In the first six months of 1996, the provision
for income taxes was $19,000 on income before taxes of $50,000.
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 62.1%. 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 $2.4 million or 125.3%. 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 $935,000 or 42.8%. 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 12.0% 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 90.4%. Rental expense from the Completed
Acquisitions accounted for nearly all of the increase. Expressed as a percentage
of patient revenues, rental and lease expense increased from 4.6% in 1995 to
5.4% in 1996, as
26
<PAGE>
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 58.7%. The Completed Acquisitions
accounted for $420,000 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 $653,000 or 31.1%. 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 52.9%. 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.
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
27
<PAGE>
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, general and
administrative expense increased from 31.1% to 49.9% for the years ended
December 31, 1994 and 1995, respectively.
28
<PAGE>
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
At June 30, 1997, the Company had a net working capital deficit of $12.0
million, representing a decrease in working capital of $8.8 million from the net
working capital deficit of $3.2 million at December 31, 1996. Current
liabilities were $19.8 million at June 30, 1997, consisting of $14.0 million in
current maturities of notes payable and subordinated debt, $4.9 million in
accounts payable and accrued liabilities, which include $455,000 in accrued
interest and $789,000 in accrued deferred compensation payments, and $833,000
payable to affiliated dental practices in consideration for accounts receivable
from the affiliated practices. These current liabilities were partially offset
by current assets of $7.8 million, consisting of cash of $1.5 million, billed
and unbilled accounts receivable of $5.8 million and other current assets of
$458,000. A portion of the proceeds of this offering will be used to repay $13.1
million of current indebtedness resulting in pro forma net working capital of
$1.5 million upon completion of the offering and the Austin Acquisition.
For the six months ended June 30, 1997 cash provided by operating
activities was $1.1 million, compared to cash used in operating activities of
$367,000 in the first six months of 1996. In the first six months of 1996, cash
used in investing activities was $7.8 million, of which $7.6 million was
utilized to purchase the assets of dental practices in Florida and Tennessee. In
the six months ended June 30, 1997, $1.4 million in cash was used in investing
activities of which $1.0 million was used to acquire the option to purchase SW
Dental and $443,000 was used to develop two DE NOVO dental centers in Houston.
Cash provided by financing activities was $3.8 million and $1.8 million in the
six month periods ended June 30, 1996 and 1997, respectively. In the first half
of 1996, cash provided by financing activities consisted of bank borrowings of
$4.0 million, partially offset by debt repayments of $117,000. In the six months
ended June 30, 1997, cash provided by financing activities consisted primarily
of $2.1 million in additional subordinated debt borrowings, partially offset by
debt repayments of $148,000 and offering costs of $146,000.
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 by 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 by
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 $7.5 million proceeds were allocated between the Senior Subordinated
29
<PAGE>
Notes and the Series A Convertible Preferred Stock based on the estimated fair
value of the Series A Convertible Preferred Stock ($2.52 per share), resulting
in a discount on the Senior Subordinated Notes of approximately $2.9 million and
an effective annual interest rate of approximately 24%. 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 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,
$894,000 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. The option
terminates upon payment of $1.8 million owing under the 1st Dental Care Notes.
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. The Company intends to pay the 1st Dental Care Notes with a portion of
the proceeds of this offering.
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
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credit bears interest at the bank's base rate plus 1.0% and also expires on
January 31, 1998. As of July 31, 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, including a pledge
of the stock of the Company's subsidiaries, and is personally guaranteed by Jack
H. Castle, Jr. The Company intends to repay approximately $7.5 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 June 30, 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 June 30, 1997, the Company
had issued $900,000 in interest notes to the Pecks Investors in lieu of
quarterly interest payments accruing from July 1996. 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 $2.0 million proceeds were allocated
between the Senior Subordinated Notes and the Series C Convertible Preferred
Stock based on their relative fair values of $2.0 million for the Senior
Subordinated Notes and $11 per share for the Series C Convertible Preferred
Stock, resulting in a discount on the $2.0 million Senior Subordinated Notes of
approximately $1.1 million and an effective annual rate through maturity of
approximately 200%. The effective yield of the Series C Convertible Preferred
Stock through its redemption date approximated 18.5% based on the fair value of
the underlying common stock at June 30, 1997. In June 1997, the Company recorded
a $309,000 dividend to accrete the Series A Convertible Preferred Stock and the
Series C Convertible Preferred Stock to their estimated fair value at their
redemption date. The terms of the Series C Convertible Preferred Stock are
similar to those of the Series A Convertible Preferred Stock. The conversion of
the Series A Convertible Preferred Stock and the Series C Convertible Preferred
Stock into 705,552 and 242,691 shares of Common Stock, respectively, is a
condition to the completion of this offering. The Company anticipates recording
an additional $1.5 million non-cash dividend on the Series C Convertible
Preferred Stock and a $3.8 million extraordinary loss on the Senior Subordinated
Notes upon conversion of the Series A Convertible Preferred Stock and the Series
C Convertible Preferred Stock into the Company's Common Stock and retirement of
the Senior Subordinated Notes in connection with 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 $22.8 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 in August 1997, received a commitment from a bank to
refinance and expand its existing credit facility to $30.0 million upon the
consummation of this offering. The commitment provides for a credit facility of
$15.0 million with an additional $15.0 million credit facility to be syndicated
on a best efforts basis. The credit facility provides for repayment of existing
bank debt over a four year period, with additional advances due five years from
the commencement date. If the Company is successful in completing the full $30.0
million credit facility, the Company will have approximately $23.0 million of
additional borrowing capacity which the Company believes will be sufficient to
fund its acquisition, expansion and working capital needs for the
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next 18 months, along with existing cash resources and cash flow from
operations. Completion of the initial $15.0 million bank credit facility is
contingent upon completion of this offering, reduction of the existing Bank
Credit Facility by at least $5.4 million and repayment of the Company's
subordinated debt. There can be no assurance that the Company will be able to
secure the additional $15.0 million syndicated credit facility.
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 August 1, 1997, the
Company provided management services to 40 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 30,000 members, and, upon consummation of the Austin
Acquisition, the Company's affiliated dental practices will have an aggregate of
16 managed care contracts covering approximately 50,000 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 11 Castle Dental Centers operating in the Houston,
Texas area and four additional centers in Houston in various stages of
development. In May 1996, the Company acquired the assets of and entered into
long-term management 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
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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 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 by
the Health Care Financing Administration, Health Care Financing Review (1995) 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 8.1% from
1980 to 1995, and is projected to grow at a compound annual growth rate of
approximately 6.3% 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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<PAGE>
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 specialties (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 July 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 comprised of (i) the
costs incurred by it on behalf of SW Dental, and (ii) 15% of the adjusted gross
revenues of SW Dental attributable to the
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applicable monthly period, limited over the term of the management services
agreement to the aggregate cash flow of SW Dental for such period. The term of
the management services agreement with SW Dental expires on the 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 129,166 shares of Series B Convertible Preferred Stock. The Company
will also assume approximately $412,000 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 operations, 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.
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Subject to applicable law, the Company is paid a monthly management fee
comprised of three components: (i) the costs incurred by it on behalf of the
affiliated practice; (ii) a base management fee in an amount ranging from 12.5%
to 15.0% of adjusted gross revenues; and (iii) a performance fee equal to the
patient revenues of the affiliated dental practice less (a) the expenses of the
affiliated dental practice and (b) the sum of (i) and (ii), as described in each
agreement. 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 25 to
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
employment agreements with substantially all 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 four to 22 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
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<PAGE>
locations in Houston, Texas to accommodate the full range of dental specialties.
The Company believes the application of its method of designing and locating
dental centers will facilitate the expansion of services offered by the acquired
practices.
STAFFING AND SCHEDULING
The Company believes that making its facilities available at times which
are convenient to its patients is an important element of its strategy. As a
result, the affiliated dental practices maintain extended hours of operation,
with many affiliated practices opening as early as 7:00 a.m. and closing as late
as 9:00 p.m. on weekdays and 5:00 p.m. on Saturdays. The affiliated practices
are staffed with dentists and dental assistants every day they are open, with
orthodontists and other specialists rotating among 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
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can enter all relevant information into the Company's management information
system for patients making appointments for an initial visit, including
pre-screening patients for insurance and other credit information.
QUALITY ASSURANCE
Affiliated dental practices are solely responsible for all aspects of the
practice of dentistry. The Company has responsibility for the business and
administrative aspects of the practices and exercises no control over the
provision of dental services. 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.
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Aside from the centralization of functions mentioned above, the affiliated
dental practices are encouraged to administer their practices in accordance with
the needs of their specific patient populations. The practice of dentistry at
each affiliated dental practice is under the exclusive control of the dentists
who practice at such location.
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.
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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 over the professional assets; the non-dental entity does not
employ or control the dentists (or, in some states,
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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 compliance 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 July 31, 1997, the Company and its affiliated dental practices
employed approximately 620 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 700 people will be employed on a full-time or part-time basis
by the Company and 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
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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 1997 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.
In July and August 1997, a dentist from whom the Company acquired Horizon
Dental Centers in August 1996 asserted claims against the Company contending
that the Company misrepresented the value of the Common Stock issued to him as a
part of the consideration for the acquisition, and demanded the issuance of
approximately 200,000 shares of Common Stock as additional consideration for the
transaction. The Company believes that asserted claims are without merit and has
denied the demand for the issuance of additional shares of Common Stock. The
Company has been advised that the complainant does not presently intend to
commence litigation against the Company. In the event, however, that litigation
is initiated against the Company, the Company intends to defend itself
vigorously. See "Risk Factors -- Risks Associated With Potential Litigation."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
directors, executive officers and certain significant employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- ---- ---------------------------------------------------------------
<S> <C> <C>
Jack H. Castle, Jr...................... 42 Chairman, Chief Executive Officer and Director
G. Daniel Siewert III................... 53 President and Chief Operating Officer
John M. Slack........................... 49 Vice President, Chief Financial Officer and Secretary
Eric H. Shamban......................... 44 Vice President -- Operations
Judith A. Dolifka....................... 37 Controller
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........................ 53 Director
G. Kent Kahle........................... 45 Director
Emmett E. Moore*........................ 55 Director
Elizabeth A. Tilney..................... 40 Director
Louis A. Waters*........................ 58 Director
</TABLE>
- ------------
* 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,
executive officers and certain significant employees of the Company:
JACK H. CASTLE, JR. was a co-founder of the Company in 1981 and has served
as 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.
G. DANIEL SIEWERT III joined the Company in August 1997 as President and
Chief Operating Officer. From January 1995 through June 1997, he served as Chief
Operating Officer for Family Dental Center, Inc., a large group dental practice
with locations in Sears Roebuck & Company stores. From November 1993 to December
1994, Mr. Siewert provided business management consulting for a major retail
eyecare company. Prior to that, from September 1990 until August 1993, he was
CEO of National Vision Associates, Inc.
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., a 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.
JUDITH A. DOLIFKA joined the Company in May 1996 as Controller. From April
1990 to April 1996 she was the Assistant Controller and Manager of Financial
Reporting of Serv-Tech, Inc. From 1982 until 1990 Ms. Dolifka worked in public
accounting most recently as an audit manager with Coopers & Lybrand,
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L.L.P. Ms. Dolifka received a B.B.A. in accounting from Ball State University
and is a Certified Public Accountant in the State of Texas.
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.
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
ophthalmology management 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.
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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 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.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Board of Directors currently has an Audit Committee. The members of the
Audit Committee 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 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. Additionally, 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
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<PAGE>
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 $25.0 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. In
the event the Underwriters exercise their over-allotment option in full, the
Company intends to prepay the remaining $1.9 million balance due under the
Deferred Compensation Agreement. The Company has obtained the required consents
under the Bank Credit Facility to prepay 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 currently has an employment
agreement or is 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
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<PAGE>
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.
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.
For 1997, the Company has agreed to pay its senior executive officers the
following base salaries. Each of the senior executive officers is eligible to
receive a performance based discretionary bonus for 1997. Additionally, the
following executive officers will receive grants under the Plan, effective at
the consummation of this offering. All of these options will be granted at the
initial public offering price and 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 the option grant, except for 10,000
of the options granted to Mr. Siewert, which are currently exercisable.
SALARY OPTIONS
-------- --------
Jack H. Castle, Jr................... $254,166
G. Daniel Siewert III................ 175,000 110,000
John M. Slack........................ 120,000 30,000
PRIOR EMPLOYMENT RELATIONSHIP OF MR. SIEWERT
Until June 1998, Mr. Siewert is subject to a covenant not to compete with a
former employer that prohibits his employment by or affiliation with any entity
that offers or performs dental services or management services in certain
counties of Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin. The
Company has no present plans to expand into these markets before June 1998.
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
49
<PAGE>
less than $25.0 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. In the event the
Underwriters exercise their over-allotment option in full, the Company intends
to prepay the remaining $1.9 million balance due under the Deferred Compensation
Agreement. The Company has obtained the required consents under the Bank Credit
Facility to prepay the Deferred Compensation Agreement. See "Use of Proceeds."
In connection with the purchase of the stock of Jack H. Castle, D.D.S., Inc.,
the Company also entered into a management services agreement with Jack H.
Castle, D.D.S., P.C., a professional corporation of which Dr. Castle is the sole
owner. Pursuant to the management services agreement, Dr. Castle receives an
annual payment of $100,000 for services performed in connection therewith.
The Company is party to a lease agreement with Goforth, Inc., a company
owned by Jack H. Castle, Jr., the Company's Chairman and Chief Executive
Officer. The lease agreement relates to the Castle Dental Center located at 2101
West Loop South in Houston, Texas, a 6,781 square foot free-standing building.
The Company has agreed to pay Goforth, Inc. a minimum guaranteed rental of
$12,000 per month through January 2001 and $13,200 per month from January 2001
through January 2006. The Company has also agreed to pay additional rent of
approximately $1,600 per month for insurance, taxes and common area maintenance.
The Company believes that this lease agreement is on terms no less favorable to
the Company than could have been obtained with an independent third party.
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."
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, directors, consultants and former consultants, 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 750,000 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
50
<PAGE>
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 approximately [______] shares of Common Stock
under the Plan at prices per share ranging from $10.00 to the initial public
offering price. Generally, the outstanding options are, and options to be
granted will be, exercisable one year from the date of grant as to 20% of the
underlying shares, and as to an additional 20% on each of the next four
anniversaries of the date of option grant.
DIRECTORS' STOCK OPTION PLAN
In August 1996, the Board of Directors adopted the Directors' Plan. The
purpose of the Directors' Plan is to encourage ownership of Common Stock by
eligible non-employee directors of the Company and to provide increased
incentive for such directors to render services and to exert maximum effort for
the business success of the Company. In addition, the Company believes that the
Directors' Plan will further 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 25,000 nonqualified
stock options (the "Options") to non-employee directors at the time they
become directors. The Directors' Plan will be administered by the Compensation
Committee, which has, subject to the terms of the Directors' Plan, the sole
authority to grant Options under the Directors' Plan, to construe and interpret
the Directors' Plan and to make all other determinations and take any and all
actions necessary or advisable for the administration of the Directors' Plan.
All non-employee directors are eligible to receive Options under the
Directors' Plan. Options will be exercisable during a ten-year period from the
date of grant of the Options and will vest based upon the number of full years
of service a non-employee director serves on the Board of Directors as follows:
20% after one full year of service, 40% after two full years of service, 60%
after three full years of service, 80% after four full years of service and 100%
after five full years of service. No option will remain exercisable later than
ten years after the date of grant.
The exercise price for Options granted under the Directors' Plan may be no
less than the fair market value of the Common Stock on the date of grant.
The Company anticipates that upon the consummation of this offering it will
have outstanding Options to purchase a total of approximately 125,000 shares of
Common Stock under the Directors' Plan at the initial public offering price.
SECURITYHOLDERS AGREEMENT
On December 18, 1995, the Company, the Pecks Investors and the Castle
Family entered into the Securityholders Agreement (the "Securityholders
Agreement") pursuant to which (i) the Castle Family agreed not to sell or
otherwise transfer shares of Common Stock to any third party without first
offering the Pecks Investors the opportunity to participate in such sale or
transfer on a pro rata basis and on the same price and terms as those applicable
to the initiating seller and (ii) the Pecks Investors have the right to have one
designee nominated to the Board of Directors for so long as 20% of the Series A
Convertible Preferred Stock or 20% of the Common Stock issuable on conversion of
the Series A Convertible Preferred Stock is held by the Pecks Investors. The
right of the Pecks Investors to have a designee nominated to the Board of
Directors is also provided for in the Securities Purchase Agreement. The
provisions regarding Board of Director representation contained in the
Securityholders Agreement and the Securities Purchase Agreement will remain in
effect after this offering.
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<PAGE>
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.
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 $25.0 million; provided, however, that such payments shall only be
made in the event the
52
<PAGE>
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. In the event the Underwriters exercise
their over-allotment option in full, the Company intends to prepay the remaining
$1.9 million balance due under the Deferred Compensation Agreement. The Company
has obtained the required consents under the Bank Credit Facility to prepay the
Deferred Compensation Agreement. See "Use of Proceeds." In connection with the
purchase of the stock of Jack H. Castle, D.D.S., Inc., the Company also entered
into a management services agreement with Jack H. Castle, D.D.S., P.C., a
professional corporation of which Dr. Castle is the sole owner. Pursuant to the
management services agreement, Dr. Castle receives an annual payment of $100,000
for services performed in connection therewith.
The Company is party to a lease agreement with Goforth, Inc., a company
owned by Jack H. Castle, Jr., the Company's Chairman and Chief Executive
Officer. The lease agreement relates to the Castle Dental Center located at 2101
West Loop South in Houston, Texas, a 6,781 square foot free-standing building.
The Company has agreed to pay Goforth, Inc. a minimum guaranteed rental of
$12,000 per month through January 2001 and $13,200 per month from January 2001
through January 2006. The Company has also agreed to pay additional rent of
approximately $1,600 per month for insurance, taxes and common area maintenance.
The Company believes that this lease agreement is on terms no less favorable to
the Company than could have been obtained with an independent third party.
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 August 12, 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 16.4
Robert J. Cresci(5)..................... 948,243 28.9 16.4
G. Kent Kahle(6)........................ 56,579 1.7 1.0
G.Daniel Siewert III.................... 10,000 * *
John M. Slack(8)........................ 5,000 * *
Elizabeth A. Tilney..................... -- -- --
Emmett E. Moore(9)...................... -- -- --
Louis A. Waters(10)...................... -- -- --
All directors and executive officers as
a group (12 persons)(10)............... 2,604,822 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 10,000 shares of Common Stock issued under the
Plan.
(8) Includes options to acquire 5,000 shares of Common Stock issued under the
Plan.
(9) Messrs. Moore and Waters have agreed to serve as directors of the Company
upon the closing of this offering.
(10) 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, 129,166 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)
129,166 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.
The Series B Convertible Preferred Stock has a liquidation preference of
$1.6 million and is convertible at the option of the holder into Common Stock on
a share for share basis during the 30 day period commencing 12 months after the
date of issuance of such shares and ending on the 30th day thereafter (the
"Conversion Period"). At the option of the holder of the Series B Convertible
Preferred Stock, during the Conversion Period all but not less than all of the
shares of Series B Convertible Preferred Stock are mandatorily redeemable by the
Company with redemption payments to be made in 16 equal quarterly redemption
payments of $114,000. Following the Conversion Period, all but not less than all
of the shares of Series B Convertible Preferred Stock may be optionally redeemed
at any time by the Company in 16 equal quarterly redemption payments of
$114,000. Shares of Series B Convertible Preferred Stock are entitled to one
vote on all matters submitted to stockholders for a vote for each share of
Common Stock into which Series B Convertible Preferred Stock is convertible.
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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 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.
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ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER PROPOSALS AND STOCKHOLDER NOMINATIONS
OF DIRECTORS
The Company's Bylaws establish an advance notice procedure with regard to
the nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors (the "Nomination
Procedure") and with regard to other matters to be brought by stockholders
before an annual meeting of stockholders of the Company (the "Business
Procedure").
The Nomination Procedure requires that a stockholder give prior written
notice, in proper form, of a planned nomination for the Board of Directors to
the Secretary of the Company. The requirements as to the form and timing of that
notice are specified in the Company's Bylaws. If the Chairman of the Board of
Directors determines that a person was not nominated in accordance with the
Nomination Procedure, such person will not be eligible for election as a
director.
Under the Business Procedure, a stockholder seeking to have any business
conducted at an annual meeting must give prior written notice, in proper form,
to the Secretary of the Company. The requirements as to the form and timing of
that notice are specified in the Company's Bylaws. If the Chairman of the Board
of Directors determines that the other business was not properly brought before
such meeting in accordance with the Business Procedure, such business will not
be conducted at such meeting.
Although the Company's Bylaws do not give the Board of Directors any power
to approve or disapprove stockholder nominations for the election of directors
or 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 3,409,405 shares of Common Stock and
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shares of Common Stock issuable on conversion of the Series A Convertible
Preferred Stock, the Series B Convertible Preferred Stock and the Series C
Convertible Preferred Stock presently 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 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 Harris
Trust and Savings Bank.
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 5,780,239 shares of Common Stock outstanding
(6,055,239 shares of Common Stock if the Underwriters exercise their over-
allotment option in full). Up to 69,879 shares of Common Stock are presently
issuable on the conversion of two Seller Notes issued by the Company, and
129,166 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
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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 at least three months prior
to the sale would be entitled to sell the shares immediately without regard to
the volume limitations and other conditions described above.
The Company, its directors and executive officers and all of the
stockholders of the Company have agreed that, for a period of 180 days after the
date of this Prospectus (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; provided,
however, that the Company may issue shares of Common Stock in connection with
acquisitions to parties that agree to be bound by the same restriction on offers
and sales. After this offering, sales of substantial amounts of Common Stock by
existing stockholders could have an adverse impact on the market price of the
Common Stock. No 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 900,000
shares reserved for issuance. As of the closing of this offering, the Company
anticipates that it will have issued options to purchase [ ] 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.
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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 stabilized, or that stabilizing, if commenced, will not be discontinued at
any time. Subject to applicable limitations, the Underwriters may also place
bids or make purchases on behalf of the underwriting syndicate to reduce a short
position created in connection with the offering.
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
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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
for a period of 180 days after the date of this Prospectus without the prior
written consent of the Representatives; provided, however, that the Company may
issue shares of Common Stock in connection with acquisitions to parties that
agree to be bound by the same restrictions on offers and sales. After such
180-day period, these 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.
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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 June 30,
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
six months
ended June 30, 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
June 30, 1997................. F-32
Condensed Consolidated
Statements of Operations
(Unaudited) for the six months
ended June 30, 1996 and 1997... F-33
Condensed Consolidated
Statements of Cash Flows
(Unaudited) for the six months
ended June 30, 1996 and 1997... F-34
Notes to Condensed Consolidated
Financial Statements
(Unaudited).................... F-35
SW DENTAL ASSOCIATES
Report of Independent
Accountants.................... F-38
Balance Sheets as of December
31, 1995 and 1996.............. F-39
Statements of Operations for the
years ended December 31, 1995
and 1996....................... F-40
Statements of Changes in
Members' Equity (Deficit) for
the year ended December 31,
1995 and 1996.................. F-41
Statements of Cash Flows for the
year ended December 31, 1995
and 1996....................... F-42
Notes to Financial Statements... F-43
SW DENTAL ASSOCIATES
Condensed Balance Sheets
(Unaudited) as of December 31,
1996, and June 30, 1997........ F-47
Condensed Statements of
Operations (Unaudited) for the
six months ended June 30, 1996
and 1997....................... F-48
Condensed Statements of Cash
Flows (Unaudited) for the six
months ended June 30, 1996 and
1997........................... F-49
Notes to Condensed Financial
Statements (Unaudited)......... F-50
1ST DENTAL CARE
Report of Independent
Accountants.................... F-51
Combined Balance Sheets as of
December 31, 1994 and 1995..... F-52
Combined Statements of
Operations for the years ended
December 31, 1993,
1994 and 1995................. F-53
Combined Statements of Changes
in Stockholder's Equity
(Deficit) for the years ended
December 31, 1993, 1994 and
1995........................... F-54
Combined Statements of Cash
Flows for the years ended
December 31, 1993,
1994 and 1995................. F-55
Notes to Combined Financial
Statements..................... F-56
F-1
<PAGE>
PAGE
-----
MID-SOUTH DENTAL CENTERS
Report of Independent
Accountants.................... F-61
Balance Sheets as of December
31, 1994 and 1995.............. F-62
Statements of Operations for the
years ended December 31, 1993,
1994 and 1995.................. F-63
Statements of Changes in
Stockholder's Equity for the
years ended December 31, 1993,
1994 and 1995.................. F-64
Statements of Cash Flows for the
years ended December 31, 1993,
1994 and 1995.................. F-65
Notes to Financial Statements... F-66
HORIZON DENTAL CENTERS
Report of Independent
Accountants.................... F-71
Combined Balance Sheet as of
December 31, 1995.............. F-72
Combined Statements of
Operations for the years ended
December 31, 1994 and 1995..... F-73
Combined Statements of Changes
in Stockholder's Equity
(Deficit) for the years ended
December 31, 1994 and 1995..... F-74
Combined Statements of Cash
Flows for the years ended
December 31, 1994 and 1995..... F-75
Notes to Combined Financial
Statements..................... F-76
F-2
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Consolidated Balance Sheet as of June 30,
1997 and the Unaudited Pro Forma Consolidated Statements of Operations for the
year ended December 31, 1996 and the six months ended June 30, 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 June 30, 1997, and the Unaudited Pro Forma
Consolidated Statement of Operations for the year ended December 31, 1996 and
for the six months ended June 30, 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 June 30, 1997
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
in "Use of Proceeds," assuming an initial public offering price of $12.00, (ii)
the conversion of the Series A 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 129,166 shares of Series B Convertible Preferred Stock, as
if each of such transactions had occurred as of June 30, 1997. The Unaudited Pro
Forma Consolidated Statement of Operations for the year ended December 31, 1996,
and six months ended June 30, 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 $12.00 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
JUNE 30, 1997
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA HISTORICAL -------------------------
HISTORICAL ----------- ----------- AUSTIN
---------- OFFERING AUSTIN ACQUISITION
COMPANY ADJUSTMENTS ACQUISITION ADJUSTMENTS
(A) (B) (C) (C) AS ADJUSTED
---------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 1,488 $ 3,886 $ 26 $(3,650) $ 1,750
Patient receivables, net........... 5,855 -- 276 -- 6,131
Prepaid expenses and other current
assets.......................... 174 -- 105 -- 279
Deferred income taxes.............. 284 -- -- -- 284
---------- ----------- ----------- ----------- -----------
Total current assets....... 7,801 3,886 407 (3,650) 8,444
---------- ----------- ----------- ----------- -----------
Property and equipment, net.......... 4,155 -- 378 100 4,633
Intangible assets, net............... 16,096 -- -- 6,459 22,555
Other assets......................... 3,466 (306) 3 (1,612) 1,551
Deferred income taxes................ 649 -- -- -- 649
---------- ----------- ----------- ----------- -----------
Total assets.................... $ 32,167 $ 3,580 $ 788 $ 1,297 $37,832
========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Revolving line of credit........... $ 1,270 $(1,270) $ -- $-- $--
Current portion of long-term debt
and capital lease obligations... 12,737 (11,583) 126 -- 1,280
Accounts payable and accrued
liabilities..................... 4,939 (263) 224 (101) 4,799
Due to affiliated dental
practices....................... 833 -- -- -- 833
---------- ----------- ----------- ----------- -----------
Total current
liabilities............. 19,779 (13,116) 350 (101) 6,912
---------- ----------- ----------- ----------- -----------
Long-term debt and capital lease
obligations, less current
portion............................ 10,327 (5,964) 286 -- 4,649
Other long-term liabilities.......... 1,578 (263) 1,315
Redeemable preferred stock........... 4,381 (4,381)(D) -- 1,550 1,550
Stockholders' equity (deficit):
Common stock....................... 2 3 1 (1) 6
1(D)
Additional paid-in capital......... 3,107 26,672 -- 34,159
4,380(D)
Retained earnings (accumulated
deficit)........................ (7,007) (3,752) 151 (151) (10,759)
---------- ----------- ----------- ----------- -----------
Total stockholders' equity
(deficit)............... (3,898) 27,304 152 (152) 23,406
---------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity (deficit)................... $ 32,167 $ 3,580 $ 788 $ 1,297 $37,832
========== =========== =========== =========== ===========
</TABLE>
F-4
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Represents the June 30, 1997 historical consolidated balance sheet of the
Company, which includes the assets and liabilities acquired from 1st Dental
Care and Mid-South Dental Centers, in May 1996, and the assets and
liabilities acquired from Horizon Dental Centers, in August 1996.
(B) 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 $12.00 per share, as follows:
IN THOUSANDS
------------
Gross proceeds of the offering.......... $ 30,000
Underwriting discount................... (2,100)
Expenses related to the offering........ (1,225)
------------
Net proceeds....................... 26,675(1)
Repayment of debt, including current
portion............................... (22,263)(2)
Payment of amounts due under the
Deferred Compensation
Agreement with Jack H. Castle, D.D.S.
(current portion $263,000, long-term
$263,000)............................. (526)
------------
Net increase in cash and cash
equivalents...................... $ 3,886
============
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......... 26,672
------------
$ 26,675
============
(2) The repayment of long-term debt will affect pro forma assets
and liabilities, as follows:
IN THOUSANDS
------------
Other assets....................... $ (306)(a)
Revolving line of credit........... 1,270
Current portion of long-term
debt............................. 11,583
Long-term debt, net of unamortized
discount of $3,446............... 5,964
Retained earnings.................. 3,752(b)
------------
Cash paid................ $ 22,263
============
- ------------
(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.
(C) Represents the June 30, 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.................................... $ 26
Patient receivables, net................ 276
Prepaid expenses and other current
assets................................ 105
Property and equipment.................. 478
Other assets............................ 3
Management services agreement........... 6,459
Current portion of long-term debt and
capital leases assumed................ (126)
Accounts payable and accrued liabilities
assumed............................... (123)
Long-term debt and capital lease
obligations assumed................... (286)
------------
$ 6,812
============
The aggregate acquisition price for the Austin Acquisition will be funded
as follows:
IN THOUSANDS
------------
Cash.................................... $ 3,650
Escrow deposit and acquisition costs.... 1,612
Series B Convertible Preferred Stock.... 1,550
------------
$ 6,812
============
The excess of cost over the fair value of the net assets acquired will be
amortized over the estimated life, which is 25 years.
(D) Represents the conversion of 1,244,737 shares of Series A and 485,382
shares of Series C Convertible Preferred Stock into an aggregate of 948,243
shares of 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 (2,694)(M) 34
240(K)
Other expense (income).................. (89 ) -- -- (89 ) -- --
------- ------------ --------------- -------- ----------- ------------
Income (loss) before income taxes....... (1,647 ) 253 (74) (1,468 ) 2,509 512
Provision (benefit) for income taxes.... (561 ) -- 61(N) (500 ) 855(N) --
------- ------------ --------------- -------- ----------- ------------
Net income (loss)....................... $(1,086) $ 253 $ (135) $ (968 ) $ 1,654 $ 512
======= ============ =============== ======== =========== ============
Net income (loss) per share (P)......... $(0.30 )
=======
Weighted average outstanding shares
(P)................................... 3,626
=======
</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....... 278(I) 1,780
Other operating expenses............ -- 3,818
General and administrative.......... 215(J) 5,808
------------- -----------
Total expenses................. (645) 29,112
------------- -----------
Operating income (loss)................. (493) 1,606
Interest expense........................ 635
Other expense (income).................. -- (89)
------------- -----------
Income (loss) before income taxes....... (493) 1,060
Provision (benefit) for income taxes.... 6(N) 361
------------- -----------
Net income (loss)....................... $ (499) $ 699
============= ===========
Net income (loss) per share (P)......... $ 0.12
===========
Weighted average outstanding shares
(P)................................... 5,776
===========
F-7
<PAGE>
CASTLE DENTAL CENTERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL PRO FORMA
HISTORICAL ------------ ------------ -----------------------------
-------- OFFERING 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.......................... $21,327 $ -- $2,623 $-- $ 23,950
Amount retained by affiliated dental
practices.......................... 6,954 -- -- 651(E) 7,605
-------- ------------ ------------ ------------ ------------
Net revenues......................... 14,373 -- 2,623 (651) 16,345
-------- ------------ ------------ ------------ ------------
Expenses:
Dentists' salaries.............. -- -- 635 (635)(E) --
Clinical salaries............... 2,781 -- 752 -- 3,533
Dental supplies and laboratory
fees.......................... 1,967 -- 346 -- 2,313
Rental and lease expense........ 1,258 -- 58 -- 1,316
Advertising and marketing....... 1,031 -- 89 -- 1,120
Depreciation and amortization... 963 (28)(L) 50 140(I) 1,125
Other operating expenses........ 1,784 -- 174 -- 1,958
General and administrative...... 3,047 -- 232 82(J) 3,361
-------- ------------ ------------ ------------ ------------
Total expenses 12,831 (28) 2,336 (413) 14,726
-------- ------------ ------------ ------------ ------------
Operating income..................... 1,542 28 287 (238) 1,619
Interest expense..................... 1,683 (1,532)(M) 17 -- 280
112(K)
Other income......................... (12 ) -- -- (12)
-------- ------------ ------------ ------------ ------------
Income (loss) before income taxes.... (129 ) 1,448 270 (238) 1,351
Provision for income taxes........... (49 ) 550(N) -- 12(N) 513
-------- ------------ ------------ ------------ ------------
Net income (loss).................... (80 ) 898 270 (250) 838
Preferred stock dividends............ (309 ) 309(O) -- -- --
-------- ------------ ------------ ------------ ------------
Net income (loss) attributable to
common stock....................... $ (389 ) $ 1,207 $ 270 $ (250) $ 838
======== ============ ============ ============ ============
Net income (loss) per share(P)....... $ (0.10 ) $ 0.15
======== ============
Weighted average outstanding
shares(P).......................... 3,798 5,776
======== ============
</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 results of management services provided to 1st
Dental Care and Mid-South Dental Centers, effective May 1996, and Horizon
Dental Centers, effective August 1996.
(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 $3,752,000
extraordinary loss on retirement of the Senior Subordinated Notes, with no
income tax effect, or a $1,517,000 preferred stock dividend 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 six months ended June 30, 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, (ii) reclassification of amounts that would have
been retained by the affiliated dental practices pursuant to the terms of
the management services agreements and (iii) the elimination of a
management fee recognized in June 1997 between the Company and SW Dental:
<TABLE>
<CAPTION>
COMPLETED AUSTIN ACQUISITION
ACQUISITIONS ----------------------------------
----------------- SIX MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Reduction in owner's
compensation..................... $ 100 $-- $--
Reclassification of expenses....... 732 1,138 635
Elimination of management fee...... -- -- 16
------ -------- --------------
$ 832 $ 1,138 $ 651
====== ======== ==============
</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 25 years.
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- --------------
(IN THOUSANDS)
Amortization of management services
agreements....................... $ 442 $ 130
Depreciation adjustment............ 76 10
------ --------------
$ 518 $ 140
====== ==============
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- --------------
(IN THOUSANDS)
Completed Acquisitions............. $ 240 $ --
Austin Acquisition................. 278 140
------ --------------
Total......................... $ 518 $ 140
====== ==============
(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 and the elimination of a management fee recognized in June
1997 between the Company and SW Dental.
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- --------------
(IN THOUSANDS)
Adjust owners compensation of
acquired dental practices
pursuant to the terms of the
related employment agreements.... $ 289 $ 98
Adjust other costs, pursuant to the
terms of the acquisition
agreements....................... 17 --
Elimination of management fee...... -- (16)
------ --------------
$ 306 $ 82
====== ==============
Completed Acquisitions............. $ 91 $ --
Austin Acquisition................. 215 82
------ --------------
$ 306 $ 82
====== ==============
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:
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
(IN THOUSANDS)
Seller Notes (6.34% - 10%)......... $ 181 $ --
Senior Subordinated Notes (12%).... 240 112
Bank Credit Facility (8.75%)....... 251 --
Interest on acquisition debt paid
or not assumed................... (81) --
------ -------------
$ 591 $ 112
====== =============
Completed Acquisitions............. $ 351 $ --
Offering and interim financing
adjustments...................... 240 112
------ -------------
$ 591 $ 112
====== =============
(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:
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- --------------
(IN THOUSANDS)
Seller Notes (6.34% - 10%)......... $ (412) $ (267)
Senior Subordinated Notes (12%).... (1,140) (604)
Bank Credit Facility (8.75%)....... (620) (348)
Amortization of Senior Subordinated
Note discount.................... (522) (313)
----------------- --------------
$(2,694) $ (1,532)
================= ==============
(N) Represents adjustments to accrue income taxes on pro forma net income based
on a tax rate of 34.1% for the year ended December 31, 1996 and 38% for the
six months ended June 30, 1997.
(O) Represents the reversal of preferred stock dividends on the Series A and
Series C preferred stock, which will be converted to the Company's common
stock in connection with the offering.
(P) 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. Additionally they assume conversion of the Series A and
Series C stock to 948,243 shares of the Company's common stock and include
the number of shares to be issued in connection with the offering, the
proceeds of which will be used to retire a portion of the Bank Credit
Facility, the Senior Subordinated Notes and certain Seller Notes.
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 stockholders' deficit, and cash flows for the year ended December 31,
1996 and the related statements of operations, changes in stockholders' 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....................... 2,310 3,849
Deferred compensation payable,
related party..................... 526 789
Due to affiliated dental
practices......................... -- 1,010
--------- ---------
Total current liabilities..... 3,876 9,219
--------- ---------
Long-term debt, net of current
portion............................... 5,099 13,616
Long-term debt, related party........... 4,363 5,335
Capital lease obligations, net of
current portion....................... 50 --
Other long-term liabilities, related
party................................. 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 57 1,174
Interest expense, related party...... -- 30 1,422
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.......... $ (0.35)
============
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)
========= =========
Weighted average number of common and
common equivalent shares
outstanding........................ 3,126
============
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............ 3,626
============
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 to
shareholder........ -- -- (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 25 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.
The management services fee charged to affiliated dental practices is
comprised of three components: (1) the reimbursable expenses of the Company, (2)
a base management fee ranging from 12.5% to 15.0% of net patient revenues of the
affiliated dental practices and (3) a performance fee equal to the patient
revenues of the affiliated dental practice less (a) the expenses of the
professional corporation and (b) the reimbursable expenses and base management
fees comprised of (1) and (2) above, if any.
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 25 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
F-18
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-19
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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 $12.00 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 December 31, 2000, or of a qualified equity or debt financing, as
described in the amended
F-20
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
agreement, 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 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
========= =========
F-21
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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)
F-22
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-23
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
========= =========
Long-term debt, net of current
portion............................ $ 5,099 $ 13,616
Long-term debt, related party........ 4,363 5,335
--------- ---------
$ 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.
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
F-24
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-25
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
into 705,552 shares of common stock. The Series A Stock is mandatorily
redeemable at the fair market value of the underlying common stock at the date
of redemption at the holder's option either upon receipt of a change of control
notice or after December 18, 2001, if no secondary market exists for Series A
Stock. The fair market value of the Series A Stock issued ($2.52 per share) has
been recorded as a discount on the Senior Subordinated Notes. The valuation of
the Series A Stock considered the Company's condition at the issuance date, the
terms of the 1995 reorganization, the risk associated with the successful
implementation of its business plan and valuation of comparable private
companies. The Company evaluates the redemption value of the Series A Stock at
each balance sheet date and accretes the portion of the difference between the
recorded value at that date and the redemption value over the remaining period
to the earliest redemption date, December 18, 2001. The accretion for each
period is charged to Series A Stock dividends. The Company has a right to call
all the shares of the Series A Stock at $.001 per share, upon a qualifying
public offering of the Company's common stock.
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.
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.
F-26
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
DENTIST EMPLOYMENT AGREEMENTS AND PROFESSIONAL LIABILITY
Each Affiliated Dental Practice has entered into 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.
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
========= =========
F-27
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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)
=== ========= =========
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 750,000
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-
F-28
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
The carrying amounts of the Company's Series A Stock and warrants
approximate their fair value based on the Company's financial condition at
December 31, 1996.
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
the 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
F-30
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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, JUNE 30,
1996 1997
------------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents....... $ 79 $ 1,488
Patient receivables, net........ 3,649 3,905
Unbilled patient receivables,
net............................ 1,637 1,950
Prepaid expenses and other
current assets................. 326 174
Deferred income taxes, net...... 284 284
------------- -----------
Total current assets....... 5,975 7,801
Property and equipment, net.......... 3,882 4,155
Intangible assets, net............... 16,432 16,096
Other assets......................... 2,278 3,466
Deferred income taxes, net........... 600 649
------------- -----------
Total assets............... $29,167 $32,167
============= ===========
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 11,881
Current portion of long-term
debt, related party............ -- 856
Accounts payable and accrued
liabilities.................... 3,849 4,150
Deferred compensation payable,
related party.................. 789 789
Due to affiliated dental
practices...................... 1,010 833
------------- -----------
Total current
liabilities............. 9,219 19,779
Long-term debt and capital lease
obligations, net of current
portion............................ 13,616 4,229
Long-term debt related party, net of
current portion.................... 5,335 6,098
Commitments and contingencies
Other long-term liabilities, related
party.............................. 1,578 1,578
Preferred stock, $.001 par value,
5,000,000 shares authorized;
1,244,737 shares Series A and
485,382 shares Series C issued and
outstanding........................ 2,928 4,381
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 3,107
Accumulated deficit............. (6,927) (7,007)
------------- -----------
Total stockholders'
deficit................. (3,509) (3,898)
------------- -----------
Total liabilities and
stockholders' deficit... $29,167 $32,167
============= ===========
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)
SIX MONTHS ENDED
JUNE 30,
----------------------
1996 1997
---------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Patient revenues of affiliated dental
practices.......................... $ 10,707 $ 21,327
Amounts retained by affiliated dental
practices.......................... 3,386 6,954
---------- ----------
Net revenues.................... 7,321 14,373
---------- ----------
Expenses:
Clinical salaries............... 1,359 2,781
Dental supplies and laboratory
fees........................... 1,351 1,967
Rental and lease expense........ 490 1,258
Advertising and marketing....... 533 1,031
Depreciation and amortization... 334 963
Other operating expenses........ 1,045 1,784
General and administrative...... 1,200 3,047
---------- ----------
Total expenses............. 6,312 12,831
---------- ----------
Operating income........... 1,009 1,542
Interest expense..................... 354 878
Interest expense, related party...... 711 805
Other income......................... (106) (12)
---------- ----------
Income (loss) before income taxes.... 50 (129)
Provision (benefit) for income
taxes.............................. 19 (49)
---------- ----------
Net income (loss).......... 31 (80)
Preferred stock dividends............ -- (309)
---------- ----------
Net income (loss) attributable to
common stock....................... $ 31 $ (389)
========== ==========
Net income (loss) per share.......... $ 0.01 $ (0.12)
========== ==========
Weighted average number of common and
common equivalent shares
outstanding........................ 3,010 3,298
========== ==========
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.......................... $ (0.10)
==========
Weighted average number of
common and common equivalent
shares outstanding............. 3,798
==========
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)
SIX MONTHS ENDED
JUNE 30,
--------------------
1996 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
Net cash (used in) provided by
operating activities............... $ (367) $ 1,076
Investing activities:
Capital expenditures............ (194) (443)
Acquisition of affiliated
practices, net of cash
acquired....................... (7,616) --
Escrow deposit.................. -- (1,000)
--------- ---------
Net cash used by investing
activities......................... (7,810) (1,443)
--------- ---------
Financing activities:
Payments on long-term debt and
capital lease obligations...... (117) (148)
Proceeds from debt, related
party.......................... -- 2,000
Proceeds from debt.............. 3,950 70
Offering costs.................. -- (146)
--------- ---------
Net cash provided by financing
activities......................... 3,833 1,776
--------- ---------
Net change in cash and cash
equivalents............. (4,344) 1,409
Cash and cash equivalents, beginning
of period.......................... 6,439 79
--------- ---------
Cash and cash equivalents, end of
period............................. $ 2,095 $ 1,488
========= =========
Supplemental Cash Flow Information:
Supplemental disclosure of
noncash investing and financing
activities
Issuance of capital lease
obligation for purchase
of property and
equipment............... $ -- $ 357
Issuance of preferred stock
in connection with
related
party financing......... -- 1,144
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 June 30,
1997 and for the six months ended June 30, 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 $12.00 per share). Fully diluted earnings per share are not
presented because such amounts would be the same as amounts computed for primary
earnings per share.
3. ACQUISITIONS
In June 1997, the Company entered into management services and option
agreements with SW Dental Associates, LC ("SW Dental"), a group dental practice
located in Austin, Texas. Under the terms of the option agreement the Company
agreed to acquire the assets and assume certain liabilities of SW Dental. As
partial consideration the Company paid a $1.0 million non-refundable deposit in
June 1997. The deposit, together with a $500,000 deposit paid in September 1996,
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 Preferred Stock. 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.
F-35
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Long-term debt and capital lease obligations consisted of the following at
June 30, 1997 (in thousands):
Term loan............................... $ 10,847
Seller Notes............................ 4,363
Other various notes payable and capital
lease obligations..................... 900
---------
Total debt and capital lease
obligations....................... 16,110
Less current portion.................... 11,881
---------
Total long-term debt and capital
lease obligations................. $ 4,229
=========
Long-term debt related party consisted of the following at June 30, 1997
(in thousands):
Senior Subordinated Notes............... $ 10,400
Less discount........................... 3,446
---------
Total debt related party........... 6,954
Less current portion.................... 856
---------
Long-term debt related party....... $ 6,098
---------
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 bank's aggregate commitment under the
term loan to $10.8 million.
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 (the "Series C Stock"). The proceeds were allocated
between the Senior Subordinated Notes and the Series C Stock based on their
relative fair values, resulting in a discount on the $2.0 million Senior
Subordinated Notes of $1.1 million and an effective rate through maturity of
approximately 200%.
5. SERIES C CONVERTIBLE PREFERRED STOCK
In June 1997, the Company issued 485,382 shares of its Series C Preferred
Stock in connection with issuance of $2 million in Senior Subordinated Notes.
The Series C Stock is convertible into 242,691 shares of the Company's common
stock.
The Series C Stock is mandatorily redeemable at the fair market value of
the underlying common stock 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 C Stock. The Series C Stock has been
recorded based on allocation of proceeds of the June 1997 issuance of $2.0
million Senior Subordinated Notes as described in Note 4. The Company evaluates
the redemption value of the Series C Stock at each balance sheet date and
accretes the portion of the difference between the recorded value at that date
and the redemption value over the remaining period to the earliest redemption
date, December 18, 2001. The acretion for each period is charged to Series C
Stock dividends. The effective yield of the Series C Stock through its
redemption date approximated 18.5% based on the fair value of the underlying
common stock at June 30, 1997. The Company has a right to call all the shares of
the Series C Stock at $.001 per share, upon a qualifying public offering of the
Company's common stock.
F-36
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
6. 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.
In July 1997, the former owner of Horizon Dental Centers, who is employed
by the Company as a regional manager, asserted claims against the Company
contending that the Company misrepresented the value of the Common Stock issued
to him as a part of the consideration for the acquisition, and demanded the
issuance to him of approximately 200,000 additional shares. The Company believes
that these claims for additional consideration from the sale of Horizon Dental
Centers are without merit. In the opinion of management, resolution of these
claims 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.
7. STOCK OPTIONS:
In August 1997, the Company approved grants of employee and director stock
options for approximately 600,000 shares of the Company's common stock. The
grants are contingent upon completion of the Company's initial public offering
("IPO") of its common stock and will be exercisable at the IPO price. The
options will generally vest 20% each year on the anniversary date of the grant.
F-37
<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.
COOPERS & LYBRAND L.L.P.
Houston, Texas
June 18, 1997
F-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<PAGE>
SW DENTAL ASSOCIATES
CONDENSED BALANCE SHEET (UNAUDITED)
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 285 $ 26
Patient receivables, net........... 218 276
Other current assets............... 35 105
------------ --------
Total current assets.......... 538 407
Property and equipment, net............. 419 378
Other assets............................ 3 3
------------ --------
Total assets.................. $ 960 $ 788
============ ========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Current portion of long-term debt
and capital lease obligations..... $ 126 $ 126
Accounts payable and accrued
liabilities....................... 186 224
------------ --------
Total current liabilities..... 312 350
Long-term debt and capital lease
obligations, net of current portion... 319 286
Commitments and contingencies
Common stock, $1 par value, 1,000 shares
authorized, issued and
outstanding........................... 1 1
Retained earnings....................... 328 151
------------ --------
Total liabilities and members'
equity..................... $ 960 $ 788
============ ========
The accompanying notes are an integral part of the financial statements.
F-47
<PAGE>
SW DENTAL ASSOCIATES
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
1996 1997
--------- ---------
(IN THOUSANDS)
Net patient revenue.................. $ 2,217 $ 2,623
Expenses:
Dentists' salaries.............. 479 635
Clinical salaries............... 601 752
Dental supplies and laboratory
fees........................... 348 346
Rental and lease expense........ 68 58
Advertising and marketing....... 80 89
Depreciation.................... 38 50
Other operating expenses........ 251 174
General and administrative...... 148 232
--------- ---------
Total expenses............. 2,013 2,336
--------- ---------
Operating income........... 204 287
Interest expense..................... 12 17
--------- ---------
Net income........................... $ 192 $ 270
========= =========
Ifall of the Company's operations
had been subject to income
taxes, net income would have been
as follows (unaudited):
Historical income before income
taxes.......................... $ 192 $ 270
Provision for income taxes...... 71 100
--------- ---------
Pro forma net income............ $ 121 $ 170
========= =========
The accompanying notes are an integral part of the financial statements.
F-48
<PAGE>
SW DENTAL ASSOCIATES
CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
1996 1997
--------- ---------
(IN THOUSANDS)
Net cash provided by operating
activities............................ $ 273 $ 229
--------- ---------
Net cash used in investing
activities - capital expenditures..... (84) (9)
--------- ---------
Financing activities:
Payments on long-term debt and
capital leases.................... (27) (31)
Distributions to members........... (217) (448)
--------- ---------
Net cash used in financing activities... (244) (479)
--------- ---------
Net increase in cash and cash
equivalents................. (55) (259)
Cash and cash equivalents, beginning of
period................................ 101 285
--------- ---------
Cash and cash equivalents, end of
period................................ $ 46 $ 26
========= =========
The accompanying notes are an integral part of the financial statements.
F-49
<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 six months ended June 30, 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.
3. MANAGEMENT SERVICES AND OPTION AGREEMENTS
In May 1997, the Company entered into management services and option
agreements with Castle Dental Centers of Texas ("Castle") which replaced the
September 1996 definitive acquisition agreement. The new agreements contain
stipulations regarding the retention of deposits paid to the Company's
stockholders and an option to acquire the Castle facilities in the Austin, Texas
area for $3.4 million if Castle's acquisition of the Company is not consummated
by May 1998.
F-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<PAGE>
MID-SOUTH DENTAL CENTER, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, MAY 31,
1995 1996
------------ -------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents....... $ 166 $ 55
Patient receivables, net........ 281 272
Unbilled patient receivables,
net............................ 66 66
Other current assets............ 12 --
------------ -------
Total current assets....... 525 393
Property and equipment, net.......... 510 639
Other assets......................... 14 12
------------ -------
Total assets............... $1,049 $1,044
============ =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term
debt and capital lease
obligations.................... $ 197 $ 186
Accounts payable and accrued
liabilities.................... 209 193
------------ -------
Total current
liabilities............. 406 379
Long-term debt and capital lease
obligations........................ 511 495
Commitments and contingencies
Common stock, $1 par value 1,000
shares authorized, 1,000 shares
issued and outstanding............. 1 1
Additional paid in capital........... 4 4
Retained earnings.................... 127 165
------------ -------
Total liabilities and
stockholder's equity.... $1,049 $1,044
============ =======
The accompanying notes are an integral part of the condensed financial
statements.
F-79
<PAGE>
MID-SOUTH DENTAL CENTER, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FIVE MONTHS ENDED
MAY 31,
--------------------
1995 1996
--------- ---------
(DOLLARS IN THOUSANDS)
Net patient revenues.................... $ 2,238 $ 2,391
Expenses:
Dentists' salaries................. 380 395
Clinical salaries.................. 853 875
Dental supplies and laboratory
fees.............................. 222 215
Rental and lease expense........... 153 153
Advertising and marketing.......... 74 80
Depreciation....................... 54 60
Other operating expenses........... 92 122
General and administrative......... 189 260
Compensation to stockholder........ 229 162
--------- ---------
Total expenses................ 2,246 2,322
--------- ---------
Operating income (loss)....... (8) 69
Interest expense........................ 27 31
--------- ---------
Net income.................... $ (35) $ 38
========= =========
If all of the Company's operations had
been subject to
income taxes, net income would have
been as follows (unaudited):
Historical income before income
taxes............................. $ 38
Provision for income taxes......... 14
---------
Pro forma net income............... $ 24
=========
The accompanying notes are an integral part of the condensed financial
statements.
F-80
<PAGE>
MID-SOUTH DENTAL CENTER, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FIVE MONTHS ENDED
MAY 31,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Net cash provided by operating
activities......................... $ 193 $ 105
--------- ---------
Investing activities -- capital
expenditures....................... (104) (189)
--------- ---------
Net cash used in investing
activities................... (104) (189)
Financing activities:
Payments on long-term debt and
capital leases................ -- (27)
Proceeds from debt.............. 2 --
--------- ---------
Net cash provided by (used
in) financing activities..... 2 (27)
--------- ---------
Net change in cash and cash
equivalents.................. 91 (111)
Cash and cash equivalents, beginning
of period.......................... 52 166
--------- ---------
Cash and cash equivalents, end of
period............................. $ 143 $ 55
========= =========
The accompanying notes are an integral part of the condensed financial
statements.
F-81
<PAGE>
MID-SOUTH DENTAL CENTERS
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
ORGANIZATION
Mid-South Dental Centers (the "Company") is a provider of dental and
orthodontics services and products. The accompanying unaudited condensed
financial statements for the five months ended May 31, 1995 and 1996 reflect the
results of operations for the Company through the date of acquisition and have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. These unaudited condensed financial statements should be
read in conjunction with the annual financial statements of the Company included
elsewhere, herein. In management's opinion, such interim financial statements
include all normal recurring adjustments considered necessary for a fair
presentation of such financial statements. Interim results are not necessarily
indicative of results for a full year.
2. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material effect on
the Company's financial position, results of operations or liquidity.
3. SALE OF COMPANY:
The assets of the Company were acquired by Castle Dental Centers of
Tennessee in May 1996.
F-82
<PAGE>
HORIZON DENTAL CENTERS
CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, JUNE 30,
1995 1996
------------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 50 $ 208
Patient receivables, net........... 160 168
Prepaid expenses and other current
assets............................ 4 4
------------- ---------
Total current assets.......... 214 380
Property and equipment, net............. 26 24
Receivable from affiliate............... 809 600
------------- ---------
Total assets.................. $ 1,049 $ 1,004
============= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT)
Current liabilities:
Current portion of long-term
debt.............................. $ 458 $ 509
Accounts payable................... 6 6
------------- ---------
Total current liabilities..... 464 515
Long-term debt.......................... 659 403
Commitments and contingencies
Common stock............................ 10 10
Retained earnings (accumulated
deficit).............................. (84) 76
------------- ---------
Total liabilities and
stockholder's equity
(deficit).................. $ 1,049 $ 1,004
============= =========
The accompanying note are an integral part of the condensed combined financial
statements.
F-83
<PAGE>
HORIZON DENTAL CENTERS
CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS,
EXCEPT PER SHARE
DATA)
Net patient revenues................. $ 2,811 $ 2,684
Operating expenses:
Professional fees and clinic
expenses....................... 1,503 1,506
Dental supplies and laboratory
fees........................... 74 47
Affiliate management fee........ 803 490
Rental expense.................. 135 227
Advertising and marketing....... 82 116
Other operating expenses........ 29 31
General and administrative...... 63 67
--------- ---------
Total expenses............. 2,689 2,484
--------- ---------
Operating income........... 122 200
--------- ---------
Interest expense..................... 27 40
--------- ---------
Net income........................... $ 95 $ 160
========= =========
If all of the Company's operations
had been subject to
income taxes, net income would have
been as follows (unaudited):
Historical income before income
taxes.......................... $ 160
Provision for income taxes...... 59
---------
Pro forma net income............ $ 101
=========
The accompanying notes are an integral part of the condensed combined financial
statements.
F-84
<PAGE>
HORIZON DENTAL CENTERS
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Net cash provided by operating
activities......................... $ 97 $ 154
--------- ---------
Financing activities:
Proceeds from long-term debt.... 15 --
Payments on long-term debt...... (182) (205)
Proceeds from stockholder
receivable..................... 87 209
--------- ---------
Net cash provided by
financing activities......... (80) 4
--------- ---------
Net change in cash and cash
equivalents........................ 17 158
--------- ---------
Cash and cash equivalents, beginning
of period.......................... 2 50
--------- ---------
Cash and cash equivalents, end of
period............................. $ 19 $ 208
========= =========
The accompanying notes are an integral part of the condensed combined financial
statements.
F-85
<PAGE>
HORIZON DENTAL CENTERS
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENT
1. BASIS OF PRESENTATION:
Horizon Dental Centers (the "Company") is a provider of dental services
and products. The accompanying unaudited condensed combined financial statements
for the six months ended June 30, 1995 and 1996 have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations.
These unaudited condensed combined financial statements should be read in
conjunction with the annual combined financial statements of the Company
included elsewhere, herein. In management's opinion, such interim financial
statements include all normal recurring adjustments considered necessary for a
fair presentation of such financial statements. Interim results are not
necessarily indicative of results for a full year.
2. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material effect on
the Company's financial position, results of operations or cash flows.
3. SUBSEQUENT EVENTS:
During August 1996, Castle Dental Centers of Texas acquired certain assets
and stock of the entities described in Note 1 of the Horizon Dental Centers
combined financial statements.
F-86
<PAGE>
AMERICAN DENTAL CENTERS
CONDENSED COMBINED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents....... $ 401 $ 1,722
Investments..................... 1,567 1,784
Accounts receivable, net........ 1,291 841
Inventory....................... 128 126
------------ -------------
Total current assets....... 3,387 4,473
Property and equipment, net.......... 706 774
Other assets......................... 12 12
------------ -------------
Total assets............... $4,105 $ 5,259
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
liabilities................... $ 480 $ 1,532
------------ -------------
Total current
liabilities............. 480 1,532
Commitments and contingencies
Common stock......................... 21 21
Additional paid in capital........... 11 11
Retained earnings.................... 3,593 3,695
------------ -------------
Total liabilities and
stockholders' equity.... $4,105 $ 5,259
============ =============
The accompanying notes are an integral part of the condensed combined financial
statements.
F-87
<PAGE>
AMERICAN DENTAL CENTERS
CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Net patient revenues................. $ 12,338 $ 12,342
Expenses:
Dentists' fees.................. 2,741 2,624
Clinical salaries............... 4,210 4,371
Dental supplies and laboratory
fees........................... 1,327 1,068
Rental and lease expense........ 520 529
Advertising and marketing....... 76 120
Depreciation.................... 270 270
Other operating expenses........ 749 733
General and administrative...... 386 393
Compensation to stockholders.... 1,746 1,743
--------- ---------
Total expenses............. 12,025 11,851
--------- ---------
Net income................. $ 313 $ 491
========= =========
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.......................... $ 491
Provision for income taxes...... 201
---------
Pro forma net income............ $ 290
=========
The accompanying notes are an integral part of the condensed combined financial
statements.
F-88
<PAGE>
AMERICAN DENTAL CENTERS
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Net cash provided by operating
activities......................... $ 2,849 $ 2,265
--------- ---------
Cash used in investing activities:
Capital expenditures............ (305) (338)
Purchases of investments........ (1,676) (1,784)
Proceeds from maturities of
investments.................... 930 1,567
--------- ---------
Net cash used in investing
activities..................... (1,051) (555)
--------- ---------
Cash used in financing activities:
Distributions................... (1,491) (389)
--------- ---------
(1,491) (389)
Net change in cash and cash
equivalents.................... 307 1,321
Cash and cash equivalents, beginning
of period.......................... 1,049 401
--------- ---------
Cash and cash equivalents, end of
period............................. $ 1,356 $ 1,722
========= =========
The accompanying notes are an integral part of the combined financial
statements.
F-89
<PAGE>
AMERICAN DENTAL CENTERS
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
Jules V. Lane, Professional Corporation, doing business as American Dental
Centers (the "Company") is a provider of dental services and products in the
Long Island, Westchester County and New York City, New York areas. The
accompanying unaudited condensed combined financial statements as of September
30, 1996 and for the nine months ended September 30, 1995 and 1996 have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules and
regulations. These unaudited condensed combined financial statements should be
read in conjunction with the annual combined financial statements of the Company
included elsewhere, herein. In management's opinion, such interim financial
statements include all normal recurring adjustments considered necessary for a
fair presentation of such financial statements. Interim results are not
necessarily indicative of results for a full year.
2. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material effect on
the Company's financial position, results of operations or liquidity.
3. SUBSEQUENT EVENT:
The Company entered into a definitive agreement with Castle Dental Centers
of New York ("Castle") whereby Castle would acquire certain assets and
liabilities for cash and stock consideration.
F-90
<PAGE>
UNITED DENTALCARE
CONDENSED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- --------------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 8 $ 71
Patient receivables, net........... 97 125
Other current assets............... 3 5
------------- --------------
Total current assets.......... 108 201
Property and equipment, net............. 354 394
Other assets............................ -- 120
------------- --------------
Total assets.................. $ 462 $ 715
============= ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT)
Current liabilities:
Current portion of long-term
debt............................. $ 263 $ 275
Accounts payable and accrued
liabilities...................... 135 92
------------- --------------
Total current liabilities..... 398 367
Long-term debt and capital lease
obligations........................... 79 224
Commitments and contingencies
Common stock, no par value, 1,000 shares
authorized, 300 issued and
outstanding........................... 56 56
Retained earnings (accumulated
deficit).............................. (71) 68
------------- --------------
Total liabilities and
stockholder's equity
(deficit).................. $ 462 $ 715
============= ==============
The accompanying notes are an integral part of the condensed financial
statements.
F-91
<PAGE>
UNITED DENTALCARE
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Net patient revenues................. $ 2,464 $ 3,070
Expenses:
Dentists' salaries.............. 397 483
Clinical salaries............... 537 657
Dental supplies and laboratory
fees........................... 237 223
Rental and lease expense........ 139 159
Advertising and marketing....... 181 154
Depreciation.................... 39 74
Other operating expenses........ 204 139
General and administrative...... 696 633
--------- ---------
Total expenses............. 2,430 2,522
--------- ---------
Operating income........... 34 548
Interest income (expense), net....... (4) (22)
--------- ---------
Net income........................... $ 30 $ 526
========= =========
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.......................... $ 526
Provision for income taxes...... 195
---------
Pro forma net income............ $ 331
=========
The accompanying notes are an integral part of the condensed financial
statements.
F-92
<PAGE>
UNITED DENTALCARE
CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
Net cash provided by operating
activities............................ $ 40 $ 531
--------- ---------
Investing activities:
Capital expenditures............... (101) (114)
Proceeds from sale of assets....... 131 --
--------- ---------
Net cash provided by (used in)
investing activities........ 30 (114)
Financing activities:
Proceeds from long-term debt....... 104 311
Repayment of debt.................. (164) (157)
Payment of organizational costs.... -- (121)
Distributions to owner............. (58) (387)
--------- ---------
Net cash provided by (used in)
financing activities........ (118) (354)
--------- ---------
Net change in cash and cash
equivalents........................... (48) 63
Cash and cash equivalents, beginning of
period................................ 59 8
--------- ---------
Cash and cash equivalents, end of
period................................ $ 11 $ 71
========= =========
The accompanying notes are an integral part of the condensed financial
statements.
F-93
<PAGE>
UNITED DENTALCARE
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
United DentalCare (the "Company") is a provider of dental services. The
accompanying unaudited condensed financial statements as of September 30, 1996
and for the nine months ended September 30, 1995 and 1996 have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations.
These unaudited condensed financial statements should be read in conjunction
with the annual condensed financial statements of the Company included
elsewhere, herein. In management's opinion, such interim financial statements
include all normal recurring adjustments considered necessary for a fair
presentation of such financial statements. Interim results are not necessarily
indicative of results for a full year.
2. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material effect on
the Company's financial position, results of operations or liquidity.
3. SUBSEQUENT EVENTS:
The Company has entered into definitive agreements to sell its assets to
and enter into a long-term management services agreement with Castle Dental
Centers of Arkansas.
F-94
<PAGE>
[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 ........................................................... 16
Use of Proceeds ....................................................... 17
Dividend Policy ....................................................... 18
Dilution .............................................................. 18
Capitalization ........................................................ 19
Selected Historical and Pro Forma Financial Data ...................... 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................... 22
Business .............................................................. 32
Management ............................................................ 44
Certain Transactions .................................................. 51
Principal Stockholders ................................................ 53
Description of Capital Stock .......................................... 55
Shares Eligible for Future Sale ....................................... 58
Underwriting .......................................................... 60
Legal Matters ......................................................... 61
Experts ............................................................... 61
Additional Information ................................................ 61
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. In
January 1997, the Company issued an additional 31,750 shares of Common Stock to
the beneficial owners of the above entitles as a purchase price adjustment.
These shares of Common Stock represent the stock portion of the purchase price
of the acquisition by the Company of Horizon Dental. The foregoing transactions
were exempt from registration under Section 4(2) of the Securities Act, no
public offering being involved.
II-2
<PAGE>
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
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 129,166. 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 -- Form of Certificate of Designation of Series B
Convertible Preferred Stock.
*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 shareholders of Jack H. Castle,
D.D.S., P.C.
*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.
II-4
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------------------------------------------------------------
*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.
*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.
II-5
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------------------------------------------------------------
*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 -- 1996 Castle Dental Centers, Inc. Omnibus Stock and
Incentive Plan, as amended.
10.44 -- 1996 Castle Dental Centers, Inc. Non-Employee Directors'
Plan, as amended.
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
II-7
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------------------------------------------------------------
*10.67 -- Option Agreement effective as of December 18, 1995 by
and between Jack H. Castle, D.D.S. and Castle Dental
Centers, Inc.
*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.
*10.80 -- 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 June 18, 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 -- Consent of G. Daniel Siewert III.
*23.3 -- Consent of Emmett Moore.
*23.4 -- Consent of Louis A. Waters.
27 -- Financial Data Schedule.
II-8
<PAGE>
- ------------
* Filed previously.
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 AUGUST 12, 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 AUGUST 12, 1997.
SIGNATURE TITLE
- --------------------------------------------------------------------------------
/s/ JACK H. CASTLE, JR. Chairman of the Board of Directors, Chief
JACK H. CASTLE, JR. 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
<PAGE>
INDEX TO 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 -- Form of Certificate of Designation of Series B
Convertible Preferred Stock.
*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 shareholders of Jack H. Castle,
D.D.S., P.C.
*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.
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------------------------------------------------------------------------------
*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.
*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.
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------------------------------------------------------------------------------
*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.
<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 -- 1996 Castle Dental Centers, Inc. Omnibus Stock and
Incentive Plan, as amended.
10.44 -- 1996 Castle Dental Centers, Inc. Non-Employee Directors'
Plan, as amended.
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
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------------------------------------------------------------------------------
*10.67 -- Option Agreement effective as of December 18, 1995 by
and between Jack H. Castle, D.D.S. and Castle Dental
Centers, Inc.
*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.
*10.80 -- 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 June 18, 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 -- Consent of G. Daniel Siewert III.
*23.3 -- Consent of Emmett Moore.
*23.4 -- Consent of Louis A. Waters.
27 -- Financial Data Schedule.
- ------------
* Filed previously.
EXHIBIT 1
CASTLE DENTAL CENTERS
2,500,000 SHARES COMMON STOCK
UNDERWRITING AGREEMENT
August __, 1997
J.C. BRADFORD & CO., L.L.C.
SOUTHCOAST CAPITAL CORPORATION
As Representatives of the Several Underwriters
c/o J.C. Bradford & Co.
J.C. Bradford Financial Center
330 Commerce Street
Nashville, Tennessee 37201
Ladies and Gentlemen:
Castle Dental Centers, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to the underwriters named in SCHEDULE I hereto (the
"Underwriters") for whom you are acting as the representatives (the
"Representatives") 2,500,000 shares (collectively, the "Firm Shares"), of Common
Stock, $0.001 par value per share (the "Common Stock"), of the Company. Such
shares of Common Stock are to be sold to the Underwriters, acting severally and
not jointly, in such amounts as are set forth in SCHEDULE I hereto opposite the
name of such Underwriter. The Company proposes to grant to the Underwriters an
option to purchase up to 375,000 additional shares of Common Stock as provided
for in SECTION 2 of this Agreement for the purpose of covering over-allotments
(the "Option Shares"). The Firm Shares and the Option Shares purchased pursuant
to this Agreement are herein called the "Shares."
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to, and agrees with, each of the Underwriters that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended
(the "Securities Act"), a registration statement on Form S-1 (Registration
No. 333-11335), including the related preliminary prospectus relating to
the Shares. Copies of such registration statement and any amendments,
including any post-effective amendments, and all forms of the related
prospectuses contained therein and any supplements thereto, have been
delivered to you.
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Such registration statement, including the prospectus, Part II, all
financial schedules and exhibits thereto, all information deemed to be a
part of such registration statement pursuant to Rule 430A under the
Securities Act and any related registration statement filed pursuant to
Rule 462(b) under the Securities Act, at the time when they shall become
effective, are herein referred to as the "Registration Statement," and the
prospectus included as part of the Registration Statement on file with the
Commission that discloses all the information that was omitted from the
prospectus on the effective date pursuant to Rule 430A of the Rules and
Regulations (as defined below) and in the form filed pursuant to Rule
424(b) under the Securities Act is herein referred to as the "Final
Prospectus." The prospectus included as part of the Registration Statement
on the date when the Registration Statement became effective is referred
to herein as the "Effective Prospectus." Any prospectus included in the
Registration Statement and in any amendment thereto prior to the effective
date of the Registration Statement is referred to herein as a "Preliminary
Prospectus." For purposes of this Agreement, "Rules and Regulations" mean
the rules and regulations promulgated by the Commission under either the
Securities Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as applicable.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus, at
the time of filing thereof, complied in all material respects with the
requirements of the Securities Act and the Rules and Regulations, and did
not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; except that the foregoing does not apply to
statements or omissions made in reliance upon and in conformity with
written information furnished to the Company by any Underwriter
specifically for use therein (it being understood that the only
information so provided is the information included in the last paragraph
on the cover page and in the first and third paragraphs under the caption
"Underwriting" in the Preliminary, Effective and Final Prospectus). When
the Registration Statement becomes effective and at all times subsequent
thereto up to and including the First Closing Date (as hereinafter
defined), (i) the Registration Statement, the Effective Prospectus and
Final Prospectus and any amendments or supplements thereto will contain
all statements which are required to be stated therein in accordance with
the Securities Act and the Rules and Regulations and will comply in all
material respects with the requirements of the Securities Act and the
Rules and Regulations, and (ii) neither the Registration Statement, the
Effective Prospectus nor the Final Prospectus nor any amendment or
supplement thereto will include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances in which
they were made, not misleading; except that the foregoing does not apply
to statements or omissions made in reliance upon and in conformity with
written information furnished to the Company by any Underwriter
specifically for use therein (it being understood that the only
information so provided is the information included in the last paragraph
on the cover
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page and in the first and third paragraphs under the caption
"Underwriting" in the Final Prospectus).
(c) The Company and each subsidiary of the Company (as used herein,
the term "subsidiary" includes any corporation, joint venture or
partnership in which the Company or any subsidiary of the Company has a
direct or indirect ownership interest, excluding the Affiliated Practices
(as hereinafter defined)) is duly incorporated and validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization with full power and authority to own its properties and
conduct its business as now conducted and is duly qualified or authorized
to do business and is in good standing in all jurisdictions wherein the
nature of its business or the character of property owned or leased may
require it to be authorized or qualified to do business. The Company and
each subsidiary holds all licenses, consents and approvals, and has
satisfied all eligibility and other similar requirements imposed by
federal and state regulatory bodies, administrative agencies or other
governmental bodies, agencies or officials, in each case as required for
the conduct of the business in which it is engaged and is contemplated to
be engaged in the Effective Prospectus and the Final Prospectus.
(d) The capitalization of the Company as of June 30, 1997 is as set
forth under the caption "Capitalization" in the Effective Prospectus and
the Final Prospectus, and the Company's capital stock conforms to the
description thereof contained under the caption "Description of Capital
Stock" in the Effective Prospectus and the Final Prospectus. All the
issued shares of capital stock of the Company have been duly authorized
and validly issued, are fully paid and nonassessable. None of the issued
shares of capital stock of the Company have been issued in violation of
any preemptive or similar rights. The Shares to be sold by the Company
hereunder have been duly and validly authorized and, upon issuance and
delivery and payment therefor in the manner herein described, will be
validly issued, fully paid and nonassessable. Except as set forth in the
Effective Prospectus and the Final Prospectus, (i) the Company does not
have outstanding any options to purchase, or any rights or warrants to
subscribe for, or any securities or obligations convertible into, or any
contracts or commitments to issue or sell, any shares of Common Stock and
(ii) there are no preemptive rights or other rights to subscribe for or to
purchase, or any restriction upon the transfer of, any shares of Common
Stock pursuant to the Company's certificate of incorporation, bylaws or
any agreement or other instrument to which the Company is a party or by
which it may be bound. Neither the filing of the Registration Statement
nor the offer or sale of the Shares as contemplated by this Agreement
gives rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any shares of Common
Stock or any other securities of the Company. The Underwriters will
receive good and marketable title to the Shares to be issued and delivered
hereunder, free and clear of all liens, encumbrances, claims, security
interests, restrictions, shareholders' agreements and voting trusts
whatsoever.
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(e) The form of stock certificate to be used to evidence the Common
Stock will be in due and proper form and will comply with all applicable
legal requirements.
(f) All offers and sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered or the
subject of an available exemption from the registration requirements of
the Securities Act, and were duly registered or the subject of an
available exemption from the registration requirements of the applicable
state securities or Blue Sky laws, and any private placement memoranda
delivered in connection with offers and sales of the Company's securities
prior to the date hereof did not include any untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein not misleading.
(g) At the Closing Date, each of the agreements to which the Company
or its predecessor corporation, Family Dental Services of Texas, Inc.
("Family Dental"), are parties in connection with the acquisition of
certain assets or capital stock of four separate dental practices
(collectively, the "Affiliated Practices") or to which the Affiliated
Practices are parties, including management services agreements, asset
purchase agreements, employment agreements with the previous owners of the
Affiliated Practices and agreements and plans of reorganization, and the
agreement and plan of merger between the Company and Family Dental have or
will have been duly and validly authorized, executed and delivered by the
Company and are or will be valid and binding agreements of the Company
enforceable in accordance with their respective terms except, however,
that, at some later date, a court of competent jurisdiction may determine
that the scope, duration or geographic area of any covenant not to compete
set forth in any of these agreements may be overbroad or unenforceable. At
the Closing Date, the agreements pursuant to which certain persons have
agreed not to sell their Common Stock for a specified period of time (the
"Lockup Agreements") will have been duly and validly authorized, executed
and delivered by the parties thereto and will be valid and binding
agreements, enforceable in accordance with their terms. The management
services agreements, asset purchase agreements, agreements and plans of
reorganization, the agreement and plan of merger between the Company and
Family Dental and the Lockup Agreements are sometimes hereinafter called
the "Operative Documents." The execution, delivery and performance of the
Operative Documents and the consummation of the transactions contemplated
therein and compliance by the Company and the Affiliated Practices with
their obligations thereunder have been duly authorized by all necessary
action and do not or will not contravene any provision of applicable law
or the certificate of incorporation or bylaws of the Company or any
Affiliated Practice or any agreement or other instrument binding upon
them, or any judgment, order or decree of any governmental body, agency or
court having jurisdiction over them, and no consent, approval,
authorization or order of or qualification with any governmental body or
agency is required for the performance by them of their obligations under
the Operative Documents, except such as may be required by the federal
securities laws or the securities or Blue Sky laws of the various states
in connection with the offer and sale of the Shares.
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(h) The Company has full legal right, power and authority to enter
into this Agreement and to sell and deliver the Shares to be sold by it to
the several Underwriters as provided herein, and this Agreement has been
duly authorized, executed and delivered by the Company and constitutes a
valid and binding agreement of the Company enforceable against the Company
in accordance with its terms. No consent, approval, authorization or order
of any court or governmental agency or body or third party is required for
the performance of this Agreement by the Company, any subsidiary or any of
the Affiliated Practices or the consummation by the Company, any
subsidiary or any of the Affiliated Practices of the transactions
contemplated hereby, except such as have been obtained and such as may be
required by the National Association of Securities Dealers, Inc. ("NASD")
or under the Securities Act or state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the several
Underwriters. The issuance and sale of the Shares by the Company, the
Company's performance of this Agreement and the consummation of the
transactions contemplated hereby and the Operative Documents will not
result in a breach or violation of, or conflict with, any of the terms or
provisions of, or constitute a default by the Company, any subsidiary or
any of the Affiliated Practices under, any indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument to which the
Company, any subsidiary or any of the Affiliated Practices is a party or
to which the Company, any subsidiary or any of the Affiliated Practices or
any of their respective properties is subject, the certificate of
incorporation, bylaws or other governing instrument of the Company, any
subsidiary or any of the Affiliated Practices or any statute or any
judgment, decree, order, rule or regulation of any court or governmental
agency or body applicable to the Company, any subsidiary or any of the
Affiliated Practices or any of their respective properties. Neither the
Company, any subsidiary, nor any of the Affiliated Practices is in
violation of its certificate of incorporation, bylaws or other governing
instrument or any law, administrative rule or regulation or arbitrators'
or administrative or court decree, judgment or order or in violation or
default (there being no existing state of facts which with notice or lapse
of time or both would constitute a default) in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, deed of trust, mortgage, loan
agreement, note, lease, agreement or other instrument or permit to which
it is a party or by which it or any of its properties is or may be bound.
(i) The historical and pro forma financial statements, together with
the related schedules and notes, of the Company and the Affiliated
Practices (together, the "Combined Companies"), included in the
Registration Statement, the Effective Prospectus and the Final Prospectus,
conform to the requirements of the Securities Act and the Rules and
Regulations. Such historical financial statements fairly present the
financial position of the Combined Companies at the respective dates
indicated in accordance with generally accepted accounting principles
applied on a consistent basis for the periods indicated. Such pro forma
financial statements have been prepared on a basis consistent with such
historical statements, except for the pro forma adjustments specified
therein, and give effect to assumptions made on a reasonable basis and
present fairly the transactions reflected
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thereby as indicated in the Prospectus. The financial and statistical data
set forth in the Effective Prospectus and the Final Prospectus fairly
present the information set forth therein on the basis stated in the
Effective Prospectus and the Final Prospectus. Coopers & Lybrand L.L.P.,
whose reports are included in the Effective Prospectus and the Final
Prospectus, are independent accountants as required by the Securities Act
and the Rules and Regulations.
(j) Subsequent to June 30, 1997, the Company has not sustained any
material loss or interference with its business or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree, which is not disclosed in the Effective Prospectus and
the Final Prospectus; and subsequent to the respective dates as of which
information is given in the Registration Statement, the Effective
Prospectus and the Final Prospectus, (i) neither the Company, any
subsidiary, nor any Affiliated Practice has incurred any material
liabilities or obligations, direct or contingent, or entered into any
transactions not in the ordinary course of business, and (ii) there has
not been any issuance of options, warrants or rights to purchase interests
or the capital stock of the Company, or any adverse change, or any
development involving a prospective adverse change, in the general
affairs, management, business, prospects, financial position, net worth or
results of operations of the Company or any Affiliated Practice, except in
each case as described in the Effective Prospectus and the Final
Prospectus.
(k) Except as described in the Effective Prospectus and the Final
Prospectus, there is not pending, or to the knowledge of the Company
threatened, any legal or governmental action, suit, proceeding, inquiry or
investigation, to which the Company, any of its subsidiaries, any
Affiliated Practice or any of their respective officers or directors is a
party, or to which their respective property is subject, before or brought
by any court or governmental agency or body, wherein an unfavorable
decision, ruling or finding could prevent or materially hinder the
consummation of this Agreement or the Operative Documents or result in a
material adverse change in the business condition (financial or other),
prospects, financial position, net worth or results of operations of the
Company or any of its subsidiaries.
(l) __________ shares of Common Stock, including the Shares, have
been approved for listing on the Nasdaq Stock Market's National Market
("Nasdaq"), subject to official notice of issuance.
(m) Neither the Company nor any of its directors, officers or
controlling persons, has taken or will take, directly or indirectly, any
action resulting in a violation of Regulation M under the Exchange Act, or
designed to cause or result under the Exchange Act or otherwise in, or
which has constituted or which reasonably might be expected to constitute,
the stabilization or manipulation of the price of any securities of the
Company or facilitation of the sale or resale of the Shares.
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(n) Except as described in the Effective Prospectus and the Final
Prospectus, the Company, each of its subsidiaries and each Affiliated
Practice has good and marketable title to all real and material personal
property owned by it, free and clear of all liens, charges, encumbrances
or defects, except those reflected in the financial statements hereinabove
described. The real and personal property and buildings referred to in the
Effective Prospectus and the Final Prospectus which are leased from others
by the Company, its subsidiaries or any Affiliated Practice are held under
valid, subsisting enforceable leases. The Company, its subsidiaries or any
Affiliated Practice owns or leases all such properties as are necessary to
their respective operations as now conducted.
(o) The Company's system of internal accounting controls is
sufficient to meet the broad objectives of internal accounting controls
insofar as those objectives pertain to the prevention or detection of
errors or irregularities in amounts that would be material in relation to
the Company's financial statements.
(p) The Company, each of its subsidiaries and each Affiliated
Practice has filed all foreign, federal, state and local income and
franchise tax returns required to be filed through the date hereof and has
paid all taxes shown as due therefrom to the extent such taxes have become
due and are not being contested in good faith; and there is no tax
deficiency that has been, nor does the Company have knowledge of any tax
deficiency which is likely to be, asserted against the Company, any of its
subsidiaries or any Affiliated Practice, which if determined adversely
could materially and adversely affect the earnings, assets, affairs,
business prospects or condition (financial or other) of the Company, any
of its subsidiaries or any Affiliated Practice.
(q) The Company, each of its subsidiaries, and each Affiliated
Practice operates its business in conformity, in all material respects,
with all applicable statutes, common laws, ordinances, decrees, orders,
rules and regulations of governmental bodies including, without
limitation, those relating to the practice of dentistry (including the
management or operation of dental offices), the splitting of professional
fees with non-dentists, the ownership or control of the assets of a dental
practice, the employment of dentists, orthodontists, other dental
specialists or other personnel, the content of advertising, the making of
payments in consideration for referrals of patients, limitations on tasks
that may be delegated by a dentist to other staff members, the business of
insurance and reimbursement by governmental agencies. The Company, each of
its subsidiaries and each Affiliated Practice has all licenses, approvals,
consents or permits to operate its businesses in all locations in which
such businesses are currently being operated, and, except as described in
the Prospectus, such permits contain no restrictions that are materially
burdensome. The Company is not aware of any existing or imminent matter
which may materially adversely impact its, any of its subsidiaries' or any
of the Affiliated Practices' operations or business prospects other than
as specifically disclosed in the Effective Prospectus and the Final
Prospectus. Each of the (i) dentists, orthodontists, other dental
specialists and (ii) other professionals involved in providing dental care
to patients (each,
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a "Professional") who is employed by or affiliated with an Affiliated
Practice has such permits under laws and related governmental regulations
(including, as applicable, state and local licenses to practice dentistry
and federal Drug Enforcement Agency Controlled Substances Registration
Certificates) as are necessary to provide dental, orthodontic and other
specialty dental care in such jurisdictions as are contemplated by the
management services agreement between the Affiliated Practice and the
Company, the failure of which to have would have a material adverse effect
on the Affiliated Practice; each of such Professionals has fulfilled and
performed all of his or her material obligations with respect to such
permits, and no event has occurred which allows, or after notice or lapse
of time (or both) would allow, revocation or termination thereof or would
result in any other material impairment of the rights of the holder of
such permit; and, except as described in the Effective Prospectus, no such
permit contains any restrictions that are materially burdensome to the
holder thereof or the Affiliated Practice with which that holder is
affiliated or employed. The Company's and the Affiliated Practice's
business practices do not violate any foreign, federal or state laws
regarding dentist ownership of (or financial relationship with), and
referral to, entities providing dentistry-related goods or services, or
laws respecting financial interests held by dentists in entities to which
they may refer patients for the provision of dentistry-related goods or
services.
(r) Neither the Company, any of its subsidiaries, nor any of the
Affiliated Practices is in material violation of any federal, state, local
or foreign law or regulation relating to occupational safety and health or
to the storage, handling or transportation of hazardous or toxic
materials, and the Company, each of its subsidiaries and each Affiliated
Practice has received all permits, licenses or other approvals required of
it under applicable federal, state and foreign occupational safety and
health and environmental laws and regulations to conduct its respective
businesses, and the Company and each of its subsidiaries is in compliance
with all terms and conditions of any such permit, license or approval,
except any such violation of law or regulation, failure to receive
required permits, licenses or other approvals or failure to comply with
the terms and conditions of such permits, licenses or approvals which
would not result in a material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or prospects of the
Company or any of its subsidiaries.
(s) Neither the Company, any of its subsidiaries, nor any Affiliated
Practice has failed to file with the applicable regulatory authorities any
statements, reports, information or forms required by all applicable laws,
regulations or orders; all such filings or submissions were in compliance
with applicable laws when filed, and no deficiencies have been asserted by
any regulatory commission, agency or authority with respect to such
filings or submissions. Neither the Company, any of its subsidiaries, nor
any Affiliated Practice has failed to maintain in full force and effect
any licenses, registrations or permits necessary or proper for the conduct
of its business, or received any notification that any revocation or
limitation thereof is threatened or pending, and there is not to the
knowledge of the Company pending any change under any law, regulation,
license or permit which
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could materially adversely affect the business, operations, property or
business prospects of the Company. Neither the Company, any of its
subsidiaries, nor any Affiliated Practice has received any notice of
violation of or been threatened with a charge of violating or is under
investigation with respect to a possible violation of any provision of any
law, regulation or order.
(t) No labor dispute exists or is imminent with any of the employees
of the Company, any of its subsidiaries, nor any Affiliated Practice or
otherwise which could materially adversely affect the Company or any of
its subsidiaries. The Company is not aware of any existing or imminent
labor disturbance by employees of the Company, any of its subsidiaries or
any Affiliated Practice which could be expected to materially adversely
affect the condition (financial or otherwise), results of operations,
properties, affairs, management, business affairs or business prospects of
the Company or its subsidiaries.
(u) The Company, each of its subsidiaries and each Affiliated
Practice owns all licenses, copyrights, trademarks, service marks and
trade names presently employed by it in connection with the businesses
proposed to be operated by it, and neither the Company, any of its
subsidiaries nor any of the Affiliated Practices has received any notice
of infringement of or conflict with asserted rights of others with respect
to any of the foregoing which, alone or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, could result in any
material adverse change in the condition, financial or otherwise, or in
the earnings, business affairs or business prospects of the Company or any
of its subsidiaries.
(v) The Company, each of its subsidiaries and each Affiliated
Practice is insured by insurers of recognized financial responsibility
against such losses and risks and in such amounts as are prudent and
customary in the businesses in which it is engaged and in which it
proposes to engage; and neither the Company, any of its subsidiaries, nor
any Affiliated Practice has any reason to believe that it will not be able
to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers as may be necessary to
continue its business at a comparable cost.
(w) Neither the Company, any of its subsidiaries, any Affiliated
Practice, nor to the knowledge of the Company, any director, officer,
agent, employee or other person acting on behalf of the Company has (i)
used, or authorized the use of, any corporate or other funds for unlawful
payments, contributions, gifts or entertainment, (ii) made unlawful
expenditures relating to political activity to government officials or
others, or (iii) established or maintained any unlawful or unrecorded
funds in violation of any federal, state, local or foreign law or
regulation, including Section 30A of the Exchange Act. Neither the Company
nor, to the knowledge of the Company, any director, officer, agent,
employee or other person acting on behalf of the Company has accepted or
received any unlawful contributions, payments, gifts or expenditures.
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(x) The Company is not, will not become as a result of the
transactions contemplated hereby, and does not intend to conduct its
business in a manner that would cause it to become, an "investment
company" or a company "controlled" by an "investment company" within the
meaning of the Investment Company Act of 1940.
(y) Except as disclosed in the Registration Statement and the
Effective Prospectus, there are no business relationships or related party
transactions required to be disclosed therein by Item 404 of Regulation
S-K of the Commission.
2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein
set forth, the Company agrees to sell to the several Underwriters the Firm
Shares, and each of the Underwriters, severally and not jointly, agrees to
purchase at a purchase price of $______ per share, the number of Firm
Shares set forth opposite such Underwriter's name in SCHEDULE I hereto.
(b) The Company hereby grants to the Underwriters an option to
purchase, solely for the purpose of covering over-allotments in the sale
of Firm Shares, all or any portion of the Option Shares at the purchase
price per share set forth above. The option granted hereby may be
exercised as to all or any part of the Option Shares at any time within 30
days after the date of the Final Prospectus. The Underwriters shall not be
under any obligation to purchase any Option Shares prior to the exercise
of such option. The option granted hereby may be exercised by the
Underwriters by the Representatives giving written notice to the Company
setting forth the number of Option Shares to be purchased and the date and
time for delivery of and payment for such Option Shares and stating that
the Option Shares referred to therein are to be used for the purpose of
covering over-allotments in connection with the distribution and sale of
the Firm Shares. If such notice is given prior to the First Closing Date
(as defined herein), the date set forth therein for such delivery and
payment shall not be earlier than two full business days thereafter or the
First Closing Date, whichever occurs later. If such notice is given on or
after the First Closing Date, the date set forth therein for such delivery
and payment shall not be earlier than three full business days thereafter.
In either event, the date so set forth shall not be more than four full
business days after the date of such notice. The date and time set forth
in such notice is herein called the "Option Closing Date." Upon exercise
of the option, the Company shall become obligated to sell to the
Underwriters, and, subject to the terms and conditions herein set forth,
the Underwriters shall become obligated to purchase, for the account of
each Underwriter, from the Company, severally and not jointly, the number
of Option Shares specified in such notice. Option Shares shall be
purchased for the accounts of the Underwriters in proportion to the number
of Firm Shares set forth opposite such Underwriter's name in SCHEDULE I
hereto, except that the respective purchase obligations of each
Underwriter shall be adjusted so that no Underwriter shall be obligated to
purchase fractional Option Shares.
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(c) Certificates in definitive form for the Firm Shares which each
Underwriter has agreed to purchase hereunder shall be delivered by or on
behalf of the Company to the Underwriters for the account of such
Underwriter against payment by such Underwriter or on its behalf of the
purchase price therefor by wire transfer of immediately available funds to
the order of the Company, at the offices of J.C. Bradford & Co., L.L.C.,
330 Commerce Street, Nashville, Tennessee 37201, or at such other place as
may be agreed upon by the Representatives, at 10:00 A.M., Nashville time,
on the third full business day after this Agreement becomes effective, or,
at the election of the Representatives, on the fourth full business day
after this Agreement becomes effective, if it becomes effective after 4:30
P.M. Eastern time, or at such other time not later than the seventh full
business day thereafter as the Representatives and the Company may
determine, such time of delivery against payment being herein referred to
as the "First Closing Date." The First Closing Date and the Option Closing
Date are herein individually referred to as the "Closing Date" and
collectively referred to as the "Closing Dates." Certificates in
definitive form for the Option Shares which each Underwriter shall have
agreed to purchase hereunder shall be similarly delivered by or on behalf
of the Company on the Option Closing Date. The certificates in definitive
form for the Shares to be delivered will be in good delivery form and in
such denominations and registered in such names as the Representatives may
request not less than 48 hours prior to the First Closing Date or the
Option Closing Date, as the case may be. Such certificates will be made
available for checking and packaging at a location in New York, New York
as may be designated by you, at least 24 hours prior to the First Closing
Date or the Option Closing Date, as the case may be. It is understood that
the Representatives may (but shall not be obligated to) make payment on
behalf of any Underwriter or Underwriters for the Shares to be purchased
by such Underwriter or Underwriters. No such payment shall relieve such
Underwriter or Underwriters from any of its or their obligations
hereunder.
3. OFFERING BY THE UNDERWRITERS. After the Registration Statement becomes
effective, the several Underwriters propose to offer for sale to the public the
Firm Shares and any Option Shares which may be sold at the price and upon the
terms set forth in the Final Prospectus.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees with each of
the Underwriters that:
(a) The Company shall comply with the provisions of and make all
requisite filings with the Commission pursuant to Rules 424 and 430A of
the Rules and Regulations and shall notify the Representatives promptly
(in writing, if requested) of all such filings. The Company shall notify
the Representatives promptly of any request by the Commission for any
amendment of or supplement to the Registration Statement, the Effective
Prospectus or the Final Prospectus or for additional information; the
Company shall prepare and file with the Commission, promptly upon the
Representatives' request, any amendments of or supplements to the
Registration Statement, the Effective Prospectus or the Final Prospectus
which, in the Representatives' opinion, may be necessary or advisable
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in connection with the distribution of the Shares; and the Company shall
not file any amendment of or supplement to the Registration Statement, the
Effective Prospectus or the Final Prospectus which is not approved by the
Representatives after reasonable notice thereof. The Company shall advise
the Representatives promptly of the issuance by the Commission or any
jurisdiction or other regulatory body of any stop order or other order
suspending the effectiveness of the Registration Statement, suspending or
preventing the use of any Preliminary Prospectus, the Effective Prospectus
or the Final Prospectus or suspending the qualification of the Shares for
offering or sale in any jurisdiction, or of the institution of any
proceedings for any such purpose; and the Company shall use its best
efforts to prevent the issuance of any stop order or other such order and,
should a stop order or other such order be issued, to obtain as soon as
possible the lifting thereof.
(b) The Company will take or cause to be taken all necessary action
and furnish to whomever the Representatives direct such information as may
be reasonably required in qualifying the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as the Underwriters
may designate and will continue such qualifications in effect for as long
as may be reasonably necessary to complete the distribution of the Shares.
(c) Within the time during which a Final Prospectus relating to the
Shares is required to be delivered under the Securities Act, the Company
shall comply with all requirements imposed upon it by the Securities Act,
as now and hereafter amended, and by the Rules and Regulations, as from
time to time in force, so far as is necessary to permit the continuance of
sales of or dealings in the Shares as contemplated by the provisions
hereof and the Final Prospectus. If during such period any event occurs as
a result of which the Final Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances then existing, not misleading, or if during such period it
is necessary to amend the Registration Statement or supplement the Final
Prospectus to comply with the Securities Act, the Company shall promptly
notify the Representatives and shall amend the Registration Statement or
supplement the Final Prospectus (at the expense of the Company) so as to
correct such statement or omission or effect such compliance.
(d) The Company will furnish without charge to the Representatives
and make available to the Underwriters copies of the Registration
Statement (four of which shall be signed and shall be accompanied by all
exhibits), each Preliminary Prospectus, the Effective Prospectus and the
Final Prospectus, and all amendments and supplements thereto, including
any prospectus or supplement prepared after the effective date of the
Registration Statement, in each case as soon as available and in such
quantities as the Underwriters may reasonably request.
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(e) The Company will (A) deliver to the Representatives at such
office or offices as the Representatives may designate as many copies of
the Preliminary Prospectus and Final Prospectus as the Representatives may
reasonably request, (B) for a period of not more than nine months after
the Registration Statement becomes effective, send to the Underwriters as
many additional copies of the Final Prospectus and any supplement thereto
as the Representatives may reasonably request, and (C) following nine
months after the Registration Statement becomes effective, send to the
Underwriters at their expense as many additional copies of the Final
Prospectus and any supplement thereto as the representatives may
reasonably request.
(f) The Company shall make generally available to its security
holders, in the manner contemplated by Rule 158(b) under the Securities
Act as promptly as practicable and in any event no later than 45 days
after the end of its fiscal quarter in which the first anniversary of the
effective date of the Registration Statement occurs, an earnings statement
satisfying the provisions of Section 11(a) of the Securities Act covering
a period of at least 12 consecutive months beginning after the effective
date of the Registration Statement.
(g) The Company will apply the net proceeds from the sale of the
Shares to be sold by it as set forth under the caption "Use of Proceeds"
in the Final Prospectus and will timely file reports on Form SR with the
Commission in accordance with Rule 463 of the Securities Act or any
successor provision.
(h) During a period of five years from the effective date of the
Registration Statement or such longer period as the Representatives may
reasonably request, the Company will furnish to the Representatives copies
of all reports and other communications (financial or other) furnished by
the Company to its shareholders and, as soon as available, copies of any
reports or financial statements furnished or filed by the Company to or
with the Commission or any national securities exchange on which any class
of securities of the Company may be listed.
(i) The Company will, from time to time, after the effective date of
the Registration Statement file with the Commission such reports as are
required by the Securities Act, the Exchange Act and the Rules and
Regulations, and shall also file with foreign, state and other
governmental securities commissions in jurisdictions where the Shares have
been sold by the Underwriters (as the Representatives shall have advised
the Company in writing) such reports as are required to be filed by the
securities acts and the regulations of those states.
(j) Except pursuant to this Agreement or with the Representatives'
written consent, for a period of 180 days from the effective date of the
Registration Statement, the Company will not, and the Company has provided
agreements executed by each of its executive officers, directors and all
of its stockholders providing that for a period of 180
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days from the effective date of the Registration Statement, such person
will not, offer to sell (other than the issuance by the Company of shares
of Common Stock pursuant to the exercise of options granted pursuant to
existing employee benefit plans and agreements), grant any options (other
than pursuant to existing employee benefit plans and agreements), rights
or warrants with respect to any shares of Common Stock, securities
convertible into shares of Common Stock or any other capital stock of the
Company, or otherwise dispose of, directly or indirectly, any shares of
Common Stock or such other securities or capital stock, except in the case
of the Company, shares of Common Stock issued in connection with
acquisitions to parties that agree to be bound by the same restrictions on
offers and sales.
(k) Neither the Company nor any of its officers, directors or
affiliates will take, directly or indirectly, any action designed to cause
or result in, or which might constitute or be expected to constitute,
stabilization or manipulation of the price of the Common Stock.
(l) The Company will either conduct its business and operations as
described in the Final Prospectus or, if the Company makes any material
change to its business or operations as so conducted, promptly disclose
such change generally to the Company's securityholders.
(m) If at any time during the 25-day period after the Registration
Statement is declared effective, any rumor, publication or event relating
to or affecting the Company shall occur as a result of which, in the
Representatives' opinion, the market price for the Shares has been or is
likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Final Prospectus), the Company will, after written notice from the
Representatives advising it as to the effect set forth above, prepare,
consult with the Representatives concerning the substance of and, subject
to the Rules and Regulations, disseminate a press release or other public
statement, reasonably satisfactory to the Representatives, responding to
or commenting on such rumor, publication or event.
(n) The Company will use its best efforts to effect the listing of
the Common Stock, subject to notice of issuance, on Nasdaq on or before
the effective date of the Registration Statement.
(o) Subject to the terms thereof, the Company will do and perform
its obligations under each of the Operative Documents to which it is a
party, to the extent required to consummate the transactions set forth
therein, and all things required to be done or performed prior to the
Closing Date pursuant to this Agreement.
5. EXPENSES. The Company agrees with the Underwriters that (a) whether or
not the transactions contemplated by this Agreement are consummated or this
Agreement becomes
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effective or is terminated, the Company will pay all fees and expenses incident
to the performance of the obligations of the Company hereunder, including, but
not limited to, (i) the Commission's registration fee, (ii) the expenses of
printing (or reproduction) and distributing the Registration Statement
(including the financial statements therein and all amendments and exhibits
thereto), each Preliminary Prospectus, the Effective Prospectus, the Final
Prospectus, any amendments or supplements thereto, any Marketing Materials (as
defined herein) and this Agreement and other underwriting documents, including
Underwriter's Questionnaires, Underwriter's Powers of Attorney, Blue Sky
Memoranda, Agreements Among Underwriters and Selected Dealer Agreements, (iii)
fees and expenses of accountants and counsel for the Company, (iv) expenses of
registration or qualification of the Shares under state Blue Sky and securities
laws, including the fees and disbursements of counsel to the Underwriters in
connection therewith, (v) filing fees paid or incurred by the Underwriters in
connection with filings with the NASD, (vi) expenses of listing the outstanding
Common Stock on Nasdaq, (vii) all travel, lodging and reasonable living expenses
incurred by the Company in connection with marketing, dealer and other meetings
attended by the Company and the Underwriters in marketing the Shares, (viii) the
costs and charges of the Company's transfer agent and registrar and the cost of
preparing the certificates for the Shares and (ix) all other costs and expenses
incident to the performance of its obligations hereunder not otherwise provided
for in this Section; and (b) all out-of-pocket expenses, including counsel fees,
disbursements and expenses, incurred by the Underwriters in connection with
investigating, preparing to market and marketing the Shares and proposing to
purchase and purchasing the Shares under this Agreement, will be borne and paid
by the Company if the sale of the Shares provided for herein is not consummated
(i) by reason of the termination of this Agreement by the Company pursuant to
SECTION 12(A)(I) or (ii) by reason of the termination of this Agreement by the
Representatives pursuant to SECTION 12(B)(II) OR (IV) of this Agreement.
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The respective obligations
of the Underwriters to purchase and pay for the Firm Shares shall be subject to
the accuracy of the representations and warranties of the Company herein as of
the date hereof and as of the Closing Date as if made on and as of the Closing
Date, to the accuracy of the statements of the Company's officers made pursuant
to the provisions hereof, to the performance by the Company of all of their
respective covenants and agreements hereunder and to the following additional
conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective not later than 5:30 P.M., Washington,
D.C. time, on the day following the date of this Agreement, or such later
time and date as shall have been consented to by the Representatives, and
all filings required by Rule 424 and Rule 430A of the Rules and
Regulations shall have been made; no stop order suspending the
effectiveness of the Registration Statement shall have been issued, and no
proceedings for that purpose shall have been instituted or threatened or,
to the knowledge of the Company or the Underwriters, shall be contemplated
by the Commission; any request of the Commission for additional
information (to be included in the Registration Statement or the Final
Prospectus or otherwise) shall have been complied with to the
Representatives' satisfaction; and the NASD, upon review of the terms of
the public offering of the Shares,
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<PAGE>
shall not have objected to such offering, such terms or the Underwriters'
participation in the same.
(b) No Representative shall have advised the Company that the
Registration Statement, Preliminary Prospectus, the Effective Prospectus
or Final Prospectus, or any amendment or any supplement thereto, contains
an untrue statement of fact which, in the Representatives' reasonable
judgment, is material, or omits to state a fact which, in the
Representatives' reasonable judgment, is material and is required to be
stated therein or necessary to make the statements therein not misleading
and the Company shall not have cured such untrue statement of fact or
stated a statement of fact required to be stated therein.
(c) The Representatives shall have received an opinion, dated the
Closing Date, from Bracewell & Patterson, L.L.P., counsel for the Company,
in substantially the form of Exhibit 6(c) attached hereto.
The opinion to be rendered pursuant to this paragraph (c) may be limited
to federal law, and as to foreign and state law matters, to the laws of the
states or jurisdictions in which such counsel is admitted to practice and the
law of the State of Delaware. Such counsel may rely upon opinions of other
counsel in rendering such opinions provided that such counsel shall state that
they believe that both the Representatives and they are justified in relying
upon such opinions and that such counsel is reasonably satisfactory to you.
(d) The Underwriters shall have received an opinion or opinions,
dated the Closing Date, of Bass, Berry & Sims PLC, counsel for the
Underwriters, with respect to the Registration Statement and the Final
Prospectus, and such other related matters as the Underwriters may
require, and the Company shall have furnished to such counsel such
documents as they may reasonably request for the purpose of enabling them
to pass upon such matters.
(e) The Representatives shall have received from Coopers & Lybrand
L.L.P., a letter dated the date hereof and, at the Closing Date, a second
letter dated the Closing Date, in form and substance satisfactory to the
Representatives, stating that they are independent public accountants with
respect to the Company within the meaning of the Securities Act and the
applicable Rules and Regulations, and containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain financial information of the Company contained in the Registration
Statement and the Prospectus.
In the event that the letters to be delivered referred to above set forth
any such changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that the Underwriters shall have determined,
after discussions with officers of the Company responsible for financial and
accounting matters and with Coopers & Lybrand L.L.P., that such
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<PAGE>
changes, decreases or increases as are set forth in such letters do not reflect
a material adverse change in the total assets, stockholders' equity or long-term
debt of the Company as compared with the amounts shown in the latest balance
sheets of the Company included in the Final Prospectus, or a material adverse
change in revenues or net income of the Company, in each case as compared with
the corresponding period of the prior year.
(f) There shall have been furnished to the Representatives a
certificate, dated the Closing Date and addressed to you, signed by the
Chief Executive Officer and Chief Financial Officer of the Company, to the
effect that:
(i) the representations and warranties of the Company in
SECTION 1 of this Agreement are true and correct, as if made at and
as of the Closing Date, and the Company has complied with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that
purpose have been initiated or are pending, or to their knowledge,
threatened under the Securities Act;
(iii) all filings required by Rule 424 and Rule 430A of the
Rules and Regulations have been made;
(iv) they have carefully examined the Registration Statement,
the Effective Prospectus and the Final Prospectus, and any
amendments or supplements thereto, and such documents do not include
any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances
under which they were made; and
(v) since the effective date of the Registration Statement,
there has occurred no event required to be set forth in an amendment
or supplement to the Registration Statement, the Effective
Prospectus or the Final Prospectus which has not been so set forth.
(g) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Final Prospectus, and except
as stated therein, the Company has not sustained any material loss or
interference with its business or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from
any labor dispute or any court or governmental action, order or decree, or
become a party to or the subject of any litigation which is material to
the Company, nor shall there have been any material adverse change, or any
development involving a prospective material adverse change, in the
business, properties, key personnel, capitalization, prospects, net worth,
results of operations or condition (financial or other) of the Company,
which loss,
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<PAGE>
interference, litigation or change, in the Representatives' reasonable
judgment shall render it unadvisable to commence or continue the offering
of the Shares at the offering price to the public set forth on the cover
page of the Prospectus or to proceed with the delivery of the Shares.
(h) The Shares shall be listed on Nasdaq.
(i) The Representatives shall have received the Lockup Agreements.
(j) The Company shall have consummated the acquisition of a
multi-location dental practice in Austin, Texas (the "Austin
Acquisition"), as such acquisition is referred to and described in the
Registration Statement.
(k) The Company shall have received appropriate waivers under its
bank credit facility or entered into an amended or replacement credit
facility permitting the Company to apply the proceeds of the offering as
stated in "Use of Proceeds" in the Registration Statement.
(l) The Series A convertible preferred stock and the Series C
convertible preferred stock of the Company shall be converted into an
aggregate of 948,243 shares of Common Stock upon consummation of the
Offering, as contemplated in the Registration Statement.
All such opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory to the Representatives and their counsel. The Company
shall furnish to the Representatives such conformed copies of such opinions,
certificates, letters and documents in such quantities as the Representatives
shall reasonably request.
The respective obligations of the Underwriters to purchase and pay for the
Option Shares shall be subject, in their discretion, to the conditions of this
SECTION 6, except that all references to the "Closing Date" shall be deemed to
refer to the Option Closing Date, if it shall be a date other than the Closing
Date.
7. CONDITION OF THE COMPANY'S OBLIGATIONS. The obligations hereunder of
the Company are subject to the condition set forth in SECTION 6(A) hereof.
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8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, and each person, if any, who controls any Underwriter within
the meaning of the Securities Act, against any losses, claims, damages or
liabilities to which such Underwriter or controlling person may become
subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out
of or are based in whole or in part upon: (i) any inaccuracy in the
representations and warranties of the Company contained herein; (ii) any
failure of the Company to perform its obligations hereunder or under law;
(iii) any untrue statement or alleged untrue statement of any material
fact contained in (A) the Registration Statement, any Preliminary
Prospectus, the Effective Prospectus or Final Prospectus, or any amendment
or supplement thereto, (B) any audio or visual materials supplied by the
Company expressly for use in connection with the marketing of the Shares,
including without limitation, slides, videos, films and tape recordings
(the "Marketing Materials"), or (C) in any Blue Sky application or other
written information furnished by the Company filed in any state or other
jurisdiction in order to qualify any or all of the Shares under the
securities laws thereof (a "Blue Sky Application"); (iv) the omission or
alleged omission to state in the Registration Statement, any Preliminary
Prospectus, the Effective Prospectus or Final Prospectus or any amendment
or supplement thereto, any Marketing Materials or Blue Sky Application a
material fact required to be stated therein or necessary to make the
statements therein not misleading; or (v) any act or failure to act or any
alleged act or failure to act by any Underwriter in connection with, or
relating in any manner to, the Shares or the offering contemplated hereby,
and which is included as part of or referred to in any loss, claim,
damage, liability or action arising out of or based upon matters covered
by clause (i), (ii), (iii) or (iv) above (PROVIDED, that the Company shall
not be liable under this clause (v) to the extent that it is determined in
a final judgment by a court of competent jurisdiction that such loss,
claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter
through its gross negligence or willful misconduct); and will reimburse
each Underwriter and each such controlling person for any legal or other
expenses reasonably incurred by such Underwriter or such controlling
person in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; 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 any untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement, the Preliminary
Prospectus, the Effective Prospectus or Final Prospectus, or any amendment
or supplement thereto, or any Marketing Materials or Blue Sky Application
in reliance upon and in conformity with written information furnished to
the Company by any Underwriter specifically for use therein (it being
understood that the only information so provided is the information
included in the last paragraph on the cover page and in the first and
third paragraphs under the caption "Underwriting" in any Preliminary
Prospectus and in the Final Prospectus and the Effective Prospectus).
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(b) Each Underwriter will indemnify and hold harmless the Company,
each of its directors, each of the Company's officers who signed the
Registration Statement and each person, if any, who controls the Company
within the meaning of the Securities Act against any losses, claims,
damages or liabilities to which the Company or any such director, officer
or controlling person may become subject, under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in
the Registration Statement, any Preliminary Prospectus, the Effective
Prospectus or Final Prospectus, or any amendment or supplement thereto,
any Marketing Materials or any Blue Sky Application, or arise out of or
are based upon the omission or the alleged omission to state in the
Registration Statement, any Preliminary Prospectus, the Effective
Prospectus or Final Prospectus, or any amendment or supplement thereto,
any Marketing Materials or any Blue Sky Application a material fact
required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written
information furnished to the Company by any Underwriter specifically for
use therein (it being understood that the only information so provided is
the information included in the last paragraph on the cover page and in
the first and third paragraphs under the caption "Underwriting" in any
Preliminary Prospectus and in the Final Prospectus and the Effective
Prospectus).
(c) Promptly after receipt by an indemnified party under this
SECTION 8 of notice of the commencement of any action, including
governmental proceedings, such indemnified party will, if a claim in
respect thereof is to be made against the indemnifying party under this
SECTION 8, notify the indemnifying party of the commencement thereof; but
the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party hereunder unless
the indemnifying party has been materially prejudiced thereby and in any
event shall not relieve it from liability otherwise than under this
SECTION 8. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof,
the indemnifying party will be entitled to participate therein, and to the
extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
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 will not be liable to such
indemnified party under this SECTION 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, except that
the indemnified party shall have the right to employ separate counsel if,
in the indemnified party's reasonable judgment, it is advisable for the
indemnified party to be represented by separate counsel, and in that event
the fees and expenses of separate counsel shall be paid by the
indemnifying party.
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(d) In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in the
preceding part of this SECTION 8 is for any reason held to be unavailable
to the Underwriters or the Company or is insufficient to hold harmless an
indemnified party, then the Company shall contribute to the damages paid
by the Underwriters, and the Underwriters shall contribute to the damages
paid by the Company; provided, however, that no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The amount of such
contribution shall (i) be in such proportion as shall be appropriate to
reflect the relative benefits received by the Company on the one hand and
the Underwriters on the other from the offering of the Shares or (ii) if
the allocation provided by clause (i) above is not permitted by applicable
law, be in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative
fault of the Company on the one hand and the Underwriters on the other
with respect to the statements or omissions which resulted in such loss,
claim, damage or liability, or action in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by
the Company on the one hand and the Underwriters on the other with respect
to such offering shall be deemed to be in the same proportion as the total
net proceeds from the offering of the Shares purchased under this
Agreement (before deducting expenses) received by the Company, in the case
of the Company, and the total underwriting discount received by the
Underwriters with respect to the Shares purchased under this Agreement, in
the case of the Underwriters, bear to the total gross proceeds from the
offering of the Shares under this Agreement, in each case as set forth in
the Prospectus. The relative fault shall be determined by reference to
whether the untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriters, the intent of the
parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company
and the Underwriters agree that it would not be equitable if the amount of
such contribution were determined by pro rata or per capita allocation
(even if the Underwriters were treated as one entity for such purpose).
Notwithstanding the foregoing, no Underwriter or person controlling such
Underwriter shall be obligated to make contribution hereunder which in the
aggregate exceeds the underwriting discount applicable to the Shares
purchased by such Underwriter under this Agreement, less the aggregate
amount of any damages which such Underwriter and its controlling persons
have otherwise been required to pay in respect of the same or any similar
claim. The Underwriters' obligations to contribute hereunder are several
in proportion to their respective obligations and not joint. For purposes
of this Section, each person, if any, who controls an Underwriter within
the meaning of Section 15 of the Securities Act shall have the same rights
to contribution as such Underwriter, and each director of the Company,
each officer of the Company who signed the Registration Statement, and
each person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act, shall have the same rights to
contribution as the Company.
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(e) No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of any pending or
threatened action, suit or proceeding in respect of which any indemnified
party is a party or is (or would be, if a claim were to be made against
such indemnified party) entitled to indemnity hereunder, unless such
settlement includes an unconditional release of such indemnified party
from all liability on claims that are the subject matter of such action,
suit or proceeding.
9. DEFAULT OF UNDERWRITERS. If any Underwriter defaults in its obligation
to purchase Shares hereunder, and if the total number of Shares which such
defaulting Underwriter agreed but failed to purchase is ten percent or less of
the total number of Shares to be sold hereunder, the non-defaulting Underwriters
shall be obligated severally to purchase (in the respective proportions which
the number of Shares set forth opposite the name of each non-defaulting
Underwriter in SCHEDULE I hereto bears to the total number of Shares set forth
opposite the names of all the non-defaulting Underwriters), the Shares which
such defaulting Underwriter or Underwriters agreed but failed to purchase. If
any Underwriter so defaults and the total number of Shares with respect to which
such default or defaults occur is more than ten percent of the total number of
Shares to be sold hereunder, and arrangements satisfactory to the other
Underwriters and the Company for the purchase of such Shares by other persons
(who may include the non-defaulting Underwriters) are not made within 36 hours
after such default, this Agreement, insofar as it relates to the sale of the
Shares, will terminate without liability on the part of the non-defaulting
Underwriters or the Company except for (i) the provisions of SECTION 8 hereof,
and (ii) the expenses to be paid or reimbursed by the Company pursuant to
SECTION 5. As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this SECTION 9. Nothing herein shall
relieve a defaulting Underwriter from liability for its default.
10. SURVIVAL CLAUSE. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company or its
officers and the Underwriters set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement shall remain in full
force and effect, regardless of (a) any investigation made by or on behalf of
the Company, any of its officers or its directors, any Underwriter or any
controlling person, (b) any termination of this Agreement or (c) delivery of and
payment for the Shares.
11. EFFECTIVE DATE. This Agreement shall become effective at whichever of
the following times shall first occur: (i) at 11:30 A.M., Washington, D.C. time,
on the next full business day following the date on which the Registration
Statement becomes effective or (ii) at such time after the Registration
Statement has become effective as the Representatives shall release the Firm
Shares for sale to the public; provided, however, that the provisions of
SECTIONS 5, 8, 10 AND 11 hereof shall at all times be effective. For purposes of
this SECTION 11, the Firm Shares shall be deemed to have been so released upon
the release by the Representatives for publication, at any time after the
Registration Statement has become effective, of any newspaper advertisement
relating to the Firm Shares or upon the release by the Representatives of
telegrams offering the Firm Shares for sale to securities dealers, whichever may
occur first.
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12. TERMINATION.
(a) The Company's obligations under this Agreement may be terminated
by the Company by notice to the Representatives (i) at any time before it
becomes effective in accordance with SECTION 11 hereof, or (ii) in the
event that the condition set forth in SECTION 7 shall not have been
satisfied at or prior to the First Closing Date.
(b) This Agreement may be terminated by the Representatives by
notice to the Company (i) at any time before it becomes effective in
accordance with SECTION 11 hereof; (ii) in the event that at or prior to
the First Closing Date the Company shall have failed, refused or been
unable to perform any agreement on the part of the Company to be performed
hereunder or any other condition to the obligations of the Underwriters
hereunder is not fulfilled; (iii) if at or prior to the Closing Date
trading in securities on Nasdaq, the American Stock Exchange or the
over-the-counter market shall have been suspended or materially limited or
minimum or maximum prices shall have been established on either of such
exchanges or such market or a banking moratorium shall have been declared
by Federal or state authorities; (iv) if at or prior to the Closing Date
trading in securities of the Company shall have been suspended; or (v) if
there shall have been such a material adverse change in general economic,
political or financial conditions or if the effect of international
conditions on the financial markets in the United States shall be such as,
in your reasonable judgment, makes it inadvisable to commence or continue
the offering of the Shares at the offering price to the public set forth
on the cover page of the Prospectus or to proceed with the delivery of the
Shares.
(c) Termination of this Agreement pursuant to this SECTION 12 shall
be without liability of any party to any other party other than as
provided in SECTIONS 5 AND 8 hereof.
13. NOTICES. All communications hereunder shall be in writing and, if sent
to any of the Underwriters, shall be mailed or delivered or telegraphed and
confirmed in writing to the Representatives in care of J. C. Bradford &
Co.,L.L.C., J. C. Bradford Financial Center, 330 Commerce Street, Nashville,
Tennessee 37201, Attention: Catherine Gemmato-Smith, or if sent to the Company
shall be mailed, delivered or telegraphed and confirmed in writing to the
Company at 1360 Post Oak Boulevard, Suite 1300, Houston, Texas 77056-3021,
Attention: Jack H. Castle, Jr.
14. MISCELLANEOUS. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters, the Company and its successors and legal
representatives. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any other person any legal or equitable right, remedy
or claim under or in respect of this Agreement. This Agreement and all
conditions and provisions hereof are intended to be for the sole and exclusive
benefit of the Company and the several Underwriters and for the benefit of no
other person except that (a) the representations and warranties and indemnities
of the Company contained in this Agreement shall also be for the benefit of any
person or persons who control any Underwriter
23
<PAGE>
within the meaning of Section 15 of the Securities Act, and (b) the indemnities
by the Underwriters shall also be for the benefit of the directors of the
Company, officers of the Company who have signed the Registration Statement and
any person or persons who control the Company within the meaning of Section 15
of the Securities Act. No purchaser of Shares from any Underwriter will be
deemed a successor because of such purchase. The validity and interpretation of
this Agreement shall be governed by the laws of the State of Tennessee. This
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. The Representatives hereby represent and warrant to the Company that
they have authority to act hereunder on behalf of the several Underwriters, and
any action hereunder taken by the Representatives will be binding upon all the
Underwriters.
If the foregoing is in accordance with your understanding of our
agreement, please indicate your acceptance thereof in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
among the Company and each of the several Underwriters.
Very truly yours,
CASTLE DENTAL CENTERS, INC.
By:
Title: President and Chief Executive Officer
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
J. C. BRADFORD & CO., L.L.C.
SOUTHCOAST CAPITAL CORPORATION
By: J.C. BRADFORD & CO., L.L.C.
For themselves and as
Representatives of the Several
Underwriters
By:
Title: Partner
533917.3
24
<PAGE>
SCHEDULE I
UNDERWRITERS
NUMBER OF
FIRM SHARES TO
NAME OF UNDERWRITER BE PURCHASED
- ------------------- --------------
J.C. Bradford & Co..................................
Southcoast Capital Corporation......................
--------------
Total............................................... 2,500,000
==============
25
EXHIBIT 3.6
CASTLE DENTAL CENTERS, INC.
CERTIFICATE OF DESIGNATION OF THE
PREFERENCES AND RIGHTS OF THE
SERIES B CONVERTIBLE PREFERRED STOCK,
PAR VALUE $0.001 PER SHARE
PURSUANT TO SECTION 151 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE
The undersigned, the President and Secretary of Castle Dental Centers,
Inc., a Delaware corporation (the "Corporation"), do hereby certify that,
pursuant to the authority granted to and vested in the Board of Directors of the
Corporation (the "Board of Directors") and in accordance with the provisions of
Section 151 of the General Corporation Law of the State of Delaware, the Board
of Directors on June ___, 1997, duly adopted this Certificate of Designation
(the "Certificate") containing the following recital and resolutions with
respect to the creation of the Series B Convertible Preferred Stock, par value
$0.001 per share, of the Corporation.
WHEREAS, Article IV of the Amended and Restated Certificate of
Incorporation of the Corporation, as amended (the "Certificate of
Incorporation"), authorizes the issuance by the Corporation of one or more
series of preferred stock, par value $0.001 per share (the "Preferred Stock"),
by the Corporation.
NOW, THEREFORE, IT IS HEREBY --
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors by the provisions of Article IV of the Certificate of
Incorporation and the Bylaws of the Corporation, the Board of Directors hereby
(1) creates a series of preferred stock designated as the Series B Convertible
Preferred Stock, par value $0.001 per share, which shall consist of ____________
shares that the Corporation now has the authority to issue, and (2) fixes the
designations, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations or restric tions thereof, of the
shares of such series (in addition to the designations, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation that are applicable to all series of preferred
<PAGE>
stock), all in accordance with the provisions of Section 151 of the General
Corporation Law of the State of Delaware, as follows:
1. DESIGNATION AND NUMBER OF SHARES. The shares of such series shall be
designated as the Series B Convertible Preferred Stock, par value $0.001 per
share (the "Series B Preferred Stock"), and the number of shares of Series B
Preferred Stock that may be issued by the Corporation shall be ____________ and
no more.
2. PAYMENT OF DIVIDENDS.
2.1 Holders of Series B Preferred Stock shall not be entitled to
receive any dividends declared by the Corporation from time to time.
3. LIQUIDATION.
3.1 (a) SERIES B PREFERRED STOCK. In the event of any liquidation,
dissolution or winding up of the Corporation, either voluntary or involuntary,
following the distribution of amounts payable to the holders of the
Corporation's Series A Preferred Stock and the Series C Preferred Stock, the
holders of the Series B Preferred Stock shall be entitled to receive, prior and
in preference to any distribution in such liquidation, dissolution or winding up
of any of the assets of the Corporation to the holders of the Common Stock by
reason of their ownership thereof, a payment (the "Liquidation Preference") in
an aggregate amount for such Series equal to $1,550,000 which shall be payable
to the holders of Series B Preferred Stock in proportion to their holdings
thereof. If upon the occurrence of any such distribution, the assets and funds
of the Corporation thus distributed among the holders of the Series B Preferred
Stock shall be insufficient to permit the payment to such holders of the full
Liquidation Preference, then the entire assets and funds of the Corporation
legally available for distribution shall be distributed ratably among the
holders of the Series B Preferred Stock in proportion to their holdings thereof.
(b) COMMON STOCK. After the distributions described in Section
3.1(a) of this Certificate have been paid, then the remaining assets of the
Corporation available for distribution to stockholders shall be distributed
among the holders of Common Stock pro rata based on the number of shares of
Common Stock held by each.
3.2 Notice of any liquidation (complete or partial), dissolution or
winding-up of the affairs of the Corporation, whether voluntary or involuntary,
shall be given by mail, postage prepaid, not less than 30 days before the
payment date stated therein, to each holder of record of Series B Preferred
Stock appearing on the stock books of the Corporation as of the date of such
-2-
<PAGE>
notice at the address of said holder shown therein. Such notice shall state a
payment date, the amount of the liquidation payment, and the place where the
liquidation payment shall be payable.
3.3 For the purposes hereof, neither the voluntary sale, lease,
conveyance, exchange or transfer of all or substantially all of the property or
assets of the Corporation (whether for cash, shares of stock, securities or
other consideration), nor the consolidation or merger of the Corporation with
one or more other entities, shall be deemed to be a liquidation (complete or
partial), dissolution or winding-up of the affairs of the Corporation, unless
such voluntary sale, lease, conveyance, exchange or transfer shall be in
connection with a plan of liquidation (complete or partial), dissolution or
winding-up of the affairs of the Corporation.
4. CONVERSION
The holders of the Series B Preferred Stock shall have conversion rights
(the "Conversion Rights") as follows:
4.1 Subject to the provisions for adjustment hereinafter set forth
in this Section 4 of this Certificate, all but not less than all of the shares
of Series B Preferred Stock (the "Shares") shall be convertible, at the option
of the holder thereof, at any time commencing twelve months after the date of
issuance of such Shares and ending on the thirtieth day thereafter (the
"Conversion Period"), at the office of the Corporation or any transfer agent for
such Series, into one fully paid and nonassessable share of Common Stock for
each share of Series B Preferred Stock so converted. Holders of a majority of
the shares of Series B Preferred Stock outstanding shall determine whether all
shares of Series B Preferred Stock shall be so converted.
4.2 Before the holders of Series B Preferred Stock shall be entitled
to convert such Shares into shares of Common Stock, such holders shall surrender
all of 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 holders elect to
convert the Shares of Series B 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. 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 B Preferred Stock
to be converted and the person or persons entitled to receive the shares of
Common
-3-
<PAGE>
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. The
issuance of certificates for shares of Common Stock upon conversion of Shares of
Series B Preferred Stock shall be made without charge to the holder thereof for
any issue, stamp or other similar tax in respect of such issuance.
4.3 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 number of shares of
Common Stock issuable on conversion of the Series B Preferred Stock shall be
increased in proportion to such increase in outstanding shares.
4.4 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 B Preferred Stock
shall be decreased in proportion to such decrease in outstanding shares.
4.5 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 B
Preferred Stock shall thereafter have the right to receive, upon conversion of
the Series B 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 B 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
-4-
<PAGE>
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.
4.6 All calculations under this Section 4 shall be made to the
nearest one-tenth of a share.
4.7 Whenever the number of shares of Common Stock issuable upon
conversion of the Series B Preferred Stock shall be adjusted as provided in this
Section 4, the 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.
5. OPTIONAL REDEMPTION.
5.1 Following the conclusion of the Conversion Period, the Series B
Preferred Stock shall be subject to redemption at the Corporation's option, in
whole but not in part, at any time.
5.2 The total consideration for the redemption of the Series B
Preferred Stock shall be $1,826,523.20, payable in sixteen equal quarterly
installments of $114,157.70, payable to the holders of Series B Preferred Stock
in proportion to their holdings thereof, commencing on the last day of the
calendar quarter during which the Redemption Notice (as hereinafter defined) is
given.
5.3 The Corporation shall give each holder of Series B Preferred
Stock written notice (the "Redemption Notice") of the optional redemption
pursuant to this Section of this Certificate not less than 30 days prior to the
redemption date, specifying such redemption date, that all of the shares of
Series B Preferred Stock are to be redeemed on such date and that such
redemption is to be made pursuant to Section 5 of this Certificate. Notice of
redemption having been given as aforesaid the redemption amount due in respect
of all of the shares of Series B Preferred Stock and as calculated in this
Section 5, shall become due and payable.
6. VOTING RIGHTS.
6.1 The holder of each share of Series B Preferred Stock shall have
the right to one vote for each share of Common Stock into which such share of
Series B Preferred Stock could be converted during the Conversion Period (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
-5-
<PAGE>
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. Holders of Series B Preferred Stock shall
not be entitled to vote as a class on matters submitted to a vote of
stockholders of the Corporation.
7. PUT RIGHT
(a) During the Conversion Period, all but not less than all of the
holders of shares of Series B Preferred Stock shall have the right to have the
Corporation redeem all but not less than all of their shares of Series B
Preferred Stock (the "Put Right"), for a total consideration of $1,826,523.20,
payable in sixteen equal quarterly installments of $114,157.70 commencing on the
last day of the calendar quarter during which the Put Right is exercised.
(b) To exercise the Put Right, the holders of all of the shares of
Series B Preferred Stock shall deliver to the Corporation a written notice which
shall (i) refer specifically to this Section 7 of this Certificate, (ii) state
the number of shares of Series B Preferred Stock that the Corporation is
required to redeem and (iii) be delivered by certified mail return receipt
requested.
8. SUBORDINATION.
8.1 SUBORDINATED DEBT SUBORDINATE TO SENIOR DEBT. The Corporation's
obligations to redeem any shares of the Series B Preferred Stock shall be junior
and subordinate to all Senior Debt (as defined below) to the extent and in the
manner provided in this Section 8 and each holder of the Series B Preferred
Stock, by its acceptance thereof, agrees to be bound by the provisions of this
Section 8.
For purposes hereof, the following terms shall have the following
meanings:
"BANK DEBT" means indebtedness incurred by the Corporation pursuant to (i)
the Bank Debt Agreement or any renewals, extensions, amendments or modifications
thereof and (ii) any other agreement evidencing indebtedness so long as such
indebtedness by its terms is (x) not subordinated to any other indebtedness of
the Corporation or any of its subsidiaries and (y) is secured by the assets of
the Corporation and its subsidiaries and the terms of which do not restrict,
more than the Bank Debt Agreement does, the Corporation's ability to pay the
Subordinated Debt.
"BANK DEBT AGREEMENT" shall mean the Credit Agreement, dated as of
December 19, 1995, between the Corporation and NationsBank of Texas, N.A., as
the same may be amended from time to time in accordance with its terms.
-6-
<PAGE>
"SENIOR DEBT" shall mean all obligations (whether now outstanding or
hereafter incurred) for the payment of which the Corporation or any Subsidiary
thereof is responsible or liable as obligor, guarantor or otherwise in respect
of the principal, premium (if any), and unpaid interest on and all other amounts
due with respect to (i) (a) Bank Debt and (b) any increases, extensions and
rearrangements of the foregoing indebtedness under any amendments, supplements,
renewals or modifications of the documents and agreements creating the foregoing
indebtedness and (ii)(a) any indebtedness incurred by the Corporation pursuant
to the Securities Purchase Agreement dated as of December 18, 1995, as amended
by Amendment No. 1 thereto, between the Corporation and the investors party
thereto, including the senior subordinated notes issued pursuant thereto and (b)
any increases, extensions and rearrangements of the foregoing indebtedness under
any amendments, supplements, renewals or modifications of the documents and
agreements creating the foregoing indebtedness.
"SENIOR DEBT AGREEMENT" means any agreement evidencing Senior Debt.
"SUBORDINATED DEBT" means the Corporation's obligation to redeem any
shares of Series B Preferred Stock under Section 7 hereof.
8.2 SUSPENSION OF RIGHT TO RECEIVE PAYMENTS OF SUBORDINATED DEBT.
(a) Upon (i) the maturity of any Senior Debt by lapse of time, acceleration or
otherwise, or (ii) any failure by the Corporation to make any payment of any
amounts due with respect to any Senior Debt, all principal thereof and all
interest thereon and other amounts due in connection therewith, shall first be
paid in full, or such payment duly provided for in cash or in a manner
satisfactory to the holders of such Senior Debt, before any payment or
distribution of any kind or character, whether in cash, property or securities,
which may be payable or deliverable with respect to the Subordinated Debt shall
be paid or delivered directly to the holders of Senior Debt for application in
payment thereof, unless and until all Senior Debt shall have been paid in full
and in cash.
(b) Upon the occurrence of (i) any default with respect to Senior
Debt of the types described in clause (i) or (ii) of paragraph 8.2(a) or (ii)
any other default under any Senior Debt which would, with the giving of notice
or the passage of time, or both, permit the holders of such Senior Debt to
accelerate the maturity thereof, then, unless and until such default with
respect to Senior Debt shall have been cured or waived in writing by the holders
of such Senior Debt, no payment shall be made by the Corporation with respect to
any amounts due with respect to Subordinated Debt; PROVIDED, HOWEVER, that in
the case of a default described in clause (ii) above this paragraph shall not
prevent the making of any payment for longer than the longer of (x) 180 days
after the giving of notice by any of the holders of Senior Debt to the
Corporation based upon such default (a "Default Notice") and (y) any period
during which Senior Debt in respect of which such notice has been given has
become due and payable in its entirety by reason of its acceleration and
-7-
<PAGE>
such acceleration has not been rescinded or annulled and such Senior Debt has
not been paid in full. A holder of Senior Debt may deliver more than one Default
Notice to the Corporation, PROVIDED, that the Corporation shall not be prevented
from making, and the holders of the Subordinated Debt shall not be prevented
from receiving by reason of a Default Notice, any payments with respect to
principal or interest of or other amounts due with respect to the Subordinated
Debt for a period in excess of 180 days during any 365 day period.
(c) Upon the occurrence of (i) any default with respect to Senior
Debt of the types described in clause (i) or (ii) of paragraph 8.2(a), or (ii)
the giving of any Default Notice, the Corporation shall not make any payments,
and the holders of the Subordinated Debt shall not receive, ask, demand, sue for
any payment or otherwise exercise their remedies against the Corporation with
respect to the Subordinated Debt, unless and until such default with respect to
Senior Debt has been cured or waived in writing; PROVIDED, HOWEVER, that the
provisions of this paragraph shall not apply (x) for longer than 180 days after
the giving of a Default Notice by the holders of Senior Debt to the Corporation
based upon such default and (y) from and after the date upon which the relevant
Senior Debt has become due and payable in its entirety by reason of its
acceleration or otherwise, PROVIDED that the provisions of paragraphs 8.2(a) and
8.3 shall thereupon apply.
(d) Notwithstanding anything in this Section 8 that may be construed
to the contrary, nothing in this Section 8 shall in any way limit the holders of
the Series B Preferred Stock's Conversion Rights.
8.3 ACCELERATION OF PAYMENT OF SENIOR DEBT OR SUBORDINATED DEBT. If
at the time any payment with respect to any Subordinated Debt is to be made,
directly or indirectly, or immediately after giving effect thereto (i) the
Senior Debt shall have been declared by the holders thereof due and payable
before its expressed maturity and (ii) such acceleration shall not have been
expressly rescinded in writing by the holders of Senior Debt pursuant to the
relevant Senior Debt Agreement, then any payment or distribution of any kind or
character, whether in cash, property or securities, which may be payable or
deliverable with respect to Subordinated Debt shall be paid or delivered
directly to the holders of Senior Debt for application in payment thereof,
unless and until all Senior Debt shall have been paid in full or such
acceleration shall have been rescinded.
8.4 BANKRUPTCY OR INSOLVENCY. In the event of (a) any insolvency,
bankruptcy, liquidation, reorganization or other similar proceedings, or any
receivership proceedings in connection therewith, relative to the Corporation or
(b) any proceedings for voluntary liquidation, dissolution or other winding-up
of the Corporation, whether or not involving insolvency or bankruptcy
proceedings, then all Senior Debt shall first be paid in full, or such payment
shall have been duly provided for, before any further payment is made with
respect to Subordinated Debt. In
-8-
<PAGE>
any of such proceedings, any payment or distribution of any kind of character,
whether in cash, property or securities, which may be payable or deliverable
with respect to Subordinated Debt shall be paid or delivered directly to the
holders of Senior Debt for application in payment thereof, unless and until all
Senior Debt shall have been paid in full; PROVIDED, HOWEVER, that in the event
that payment or delivery of any cash, property or securities to any holders of
Subordinated Debt is authorized by a final non-appealable order or decree giving
effect, and stating in such order or decree that effect is given, to the
subordination of Subordinated Debt to Senior Debt, and made by a court of
competent jurisdiction in a liquidation or dissolution of the Corporation or in
a bankruptcy, reorganization, insolvency receivership or similar proceeding
under any applicable law, no payment or delivery of such cash, property or
securities payable or deliverable with respect to Subordinated Debt shall be
made to the holders of Senior Debt.
8.5 RIGHTS OF HOLDERS OF SENIOR DEBT NOT TO BE IMPAIRED. No right of
any present or future holder of any Senior Debt to enforce subordination as
herein provided shall at any time in any way be prejudiced or impaired by any
act or failure to act or failure to act by any such holder, or by any
noncompliance by the Corporation with the terms and provisions and covenants
herein contained, regardless of any knowledge thereof any such holder may have
or otherwise be charged with. The provisions of this Section 8 are intended to
be for the benefit of, and shall be enforceable directly by, any one or more of
the holders from time to time of the Senior Debt. Each of the holders of
Subordinated Debt waives notice of or proof of reliance on this Section 8 and
protest, demand for payment and notice of default by the holders of Senior Debt.
8.6 CORPORATION'S OBLIGATION UNCONDITIONAL. The provisions of this
Section 8 are solely for the purpose of defining the relative rights of the
holders of Senior Debt, on the one hand, and the holders of Subordinated Debt,
on the other hand, against the Corporation and its property. Nothing herein
shall impair, as between the Corporation and the holders of Subordinated Debt,
the obligation of the Corporation, which is unconditional and absolute, to pay
to the holders thereof the full amount of Subordinated Debt in accordance with
the provisions hereof and, except as expressly provided in paragraph 8.2(c),
nothing herein shall prevent the holder of any Subordinated Debt from exercising
all remedies otherwise permitted by applicable law, subject to the rights under
this Section 8 of holders of Senior Debt to receive cash, property or securities
otherwise payable or deliverable to the holders of Subordinated Debt.
Notwithstanding the foregoing, the holders of the Series B Preferred Stock shall
be entitled to their Conversion Rights
8.7 PAYMENTS HELD IN TRUST. If the holder of any Subordinated Debt
shall receive any payment or delivery of cash, property or securities in respect
of such Subordinated Debt which such holder is not entitled to receive under the
provisions of this Section 8, such holder will hold any amount so received in
trust for the holders of Senior Debt and will forthwith turn over to the holders
of Senior Debt such payment or delivery in the form received to be applied in
payment or
-9-
<PAGE>
prepayment of Senior Debt; PROVIDED, HOWEVER, that no holder of Subordinated
Debt shall be obligated to determine whether a payment received by it was
appropriately made by the Corporation.
8.8 SUBROGATION. Upon the payment in full of all Senior Debt and
termination of any Senior Debt Agreement, the holders of Subordinated Debt shall
be subrogated to the rights of the holders of Senior Debt to receive payments or
distributions of assets of the Corporation applicable to Senior Debt until all
Subordinated Debt shall have been paid in full. For the purpose of subrogation,
no payments to the holders of Senior Debt of any cash, property or securities
that the holders of Subordinated Debt would be entitled to receive and retain
but for the provisions of this Section 8, and no payment over pursuant to the
provisions of this Section 8 to holders of Senior Debt by holders of
Subordinated Debt, shall, as between the Corporation and its creditors (other
than the holders of Senior Debt), on the one hand, and the holders of
Subordinated Debt, on the other, be deemed to be a payment by the Corporation
with respect to the Senior Debt.
IN WITNESS WHEREOF, the undersigned have signed this certificate and
caused the corporate seal of the Corporation to be affixed hereto on June ___,
1997.
CASTLE DENTAL CENTERS, INC.
By: _____________________________
Jack H. Castle, Jr.
President
ATTEST:
By: _____________________________
Name: ___________________________
Title: __________________________
-10-
EXHIBIT 4.1
REGISTERED INCORPORATED UNDER THE REGISTERED
NUMBER LAWS OF THE STATE OF DELAWARE SHARES
This certificate is [CASTLE LOGO]
transferable in Chicago Il.
and N.Y., N.Y. SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP # 14844P 10 5
CASTLE DENTAL CENTERS, INC.
COMMON STOCK
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.001 PER SHARE,
OF
Castle Dental Centers, Inc., transferable on the books of the Corporation by the
holder hereof in person or by a duly authorized attorney upon surrender of this
certificate properly endorsed. This certificate is not valid until registered by
the Registrar.
Witness the seal of the Corporation and the signatures of its duly
authorized officers.
Dated:
Secretary
President
Countersigned and Registered:
Harris Trust and Savings Bank
By: Transfer Agent
and Registrar
AUTHORIZED SIGNATURE
<PAGE>
CASTLE DENTAL CENTERS, INC.
The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof which
the Corporation is authorized to issue and the qualifications, limitations or
restrictions of such preferences and/or rights. Any such request should be
addressed to the Corporation at its principal place of business or to the
Transfer Agent.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN
ACT --.............Custodian.........................
TEN ENT -- as tenants by the entireties (CUST) (MINOR)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors Act
survivorship and not as tenants
in common ......................................................
(STATE)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, _______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------
- --------------------------------------------------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP OR POSTAL CODE, OF
ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________ Shares
of the Common Stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated, _____________________________________________
X
------------------------------------------------
NOTICE: THE SIGNATURE(S) TO
THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTER-
ATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
X
------------------------------------------------
ALL GUARANTEES MUST BE MADE BY A
FINANCIAL INSTITUTION (SUCH AS A BANK OR
BROKER) WHICH IS A PARTICIPANT IN THE
SECURITIES TRANSFER AGENTS MEDALLION
PROGRAM ("STAMP"), THE NEW YORK STOCK
EXCHANGE, INC. MEDALLION SIGNATURE
PROGRAM ("MSP"), OR THE STOCK EXCHANGES
MEDALLION PROGRAM ("SEMP") AND MUST NOT
BE DATED. GUARANTEES BY A NOTARY PUBLIC
ARE NOT ACCEPTABLE.
------------------------------------------------
EXHIBIT 5
August ___,1997
Castle Dental Centers, Inc.
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056
Ladies and Gentlemen:
We have acted as counsel to Castle Dental Centers, Inc., a Delaware corporation
(the "Company"), in connection with the proposed sale of 2,500,000 shares
(2,875,000 if the over-allotment option granted to the underwriters is exercised
in full) (the "Shares") of its Common Stock, par value $.001 per share (the
"Common Stock").
A Registration Statement on Form S-1 (Registration No. 333-11269) (including all
amendments thereto, the "Registration Statement") relating to the Shares has
been filed with the Securities and Exchange Commission under the Securities Act
of 1933, as amended.
We have examined originals or copies of (1) the Registration Statement; (2) the
Certificate of Incorporation of the Company, as amended; (3) the Bylaws of the
Company, as amended; (6) certain resolutions of the Board of Directors of the
Company; (7) such other documents and records as we have deemed necessary and
relevant for purposes hereof. In addition, we have relied on certificates of
officers of the Company as to certain matters of fact relating to this opinion
and have made such investigations of law as we have deemed necessary and
relevant as a basis hereof.
We have assumed the genuineness of all signatures, the authenticity of all
documents, certificates and records submitted to us as originals, the conformity
to original documents, certificates and records of all documents, certificates
and records submitted to us as copies, and the truthfulness of all statements of
fact contained therein.
Based on the foregoing, and subject to the limitations set forth herein, and
having due regard for such legal considerations as we deem relevant, we are of
the opinion that the shares have been duly authorized and, when issued against
receipt of the consideration therefor in the manner contemplated by the
Registration Statement, will be legally issued, fully paid and nonassessable.
<PAGE>
Castle Dental Centers, Inc.
August __, 1997
Page 2
The foregoing opinion is based on and is limited to the law of the State of
Delaware and the relevant law of the United States of America, and we render no
opinion with respect to the laws of any other jurisdiction.
We hereby consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement and to the use of our
name therein, provided, however, that in giving such consent we do not admit
that we come within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission.
Very truly yours,
Bracewell & Patterson, L.L.P.
EXHIBIT 10.36
Doc. No. 3
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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<PAGE>
(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
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<PAGE>
Company to set aside for grant to the Employee, Philip Hamner and David North an
aggregate of ten percent (10%) of the pretax income of the Company in excess of
$618,000 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
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<PAGE>
positions, with comparable service credit and with comparable duties and
responsibilities, which 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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<PAGE>
(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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<PAGE>
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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<PAGE>
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
-7-
<PAGE>
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 SUPPLIERSDuring 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 10.43
CASTLE DENTAL CENTERS, INC.
OMNIBUS STOCK AND INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
PAGE
Section 1.
Establishment, Purpose, and
Effective Date of Plan ...................1
1.1 Establishment..............................................1
1.2 Purpose....................................................1
1.3 Effective Date.............................................1
Section 2.
Definitions ........................1
2.1 Definitions................................................1
2.2 Gender and Number..........................................3
Section 3.
Administration .......................3
3.1 Compensation Committee.....................................3
3.2 Committee Action...........................................3
3.3 Committee Expenses.........................................3
Section 4.
Stock Subject to the Plan .................4
4.1 Stock Reserved.............................................4
4.2 Adjustment in Capitalization...............................4
Section 5.
Participation .......................4
5.1 Eligibility................................................4
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Section 6.
Options: General, Terms and Conditions,
and Relinquishment .....................5
6.1 Options: General..........................................5
6.2 Options: Terms and Conditions.............................5
6.3 Options: Relinquishment..................................10
Section 7.
Restricted Stock .....................13
7.1 Grant of Restricted Stock.................................13
7.2 Transferability...........................................13
7.3 Other Restrictions........................................13
7.4 Voting Rights.............................................13
7.5 Dividends and Other Distributions.........................13
7.6 Nontransferability of Restricted Stock....................14
7.7 Termination of Employment Due to Death or Disability......14
7.8 Termination of Employment for Reasons Other than Death
or Disability............................................14
Section 8.
Effectiveness, Expiration, Amendments and
Termination of the Plan .....................14
8.1 Effectiveness and Expiration of the Plan..................14
8.2 Amendment, Modification, and Termination of Plan..........14
8.3 Replacement of Awards.....................................15
8.4 Corporate Change..........................................15
Section 9.
Rights of Participants ..................16
9.1 No Right to Employment....................................16
9.2 Beneficiary Designation...................................16
Section 10.
Taxes ..........................16
10.1 Tax Withholding...........................................16
10.2 Stock Withholding Elections...............................16
10.3 Special Insider Stock Withholding Restrictions............17
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10.4 Stock Withholding Delivery Requirements...................17
Section 11.
Miscellaneous ......................17
11.1 Indemnification...........................................17
11.2 Liability of the Company..................................18
11.3 Purchase for Investment...................................18
11.4 Stockholders Agreement....................................18
11.5 Non-Exclusivity of this Plan..............................18
11.6 Participants' Rights Unsecured............................18
11.7 Governing Law.............................................18
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CASTLE DENTAL CENTERS, INC.
OMNIBUS STOCK AND INCENTIVE PLAN
Section 1.
ESTABLISHMENT, PURPOSE, AND
EFFECTIVE DATE OF PLAN
1.1 ESTABLISHMENT. Castle Dental Centers, Inc., a Delaware corporation,
hereby establishes the "CASTLE DENTAL CENTERS, INC. OMNIBUS STOCK AND INCENTIVE
PLAN" (the "Plan") for key employees, directors, consultants and former
consultants and key employees of entities managed by the Company or one of its
subsidiaries. The Plan permits the grant of stock options and restricted stock
as a payout media for payments under the Plan.
1.2 PURPOSE. The purpose of the Plan is to advance the interests of the
Company, by encouraging and providing for the acquisition of an equity interest
in the success of 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 upon whose judgment, interest, and special effort the successful
conduct of Company's operations is largely dependent.
1.3 EFFECTIVE DATE. The Plan shall become effective as provided in Section
11.1.
Section 2.
DEFINITIONS
2.1 DEFINITIONS. Whenever used herein, the following terms shall have
their respective meanings set forth below:
2.1.1 "Affiliates" means any "parent corporation" of the Company and
any "subsidiary corporation" of the Company within the meaning of Code Sections
424(e) and (f), respectively.
2.1.2 "Award" means any grant of a Stock Option or shares of
Restricted Stock under this Plan.
2.1.3 "Board" means the Board of Directors of the Company.
2.1.4 "Code" means the Internal Revenue Code of 1986, as amended.
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2.1.5 "Committee" means all or certain members of the Compensation
Committee of the Board of Directors as described in Section 3.1.
2.1.6 "Company" means Castle Dental Centers, Inc., a Delaware
corpora tion.
2.1.7 "Disability" means a condition which, in the opinion of a
physician selected by the Committee, renders a Participant incapable of
performing services for the company of the kind the Participant was performing
at the time the Disability occurred by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long, continued and indefinite duration.
2.1.8 "Employee" means a regular salaried employee (including
officers and directors who are also employees) of the Company or its Affiliates,
or any branch or division thereof.
2.1.9 "Fair Market Value" means the fair market value of a share of
Stock on a particular date, which shall be equal to the mean of the reported
high and low sales prices of the Stock on the New York Stock Exchange Composite
Tape on that date, or if no prices are reported on that date, on the last
preceding date on which such prices of the Stock are so reported. If the Stock
is not traded on the New York Stock Exchange at the time a determination of its
fair market value is required to be made hereunder, its fair market value shall
be deemed to be equal to the average between the closing bid and ask prices of
the Stock on the most recent date the Stock was publicly traded. In the event
the Stock is not publicly traded at the time a determination of its value is
required to be made hereunder, the determination of its fair market value shall
be made by the Committee in such manner as it deems appropriate.
2.1.10 "Option" means the right to purchase Stock at a stated price
for a specified period of time. For purposes of the Plan an Option may be either
(i) an "incentive stock option" within the meaning of Section 422 of the Code
("ISO"), (ii) a "nonqualified stock option," which is an Option designed not to
comply with Section 422 of the Code ("Nonqualified Option") or (iii) any other
type of option encompassed by the Code.
2.1.11 "Participant" means any Employee, director, consultant,
former consultant or key employee of an entity managed by the Company or one of
its subsidiaries designated by the Committee to participate in the Plan.
2.1.12 "Period of Restriction" means the period during which the
transfer of shares of Restricted Stock is restricted pursuant to Section 7 of
the Plan.
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2.1.13 "Relinquishment" means the right to receive cash in
consideration for a Participant forfeiting his or her right to exercise all or a
part of an Option pursuant to Section 6.3.
2.1.14 "Restricted Stock" means Stock granted to a Participant
pursuant to Section 7 of the Plan.
2.1.15 "Stock" means the common stock of the Company, par value of
$.001.
2.2 GENDER AND NUMBER. Except when otherwise indicated by the context,
words in the masculine gender when used in the Plan shall include the feminine
gender, the singular shall include the plural, and the plural shall include the
singular.
Section 3.
ADMINISTRATION
3.1 COMPENSATION COMMITTEE. The Plan shall be administered by all or
certain members of the Compensation Committee as designated by the Board, which
shall also designate the Chairman of the Committee. If the Company is governed
by Rule 16b-3 promulgated by the Securities and Exchange Commission
("Commission") pursuant to the Securities Exchange Act of 1934, as amended
("Exchange Act"), no director shall serve as a member of the Committee unless he
is a "disinterested person" within the meaning of such Rule 16b-3. If no
Compensation Committee has been formed, the duties of the Compensation Committee
shall be discharged by the Board.
3.2 COMMITTEE ACTION. The Committee shall hold its meetings at such times
and places as it may determine. A majority of its members shall constitute a
quorum, and all determinations of the Committee shall be made by not less than a
majority of its members. Any decision or determination reduced to writing and
signed by a majority of the members shall be fully effective as if it had been
made by a majority vote of its members at a meeting duly called and held. The
Committee may designate the Secretary of the Company or other Company employees
to assist the Committee in the administration of this Plan, and may grant
authority to such persons to execute award agreements or other documents on
behalf of the Committee and the Company.
3.3 COMMITTEE EXPENSES. All expenses and liabilities incurred by the
Committee in the administration of this Plan shall be borne by the Company. The
Committee may employ attorneys, consultants, accountants or other persons.
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Section 4.
STOCK SUBJECT TO THE PLAN
4.1 STOCK RESERVED. Subject to adjustment as provided in Section 4.2
hereof, the aggregate number of shares of Stock that may be issued under this
Plan shall not exceed 600,000. The shares subject to this Plan shall consist of
authorized but unissued shares of Stock or treasury Stock and such number of
shares shall be and is hereby reserved for issuance for such purpose. Any of
such shares which may remain unissued and which are not subject to outstanding
Awards at the termination of this Plan shall cease to be reserved for the
purpose of this Plan, but until termination of this Plan or the termination of
the last of the Awards granted under this Plan, whichever last occurs, the
Company shall at all times reserve a sufficient number of shares to meet the
requirements of this Plan. To the extent that an Award lapses or the rights of
the Participant holding such Award terminate or the Award is paid in cash, any
shares of Stock subject to such Award may again be made subject to another Award
under this Plan.
4.2 ADJUSTMENT IN CAPITALIZATION. In the event of any change in the
outstanding shares of Stock that occurs after ratification of the Plan by the
shareholders of the Company by reason of a common stock dividend or split,
recapitalization, merger, consolidation, combination, exchange of shares or
other similar corporate change, the aggregate number of shares of Stock subject
to each Award and its stated price, shall be adjusted appropriately by the
Committee or the Board, whose determination shall be conclusive; provided,
however, that fractional shares shall be rounded to the nearest whole share. In
such event, the Committee or the Board also shall have discretion to make
appropriate adjustments in the number and type of shares subject to an Award
under the Plan pursuant to the terms of such an Award.
Section 5.
PARTICIPATION
5.1 ELIGIBILITY. The persons eligible to participate in this Plan as a
recipient of Awards ("Participant") shall include only key Employees, directors,
consultants, and former consultants of the Company or its Affiliates, or key
employees of an entity managed by the Company or one of its subsidiaries, at the
time the Award is granted. An Employee who has been granted an Award hereunder
may be granted additional Awards, if the Committee shall so determine.
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Section 6.
OPTIONS: GENERAL, TERMS AND CONDITIONS,
AND RELINQUISHMENT
6.1 OPTIONS: GENERAL.
6.1.1 COMMITTEE DISCRETION. The Committee shall have sole and
absolute discretionary authority (i) to determine, authorize, and designate
those key Employees, directors, consultants and former consultants of the
Company or its Affiliates and key employees of an entity managed by the Company
or one of its subsidiaries who are to receive Options under this Plan, (ii) to
determine the number of shares of Stock to be covered by such Options and the
terms thereof, and (iii) to determine the type of Option granted: ISOs,
Nonqualified Options or a combination of ISOs and Nonqualified Options;
provided, however, that only key Employees shall be eligible to receive ISOs.
The Committee shall thereupon grant Options in accordance with such
determinations as evidenced by a written option agreement. Subject to the
express provisions of this Plan, the Committee shall have discretionary
authority to prescribe, amend and rescind rules and regulations relating to this
Plan, to interpret this Plan, to prescribe and amend the terms of the option
agreements (which need not be identical) and to make all other determinations
deemed necessary or advisable for the administration of this Plan.
6.1.2 LIMITATION ON INCENTIVE STOCK OPTIONS. The aggregate Fair
Market Value, determined at the time the option is granted, of the Stock with
respect to which ISOs may be exercisable for the first time by any Participant
during any calendar year under all such plans of the Company and its Affiliates
shall not exceed $100,000.
6.2 OPTIONS: TERMS AND CONDITIONS.
6.2.1 OPTION AGREEMENT. Each Option granted under this Plan shall be
evidenced by an agreement, in a form approved by the Committee, which shall be
subject to the following express terms and conditions and to such other terms
and conditions not inconsistent herewith as the Committee may deem appropriate
and include in such Option agreement.
6.2.2 OPTION PERIOD. The Committee shall promptly notify the
Participant of the Option grant and a written agreement shall promptly be
executed and delivered by and on behalf of the Company and the Participant,
provided that the Option grant shall expire if a written agreement is not signed
by said Participant (or his agent or attorney) and returned to the Company
within 60 days from date of receipt by the Participant of such agreement. The
date of grant shall be the date the Option is actually granted by the Committee,
even
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though the written agreement may be executed and delivered by the Company and
the Participant after that date. Each Option agreement shall specify the period
for which the Option thereunder is granted (which in no event shall exceed ten
years from the date of grant in the case of an ISO) and shall provide that the
Option shall expire at the end of such period. If the original term of an Option
is less than ten years from the date of grant, the Option may be amended prior
to its expiration, with the approval of the Committee and the Participant, to
extend the term so that the term as amended is not more than ten years from the
date of grant. However, in the case of an ISO granted to an individual who, at
the time of grant, owns stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the Company or its Affiliate
("Ten Percent Stockholder"), such period shall not exceed five years from the
date of grant.
6.2.3 EXERCISE PRICE. The exercise price of each share of Stock
subject to each Option granted pursuant to this Plan shall be determined by the
Committee at the time the Option is granted and, in the case of ISOs, shall not
be less than 100% of the Fair Market Value of a share of Stock on the date the
Option is granted, as determined by the Committee. In the case of ISOs granted
to a Ten Percent Stockholder, the exercise price shall not be less than 110% of
the Fair Market Value of a share of Stock on the date the Option is granted. The
exercise price of each share of Stock subject to a Nonqualified Option under
this Plan shall be determined by the Committee prior to granting the Option. The
Committee shall set the exercise price for each share subject to a Nonqualified
Option at such price as the Committee in its sole discretion shall determine.
6.2.4 EXERCISE PERIOD. The Committee may provide in the Option
agreement that an Option may be exercised immediately or over the period of the
grant and in whole or in increments. However, no portion of any Option may be
exercisable by a Participant prior to the approval of this Plan by the
shareholders of the Company.
6.2.5 PROCEDURE FOR EXERCISE. Options shall be exercised by the
delivery by the Participant of written notice to the Secretary of the Company
setting forth the number of shares of Stock with respect to which the Option is
being exercised. The notice shall be accompanied by any combination of the
following, at the election of the Participant and agreed to by the Committee,
equal in value to the full amount of the exercise price: (i) cash, cashier's
check, bank draft, or postal or express money order payable to the order of the
Company, (ii) certificates representing shares of Stock theretofore owned by the
Participant duly endorsed for transfer to the Company, or (iii) an election by
the Participant to have the Company withhold the number of shares of Stock the
Fair Market Value of which is equal to the aggregate exercise price of the
shares of Stock issuable upon exercise of the Option. Notice may also be
delivered by telecopy provided that the exercise price of such shares is
received by the Company via wire transfer on the same day the telecopy
transmission is
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received by the Company. The notice shall specify the address to which the
certificates for such shares are to be mailed. An Option to purchase shares of
Stock in accordance with this Plan, shall be deemed to have been exercised
immediately prior to the close of business on the date (i) written notice of
such exercise and (ii) payment in full of the exercise price for the number of
shares for which Options are being exercised, are both received by the Company
and the Participant shall be treated for all purposes as the record holder of
such shares of Stock as of such date.
As promptly as practicable after receipt of such written notice and
payment, the Company shall deliver to the Participant certificates for the
number of shares with respect to which such Option has been so exercised, issued
in the Participant's name or such other name as the Participant directs;
provided, however, that such delivery shall be deemed effected for all purposes
when a stock transfer agent of the Company shall have deposited such
certificates in the United States mail, addressed to the Participant at the
address specified pursuant to this Section.
6.2.6 TERMINATION OF EMPLOYMENT. If a Participant to whom an Option
is granted ceases to be employed by the Company or its Affiliates or an entity
managed by the Company or one of its subsidiaries, or ceases to provide services
to or be a director of the Company or its affiliates or an entity managed by the
Company or one of its subsidiaries, for any reason other than death or
Disability or "for cause" (as defined below), any Option which is exercisable by
the Participant on the date of such termination of employment shall expire three
months following such date of termination of employment; provided, however, the
Committee, in its sole discretion or in any Option agreement, may allow a
Participant to exercise all or a portion of the Options granted but unexercised
for a period of time after such three month period; provided further, however,
that any Option which would otherwise be on ISO which is exercised after such
three month period shall become a Nonqualified Option. Notwithstanding anything
contained herein to the contrary, if the Participant's relationship with the
Company or its Affiliates or an entity managed by the Company or one of its
subsidiaries is terminated for any of the following reasons, the Participant's
relationship was terminated "for cause": the Participant's theft or embezzlement
from the Company or its Affiliates or an entity managed by the Company or one of
its subsidiaries, the violation of a material term or condition of his service
to the Company or its Affiliates or an entity managed by the Company or one of
its subsidiaries, the disclosure by the Participant of confidential information
of the Company or its Affiliates or an entity managed by the Company or one of
its subsidiaries, conviction of the Participant of a crime of moral turpitude,
the Participant's stealing trade secrets or intellectual property owned by the
Company or its Affiliates or an entity managed by the Company or one of its
subsidiaries, any act by the Participant in competition with the Company or its
Affiliates or an entity managed by the Company or one of its subsidiaries or any
other act, activity or conduct of
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the Participant which in the opinion of the Committee is adverse to the best
interests of the Company or its Affiliates or an entity managed by the Company
or one of its subsidiaries. Upon the occurrence of a "for cause" event, any
Options and any and all rights granted to such Participant thereunder, to the
extent not yet effectively exercised, shall become null and void effective as of
the date of the occurrence of the event which results in the Participant ceasing
his relationship with the Company or its Affiliates or an entity managed by the
Company or one of its subsidiaries and any purported exercise of an Option by or
on behalf of said Participant following such date shall be of no effect.
6.2.7 DEATH OR DISABILITY. In the event the Participant dies or is
determined to be under a Disability while the Participant is employed by the
Company or its Affiliates, the Options previously granted to the Participant may
be exercised (to the extent the Participant would have been entitled to do so at
the date of death or determination of Disability) at any time and from time to
time, within a three month period after such death or determination of
Disability, by the Participant, the Participant's legal representative, the
executor or administrator of the Participant's estate or by the person or
persons to whom the Participant's rights under the Option shall pass by will or
the laws of descent and distri bution; provided, however, the Committee, in its
sole discretion or in any Option agreement, may allow a Participant to exercise
all or a portion of the Options granted but unexercised for a period of time
after such three month period; provided further, however, that in no event may
the Option be exercised after its expiration under the terms of the Option
agreement.
6.2.8 TRANSFERABILITY. An Option granted pursuant to this Plan shall
not be assignable or otherwise transferable by the Participant otherwise than by
the Participant's will or by the laws of descent and distribution or pursuant to
a transfer described in Code Section 1041(a). During the lifetime of a
Participant, an Option shall be exercisable only by such Participant or the
Participant's legal representative. Any heir or legatee of the Participant shall
take rights granted herein and in the Option agreement subject to the terms and
conditions hereof and thereof. No such transfer of any Option to heirs or
legatees of the Participant or pursuant to a transfer described in Code Section
1041(a) shall be effective to bind the Company unless the Company shall have
been furnished with written notice thereof and a copy of such evidence as the
Committee may deem necessary to establish the validity of the transfer and the
acceptance by the transferee or transferees of the terms and conditions hereof.
6.2.9 INCENTIVE STOCK OPTIONS. Each Option agreement may contain
such terms and provisions as the Committee may determine to be necessary or
desirable in order to qualify under the Code an Option designated as an
"incentive stock option."
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6.2.10 NO RIGHTS AS SHAREHOLDER. No Participant shall have any
rights as a shareholder with respect to shares covered by an Option until the
Option is exercised by written notice and accompanied by payment as provided in
Section 6.2.5 above.
6.2.11 EXTRAORDINARY CORPORATE TRANSACTIONS. The existence of
outstanding Options shall not affect in any way the right or power of the
Company or its shareholders to make or authorize any or all adjustments,
recapitalizations, reorganizations, exchanges, or other changes in the Company's
capital structure or its business, or any merger or consolidation of the
Company, or any issuance of Stock or other securities or subscription rights
thereto, or any issuance of bonds, debentures, preferred or prior preference
stock ahead of or affecting the Stock or the rights thereof, or the dissolution
or liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise. If the Company recapitalizes or otherwise
changes its capital structure, or merges, consolidates, sells all of its assets
or dissolves (each of the foregoing a "Fundamental Change"), then thereafter
upon any exercise of an Option theretofore granted the Participant shall be
entitled to purchase under such Option, in lieu of the number of shares of Stock
as to which such Option shall then be exercisable, the number and class of
shares of stock and securities to which the Participant would have been entitled
pursuant to the terms of the Fundamental Change if, immediately prior to such
Fundamental Change, the Participant had been the holder of record of the number
of shares of Stock as to which such Option is then exercisable.
6.2.12 ACCELERATION OF OPTIONS. Except as hereinbefore expressly
provided, (i) the issuance by the Company of shares of stock of any class or
securities convertible into shares of stock of any class, for cash, property,
labor or services, upon direct sale, upon the exercise of rights or warrants to
subscribe therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, (ii) the payment of a dividend
in property other than Stock, or (iii) the occurrence of any similar
transaction, and in any case whether or not for fair value, shall not affect,
and no adjustment by reason thereof shall be made with respect to, the number of
shares of Stock subject to an Option theretofore granted or the purchase price
per share, unless the Committee shall determine in its sole discretion that an
adjustment is necessary to provide equitable treatment to the Participant.
Notwithstanding anything to the contrary contained in this Plan, the Committee
may in its sole discretion accelerate the time at which any Option may be
exercised, and is authorized at any time (with the consent of the Participant)
to purchase Options pursuant to Section 6.3.
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6.3 OPTIONS: RELINQUISHMENT.
6.3.1 The Committee, in granting Options hereunder, shall have
discretion to determine whether or not Options shall include a right of
Relinquishment as hereinafter provided by this Section 6.3. The Committee shall
also have discretion to determine whether an option agreement evidencing an
Option initially granted by the Committee without a right of Relinquishment
shall be amended or supplemented to include such a right of Relinquishment.
Neither the Committee nor the Company shall be under any obligation or incur any
liability to any person by reason of the Committee's refusal to grant or include
a right of Relinquishment in any Option granted hereunder or in any option
agreement evidencing the same. Subject to the Committee's determination in any
case that the grant by it of a right of Relinquishment is consistent with
Section 6.3 hereof, any Option granted under this Plan, and the option agreement
evidencing such Option, may provide:
6.3.1.1 That the Participant, or his heirs or other legal
representatives to the extent entitled to exercise the Option under the terms
thereof, in lieu of purchasing the entire number of shares subject to purchase
thereunder, shall have the right to relinquish all or any part of the then
unexercised portion of the Option (to the extent then exercisable) for a number
of shares of Stock, for an amount of cash or for a combination of Stock and cash
to be determined in accordance with the following provisions of this Section
6.3:
6.3.1.1(a) The written notice of exercise of such right
of Relinquishment shall state the percentage, if any, of the Appreciated Value
(as defined below) that the Participant elects to receive in cash ("Cash
Percentage"), such Cash Percentage to be in increments of 10% of such
Appreciated Value up to 100% thereof;
6.3.1.1(b) The number of shares of Stock, if any,
issuable pursuant to such Relinquishment shall be the number of such shares,
rounded to the next greater number of full shares, as shall be equal to the
quotient obtained by dividing (y) the difference between (I) the Appreciated
Value and (II) the result obtained by multiplying the Appreciated Value and the
Cash Percentage by (z) the then Fair Market Value per share of Stock;
6.3.1.1(c) The amount of cash payable pursuant to such
Relinquishment shall be an amount equal to the Appreciated Value less the
aggregate Fair Market Value of the Stock issued pursuant to such Relinquishment,
if any, which cash shall be paid by the Company subject to such conditions as
are deemed advisable by the Committee to permit compliance by the Company with
the withholding provisions applicable to employers under the Code and any
applicable state income tax laws;
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6.3.1.1(d) For the purpose of this Section 6.3.1.1,
"Appreciated Value" means the excess of (y) the aggregate Fair Market Value of
the shares of Stock covered by the Option or the portion thereof to be
relinquished over (z) the aggregate purchase price for such shares specified in
such Option.
6.3.1.2 That such right of Relinquishment may be exercised
only upon receipt by the Company of a written notice of such Relinquishment
which shall be dated the date of election to make such Relinquishment; and that,
for the purposes of this Plan, such date of election shall be deemed to be the
date when such notice is sent by registered or certified mail, or when receipt
is acknowledged by the Company, if mailed by other than registered or certified
mail or if delivered by hand or by any telegraphic communications equipment of
the sender or otherwise delivered; provided, that, in the event the method just
described for determining such date of election shall not be or remain
consistent with the provisions of Section 16(b) of the Exchange Act or the rules
and regulations adopted by the Commission thereunder, as presently existing or
as hereafter may be amended, which regulations exempt from the operation of
Section 16(b) of the Exchange Act in whole or in part any such Relinquishment
transaction, then such date of election shall be determined by such other method
consistent with Section 16(b) of the Exchange Act or the rules and regulations
thereunder as the Committee shall, in its discretion, select and apply.
6.3.1.3 That the Option, or any portion thereof, may be
relinquished only to the extent that (A) it is exercisable on the date written
notice of Relinquishment is received by the Company, (B) the Committee, subject
to the provisions of Section 6.3.2, shall consent to the election of the holder
to relinquish such Option in whole or in part for cash as set forth in such
written notice of Relinquishment, and (C) the holder of such Option pays, or
makes provision satisfactory to the Company for the payment of, any taxes which
the Company is obligated to collect with respect to such Relinquishment.
6.3.2 The Committee shall have sole discretion to consent to or
disapprove, and neither the Committee nor the Company shall be under any
liability by reason of the Committee's disapproval of, any election by a holder
of an Option to relinquish such Option in whole or in part for cash as provided
in Section 6.3.1, except that no such consent to or approval of a Relinquishment
for cash shall be required under the following circumstances. Each Participant
who is subject to the short-swing profits recapture provisions of Section 16(b)
of the Exchange Act ("Covered Participant") shall be entitled to receive payment
only in cash when an Option is relinquished during any window period commencing
on the third business day following the Company's release of a quarterly or
annual summary statement of sales and earnings ending on the twelfth business
day following such release ("Window Period"); provided, however, that payment
shall be so made in cash only in respect of 50% of an Option covered by any such
option agreement. A Covered Participant shall be entitled
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to receive payment only in shares of Stock or upon (a) the Relinquishment of an
Option outside a Window Period, and (b) the Relinquishment of an Option during a
Window Period once such Participant has received payment in cash for the
Relinquishment of 50% of the Options covered by the option agreement.
6.3.3 The Committee, in granting Options hereunder, shall have
discretion to determine the terms upon which such Options shall be
relinquishable, subject to the applicable provisions of this Plan and including
such provisions as are deemed advisable to permit the exemption from the
operation from Section 16(b) of the Exchange Act of any such Relinquishment
transaction, and Options outstanding, and option agreements, may be amended, if
necessary to permit such exemption. If an Option is relinquished, such Option
shall be deemed to have been exercised to the extent of the number of shares of
Stock covered by the Option or part thereof which is relinquished, and no
further Options may be granted covering such shares of Stock.
6.3.4 Neither any Option nor any right to relinquish the same to the
Company as contemplated by this Section 6 shall be assignable or otherwise
transferable except by will or the laws of descent and distribution.
6.3.5 Except as provided in Section 6.3.6. below, no right of
Relinquishment may be exercised within the first six months after the initial
award of any Option containing, or the amendment or supplementation of any
existing option agreement adding, the right of Relinquishment.
6.3.6 No right of Relinquishment may be exercised within the first
six months after the initial award of any Option containing, or the amendment or
supplementation of any existing option agreement adding the right of
Relinquishment, unless such right of Relinquishment is effective upon the
Participant's death, Disability or termination of his relationship with the
Company and the payment upon the exercise of such right is only in cash.
6.3.7 Notwithstanding any other provision of this Section 6, the
Committee may impose such conditions on exercise of a right of Relinquishment
(including, without limitation, the right of the Committee to limit the time of
exercise to specified periods) as may be required to satisfy the requirements of
Rule 16b-3 (or any successor rule) of the Exchange Act.
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Section 7.
RESTRICTED STOCK
7.1 GRANT OF RESTRICTED STOCK. Subject to the provisions of Section 4, the
Committee may grant shares of Restricted Stock at any time and from time to
time, under the Plan to such Participants and in such amounts as it shall
determine. Each grant of Restricted Stock under this Plan shall be evidenced by
an agreement ("Restricted Stock Agreement"), in a form approved by the
Committee, which shall be subject to the following express terms and conditions
and to such other terms and conditions to the extent not inconsistent herewith
as the Committee may deem appropriate and included in a Restricted Stock
Agreement.
7.2 TRANSFERABILITY. Except as provided in Sections 7.7 and 7.8 hereof,
the shares of Restricted Stock granted hereunder may not be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated for such period of
time as shall be determined by the Committee and shall be specified in the
Restricted Stock Agreement or upon earlier satisfaction of other conditions as
specified by the Committee in its sole discretion and set forth in the
Restricted Stock Agreement.
7.3 OTHER RESTRICTIONS. The Committee shall impose such other restrictions
on any shares of Restricted Stock granted pursuant to the Plan as it may deem
advisable including, without limitation, restrictions under applicable Federal
or state securities laws, and may legend the certificates representing
Restricted Stock to give appropriate notice of such restrictions.
7.4 VOTING RIGHTS. Participants holding shares of Restricted Stock granted
hereunder may exercise full voting rights with respect to those shares during
the Period of Restriction.
7.5 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction,
Participants holding shares of Restricted Stock granted hereunder shall be
entitled to receive all dividends and other distributions paid with respect to
those shares while they are so held. At the sole discretion of the Committee,
dividends and other distributions to be paid with respect to Restricted Stock
may be paid in shares of Stock or Restricted Stock in an amount equal to the
dollar value of such dividend divided by the Fair Market Value of a share of
Stock on the dividend declaration date rounded down to the nearest whole number.
If any such dividends or distributions are paid in shares of Restricted Stock,
the shares shall be subject to the same restrictions on transferability as the
shares of Restricted Stock with respect to which they were paid.
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7.6 NONTRANSFERABILITY OF RESTRICTED STOCK. No shares of Restricted Stock
granted under the Plan may be sold, transferred, pledged, assigned, or otherwise
alienated or hypothecated until the termination of the applicable Period of
Restriction. All rights with respect to Restricted Stock granted to a
Participant under the Plan shall be exercisable during his lifetime only by such
Participant or the Participant's legal representative, or by a recipient
pursuant to a transfer described in Code Section 1041(a).
7.7 TERMINATION OF EMPLOYMENT DUE TO DEATH OR DISABILITY. In the event
that a Participant dies or is determined to be under a Disability while the
Participant is employed by the Company or its Affiliates or an entity managed by
the Company or one of its subsidiaries, the Period of Restriction applicable to
the Restricted Stock pursuant to Section 7.2 hereof shall automatically
terminate and, except as otherwise provided in Section 7.3, the shares of
Restricted Stock shall thereby be free of restrictions and freely transferable.
7.8 TERMINATION OF EMPLOYMENT FOR REASONS OTHER THAN DEATH OR DISABILITY.
In the event that a Participant terminates his employment with the Company or
its Affiliates or an entity managed by the Company or one of its subsidiaries,
for any reason other than those set forth in Sections 7.7 hereof during the
Period of Restriction, then any shares of Restricted Stock still subject to
restrictions at the date of such termination automatically shall be forfeited
and returned to the Company; provided, however, that the Committee, in its sole
discretion, or in a Restricted Stock Agreement may either (i) provide that all
or part of such Restricted Stock is not so forfeited as set forth in the
Restricted Stock Agreement, or (ii) waive the automatic forfeiture of any or all
such shares and/or may add such new restrictions to such shares of Restricted
Stock as it deems appropriate.
Section 8.
EFFECTIVENESS, EXPIRATION, AMENDMENTS AND TERMINATION OF THE PLAN.
8.1 EFFECTIVENESS AND EXPIRATION OF THE PLAN. This Plan shall be effective
on the date of adoption by the Board. If the shareholders of the Company fail to
approve this Plan within twelve months of the date of the Board adoption, this
Plan shall terminate and all Awards previously granted under this Plan shall
become void and of no effect. This Plan shall expire ten years after the date
the Board adopts this Plan and thereafter no Award shall be granted pursuant to
this Plan.
8.2 AMENDMENT, MODIFICATION, AND TERMINATION OF PLAN. The Board at any
time may terminate, and from time to time may amend or modify the Plan,
provided, however, that no such action of the Board, without approval of the
shareholders, may:
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(a) Increase the total amount of Stock which may be issued under
the Plan, except as provided in Section 4.2 of the Plan.
(b) Change the provisions of the Plan regarding the Option price
except as permitted by Section 4.2.
(c) Materially increase the cost of the Plan or materially
increase the benefits to Participants.
(d) Change the Participants eligible to participate in the Plan.
(e) Extend the period during which Awards may be granted.
(f) Extend the maximum period after the date of grant during which
Options may be exercised.
No amendment, modification, or termination of the Plan shall in any manner
adversely affect any Award theretofore granted under the Plan, without the
consent of the Participant.
8.3 REPLACEMENT OF AWARDS. The Committee from time to time may permit a
Participant under this Plan to surrender for cancellation any unexercised
outstanding Award and receive from the Company in exchange for such Award, a
number of shares of Stock or Restricted Stock as may be designated by the
Committee.
8.4 CORPORATE CHANGE. If (i) the Company shall not be the surviving entity
in any merger or consolidation (or survives only as a subsidiary of another
entity), (ii) the Company sells all or substantially all of its assets to any
other person or entity (other than to an Affiliate), (iii) any person or entity
(including a "group" as contemplated by Section 13(d)(3) of the Exchange Act)
acquires or gains ownership or control of (including, without limitation, power
to vote) more than 50 percent of the outstanding shares of Stock, (iv) the
Company is to be dissolved and liquidated, or (v) as a result or in connection
with a contested election of directors, the persons who were directors of the
Company before such election shall cease to constitute a majority of the Board
(each such event in clauses (i) through (v) above is referred to herein as a
"Corporate Change"), the Committee, in its sole discretion, or in any Option
agreement or Restricted Stock Agreement, may accelerate the time at which all or
a portion of a Participant's Award may be exercised for a limited period of time
before or after a specified date.
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Section 9.
RIGHTS OF PARTICIPANTS
9.1 NO RIGHT TO EMPLOYMENT. Employees shall be considered to be in the
employment of the Company so long as they remain employees of the Company or its
Affiliates. Any questions as to whether and when there has been a termination of
such employment and the cause of such termination shall be determined by the
Committee, and its determination shall be final. Nothing contained herein shall
be construed as conferring upon the Participant the right to continue in the
employ of the Company or its Affiliates, nor shall anything contained herein be
construed or interpreted to limit the "employment at will" relationship between
the Participant and the Company or its Affiliates. The Award agreements may
contain such provisions as the Committee may approve with reference to the
effect of approved leaves of absence.
9.2 BENEFICIARY DESIGNATION. Each Participant under the Plan may name,
from time to time, any beneficiary or beneficiaries (who may be named
contingently or successively) to whom any benefit under the Plan is to be paid
in case of his death before he receives any or all of such benefit. Each
designation will revoke all prior designations by the same Participant, shall be
in a form prescribed by the Committee, and will be effective only when filed by
the Participant in writing with the Committee during his lifetime. In the
absence of any such designation, benefits remaining unpaid at the Participant's
death shall be paid to his estate.
Section 10.
TAXES
10.1 TAX WITHHOLDING. The Company shall have the power to withhold, or
require a Participant to remit to the Company, an amount sufficient to satisfy
Federal, state, and local withholding tax requirements on any Award under the
Plan.
10.2 STOCK WITHHOLDING ELECTIONS. Subject to the consent of the Committee,
due to (i) the exercise of a Nonqualified Option or (ii) the lapse of
restrictions on Restricted Stock, a Participant may make an irrevocable election
to (a) have shares of Stock otherwise issuable under (i) withheld, or (b) tender
back to the Company shares of Stock received pursuant to (i) or (ii), or (c)
deliver back to the Company pursuant to (i) or (ii) previously- acquired shares
of Stock of the Company having a Fair Market Value sufficient to satisfy all or
part of the Participant's estimated total Federal, state, and local tax
obligations associated with the transaction. Such elections must be made by a
Participant on or prior to the date the amount of tax to be withheld is
determined (the "tax date").
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<PAGE>
10.3 SPECIAL INSIDER STOCK WITHHOLDING RESTRICTIONS. Elections by
Participants who are subject to the short swing profit restrictions of Section
16(b) of the Exchange Act are subject to the following additional restrictions:
(a) the election may not be made within six months after the grant of a
Nonqualified Option or Restricted Stock (except that this limitation does not
apply if the Participant dies or becomes under a Disability prior to the
expiration of the six-month period), and (b) the election must be made either
six months prior to the tax date or during the ten business day "window period"
beginning on the third business day following the release of the Company's
quarterly or annual summary statement of sales and earnings.
10.4 STOCK WITHHOLDING DELIVERY REQUIREMENTS. Pursuant to rules adopted by
the Committee, when the tax date of a Participant is deferred until six months
after the exercise of a Nonqualified Option granted under the Plan by the
Participant making an election under Code Section 83(b), and the Participant
elects share withholding pursuant to Subsection 12.3 above, the full number of
shares of Stock shall be issued or transferred to the Participant upon the
exercise of the Nonqualified Option, but the Participant shall be
unconditionally obligated to tender back or deliver to the Company the proper
number of shares on the tax date. When the tax date occurs in connection with
the lapse of restrictions on Restricted Stock and the Participant elects share
withholding, the Participant shall be unconditionally obligated to tender back
or deliver to the Company a sufficient number of shares of Stock of the Company
to satisfy the tax obligations on the tax date.
Section 11.
MISCELLANEOUS
11.1 INDEMNIFICATION. Each person who is or shall have been a member of
the Committee or of the Board shall be indemnified and held harmless by the
Company against and from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him in connection with or resulting from
any claim, action, suit, or proceeding to which he may be a party or in which he
may be involved by reason of any action taken or failure to act under the Plan
and against and from any and all amounts paid by him in settlement thereof, with
the Company's approval, or paid by him in satisfaction of any judgment in any
such action, suit, or proceeding against him, provided he shall give the Company
an opportunity, at its own expense, to handle and defend the same before he
undertakes to handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights or indemnification to
which such persons may be entitled under the Company's Certificate of
Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the
Company may have to indemnify them or hold them harmless.
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<PAGE>
11.2 LIABILITY OF THE COMPANY. The Company and any Affiliate which is in
existence or hereafter comes into existence shall not be liable to a Participant
or other persons as to (i) the non-issuance or sale of shares as to which the
Company has been unable to obtain from any regulatory body having the
jurisdiction and the authority deemed by the Company's counsel to be necessary
for the lawful issuance and sale of any shares hereunder, and (ii) any tax
consequence expected, but not realized, by any Participant or other person due
to the exercise of any Award granted hereunder.
11.3 PURCHASE FOR INVESTMENT. Unless the Awards and shares of Stock
covered by this Plan have been registered under the Securities Act of 1933, as
amended, or the Company has determined that such registration is unnecessary,
each person exercising an Award under this Plan may be required by the Company
to give a representation in writing that such person is acquiring such shares
for his or her own account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof.
11.4 STOCKHOLDERS AGREEMENT. The Committee shall provide in any agreement
related to an Award that prior to receiving any shares of Stock or other
securities on the exercise of an Award, the Participant or the Participant's
legal representative shall be required to execute the Company's Employee
Stockholders Agreement.
11.5 NON-EXCLUSIVITY OF THIS PLAN. Neither the adoption by the Board nor
the submission for approval of this Plan to the shareholders of the Company
shall be construed as creating any limitations on the power of the Board to
adopt such other incentive arrangements as it may deem desirable, including
without limitation, the granting of restricted stock or stock options otherwise
than under this Plan.
11.6 PARTICIPANTS' RIGHTS UNSECURED. The right of a Participant to receive
a distribution of Stock or any other payment under this Plan shall be an
unsecured claim against the general assets of the Company. The Company may, but
shall not be obligated to, acquire shares of Stock from time to time in
anticipation of its obligations under this Plan, but a Participant shall have no
right in or against any shares of Stock so acquired. All Stock shall constitute
the general assets of the Company and may be disposed of by the Company at such
time and for such purposes as it deems appropriate.
11.7 GOVERNING LAW. This Plan and any agreements hereunder shall be
interpreted and construed in accordance with the laws of the State of Delaware
and applicable federal law.
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<PAGE>
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the
foregoing by directors of the Company, Castle Dental Centers, Inc., has caused
these presents to be duly executed in its name and behalf by its proper officers
thereunto duly authorized as of this 23rd day of January, 1996.
CASTLE DENTAL CENTERS, INC.
ATTEST:
By:____________________________
________________________ Name: Jack H. Castle, Jr.
Secretary Title: President
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<PAGE>
FIRST AMENDMENT TO CASTLE DENTAL CENTERS, INC.
OMNIBUS STOCK AND INCENTIVE PLAN
W I T N E S S E T H:
WHEREAS, Castle Dental Centers, Inc. (the "Company") presently
maintains the Castle Dental Centers, Inc. Omnibus Stock and Incentive Plan
(the "Plan") which became effective on January 23, 1996; and
WHEREAS, the Company, pursuant to Section 8.2 of the Plan, has the right
to amend the Plan from time to time subject to certain limitations.
NOW, THEREFORE, in order to make various revisions desired by the Company,
the Plan is hereby amended in the following manner:
1. Paragraph 1.3 is amended to read as follows:
"1.3 EFFECTIVE DATE. The Plan shall become effective as
provided in Section 8.1."
2. Paragraph 4.1 is amended to read as follows:
"4.1 STOCK RESERVED. Subject to adjustment as provided in
Section 4.2 hereof, the aggregate number of shares of Stock
that may be issued under this Plan shall not exceed 1,000,000.
The shares subject to this Plan shall consist of authorized
but unissued shares of Stock or treasury Stock and such number
of shares shall be and is hereby reserved for issuance for
such purpose. Any of such shares which may remain unissued and
which are not subject to outstanding Awards at the termination
of this Plan shall cease to be reserved for the purpose of
this Plan, but until termination of this Plan or the
termination of the last of the Awards granted under this Plan,
whichever last occurs, the Company shall at all times reserve
a sufficient number of shares to meet the requirements of this
Plan. To the extent that an Award lapses or the rights of the
Participant holding such Award terminate or the Award is paid
in cash, any shares of Stock subject to such Award may again
be made subject to another Award under this Plan."
<PAGE>
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IN WITNESS WHEREOF, the Company has executed this First Amendment to the
Castle Dental Centers, Inc. Omnibus Stock and Incentive Plan to be effective as
of this 15th day of August, 1996.
CASTLE DENTAL CENTERS, INC.
Attest:
By:___________________________
Jack H. Castle, Jr.
Chairman and Chief Executive Officer
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<PAGE>
SECOND AMENDMENT TO CASTLE DENTAL CENTERS, INC.
OMNIBUS STOCK AND INCENTIVE PLAN
W I T N E S S E T H:
WHEREAS, Castle Dental Centers, Inc. (the "Company") presently maintains
the Castle Dental Centers, Inc. Omnibus Stock and Incentive Plan (the "Plan")
which became effective on January 23, 1996; and
WHEREAS, the Company, pursuant to Section 8.2 of the Plan, has the right
to amend the Plan from time to time subject to certain limitations.
NOW, THEREFORE, in order to make various revisions desired by the Company,
the Plan is hereby amended in the following manner:
1. The first sentence of Paragraph 5.1 is amended to read as follows:
"The persons eligible to participate in this Plan as a
recipient of Awards ("Participant") shall include only key
Employees, directors, consultants, and former consultants of
the Company or its Affiliates, key employees of an entity
managed by the Company or one of its subsidiaries, or persons
performing valuable services to entities with which the
Company or one of its Affiliates contracts, at the time the
Award is granted."
IN WITNESS WHEREOF, the Company has executed this Second Amendment to the
Castle Dental Centers, Inc. Omnibus Stock and Incentive Plan to be effective as
of this 7th day of October, 1996.
CASTLE DENTAL CENTERS, INC.
Attest:
By:___________________________
Jack H. Castle, Jr.
Chairman and Chief Executive Officer
- ------------------------------
John M. Slack
Secretary
<PAGE>
THIRD AMENDMENT TO CASTLE DENTAL CENTERS, INC.
OMNIBUS STOCK AND INCENTIVE PLAN
W I T N E S S E T H:
WHEREAS, Castle Dental Centers, Inc. (the "Company") presently maintains
the Castle Dental Centers, Inc. Omnibus Stock and Incentive Plan (the "Plan")
which became effective on January 23, 1996; and
WHEREAS, the Company, pursuant to Section 10.2 of the Plan, has the right
to amend the Plan from time to time subject to certain limitations.
NOW, THEREFORE, in order to make various revisions desired by the Company,
the Plan is hereby amended in the following manner:
1. Paragraph 2.1.5 is amended to read as follows:
"2.1.5 "Committee means all or certain members of the
Committee as described in Section 3.1"
2. Paragraph 3.1 is amended to read as follows:
"3.1 COMMITTEE. The Plan shall be administered by the Board of
Directors of the Company (the "Board"). The Board while
administering the Plan shall hereinafter be referred to as the
"Committee"
3. Paragraph 4.1 is amended to read as follows:
"4.1 STOCK RESERVED. Subject to adjustment as provided in
Section 4.2 hereof, the aggregate number of shares of Stock that may
be issued under this Plan shall not exceed 750,000. The shares
subject to this Plan shall consist of authorized but unissued shares
of Stock or treasury Stock and such number of shares shall be and is
hereby reserved for issuance for such purpose. Any of such shares
which may remain unissued and which are not subject to outstanding
Awards at the termination of this Plan shall cease to be reserved
for the purpose of this Plan, but until termination of this Plan or
the termination of the last of the Awards granted under this Plan,
whichever last occurs, the Company shall at all times reserve a
sufficient number of shares to meet the requirements of this Plan.
To the extent that an Award lapses or the rights of the Participant
holding such Award terminate or the Award is paid in cash, any
shares of Stock subject to such Award may again be made subject to
another Award under this Plan."
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<PAGE>
4. Paragraph 6.3.2 is deleted.
5. Paragraph 6.3.3 is redesignated as Paragraph 6.3.2.
6. Paragraph 6.3.4 is redesignated as Paragraph 6.3.3.
7. Paragraph 6.3.5 is deleted.
8. Paragraph 6.3.6 is deleted.
9. Paragraph 6.3.7 is redesignated as Paragraph 6.3.4.
10. Paragraph 10.2 is amended to read as follows:
"10.2 STOCK WITHHOLDING ELECTIONS. Subject to the consent of
the Committee, due to (i) the exercise of a Nonqualified Option or
(ii) the lapse of restrictions on Restricted Stock, a Participant
may make an irrevocable election to (a) have shares of Stock
otherwise issuable under (i) withheld, or (b) tender back to the
Company shares of Stock received pursuant to (i) or (ii), or (c)
deliver back to the Company pursuant to (i) or (ii)
previously-acquired shares of Stock of the Company having a Fair
Market Value sufficient to satisfy all or part of the Participant's
estimated total Federal, state, and local tax obligations associated
with the transaction, provided that such tax withholding or stock
delivery right was specifically pre-approved by the Committee as a
feature of the Nonqualified Option or Restricted Stock or is
otherwise approved in accordance with Rule 16b-3. Such elections
must be made by a Participant on or prior to the date the amount of
tax to be withheld is determined (the "tax date")."
11. Paragraph 10.3 is deleted.
12. Paragraph 10.4 is redesignated as Paragraph 10.3 and is amended to
read as follows:
"10.3 STOCK WITHHOLDING DELIVERY REQUIREMENTS. Pursuant to
rules adopted by the Committee, when a Participant makes an election
under Code Section 83(b), and the Participant elects share
withholding pursuant to Subsection 10.2 above, the full number of
shares of Stock shall be issued or transferred to the Participant
upon the exercise of the Nonqualified Option, but the Participant
shall be unconditionally obligated to tender back or deliver to the
Company the proper number of shares on the tax date. When the tax
date occurs in connection with the lapse of restrictions on
Restricted Stock and the Participant elects share withholding, the
Participant shall be unconditionally obligated to tender back or
deliver to the Company a sufficient
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<PAGE>
number of shares of Stock of the Company to satisfy the tax
obligations on the tax date."
IN WITNESS WHEREOF, the Company has executed this Third Amendment to the
Castle Dental Centers, Inc. Omnibus Stock and Incentive Plan to be effective as
of this ___ day of August, 1997.
CASTLE DENTAL CENTERS, INC.
Attest:
By:___________________________
Jack H. Castle, Jr.
Chairman and Chief Executive Officer
- ------------------------------
John M. Slack
Secretary
-3-
EXHIBIT 10.44
1996
CASTLE DENTAL CENTERS, INC.
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
SECTION 1. PURPOSE. The purpose of this 1996 Castle Dental Centers, Inc.
Non-Employee Directors Stock Option Plan ("Plan") is to encourage ownership of
common stock, $.001 par value ("Common Stock"), of Castle Dental Centers, Inc.,
a Delaware corporation (the "Company"), 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 expects that this Plan will further strengthen the
identification of directors with the stockholders. Options to be granted under
this Plan will be nonqualified options which are not intended to qualify as
Incentive Stock Options pursuant to Section 422 of the Internal Revenue Code of
1986, as amended ("Code"), as provided in the agreements evidencing the options
as provided in Section 6 hereof. As used in this Plan, the term "Affiliates"
means any "subsidiary corporation" of the Company within the meaning of Section
424(f)of the Code.
SECTION 2. ADMINISTRATION.
(a) COMPOSITION OF THE COMPENSATION COMMITTEE. This Plan shall be
administered by the Compensation Committee of the Board of Directors of the
Company (the "Board"), hereinafter designated the "Committee".
(b) COMMITTEE ACTION. The Committee shall hold its meetings at such times
and places as it may determine. A majority of its members shall constitute a
quorum, and all determinations of the Committee shall be made by not less than a
majority of its members. Any decision or determination reduced to writing and
signed by a majority of the members shall be fully effective as if it had been
made by a majority vote of its members at a meeting duly called and held. The
Committee may designate the Secretary of the Company or other Company employees
to assist the Committee in the administration of this Plan, and may grant
authority to such persons to execute award agreements or other documents on
behalf of the Committee and the Company.
(c) COMMITTEE EXPENSES. All expenses and liabilities incurred by the
Committee in the administration of this Plan shall be borne by the Company. The
Committee may employ attorneys, consultants, accountants or other persons.
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<PAGE>
SECTION 3. STOCK RESERVED. Subject to adjustment as provided in Section
6(j) hereof, the aggregate number of shares of Common Stock that may be optioned
under this Plan is 200,000. The shares subject to this Plan shall consist of
authorized but unissued shares of Common Stock and such number of shares shall
be and is hereby reserved for sale for such purpose. Any of such shares which
may remain unsold and which are not subject to outstanding options at the
termination of this Plan shall cease to be reserved for the purpose of this
Plan, but until termination of this Plan or the termination of the last of the
options granted under this Plan, whichever last occurs, the Company shall at all
times reserve a sufficient number of shares to meet the requirements of this
Plan. Should any option expire or be canceled prior to its exercise in full, the
shares theretofore subject to such option may again be made subject to an option
under this Plan.
SECTION 4. ELIGIBILITY. The persons eligible to participate in this Plan
as a recipient of options ("Optionee") shall include only non-employee directors
of the Company.
SECTION 5. GRANT OF OPTIONS. Upon (i) the election of a non-employee
individual to the Board or (ii) in the case of non-employee directors serving on
the date this Plan is adopted by the Board, on the date of adoption, such
non-employee director shall receive a grant of an option to purchase 25,000
shares of Common Stock. A non-employee director who has been granted an option
to purchase 25,000 shares of Common Stock in accordance with this Plan shall not
be granted another option to purchase any shares of Common Stock under this
Plan.
SECTION 6. TERMS AND CONDITIONS. Each option granted under this Plan shall
be evidenced by an agreement, in a form approved by the Committee, which shall
be subject to the following express terms and conditions and to such other terms
and conditions as the Committee may deem appropriate.
(a) OPTION PERIOD. The Committee shall promptly notify the Optionee of the
option grant and a written agreement shall promptly be executed and delivered by
and on behalf of the Company and the Optionee. The date of grant shall be the
date the option is actually granted by the Committee, even though the written
agreement may be executed and delivered by the Company and the Optionee after
that date. Each option agreement shall provide that the option shall expire ten
years from the date of grant.
(b) EXERCISE PRICE. The exercise price of each share of Common Stock
subject to each option granted pursuant to this Plan shall be the fair market
value of a share of Common Stock on the date of grant.
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For all purposes under this Plan, the fair market value of a share of
Common Stock on a particular date shall be equal to the mean of the reported
high and low sales prices of the Stock on the NASDAQ Composite Tape on that
date, or if no prices are reported on that date, on the last preceding date on
which such prices of the Stock are so reported. If the Stock is not traded on
the NASDAQ at the time a determination of its fair market value is required to
be made hereunder, its fair market value shall be deemed to be equal to the
average between the closing bid and ask prices of the Stock on the most recent
date the Stock was publicly traded. In the event the Stock is not publicly
traded at the time a determination of its value is required to be made
hereunder, the determination of its fair market value shall be made by the
Committee in such manner as it deems appropriate. Notwithstanding the foregoing,
however, the exercise price of all options granted prior to or contemporaneously
with the Company's initial public offering shall be the initial public offering
price of the Company's Common Stock, prior to application of discounts or
commissions.
(c) EXERCISE PERIOD. The option agreement shall provide that all options
granted upon the election of a non-employee director to the Board in accordance
with Section 5 may be exercised by an Optionee in whole or in part at any time
during a ten year period, subject to the limitation that the option shall not be
exercisable for more than a percentage of the aggregate number of shares under
such option determined by the number of years of service the Optionee has served
on the Board as a non-employee director to the date of exercise, in accordance
with the following schedule:
SCHEDULE OF VESTING
NUMBER OF FULL YEARS PERCENTAGE OF SHARES PURCHASABLE
Less than 1 year 0%
1 year 20%
2 years 40%
3 years 60%
4 years 80%
5 years 100%
Notwithstanding the above, no option shall be exercisable prior to six (6)
months after the date of grant of such option.
(d) PROCEDURE FOR EXERCISE. Options shall be exercised by the delivery by
the Optionee of written notice to the Secretary of the Company setting forth the
number of
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<PAGE>
shares of Common Stock with respect to which the option is being exercised. The
notice shall be accompanied by, at the election of the Optionee, (i) cash,
cashier's check, bank draft, or postal or express money order payable to the
order of the Company, (ii) certificates representing shares of Common Stock
theretofore owned by the Optionee duly endorsed for transfer to the Company,
(iii) an election by the Optionee to have the Company withhold the number of
shares of Common Stock the fair market value of which is equal to the aggregate
exercise price of the shares of Common Stock issuable upon exercise of the
option, or (iv) any combination of the preceding, equal in value to the full
amount of the exercise price. Notice may also be delivered by telecopy provided
that the exercise price of such shares is received by the Company via wire
transfer on the same day the telecopy transmission is received by the Company.
The notice shall specify the address to which the certificates for such shares
are to be mailed. An option to purchase shares of Common Stock in accordance
with this Plan shall be deemed to have been exercised immediately prior to the
close of business on the date (i) written notice of such exercise and (ii)
payment in full of the exercise price for the number of share for which options
are being exercised, are both received by the Company and the Optionee shall be
treated for all purposes as the record holder of such shares of Common Stock as
of such date.
As promptly as practicable after receipt of such written notice and
payment, the Company shall deliver to the Optionee certificates for the number
of shares with respect to which such option has been so exercised, issued in the
Optionee's name or such other name as Optionee directs; provided, however, that
such delivery shall be deemed effected for all purposes when a stock transfer
agent of the Company shall have deposited such certificates in the United States
mail, addressed to the Optionee at the address specified pursuant to this
Section 6(d).
(e) TERMINATION OF SERVICE FROM THE BOARD. If an Optionee ceases to serve
on the Board for any reason other than death, disability or an involuntarily
"for cause" termination, the rights under such option which are not vested and
forfeitable (in accordance with Section 6(c)) shall terminate upon the
Optionee's cessation of service on the Board and the rights under such option
which are vested and non-forfeitable (in accordance with Section 6(c)) shall
terminate upon the expiration date of the option. If the Optionee's service on
the Board is involuntarily terminated by the Company "for cause", rights under
all options, whether vested or not, shall terminate immediately upon such
cessation of service. An Optionee's service on the Board is involuntarily
terminated "for cause" if the Optionee (i) divulges without the consent of the
Company any secret or confidential information belonging to the Company or an
Affiliate, (ii) has been dishonest or fraudulent in any manner affecting the
Company or an Affiliate, or (iii) has committed any act that, in the sole
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<PAGE>
judgment of the Committee, has been substantially detrimental to the interest of
the Company or an Affiliate.
(f) DISABILITY OR DEATH. In the event the Optionee dies or is determined
under this Plan to be disabled while the Optionee serves on the Board, all
options previously granted to the Optionee, whether vested or not, may be
exercised at any time and from time to time, after such death or determination
of disability, by the Optionee, the Optionee's authorized legal representative,
the guardian of the Optionee's estate, the executor or administrator of the
Optionee's estate or by the person or persons to whom the Optionee's rights
under the option shall pass by will or the laws of descent and distribution, but
in no event may the option be exercised after its expiration under the terms of
the option agreement. An Optionee shall be deemed to be disabled if, in the
opinion of a physician selected by the Committee, the Optionee is incapable of
performing services for the Company of the kind the Optionee was performing at
the time the disability occurred by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long, continued and indefinite duration. The date of determination of
disability for purposes hereof shall be the date of such determination by such
physician.
(g) TRANSFERABILITY. An option granted pursuant to this Plan shall not be
assign able or otherwise transferable by the Optionee otherwise than by
Optionee's will or by the laws of descent and distribution. During the lifetime
of an Optionee, an option shall be exercisable only by such Optionee or the
Optionee's legal representative. Any heir or legatee of the Optionee shall take
rights granted herein and in the option agreement subject to the terms and
conditions hereof and thereof. No such transfer of any option to heirs or
legatees of the Optionee shall be effective to bind the Company unless the
Company shall have been furnished with written notice thereof and a copy of such
evidence as the Committee may deem necessary to establish the validity of the
transfer and the acceptance by the transferee or transferees of the terms and
conditions hereof.
(h) NO RIGHTS AS STOCKHOLDER. No Optionee shall have any rights as a
stockholder with respect to shares covered by an option until the option is
exercised by written notice and accompanied by payment as provided in Section
6(d) above.
(i) EXTRAORDINARY CORPORATE TRANSACTIONS. The existence of outstanding
options shall not affect in any way the right or power of the Company or its
stockholders to make or authorize any or all adjustments, recapitalizations,
reorganizations, exchanges, or other changes in the Company's capital structure
or its business, or any merger or consolidation of the Company, or any issuance
of Common Stock or other securities or subscription rights thereto, or any
issuance of bonds, debentures, preferred or prior preference stock ahead of
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<PAGE>
or affecting the Common Stock or the rights thereof, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise. If the Company recapitalizes or otherwise
changes its capital structure, or merges, consolidates, sells all of its assets
or dissolves (each of the foregoing a "Fundamental Change"), then thereafter
upon any exercise of an option theretofore granted the Optionee shall be
entitled to purchase under such option, in lieu of the number of shares of
Common Stock as to which option shall then be exercisable, the number and class
of shares of stock and securities to which the Optionee would have been entitled
pursuant to the terms of the Fundamental Change if, immediately prior to such
Fundamental Change, the Optionee had been the holder of record of the number of
shares of Common Stock as to which such option is then exercisable.
(j) CHANGES IN CAPITAL STRUCTURE. If the outstanding shares of Common
Stock or other securities of the Company, or both, for which the option is then
exercisable shall at any time be changed or exchanged by declaration of a stock
dividend, stock split, combination of shares or recapitalization, the number and
kind of shares of Common Stock or other securities which are subject to this
Plan or subject to any options theretofore granted, and the exercise prices,
shall be appropriately and equitably adjusted so as to maintain the
proportionate number of shares or other securities without changing the
aggregate exercise price.
(k) ACCELERATION OF OPTIONS. Except as hereinbefore expressly provided,
(i) the issuance by the Company of shares of stock of any class of securities
convertible into shares of stock of any class, for cash, property, labor or
services, upon direct sale, upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company convertible
into such shares or other securities, (ii) the payment of a dividend in property
other than Common Stock, or (iii) the occurrence of any similar transaction, and
in any case whether or not for fair value, shall not affect, and no adjustment
by reason thereof shall be made with respect to, the number of shares of Common
Stock subject to options theretofore granted or the purchase price per share,
unless the Committee shall determine in its sole discretion that an adjustment
is necessary to provide equitable treatment to Optionee.
(l) CORPORATE CHANGE. If (i) the Company shall not be the surviving entity
in any merger or consolidation (or survives only as a subsidiary of another
entity), (ii) the Company sells all or substantially all of its assets to any
other person or entity (other than to an Affiliate), (iii) any person or entity
(including a "group" as contemplated by Section 13(d)(3) of the Exchange Act)
acquires or gains ownership or control of (including, without limitation, power
to vote) more than 50 percent of the outstanding shares of Common Stock,
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<PAGE>
(iv) the Company is to be dissolved and liquidated, or (v) as a result or in
connection with a contested election of directors, the persons who were
directors of the Company before such election shall cease to constitute a
majority of the Board (each such event in clauses (i) through (v) above is
referred to herein as a "Corporate Change"), all outstanding options under this
Plan, whether vested or not, shall become fully vested and non-forfeitable.
SECTION 7. AMENDMENTS OR TERMINATION. The Board may amend, alter or
discontinue this Plan; PROVIDED, HOWEVER, (i) this Plan shall not be amended
more than once every six months, other than to comport with changes in the Code,
the Employee Retirement Income Security Act of 1976, as amended, or the rules
and regulations promulgated under either of the foregoing; and (ii) no amendment
or alteration shall be made which would impair the rights of any Optionee,
without the Optionee's consent, under any option theretofore granted.
Notwithstanding the above, no action of the Board, without the approval of the
stockholders, may (i) except as otherwise provided in Section 6 of Plan,
increase the total number of shares of Common Stock which may be issued under
the Plan, (ii) change the class of persons eligible to participate in the Plan,
(iii) change the provisions of the Plan regarding the exercise price of an
option as set forth in Section 6, or (iv) withdraw the administration of the
Plan from the Board.
SECTION 8. COMPLIANCE WITH OTHER LAWS AND REGULATIONS. This Plan, the
grant and exercise of options thereunder, and the obligation of the Company to
sell and deliver shares under such options, shall be subject to all applicable
federal and state laws, rules and regulations and to such approvals by any
governmental or regulatory agency as may be required. The Company shall not be
required to issue or deliver any certificates for shares of Common Stock prior
to the completion of any registration or qualification of such shares under any
federal or state law or issuance of any ruling or regulation of any government
body which the Company shall, in its sole discretion, determine to be necessary
or advisable. Any adjustments provided for in Sections 6(j), (k) and (l) of this
Plan shall be subject to any shareholder action required by Delaware corporate
law.
SECTION 9. PURCHASE FOR INVESTMENT. Unless the options and shares of
Common Stock covered by this Plan have been registered under the Securities Act
of 1933, as amended, or the Company has determined that such registration is
unnecessary, each person exercising an option under this Plan may be required by
the Company to give a representation in writing that such person is acquiring
such shares for his or her own account for investment and not with a view to, or
for sale in connection with, the distribution of any part thereof.
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<PAGE>
SECTION 10. TAXES.
(a) The Company may make such provisions as it may deem appropriate for
the withholding of any taxes which it determines is required in connection with
any options granted under this Plan.
(b) Notwithstanding the terms of Section 11(a), any Optionee may pay all
or any portion of the taxes required to be withheld by the Company or paid by
the Optionee in connection with the exercise of an option by electing to have
the Company withhold shares of Common Stock, or by delivering previously owned
shares of Common Stock, having a fair market value, determined in accordance
with Section 6(b), equal to the amount required to be withheld or paid. An
Optionee must make the foregoing election on or before the date that the amount
of tax to be withheld is determined ("Tax Date"). All such elections are
irrevocable and subject to disapproval by the Committee. Elections by Covered
Optionees are subject to the following additional restrictions: (i) such
election may not be made within six months of the grant of an option, provided
that this limitation shall not apply in the event of death or disability, and
(ii) such election must be made either six months or more prior to the Tax Date
or in a Window Period. Where the Tax Date in respect of an option is deferred
until six months after exercise and the Covered Optionee elects share
withholding, the full amount of shares of Common Stock will be issued or
transferred to the Optionee upon exercise of the option, but the Optionee shall
be unconditionally obligated to tender back to the Company the number of shares
necessary to discharge the Company's withholding obligation or the Optionee's
estimated tax obligation on the Tax Date.
SECTION 11. STOCKHOLDERS AGREEMENT. The Committee shall provide in any
agreement related to an option granted hereunder that prior to receiving any
shares of Common Stock on the exercise of an option, the Optionee or the
Optionee's legal representative shall be required to execute the Company's
Stockholders Agreement.
SECTION 12. LIABILITY OF COMPANY FOR NON-ISSUANCE OF SHARES AND TAX
CONSEQUENCES. The Company and any Affiliate which is in existence or hereafter
comes into existence shall not be liable to an Optionee or other persons as to:
(a) The non-issuance or sale of shares as to which the Company has been
unable to obtain from any regulatory body having jurisdiction the authority
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any shares hereunder; and
(b) Any tax consequence expected, but not realized, by any Optionee or
other person due to the exercise of any option granted hereunder.
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<PAGE>
SECTION 13. EFFECTIVENESS AND EXPIRATION OF PLAN. This Plan shall be
effective on the date of adoption by the Board. This Plan shall expire ten years
after the date the Board adopts this Plan and thereafter no option shall be
granted pursuant to this Plan.
SECTION 14. NON-EXCLUSIVITY OF THIS PLAN. Neither the adoption by the
Board nor the submission for approval of this Plan to the stockholders of the
Company shall be construed as creating any limitations on the power of the Board
to adopt such other incentive arrangements as it may deem desirable, including
without limitation, the granting of restricted stock or stock options otherwise
than under this Plan, and such arrangements may be either generally applicable
or applicable only in specific cases.
SECTION 15. GOVERNING LAW. This Plan and any agreements hereunder shall be
interpreted and construed in accordance with the laws of the State of Delaware
and applic able federal law.
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the
foregoing by directors of the Company, Castle Dental Centers, Inc., has caused
these presents to be duly executed in its name and behalf by its proper officers
thereunto duly authorized as of this 16th day of August, 1996.
CASTLE DENTAL CENTERS, INC.
ATTEST:
By:_______________________________________
______________________ Jack H. Castle, Jr.
Chairman and Chief Executive Officer
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<PAGE>
FIRST AMENDMENT TO 1996
CASTLE DENTAL CENTERS, INC.
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
W I T N E S S E T H:
WHEREAS, Castle Dental Centers, Inc. (the "Company") presently maintains
the 1996 Castle Dental Centers, Inc. Non-Employee Directors Stock Option Plan
(the "Plan") which became effective on August 19, 1996; and
WHEREAS, the Company, pursuant to Section 7 of the Plan, has the right to
amend the Plan from time to time subject to certain limitations.
NOW, THEREFORE, in order to make revisions desired by the Company, the
Plan is hereby amended in the following manner:
1. The first sentence of Section 3 is amended to read as follows:
"Subject to adjustment as provided in Section 6(j) hereof, the
aggregate number of shares of Common Stock that may be
optioned under this Plan is 300,000."
IN WITNESS WHEREOF, the Company has executed this First Amendment to the
1996 Castle Dental Centers, Inc. Non-Employee Directors Stock Option Plan to be
effective as of this 7th day of October, 1996.
CASTLE DENTAL CENTERS, INC.
Attest:
By:___________________________
Jack H. Castle, Jr.
Chairman and Chief Executive Officer
- ------------------------------
John M. Slack
Secretary
<PAGE>
SECOND AMENDMENT TO 1996
CASTLE DENTAL CENTERS, INC.
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
W I T N E S S E T H:
WHEREAS, Castle Dental Centers, Inc. (the "Company") presently maintains
the 1996 Castle Dental Centers, Inc. Non-Employee Directors Stock Option Plan
(the "Plan") which became effective on August 19, 1996; and
WHEREAS, the Company, pursuant to Section 7 of the Plan, has the right to
amend the Plan from time to time subject to certain limitations.
NOW, THEREFORE, in order to make revisions desired by the Company, the
Plan is hereby amended in the following manner:
1. Section 2(a) is amended to read as follows:
"(a) COMPOSITION OF THE COMMITTEE. This Plan shall be
administered by the Compensation Committee of the Board of Directors
of the Company (the "Board"), hereinafter designated the
"Committee". The Committee shall be (i) constituted so as to permit
the Plan to comply with Rule 16b-3 ("Rule 16b-3") promulgated by the
Securities and Exchange Commission ("Commission") pursuant to the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and
(ii) constituted solely of "outside directors," within the meaning
of section 162(m) of the Code and applicable interpretive authority
thereunder."
2. The first sentence of Section 3 is amended to read as follows:
"Subject to adjustment as provided in Section 6(j) hereof, the
aggregate number of shares of Common Stock that may be optioned
under this Plan is 150,000."
3. Section 10(b) is amended to read as follows:
"(b) Notwithstanding the terms of Section 10(a), any Optionee
may pay all or any portion of the taxes required to be withheld by
the Company or paid by the Optionee in connection with the exercise
of an option by electing to have the Company withhold shares of
Common Stock, or by delivering previously owned shares of Common
Stock, having a fair market value, determined in accordance with
Section 6(b), equal to the amount required to be withheld or paid;
provided that such tax withholding or stock delivery right was
specifically pre-approved by the Committee as a feature of the
option or is otherwise approved in accordance with Rule 16b-3. An
Optionee must make the foregoing election on or before the date that
the amount of tax to be withheld is determined ("Tax Date"). All
such elections are
<PAGE>
irrevocable and subject to disapproval by the Committee. Where the
Optionee elects share withholding, the full amount of shares of
Common Stock will be issued or transferred to the Optionee upon
exercise of the option, but the Optionee shall be unconditionally
obligated to tender back to the Company the number of shares
necessary to discharge the Company's withholding obligation or the
Optionee's estimated tax obligation on the Tax Date."
IN WITNESS WHEREOF, the Company has executed this Second Amendment to the
1996 Castle Dental Centers, Inc. Non-Employee Directors Stock Option Plan to be
effective as of this ___ day of August, 1997.
CASTLE DENTAL CENTERS, INC.
Attest:
By:___________________________
Jack H. Castle, Jr.
Chairman and Chief Executive Officer
- ------------------------------
John M. Slack
Secretary
EXHIBIT 10.84
OPTION AGREEMENT
This Option Agreement (the "Agreement") is by and among CASTLE DENTAL
CENTERS, INC., a Delaware corporation ("Castle"), CASTLE DENTAL CENTERS OF
FLORIDA, INC., a Florida corporation ("CDC-Florida"), FIRST DENTAL CARE, INC.
n/k/a GREENBERG ENTERPRISES, INC. ("GEI"), LESTER B. GREENBERG, D.D.S.
(individually and together with GEI ("Greenberg") and NATIONSBANK OF TEXAS,
N.A. ("NationsBank"), and DECLARATION OF TRUST FOR THE DEFINED BENEFIT PLANS
OF ZENECA HOLDINGS, INC., DECLARATION OF TRUST FOR THE DEFINED BENEFIT PLANS OF
ICI AMERICAN HOLDINGS, INC., and DELAWARE STATE EMPLOYEES' RETIREMENT FUND, who
agree as follows:
1. CONSIDERATION. Contemporaneously with the execution and delivery of
this Agreement, certain of the parties hereto have exchanged limited mutual
releases and have concluded the restructuring of that certain indebtedness of
Castle to Greenberg and entities related thereto more particularly described as:
(a) that certain promissory note dated May 19, 1996 in the original principal
amount of $1,787,938, as modified (the "Performing Note"); (b) that certain
promissory note dated May 19, 1996, in the original principal amount of
$656,588, as modified; (c) that certain promissory note dated May 19, 1996, in
the original principal amount of $286,775, as modified (collectively, the
"Restructured Notes"). This Option Agreement is granted in connection with the
exchange of the limited mutual releases and is neither a payment on or security
device for the repayment of the debts held by Greenberg or related entities.
2. GRANT OF OPTION. Subject to the terms and conditions of this Agreement,
following a payment default under the Performing Note as set forth in paragraph
3 below, Greenberg is hereby granted an exclusive and non-transferable, except
as hereinafter provided, option, but not the obligation to purchase either (a)
from Castle, all of the issued and outstanding shares of capital stock of
CDC-Florida, or (b) from CDC-Florida, all of the assets and liabilities specific
to the operation of CDC-Florida. Whether Greenberg wishes to acquire the stock
of CDC-Florida or its assets shall be determined by Greenberg in writing at the
time of the exercise of the option. Contemporaneouly with the consummnation of
the purchase pursuant to said option, all security interests in the assets of
CDC-Florida (except for those specific to the operations of CDC-Florida that
existed at the time of CDC-Florida's acquisition thereof and those security
interests granted by CDC-Florida to secure its acquisition of tangible personal
property thereafter acquired in the normal conduct of its business) and if
Greenberg elects to purchase CDC-Florida stock, all security interests in the
stock of CDC-Florida shall be released, and such assets and/or CDC-Florida's
stock shall be transferred free and clear of all claims, liens, and
encumbrances, except for those security interests that existed prior to May 19,
1996, and those security interests granted by CDC-Florida to secure its
acquisition of tangible personal property after such date in the normal conduct
of its business. NationsBank, as lienholder, has executed a counterpart hereof
to indicate its agreement to release its security interest in the assets of
CDC-Florida upon the payment of the
<PAGE>
option purchase price as set forth herein. It is the intent of parties that this
option grant to Greenberg the right to purchase all of the assets of CDC-Florida
to enable Greenberg to reacqire all the assets transferred by that certain asset
purchase agreement between Greenberg and affiliates, as seller, and CDC-
Florida, as purchaser, so as to place the parties in as near the same position
with respect to such assets they would have occupied had such transaction not
occurred in the first instance as is possible.
3. OPTION TERM. Subject to the next sentence, this option shall be
exercisable by Greenberg or his assigns at any time following a payment default
under the Performing Note, subject to the cure periods set forth therein, but
the option shall terminate on July 31, 1998, if not perviously exercised.
Notwithstanding the foregoing, in the event NationsBank, its successors or
assigns, declares a default and acceleration in the payment or performance of
the obligations owed to it by Castle, said option shall be exercisable only
during a period commencing on the date of the receipt by Greenberg of notice of
such default, and said option shall terminate, if not previously exercised, on
the 61st day thereafter. The closing of the purchase pursuant to this option
shall occur within thirty (30) days of the exercise of the option. Time is of
the essence and Greenberg's failure to close the purchase in a timely manner
shall void the option and this Option Agreement shall thereafter be of no
further force or effect. Until exercisable under the terms hereof, this option
shall not be transferable.
4. AUTOMATIC TERMINATION OF THE OPTIONS. Unless sooner terminated, at such
time as the Restructured Notes have been paid in full, this option agreement
shall automatically terminate and shall be of no further force and effect.
5. CONSIDERATION FOR OPTION EXERCISE. The consideration payable by
Greenberg for the conveyance of the assets of CDC-Florida or CDC-Florida stock,
whichever Greenberg elects, payable upon the closing of the option purchase,
shall consist of the following, all of which shall be free and clear of all
claims, liens, and encumbrances of third parties whatsoever; (a) $3.1 million in
cash, to be delivered to NationsBank in exchange for the release of its liens on
the assets of CDC-Florida; (b) the Restructured Notes; and (c) all shares of
capital stock of Castle previously issued to Greensberg or its affiliates on May
19, 1996, duly endorsed and in proper form for transfer. If Greenberg elects to
purchase the stock of CDC-Florida, Castle shall deliver all shares of capital
stock of CDC-Florida, duly endorsed and in proper form for transfer to
Greenberg, free and clear of all liens and encumbrances, whatsoever. If
Greenberg elects to purchase the assets of CDC-Florida, all such assets shall be
conveyed in the same form of transfer as said assets were transferred to
CDC-Florida by Greenberg and related entities on May 19, 1996. In addition,
should Greenberg elect to purchase the assets of CDC-Florida, the Option
Agreement between Lester B. Greenberg, D.D.S. and CDC-Florida, the Management
Services Agreement between CDC-Florida and Castle First Dental Care, P.A., and
the Trademark License Agreement and the Trandename License Agreement, all
<PAGE>
executed and delivered in connection with the May 19, 1996, transaction shall be
terminated.
6. CONDUCT OF BUSINESS. Heretofore, CDC-Florida represents and warrants
that it has not transferred any non-cash assets conveyed to it by Greenberg or
related entities on May 19, 1996, except in the ordinary course of business and,
while this option remains outstanding, and prior to the closing of the purchase,
CDC-Florida shall conduct business only in the ordinary course, shall transfer
none of its existing assets other than in the ordinary course of business and
shall maintain a current status on accounts payable.
7. EFFECTIVE DATE. The effective date of this option shall be the _______
day of __________________, 1997.
CASTLE DENTAL CENTER, INC.
By:____________________________________
Name:_________________
Title:______________
CASTLE DENTAL CENTERS
OF FLORIDA, INC.
By:____________________________________
Name:_________________
Title:______________
GREENBERG ENTERPRISES, INC.
By:____________________________________
Name:_________________
Title:______________
_______________________________________
LESTER B. GREENBERG, D.D.S.
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<PAGE>
CONSENT OF SUPERIOR LENDERS
NationsBank, by its execution hereof, does hereby consent to the granting
of this option and, should the option be exercised, and the cash consideration
of $3.1 million be delivered to NationsBank for payment on the indebtedness of
Castle owing to NationsBank, to the transfer of the stock of CDC-Florida or the
transfer of the assets of CDC-Florida upon the payment of the consideration
specified, free of its security interests therein, and by execution hereof
agrees that the granting of this option does not constitute security for the
repayment of any obligations owed to Greenberg or related entities by Castle and
that the completion of the sale pursuant to the exercise of this option shall
not constitute a payment on any obligation owed to Greenberg or related entities
by Castle. By their execution hereof, the Declaration of Trust for the Defined
Benefit Plans of Zeneca Holdings, Inc., the Declaration of Trust for the Defined
Benefit Plans of ICI American Holdings, Inc., and the Delaware State Employees'
Retirement Fund, the holders of senior subordinated debt of Castle to which the
Castle debt to Greenberg is subordinate, do hereby consent to the granting of
this option and do hereby consent to the sale and purchase should said option be
exercised upon the terms specified, free and clear of its security interests,
and do hereby acknowledge and agree that this option agreement does not
constitute security for the repayment of the debt due Greenberg by Castle and
that the transfer of assets or stock of CDC-Florida, whichever the case may be,
pursuant to the exercise of this option shall not constitute a payment thereon.
NATIONSBANK OF TEXAS, N.A.
By:____________________________________
Name:_________________
Title:______________
DECLARATION OF TRUST FOR THE
DEFINED BENEFIT PLANS OF ZENECA
HOLDINGS, INC.
By: Pecks Management Partners, Ltd.
its Investment Advisor
By:_________________________________
R.J. Cresci, Managing Director
-4-
<PAGE>
DECLARATION OF TRUST FOR THE
DEFINED BENEFIT PLANS OF ICI
AMERICAN HOLDINGS, INC.
By: Pecks Management Partners, Ltd.
its Investment Advisor
By:_________________________________
R.J. Cresci, Managing Director
DELAWARE STATE EMPLOYEES'
RETIREMENT FUND
By: Pecks Management Partners, Ltd.
its Investment Advisor
By:_________________________________
R.J. Cresci, Managing Director
-5-
EXHIBIT 11.1
CASTLE DENTAL CENTERS
EXHIBIT 11.1 -- COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS)
SIX SIX
MONTHS MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, JUNE 30, JUNE 30,
------------ -------- --------
1996 1996 1997
------------ -------- --------
PRIMARY:
Weighted average common shares
outstanding........................ 2,000 2,000 2,332
Weighted average shares issued for
business acquisitions.............. 160 44 --
Assumed conversion of preferred stock
issued within one year of initial
public offering.................... 948 948 948
Net effect of dilutive stock options
and warrants based on the treasury
stock method using average market
price.............................. 18 18 18
------------ -------- --------
Total primary shares................. 3,126 3,010 3,298
============ ======== ========
Net income (loss).................... $ (1,086) $ 31 $ (80)
Preferred stock dividends............ -- -- (309)
------------ -------- --------
Net income (loss) attributable to
common stock....................... (1,086) 31 (389)
============ ======== ========
Net income (loss) per share.......... $ (0.35) $ 0.01 $(0.12)
============ ======== ========
FULLY DILUTED:
Weighted average common shares
outstanding........................ 2,000 2,000 2,332
Weighted average shares issued for
business acquisitions.............. 160 44 --
Assumed conversion of preferred stock
issued within one year of initial
public offering.................... 948 948 948
Net effect of dilutive stock options
and warrants based on the treasury
stock method using average market
price.............................. 18 18 18
------------ -------- --------
Total fully diluted shares........... 3,126 3,010 3,298
============ ======== ========
Net income (loss).................... $ (1,086) $ 31 $ (80)
Preferred stock dividends............ -- -- (309)
------------ -------- --------
Net income (loss) attributable to
common stock....................... (1,086) 31 (389)
============ ======== ========
Net income (loss) per share.......... $ (0.35) $ 0.01 $(0.12)
============ ======== ========
EXHIBIT TO COME
EXHIBIT 11.2
CASTLE DENTAL CENTERS
EXHIBIT 11.2 -- COMPUTATION OF EARNINGS PER SHARE
UNDER SAB NO. 55
(IN THOUSANDS)
SIX
MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------ ---------
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
Net effect of dilutive stock options
and warrants based on the treasury
stock method using average market
price.............................. 18 18
Assumed issuance of stock to fund
distribution to owner.............. 500 500
------------ ---------
Total primary shares................. 3,626 3,798
============ =========
Net income (loss).................... $ (1,086) $ (80)
============ =========
Preferred stock dividends............ -- (309)
------------ ---------
Net (loss) attributable to common
stock.............................. (1,806) (389)
============ =========
Net (loss) per share................. $ (0.30) $ (0.10)
============ =========
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
Net effect of dilutive stock options
and warrants based on the treasury
stock method using average market
price.............................. 18 18
Assumed issuance of stock to fund
distribution to owner.............. 500 500
------------ ---------
Total fully diluted shares........... 3,626 3,798
============ =========
Net (loss)........................... $ (1,086) $ (80)
============ =========
Preferred stock dividends............ -- (309)
------------ ---------
Net (loss) attributable to common
stock.............................. (1,806) (389)
============ =========
Net (loss) per share................. $ (0.30) $ (0.10)
============ =========
EXHIBIT TO COME
EXHIBIT 11.3
CASTLE DENTAL CENTERS
EXHIBIT 11.3 -- COMPUTATION OF PRO FORMA EARNINGS PER SHARE
(IN THOUSANDS)
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 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,
and warrants -- based on the treasury
stock method using average market
price................................. 18 18
Shares issued in initial public
offering.............................. 2,500 2,500
Less excess shares issued in initial
public offering....................... (22) (22)
----------------- --------------
Total primary shares.................... 5,776 5,776
================= ==============
Pro forma net income.................... $ 699 $ 838
================= ==============
Pro forma net income per share.......... $ 0.12 $ 0.15
================= ==============
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................................. 18 18
Shares issued in initial public
offering.............................. 2,500 2,500
Less excess shares issued in initial
public offering....................... (22) (22)
----------------- --------------
Total fully diluted shares.............. 5,776 5,776
================= ==============
Pro forma net income.................... $ 699 $ 838
================= ==============
Pro forma net income per share.......... $ 0.12 $ 0.15
================= ==============
EXHIBIT TO COME
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
August 12, 1997
EXHIBIT 23.2
CONSENT
I hereby consent to being named as an Executive Officer of Castle Dental
Centers, Inc. in the Registration Statement No. 333-11335 on Form S-1.
/s/ G. DANIEL SIEWERT III
Dated: August 6, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 JUN-30-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 79 1,488
<SECURITIES> 0 0
<RECEIVABLES> 8,072 8,771
<ALLOWANCES> 2,786 2,916
<INVENTORY> 0 0
<CURRENT-ASSETS> 5,975 7,801
<PP&E> 6,351 7,151
<DEPRECIATION> 2,469 2,996
<TOTAL-ASSETS> 29,167 32,167
<CURRENT-LIABILITIES> 9,219 19,779
<BONDS> 0 0
2,928 4,381
0 0
<COMMON> 2 2
<OTHER-SE> (3,511) (3,900)
<TOTAL-LIABILITY-AND-EQUITY> 29,167 32,167
<SALES> 19,620 14,373
<TOTAL-REVENUES> 19,620 14,373
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 18,760 12,831
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,596 1,683
<INCOME-PRETAX> (1,647) (129)
<INCOME-TAX> (561) (49)
<INCOME-CONTINUING> (1,086) (80)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,086) (80)
<EPS-PRIMARY> (0.35) (0.10)
<EPS-DILUTED> 0 0
</TABLE>
