<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 31, 1997
REGISTRATION STATEMENT NO. 333-39981
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
AMERICAN DENTAL PARTNERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8099 04-3297858
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
--------------
301 EDGEWATER PLACE, SUITE 320
WAKEFIELD, MASSACHUSETTS 01880
(781) 224-0880
(781) 224-4216 (FAX)
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
GREGORY A. SERRAO
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
AMERICAN DENTAL PARTNERS, INC.
301 EDGEWATER PLACE, SUITE 320
WAKEFIELD, MASSACHUSETTS 01880
(781) 224-0880
(781) 224-4216 (FAX)
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
COPIES TO:
GARY A. WADMAN, ESQ. KEITH F. HIGGINS, ESQ.
BAKER & HOSTETLER LLP ROPES & GRAY
65 EAST STATE STREET ONE INTERNATIONAL PLACE
COLUMBUS, OHIO 43215 BOSTON, MASSACHUSETTS 02110-2624
(614) 228-1541 (617) 951-7000
(614) 462-2616 (FAX) (617) 951-7050 (FAX)
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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,
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 of 1933, 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(d)
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,
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 THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
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<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
DECEMBER 31, 1997
2,000,000 Shares
[AMERICAN DENTAL PARTNERS LOGO]
Common Stock
--------
All of the shares of Common Stock offered hereby are being sold by American
Dental Partners, Inc. ("ADP" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $15.00 and
$17.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. Application has
been made to have the Common Stock approved for quotation on the Nasdaq
National Market under the symbol "ADPI."
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
--------
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.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share............. $ $ $
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Total(3).............. $ $ $
</TABLE>
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(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 expenses estimated at $1,000,000, payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 300,000 additional shares of Common Stock solely to cover over-
allotments, if any. To the extent the option is exercised, the Underwriters
will offer the shares at the Price to Public shown above. If all such
shares are purchased, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ , and $ ,
respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if delivered and accepted by them,
and subject to their right to reject orders in whole or in part. It is expected
that delivery of certificates for such shares of Common Stock will be made at
the offices of BT Alex. Brown Incorporated in Baltimore, Maryland on or about
, 1998.
BT ALEX. BROWN
BANCAMERICA ROBERTSON STEPHENS
PIPER JAFFRAY INC.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
SINCE ITS INCEPTION THROUGH DECEMBER 31, 1997, THE COMPANY HAS COMPLETED
AFFILIATIONS WITH NINE DENTAL GROUP PRACTICES AND CURRENTLY OPERATES 77 DENTAL
FACILITIES WITH 554 OPERATORIES IN FIVE STATES.
[A two-colored map of the United States displaying by separate color the states
in which the Company has dental facilities and in which the Company has its
corporate offices, and indicating within each state the metropolitan statistical
areas in which the Company operates, as well as the Company's corporate office,
along with a textual identification of each.]
The Company's corporate office is located at 301 Edgewater Place, Suite 320,
Wakefield, Massachusetts, 01880. Its telephone number is (781) 224-0880.
THE UNDERWRITERS AND CERTAIN OTHER PERSONS PARTICIPATING IN THIS OFFERING MAY
ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET
PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-
COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus.
THE COMPANY
American Dental Partners, Inc. is a leading provider of dental practice
management services to multi-disciplinary dental group practices in attractive
markets in the United States. The Company seeks to affiliate with leading
dental groups that provide a comprehensive range of dental care services, have
outstanding reputations for quality and have proven records of financial
performance. Since its inception through December 31, 1997, the Company has
successfully completed affiliations with nine dental group practices and
currently operates 77 dental facilities with 554 operatories in five states.
The Company's rapid growth has resulted primarily from these affiliations,
which consisted of three dental group practice affiliations completed in 1996
and six dental group practice affiliations completed in 1997.
The United States Health Care Financing Administration estimates that
expenditures for dental care were approximately $45.8 billion in 1995 and will
reach approximately $79.1 billion by 2005, representing a compound annual
growth rate of approximately 5.6%. The Company believes that the growth in
expenditures for dental care will continue to be driven by both increases in
costs and increases in demand for services due to: (i) improved dental benefits
offered by employers; (ii) increased availability and use of dental insurance,
including preferred provider organization ("PPO") plans and capitated managed
care plans; (iii) increased demand for dental care from an aging population;
and (iv) increased demand for cosmetic and preventative procedures. The Company
believes that this growth will benefit not only dentists, but companies that
provide services to the dental care industry, such as dental practice
management companies.
The delivery of dental care in the United States is highly fragmented. Unlike
many other sectors of the health care services industry, the dental care
industry is in the early stages of consolidation. Although dental care is
typically offered by solo practioners, the trend toward group practice is
growing. According to the American Dental Association, in 1995, 11.8% of the
approximately 153,300 dentists in the United States were practicing in groups
of three or more, up from 4.1% in 1991. The Company believes that this
consolidation trend will continue and that dental group practices will seek to
affiliate with entities, such as the Company, that: (i) allow dentists to focus
on the clinical aspects of dentistry by providing management resources to
conduct the business and administrative aspects of dentistry; (ii) provide
information and operating systems that are required to effectively operate in
an increasingly complex reimbursement environment; (iii) assist with third-
party contracting; (iv) realize economies of scale in purchasing and provide
access to capital; and (v) provide dentists the opportunity to realize value
for their practices.
The Company's affiliation model is designed to create a partnership in
management between the Company and the affiliated dental group practice that
allows each party to maximize its strengths and retain its autonomy. When
affiliating with a dental group practice, the Company acquires substantially
all of its assets and enters into a long-term service agreement to manage the
non-clinical aspects of the dental operations. The Company supports its
affiliated dental group practices with a broad range of services designed to
enhance practice revenue, improve operating efficiencies and expand operating
margins. The Company shares the best practices of its network with each
affiliate and provides assistance with information systems, budgeting,
financial reporting, facilities management, third-party payor contracting,
supplies and equipment procurement, quality assurance initiatives, billing and
collecting accounts receivable, marketing and recruiting, hiring and training
support staff.
The Company's objective is to be the leading dental practice management
company in the United States. The Company's strategy for achieving this
objective is to: (i) expand into carefully selected and diverse geographic
markets which have favorable demographics and projected economic growth; (ii)
affiliate with leading dental group practices which have reputations for
quality care and proven records of financial performance; (iii) increase market
penetration in each of its markets through additional affiliations, recruitment
of dentists and new facility development; (iv) add value to each affiliated
dental group practice by assisting the practice in improving operating
performance; and (v) pursue various initiatives to help its affiliates provide
the highest quality of care and service.
3
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company................ 2,000,000 shares
Common Stock to be outstanding after the offering.. 6,794,217 shares(1)(2)
Use of proceeds.................................... To redeem the Company's Series B Redeemable
Preferred Stock, to repay certain indebtedness
and for general corporate purposes, including
acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market symbol............. ADPI
</TABLE>
- --------
(1) Based on shares outstanding at October 31, 1997. Does not include 1,118,166
shares of Common Stock issuable upon the exercise of outstanding options
issued pursuant to the Company's stock option plans, at a weighted average
exercise price of $8.70.
(2) After completion of this offering, executive officers and directors of the
Company as a group will own approximately 50.6% of the outstanding shares
of Common Stock and dentists affiliated with the Company's affiliated
dental group practices will beneficially own approximately 19.9% of the
outstanding shares of Common Stock. See "Risk Factors--Control by Existing
Stockholders" and "Principal Stockholders."
Unless otherwise indicated, the term "Company" includes American Dental
Partners, Inc. and (i) its management service organization ("MSO") subsidiaries
and (ii) its wholly-owned subsidiary Orthocare, Ltd. The term "PC" means the
dental professional corporation or other professional entity formed by the
dentists of the affiliating dental group practice. The Company does not own or
control the PCs and, accordingly, does not consolidate the financial statements
of the PCs with those of the Company.
Unless otherwise indicated, all references in this Prospectus: (i) assume no
exercise of the Underwriters' over-allotment option; (ii) assume conversion of
the Company's outstanding shares of Series A Convertible Preferred Stock, $0.01
par value (the "Series A Convertible Preferred Stock"), into 2,400,000 shares
of Common Stock upon completion of this offering; (iii) assume redemption of
the Company's outstanding Series B Redeemable Preferred Stock, $0.01 par value
(the "Series B Redeemable Preferred Stock"), upon completion of this offering;
and (iv) give effect to the 6-for-1 stock split effected in the form of a stock
dividend on November 7, 1997.
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
PRO FORMA PRO FORMA
ACTUAL AS ADJUSTED ACTUAL AS ADJUSTED
----------- ----------------------------------- ---------------------
1996 1996(1)(2) 1996 1997 1996(1)(2) 1997(2)(3)
----------- --------------------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenue............ $ 3,933 $ 54,924 $ -- $36,620 $40,390 $46,862
Operating expenses..... 6,414 53,476 1,528 35,590 39,336 44,028
Earnings (loss) from
operations............ (2,481) 1,488 (1,528) 1,030 1,054 2,834
Interest expense
(income), net......... (38) 543 (14) 195 407 366
Earnings (loss) before
income taxes.......... (2,443) 905 (1,514) 835 647 2,468
Income taxes........... -- 367 -- 81 262 1,000
Net earnings (loss).... (2,443) 538 (1,514) 754 385 1,468
Net earnings (loss) per
common share.......... $ (0.55) (/4/) $ 0.08 $(0.33)(/4/) $ 0.07(/4/) $ 0.06 $ 0.22
Weighted average common
shares outstanding ... 4,625 6,567 4,606 5,025 6,553 6,606
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA(5) AS ADJUSTED(6)
------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 2,459 $ 1,853 $9,467
Working capital........................... 743 (1,362) 6,181
Total assets.............................. 28,293 44,383 51,926
Long-term debt, excluding current
maturities............................... 5,490 18,790 5,090
Redeemable and convertible preferred
stock.................................... 16,000 16,000 --
Total stockholders' equity................ 213 1,201 38,444
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------- -------------------------------
PRO FORMA PRO FORMA
ACTUAL AS ADJUSTED ACTUAL AS ADJUSTED
------ ----------- --------- ---------------------
1996 1996(1)(2) 1996 1997 1996(1)(2) 1997(2)(3)
------ ----------- ---- ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATISTICAL DATA (END OF
PERIOD):
Number of dental
facilities................ 42 71 -- 59 71 77
Number of
operatories(/7/).......... 331 523 -- 471 523 554
Number of affiliated
dentists(/8/)............. 128 n/a -- 148 n/a 165
</TABLE>
- --------
The following footnotes should be read in conjunction with the information
under "The Company," "Use of Proceeds," "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Unaudited Pro Forma Consolidated Financial Information.
(1) Gives effect to (i) the 1996 Transactions and (ii) the 1997 Transactions,
including those transactions completed subsequent to September 30, 1997, as
if they had been completed on January 1, 1996.
(2) Gives effect to the sale of 1,506,000 shares of Common Stock as if it had
been completed on January 1, 1996, at an assumed initial public offering
price of $16.00 per share and the application of the estimated net proceeds
therefrom to redeem the Series B Redeemable Preferred Stock, to reduce debt
and the associated interest expense and to adjust taxes.
(3) Gives effect to the 1997 Transactions, including those transactions
completed subsequent to September 30, 1997, as if they had been completed
on January 1, 1996
(4) Computed on the basis described in Note 2 to the Company's Consolidated
Financial Statements.
(5) Gives effect to the 1997 Transactions completed subsequent to September 30,
1997, as if they occurred on September 30, 1997.
(6) Gives effect to the conversion of the Series A Convertible Preferred Stock
into 2,400,000 shares of Common Stock and the completion of this offering
at an assumed initial public offering price of $16.00 per share and the
receipt and application of the estimated net proceeds therefrom, as if such
events occurred on September 30, 1997.
(7) An operatory is an area where dental care is performed and generally
contains a dental chair, a hand piece delivery system and other essential
dental equipment.
(8) Includes full-time general dentists employed by the PCs and full-time
specialists, some of whom are independent contractors to the PCs.
5
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should carefully consider the following risk
factors, in addition to other information contained in this Prospectus, before
purchasing the securities offered hereby. This Prospectus contains forward-
looking statements. Prospective investors are cautioned that any such forward-
looking statements are not guarantees of future performance and involve risks
and uncertainties. Actual events or results may differ materially from those
discussed in the forward-looking statements, including the risk factors set
forth below and the matters set forth in this Prospectus generally.
LIMITED OPERATING HISTORY; 1996 OPERATING LOSS
The Company was formed in December 1995, commenced operations in January
1996 and began engaging in dental practice management operations in November
1996, concurrent with the completion of its first dental practice affiliation.
The Company experienced an operating loss in 1996. Although the Company was
profitable for the first three quarters of 1997, there can be no assurance
that the Company will be able to sustain profitable operations.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
The Company's strategy includes expansion through affiliations with dental
practices in new and existing markets and the expansion of such affiliated
practices. Affiliations involve numerous risks, including failure to retain
key personnel and contracts of the affiliated practices, inability to
integrate businesses without material disruption and amortization of acquired
intangible assets. In addition, the Company competes with other dental
practice management companies which have a similar strategy, some of which may
have greater financial resources and a longer operating history than the
Company. Competition for affiliations may intensify due to ongoing
consolidation in the dental care services industry, which may substantially
increase the costs associated with completing affiliation transactions. There
can be no assurance that any future affiliations will be successfully
integrated into the Company's operations, that competition for affiliations
will not intensify or that the Company will be able to complete such
affiliations on acceptable terms and conditions. In addition, the costs of
unsuccessful affiliation efforts may adversely affect the Company's business,
financial condition or results of operations. Finally, a significant portion
of the Company's consolidated total assets are represented by intangible
assets, the amount and concentration of which is expected to increase in
connection with future acquisitions.
The Company devotes substantial time and resources to affiliation-related
activities. Identifying appropriate affiliation candidates and negotiating and
consummating affiliations with dental practices can be a lengthy, complex and
costly process. The success of the Company's expansion strategy will depend on
a number of factors, including the Company's ability to identify and affiliate
with quality dental practices in suitable markets and regulatory constraints.
There can be no assurance that the Company's affiliation strategy will be
successful or that modifications to its strategy will not be required.
MANAGEMENT OF RAPID GROWTH
The Company has experienced substantial growth in a relatively short period
of time, primarily because of affiliations with existing dental practices.
This growth has placed, and will continue to place, significant demands upon
the Company's management, operations and systems. The Company's ability to
manage its growth effectively will depend upon its ability to hire, train and
assimilate additional management and other employees and its ability to
expand, improve and effectively utilize its accounting and finance, management
and operating systems in order to accommodate its expanded operations. A
failure by the Company's management to anticipate, implement and manage
effectively the changes required to sustain the Company's growth could have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE UPON AFFILIATED DENTAL GROUP PRACTICES
The Company's revenue will depend on revenue generated by dental group
practices with which the Company affiliates. The Company does not employ
dentists or control the clinical practices of the dental groups
6
<PAGE>
with which it affiliates. There can be no assurance that dental group
practices with which the Company affiliates will maintain successful dental
practices or that any of the key members of a particular dental group practice
will continue practicing with that group. A shortage of available dentists
could have a material adverse effect on the Company's expansion opportunities.
To the extent permitted by state law, each PC has entered into non-competition
agreements and other restrictive covenants with the dentists employed by the
PC. There can be no assurance that these restrictive covenants are or will be
sufficient to protect the interests of the Company or the PC or that a court
would enforce such agreements. Any material loss of revenue by the affiliated
dental group practices, whether through the loss of existing dentists, the
inability to attract new dentists or otherwise, would have a material adverse
effect on the Company's business, financial condition and results of
operations.
DEPENDENCE UPON SERVICE AGREEMENTS
The Company is dependent upon the service agreements it has entered into
with each of its affiliated PCs for substantially all of its operating
revenue. Under the service agreements, the Company is responsible for
providing all services necessary for the administration of the non-clinical
aspects of the PCs' dental operations. The Company pays all expenses incurred
for these services. The Company is reimbursed for these expenses and also
receives fees for providing management services. A portion of these fees
typically includes a fixed monthly amount. The Company typically receives an
additional fee if certain operating objectives are achieved. The fees payable
to the Company are determined prior to each affiliation and annually
thereafter based on a formal budgeting process.
The Company's service agreements with two of its affiliated dental group
practices, Park Dental and Smileage Dental Care, represented approximately 47%
and 14%, respectively, of the Company's pro forma consolidated net revenue for
the nine months ended September 30, 1997. The termination of either of these
service agreements could have a material adverse effect on the Company.
Any material loss in revenue by one or more PCs would have a material
adverse effect on their ability to reimburse the Company for expenses and to
pay service fees. The failure to receive such amounts could have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, in the event of a breach of a service agreement by a
PC, there can be no assurance that the remedies available to the Company under
the service agreements will be enforceable or will be adequate to compensate
the Company for its damages resulting from such breach.
GOVERNMENT REGULATION
The dental industry and dental practices are regulated extensively at the
state and federal levels. The laws of many states, including states where the
Company operates and anticipates operating, prohibit entities not wholly owned
or controlled by dentists from practicing dentistry (which in certain states
includes owning, managing or controlling the assets, equipment or offices used
in a dental practice), employing dentists and, in certain circumstances,
dental assistants and dental hygienists, or exercising control over the
provision of dental services. These laws also often regulate the content of
advertisements of dental services. The Company and its affiliated dental
practices are also subject to state and/or federal licensure, fraud and abuse,
anti-kickback, false claims, fee splitting, self-referral, antitrust and
safety and health laws and regulations. At the state level, many of these laws
and regulations vary widely. In addition, these laws and regulations are
enforced by federal and state regulatory authorities with broad discretion.
The Company does not, and does not intend to, control the practice of
dentistry by the affiliated dental group practices or their compliance with
the regulatory requirements directly applicable to dentists or the practice of
dentistry. However, there can be no assurance that any review of the Company's
business relationships, including the relationships of the Company with
affiliated dental group practices, by courts or other regulatory authorities,
will not result in determinations that could have a material adverse effect on
the operations of the Company, or that the laws and regulatory environment
will not change to restrict or limit the enforceability of the Company's
service agreements. The laws and regulations of certain states in which the
Company may seek to expand may require the Company to change its contractual
relationships with dental practices in a manner that may restrict the
Company's operations in those states or may prevent the Company from
affiliating with dental practices or providing comprehensive services to
dental
7
<PAGE>
practices in those states. To the extent that the Company or any affiliated
dental group practice contracts with third party payors, including self-
insured plans, on a capitated or other basis which causes the Company or such
affiliated dental group practice to assume a portion of the financial risk of
providing dental care, the Company or such affiliated dental group practice
may become subject to state insurance laws, in which case the Company may be
required to change the method of payment from third party payors or seek
appropriate licensure. Any regulation of the Company or its affiliated dental
group practices under insurance laws could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Government Regulation."
NEED FOR ADDITIONAL FINANCING
The Company's ability to execute its business strategy depends to a
significant degree on its ability to obtain substantial capital to finance
future affiliations. To date, the Company has obtained financing through
private sales of Preferred and Common Stock and through its $30 million
revolving credit facility. The Company has historically used a combination of
cash, Common Stock and subordinated promissory notes as consideration in
affiliations with dental practices and intends to continue this practice.
However, the Company's ability to use its Common Stock and subordinated
promissory notes as consideration for future affiliations may be adversely
affected if the Common Stock fails to maintain a sufficient market value or if
the affiliation candidates are unwilling to accept the Company's subordinated
promissory notes. Furthermore, while funds are currently available under the
Company's revolving credit facility, the Company's ability to draw such funds
is subject to certain terms and conditions, and there can be no assurance that
the Company will be able to satisfy such terms and conditions. There can be no
assurance that any other financing will be available to the Company, or if
available, that such financing would be on terms favorable to the Company.
DEPENDENCE UPON AND REDUCTIONS IN THIRD PARTY PAYMENTS
A significant portion of the payments for dental care is paid or reimbursed
under insurance programs ("third party payors"). While payor mix varies from
market to market, the aggregate payor mix percentage of the Company's
affiliated practices was approximately 36% fee-for-service (which includes
indemnity plans), 13% PPO plans and 51% capitated managed care plans for the
nine months ended September 30, 1997. Third party payors are continually
negotiating the prices charged for dental care, with a goal of lowering
reimbursement and utilization rates. Third party payors can also deny
reimbursement for dental care if they determine that a treatment was not
performed in accordance with treatment protocols established by such third
party payors or for other reasons. Loss of revenue by the Company's affiliated
dental group practices caused by cost containment efforts could have a
material adverse effect on the Company. Additionally, some third-party payor
contracts are capitated arrangements. Under such contracts, the affiliated
dental group practice receives a capitated payment, calculated on a per member
per month basis, to provide care to the covered enrollees and generally
receives a co-payment at the time care is provided. Such payment methods shift
a portion of the risk of high costs of over-utilization from the third party
payor to the affiliated dental group practice and indirectly to the Company
through the possible reduction in expense reimbursement or management fees. To
the extent that patients or enrollees covered by certain third-party payor
contracts require more frequent or extensive care than is anticipated by the
affiliated dental group practices, the revenue to the affiliated dental group
practices derived from such contracts may be insufficient to cover the costs
of the services provided. Insufficient revenue under capitated contracts or
other agreements with third party payors could have a material adverse effect
on the Company's business, financial condition and results of operations.
POSSIBLE EXPOSURE TO PROFESSIONAL LIABILITY
The Company's affiliated dental practices provide dental care to the public
and could be exposed to the risk of professional liability and other claims.
Such claims, if successful, could result in substantial damages which could
exceed the limits of any applicable insurance coverage. It is possible that
such claims could be asserted against the Company as well as the affiliated
dental practices, that a claim brought against an affiliated dental group
practice or dentist could materially increase professional liability insurance
premiums of the affiliated
8
<PAGE>
dental group practice, or that fees to the Company from a dental group
practice could be adversely affected, if damages payable by that practice
exceed insurance coverage limits. The Company's service agreements require
that it be named as an additional insured party under the liability insurance
policy that each affiliated dental group is required to maintain. In addition,
the Company requires each affiliated dental group practice to indemnify the
Company for actions or omissions related to the delivery of dental care by
such affiliated dental group practice. However, a successful professional
liability claim against the Company or an affiliated dental group practice
could have a material adverse effect on the Company's business, financial
condition and results of operations.
FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations may fluctuate significantly from quarter
to quarter or year to year. Results may fluctuate due to a number of factors,
including the timing of future affiliations, seasonal fluctuations in the
demand for dental care and competitive factors. Accordingly, quarterly
comparisons of the Company's revenues and operating results should not be
relied on as an indication of future performance, and the results of any
quarterly period may not be indicative of results to be expected for a full
year. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
HIGHLY COMPETITIVE MARKET
The business of providing practice management services is highly
competitive. The Company is aware of a number of competitors specializing in
the business of providing comprehensive management services to dental
practices and there are other companies with substantial resources that may
decide to enter the dental practice management business. In addition, the
Company's revenue depends on the success of its affiliated dental groups and
those groups face competition from several sources, including solo
practitioners and single and multi-disciplinary groups, many of which may have
more established practices. See "Business--Competition."
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of this offering, Summit Partners, executive officers of the
Company and dentists affiliated with the Company's affiliated dental group
practices will beneficially own an aggregate of approximately 35.0%, 10.7% and
19.9%, respectively, of the outstanding shares of Common Stock. If these
groups were to act together, they would be able to elect all of the Company's
directors and determine the outcome of all corporate actions requiring
approval of stockholders, and thus control the business affairs and policies
of the Company. Such control could also have the effect of delaying or
preventing a change in control of the Company and consequently may adversely
affect the market price of the Common Stock. See "Principal Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, 4,621,328 shares of Common Stock,
representing approximately 68.0% of the outstanding shares of Common Stock,
will be eligible for sale in the public market under Rule 144 beginning 90
days after the date of this Prospectus, all of which are subject to lock-up
agreements for a period of 180 days from the date of this Prospectus. In
addition, following the completion of this offering, the Company intends to
register 500,000 shares of its Common Stock under a shelf registration for use
in connection with future affiliations. These shares generally will be
eligible for resale in compliance with the volume and manner-of-sale
restrictions of Rule 145 after their issuance, unless the Company
contractually restricts their sale. Initially, the Company will issue such
shares subject to a lock-up period of up to 180 days following the date of
this Prospectus. See "Shares Eligible for Future Sale."
Sales of substantial amounts of Common Stock in the public market following
the offering, or the perception that such sales could occur, could adversely
affect prevailing market prices of the Common Stock and could impair the
future ability of the Company to raise capital through the sale of its equity
securities. The Company is unable to predict the effect, if any, that future
sales of Common Stock or the availability of Common Stock for
9
<PAGE>
sale may have on the market price of the Common Stock prevailing from time to
time. Certain existing stockholders have the right to require the Company to
register their Common Stock from time to time. See "Description of Capital
Stock" and "Shares Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock. The Company has applied for quotation on the Nasdaq National Market,
however, there can be no assurance that an active trading market will develop
or be sustained upon completion of this offering or that the market price of
the Common Stock will not decline below the initial public offering price. The
initial public offering price of the Common Stock will be determined by
negotiations between the Company and the Representatives of the Underwriters
and may not be indicative of the prices that will prevail in the public
market. The trading prices of the Company's Common Stock could be subject to
wide fluctuations in response to quarter-to-quarter variations in the
Company's operating results, material announcements by the Company,
governmental regulatory action, general conditions in the health care
industry, or other events or factors, many of which are beyond the Company's
control. In addition, the stock market has experienced extreme price and
volume fluctuations, which have particularly affected the market prices of
many health care services companies and which have often been unrelated to the
operating performance of such companies. The Company's operating results in
the future may be below the expectations of securities analysts and investors.
In such event, the price of the Common Stock would likely decline, perhaps
substantially. See "Underwriting."
NO DIVIDENDS DUE TO POLICY AND PROHIBITIONS
The Company does not intend to pay cash dividends on the Common Stock in the
foreseeable future and anticipates that future earnings will be retained to
finance future operations and expansion. In addition, the terms of Company's
revolving credit facility prohibit the Company from paying dividends or making
other payments with respect to its Common Stock without the consent of the
lender. See "Dividend Policy."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Second Amended and Restated Certificate
of Incorporation (the "Certificate of Incorporation") and Amended and Restated
By-laws (the "By-laws") and of Delaware law could, together or separately,
discourage potential acquisition proposals, delay or prevent a change in
control of the Company or limit the price that certain investors might be
willing to pay in the future for shares of the Common Stock. Among other
matters, the Certificate of Incorporation provides for "blank check" preferred
stock, which may be issued without stockholder approval, and requires all
actions by stockholders to be taken at meetings of stockholders. The By-laws
provide for a classified Board of Directors. The Company also is subject to
Section 203 of the Delaware General Corporation Law ("DGCL"), which, subject
to certain exceptions, prohibits a Delaware corporation from engaging in any
of a broad range of business acquisitions with an "interested stockholder" for
a period of three years following the date such stockholder became an
interested stockholder. See "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will incur immediate and
substantial dilution in net tangible book value of $14.61 per share from this
offering. In addition, shares of Common Stock issued in connection with future
acquisitions will result in ownership dilution to investors in this offering.
See "Dilution."
10
<PAGE>
THE COMPANY
Overview
American Dental Partners, Inc. was formed as a Delaware corporation on
December 22, 1995, commenced operations in January 1996 and began engaging in
dental practice management operations in November 1996, concurrent with the
completion of its first dental group practice affiliation. The Company
acquires substantially all the assets of the dental practices with which it
affiliates, except those required by law to be owned or maintained by dentists
(such as third party contracts, certain governmental receivables and patient
records), and enters into long-term service agreements with the affiliated
dental practices. The Company provides all services necessary for the
administration of the non-clinical aspects of the dental operations. Services
provided to affiliated dental practices include assistance with information
systems, budgeting, financial reporting, facilities management, third-party
payor contracting, supplies and equipment procurement, billing and collecting
accounts receivable, marketing and recruiting, hiring and training support
staff. The Company does not employ dentists or control the clinical aspects of
dentistry. As described below, the Company's rapid growth has resulted
primarily from the affiliations completed, which consisted of three dental
group practice affiliations in 1996 and six dental group practice affiliations
completed in 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Affiliation Summary."
1996 Transactions
During 1996, the Company acquired substantially all the assets of three
dental group practices, except those required by law to be owned or maintained
by dentists (such as third party contracts, certain governmental receivables
and patient records), and simultaneously entered into a 40-year service
agreement with each of the affiliated dental groups. These affiliated dental
groups and their respective dates of affiliation are: PDG, P.A. ("Park
Dental") on November 12, 1996; L. Crane & Associates, P.C. ("Longhorn Dental")
on December 13, 1996; and the Wisconsin Dental Group, S.C. ("Smileage Dental
Care") on December 23, 1996. These transactions are referred to as the "1996
Transactions."
1997 Transactions
During 1997, the Company acquired substantially all the assets of six dental
group practices, except those required by law to be owned or maintained by
dentists (such as third party contracts, certain governmental receivables and
patient records), and simultaneously entered into 40-year service agreements
with four of the affiliated dental groups (two practices joined existing
affiliates). These dental group practices and their respective dates of
affiliation are: Lakeside Dental Group professional corporation ("Lakeside
Dental Care") on March 31, 1997; Malcolm R. Scott, D.D.S. on March 31, 1997;
AJS Associates, P.C. ("Soster Dental Group") on May 22, 1997; Wisconsin Dental
Professionals, S.C. ("Northpoint Dental Group") on July 1, 1997; the four
professional corporations owned by Dr. Terrance R. Wilkens (the "Wilkens
Dental Group") on October 1, 1997; and OCG, Ltd. (the "Orthocare Group") on
October 1, 1997. As part of the Orthocare Group transaction, the Company
acquired a related entity that contracts with third party payors and
orthodontic providers to arrange for the provision of orthodontic care to
patients insured by such third party payors in Minneapolis/St. Paul and
Wisconsin. These transactions are referred to as the "1997 Transactions."
1998 Pending Transactions
Effective January 1, 1998, the Company anticipates it will acquire
substantially all the assets of one dental group practice, except those
required by law to be owned or maintained by dentists (such as third party
contracts, certain governmental receivables and patient records), and
simultaneously enter into a 40-year service agreement with the affiliated
dental group. This dental group practice is Associated Dental Care Providers,
P.C. ("Associated Dental Care").
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,000,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $16.00 per
share are estimated to be $28.8 million ($33.2 million if the Underwriters'
over-allotment option is exercised in full). The Company will use the net
proceeds as follows: (i) approximately $7.7 million will be used to redeem all
the Series B Redeemable Preferred Stock, including unpaid dividends; (ii)
approximately $13.7 million will be used to repay outstanding indebtedness
under the Company's revolving credit facility; and (iii) the balance of
approximately $7.4 million will be used for general corporate purposes,
including affiliations with additional dental group practices. The Company's
$30 million revolving credit facility bears interest at either prime- or
LIBOR-based rates, at the Company's option, plus a margin based upon the
Company's debt coverage ratio, which ranges up to 0.50% for prime-based loans
and up to 2.125% for LIBOR-based loans. At November 30, 1997, $13.7 million
was outstanding under this credit facility at a LIBOR-based rate of
approximately 7.5%. The facility matures April 2000. To date, the proceeds
from this revolving credit facility have been used for affiliations with
dental practices. Pending the foregoing uses, the balance of the net proceeds
will be invested in short-term, investment grade, interest bearing
obligations. The Company anticipates that future affiliations will be
completed using a combination of cash, Common Stock and subordinated
promissory notes.
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock in the past
and does not plan to pay any cash dividends on its Common Stock in the
foreseeable future. In addition, the terms of the Company's revolving credit
facility prohibit it from paying dividends or making other payments with
respect to its Common Stock without the lender's consent. The Company's Board
of Directors intends, for the foreseeable future, to retain earnings to
finance the continued operation and expansion of the Company's business.
12
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1997: (i) the
capitalization of the Company; (ii) the capitalization of the Company on a pro
forma basis to reflect the 1997 Transactions completed subsequent to September
30, 1997; and (iii) the pro forma capitalization of the Company as adjusted to
reflect the sale of the shares of Common Stock offered hereby (based on an
assumed offering price of $16.00 per share) and the application of the
estimated net proceeds, all as if such events occurred on September 30, 1997.
See "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------------
PRO PRO FORMA
ACTUAL FORMA(1) AS ADJUSTED
----------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents........... $ 2,459 $ 1,853 $ 9,467
=========== =========== ===========
Current maturities of debt.......... $ 534 $ 534 $ 534
=========== =========== ===========
Long-term debt, less current
maturities(2)...................... $ 5,490 $ 18,790 $ 5,090
----------- ----------- -----------
Series A convertible preferred
stock, par value $0.01 per share,
400,000 shares authorized, issued
and outstanding; no shares
authorized, issued or outstanding
pro forma as adjusted(3)........... 8,483 8,483 --
Series B redeemable preferred stock,
par value $0.01 per share, 70,000
shares authorized, issued and
outstanding; no shares authorized,
issued or outstanding pro forma as
adjusted(4)........................ 7,517 7,517 --
Stockholders' equity:
Preferred stock, par value $0.01
per share, 530,000 shares
authorized, no shares issued or
outstanding; 1,000,000 shares
authorized, no shares issued or
outstanding pro forma as
adjusted(5)...................... -- -- --
Common stock, par value $0.01 per
share, 25,000,000 shares
authorized, 2,254,736 shares
issued and outstanding; 2,394,217
shares pro forma; 6,794,217
shares pro forma as
adjusted(5)(6)................... 23 24 68
Additional paid-in capital........ 1,936 2,923 40,122
Unearned compensation(7).......... (57) (57) (57)
Accumulated deficit............... (1,689) (1,689) (1,689)
----------- ----------- -----------
Total stockholders' equity...... 213 1,201 38,444
----------- ----------- -----------
Total capitalization.......... $ 21,703 $ 35,991 $ 43,534
=========== =========== ===========
</TABLE>
- --------
(1) To reflect the 1997 Transactions completed subsequent to September 30,
1997. See "The Company."
(2) See Note 7 to the Company's Consolidated Financial Statements.
(3) Upon completion of this offering, all of the Series A Convertible Preferred
Stock will be converted into 2,400,000 shares of Common Stock.
(4) Upon completion of this offering, all of the Series B Redeemable Preferred
Stock will be redeemed for approximately $7.7 million in cash, which
includes unpaid dividends through the anticipated completion date of this
offering.
(5) Reflects the additional 530,000 shares of undesignated Preferred Stock and
22,500,000 shares of Common Stock authorized on October 31, 1997. See Note
13 to the Company's Consolidated Financial Statements.
(6) Excludes 1,118,166 shares of Common Stock issuable upon the exercise of
outstanding options issued pursuant to the Company's stock option plans at
a weighted average price of $8.70 per share, as of October 31, 1997. See
"Management--Stock Plans."
(7) Unearned compensation relates to the sale of 300,000 shares of Common Stock
in January 1996 which were subject to certain restrictions, for which the
Company is recording compensation expense ratably as the restrictions
lapse. See Note 9 to the Company's Consolidated Financial Statements.
13
<PAGE>
DILUTION
As of September 30, 1997, after giving effect to the conversion of the
Series A Convertible Preferred Stock into 2,400,000 shares of Common Stock,
the Company had net tangible book value (deficit) of approximately
$(4,395,000) or $(0.94) per share of Common Stock. After giving effect to the
1997 Transactions completed subsequent to September 30, 1997, the Company had
pro forma net tangible book value (deficit) of approximately $(19,316,000) or
$(4.03) per share of Common Stock. The pro forma net tangible book value
(deficit) per share represents the amount of total tangible assets less total
liabilities and the Series B Redeemable Preferred Stock, divided by the number
of shares of Common Stock outstanding. After giving effect, as of such date,
to the sale of 2,000,000 shares of Common Stock at an assumed initial public
offering price of $16.00 per share and the application of the net proceeds,
the pro forma net tangible book value of the Company as of September 30, 1997
would have been approximately $9,444,000 or $1.39 per share. This represents
an immediate increase in net tangible book value of $5.42 per share to
existing stockholders and an immediate dilution of net tangible book value of
$14.61 per share to new investors purchasing Common Stock in this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $16.00
Net tangible book value per share at September 30, 1997........ (0.94)
Decrease in net tangible book value per share attributable to
the 1997 Transactions completed subsequent to September 30,
1997.......................................................... (3.09)
-----
Pro forma net tangible book value (deficit) per share before
the offering(1)............................................... (4.03)
Increase per share attributable to new investors............... 5.42
-----
Pro forma net tangible book value per share after the offering.. 1.39
------
Dilution in net tangible book value per share to new
investors(2)................................................... $14.61
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1997, the differences between existing stockholders (including 2,400,000
shares of Common Stock to be issued upon conversion of the Series A
Convertible Preferred Stock) and the new investors with respect to the number
of shares of Common Stock purchased from the Company, the total consideration
paid 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(1)...... 4,794,217 70.6% $ 17,862,000 35.8% $ 3.73
New investors................. 2,000,000 29.4 32,000,000 64.2 16.00
--------- ----- ------------ -----
Total....................... 6,794,217 100.0% $ 49,862,000 100.0%
========= ===== ============ =====
</TABLE>
- --------
(1) Excludes Common Stock issuable upon the exercise of outstanding options to
purchase 1,118,166 shares of Common Stock at a weighted average exercise
price of $8.70 per share at October 31, 1997. To the extent these options
are exercised or additional shares of Common Stock are issued in
connection with future transactions, there will be further dilution to new
investors. See "Risk Factors--Dilution" and "Management--Stock Plans."
(2) Dilution is determined by subtracting pro forma net tangible book value
per share after giving effect to this offering at the initial public
offering price per share. Dilution to new investors will be $14.04 if the
Underwriters' over-allotment option is exercised in full.
14
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
The selected consolidated statement of operations data for the year ended
December 31, 1996 and the nine months ended September 30, 1997, and the
selected consolidated balance sheet data at December 31, 1996 and September 30,
1997, have been derived from the Consolidated Financial Statements of the
Company which have been audited by KPMG Peat Marwick LLP, Independent Certified
Public Accountants, and which are included elsewhere in this Prospectus. The
selected consolidated statement of operations data for the nine months ended
September 30, 1996, have been derived from unaudited financial statements of
the Company which, in the opinion of management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of the results of operations of the Company. The selected pro forma financial
data set forth below as of and for the nine-month period ended September 30,
1997, for the nine-month period ended September 30, 1996 and for the year ended
December 31, 1996, have been derived from the Unaudited Pro Forma Consolidated
Financial Information of the Company which is included elsewhere in this
Prospectus. 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. The selected
historical and pro forma financial data provided below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," Unaudited Pro Forma Consolidated Financial
Information, Consolidated Financial Statements and the related notes thereto of
the Company and other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
----------------------- --------------------------------------------
PRO FORMA PRO FORMA
ACTUAL AS ADJUSTED ACTUAL AS ADJUSTED
----------- --------------------------------- ---------------------
1996 1996(1)(2) 1996 1997 1996(1)(2) 1997(2)(3)
----------- --------------------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenue............ $ 3,933 $ 54,924 $ -- $36,620 $40,390 $46,862
----------- ----------- ------- ------- ------- -------
Operating expenses:
Salaries and
benefits.............. 2,098 29,302 -- 19,625 21,543 24,503
Lab fees and dental
supplies.............. 534 6,596 -- 4,491 4,850 5,566
Office occupancy...... 389 5,153 -- 3,368 3,789 4,236
Other operating
expenses.............. 773 7,384 -- 4,433 5,406 5,465
General corporate
expenses.............. 2,395 2,395 1,521 2,260 1,797 2,260
Depreciation.......... 177 1,708 7 1,154 1,251 1,298
Amortization of
intangibles........... 48 938 -- 259 700 700
----------- ----------- ------- ------- ------- -------
Total operating
expenses.............. 6,414 53,476 1,528 35,590 39,336 44,028
----------- ----------- ------- ------- ------- -------
Earnings (loss) from
operations............ (2,481) 1,448 (1,528) 1,030 1,054 2,834
Interest expense
(income), net......... (38) 543 (14) 195 407 366
----------- ----------- ------- ------- ------- -------
Earnings (loss) before
income taxes.......... (2,443) 905 (1,514) 835 647 2,468
Income taxes........... -- 367 -- 81 262 1,000
----------- ----------- ------- ------- ------- -------
Net earnings (loss).... $ (2,443) $ 538 $(1,514) $ 754 $ 385 $ 1,468
=========== =========== ======= ======= ======= =======
Net earnings (loss) per
common share.......... $ (0.55)(4) $ 0.08 $ (0.33)(4) $ 0.07(4) $ 0.06 $ 0.22
Weighted average common
shares outstanding.... 4,625 6,567 4,606 5,025 6,553 6,606
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- -----------------------------------
PRO FORMA
ACTUAL ACTUAL PRO FORMA(5) AS ADJUSTED(6)
----------------- ------- ------------ --------------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents............ $ 5,836 $ 2,459 $ 1,853 $9,467
Working capital......... 3,189 743 (1,362) 6,181
Total assets............ 25,294 28,293 44,383 51,926
Long-term debt,
excluding current
maturities............. 3,063 5,490 18,790 5,090
Redeemable and
convertible preferred
stock.................. 15,105 16,000 16,000 --
Total stockholders'
equity................. 164 213 1,201 38,444
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------- -------------------------------
PRO FORMA PRO FORMA
ACTUAL AS ADJUSTED ACTUAL AS ADJUSTED
------ ----------- --------- ---------------------
1996 1996(1)(2) 1996 1997 1996(1)(2) 1997(2)(3)
------ ----------- ---- ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATISTICAL DATA (END OF
PERIOD):
Number of dental
facilities................ 42 71 -- 59 71 77
Number of operatories(7)... 331 523 -- 471 523 554
Number of affiliated
dentists(8)............... 128 n/a -- 148 n/a 165
</TABLE>
See accompanying footnotes on following page.
15
<PAGE>
- --------
The following footnotes should be read in conjunction with the information
under "The Company," "Use of Proceeds," "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Unaudited Pro Forma Consolidated Financial Information.
(1) Gives effect to (i) the 1996 Transactions and (ii) the 1997 Transactions,
including those transactions completed subsequent to September 30, 1997,
as if they had been completed on January 1, 1996.
(2) Gives effect to the sale of 1,506,000 shares of Common Stock as if it had
been completed on January 1, 1996, at an assumed initial public offering
price of $16.00 per share and the application of the estimated net
proceeds therefrom to redeem the Series B Redeemable Preferred Stock, to
reduce debt and the associated interest expense and to adjust taxes.
(3) Gives effect to the 1997 Transactions, including those transactions
completed subsequent to September 30, 1997, as if they had been completed
on January 1, 1996.
(4) Computed on the basis described in Note 2 to the Company's Consolidated
Financial Statements.
(5) Gives effect to the 1997 Transactions completed subsequent to September
30, 1997, as if they occurred on September 30, 1997.
(6) Gives effect to the conversion of the Series A Convertible Preferred Stock
into 2,400,000 shares of Common Stock and the completion of this offering
at an assumed initial public offering price of $16.00 per share and the
receipt and application of the estimated net proceeds therefrom, as if
such events occurred on September 30, 1997.
(7) An operatory is an area where dental care is performed and generally
contains a dental chair, a hand piece delivery system and other essential
dental equipment.
(8) Includes full-time general dentists employed by the PCs and full-time
specialists, some of whom are independent contractors to the PCs.
16
<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 Consolidated
Financial Statements and the Unaudited Pro Forma Consolidated Financial
Information and the notes thereto of the Company included elsewhere in this
Prospectus. This Prospectus contains forward-looking statements. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties. Actual
events or results may differ materially from those discussed in the forward-
looking statements as a result of various factors, including the risk factors
set forth under "Risk Factors" and the matters set forth in this Prospectus
generally.
OVERVIEW
American Dental Partners, Inc. is a leading provider of dental practice
management services to multi-disciplinary dental group practices in attractive
markets in the United States. The Company was formed in December 1995,
commenced operations in January 1996 and began engaging in dental practice
management operations in November 1996, concurrent with the completion of its
first dental group practice affiliation. The Company's rapid growth has
resulted primarily from the Company's affiliations with dental group
practices. Since its inception through December 31, 1997, the Company has
successfully completed affiliations with nine dental group practices and
currently operates 77 dental facilities with 554 operatories in five states.
An integral part of the Company's strategy is to affiliate with dental group
practices. Because of the financial impact of the Company's recent
affiliations, it is difficult to make meaningful comparisons between the
Company's actual financial statements for the periods presented. In addition,
due to the relatively small number of affiliated dental group practices, each
affiliation can impact the overall operating results of the Company. After
affiliating with a dental group practice, the Company typically takes a number
of steps designed to enhance the dental group's practice revenue, improve
practice operating efficiencies and expand practice operating margins. The
benefits of these actions generally do not occur immediately. Consequently,
the financial performance of a newly-affiliated dental group practice could
negatively affect overall operating margins in the near term. As the Company
grows, it expects that the effect of adding a new dental group practice
affiliation will be mitigated by the expanded financial base of the existing
affiliations. See "Business--Business Strategy."
AFFILIATION SUMMARY
When affiliating with a dental group practice, the Company acquires
substantially all its assets except those required by law to be owned or
maintained by dentists (such as third party contracts, certain governmental
receivables and patient records), and enters into a long-term service
agreement with the affiliated dental practice to manage the non-clinical
aspects of its dental operations. The Company does not own or control the
affiliated dental practices and, accordingly, does not consolidate the
financial statements of the PCs with those of the Company.
1996 Transactions
During 1996, the Company acquired substantially all the assets of three
dental group practices and simultaneously entered into a 40-year service
agreement with each of the affiliated dental groups. These affiliated dental
groups are: Park Dental in Minneapolis; Longhorn Dental in Austin; and
Smileage Dental Care in Milwaukee. These transactions resulted in the addition
of 42 dental facilities with 331 operatories. The aggregate consideration for
the 1996 Transactions consisted of approximately $7.3 million in cash, $2.2
million in subordinated promissory notes and 1,613,400 shares of Common Stock.
All subordinated promissory notes bear interest at 7% and are payable in seven
annual installments maturing in 2003.
1997 Transactions
During the nine months ended September 30, 1997, the Company acquired
substantially all the assets of four dental group practices and simultaneously
entered into 40-year service agreements with three of these
17
<PAGE>
affiliated dental groups (one practice joined an existing affiliate). These
four dental group practices are: Lakeside Dental Care in New Orleans; Malcolm
R. Scott, D.D.S. in San Marcos, Texas; Soster Dental Group in Pittsburgh; and
Northpoint Dental Group in Milwaukee. The Lakeside Dental Care and Soster
Dental Group affiliations represented the entry into two new markets by the
Company. The affiliation with Malcolm R. Scott, D.D.S. expanded the Company's
market presence in Austin by adding one dental facility with five operatories.
The affiliation with Northpoint Dental group expanded the Company's market
presence in Milwaukee by adding two dental facilities with 23 operatories. In
total, these transactions resulted in the addition of eight dental facilities
with 84 operatories. The aggregate consideration for the above transactions
consisted of approximately $3.6 million in cash, $0.5 million in subordinated
promissory notes and 41,352 shares of Common Stock.
Subsequent to September 30, 1997, the Company acquired substantially all the
assets of two dental group practices and a related entity associated with one
of these practices and simultaneously entered into a 40-year service agreement
with one of these affiliated dental groups (one practice joined an existing
affiliate). These two dental group practices are the Wilkens Dental Group and
the Orthocare Group. In total, these affiliations resulted in the addition of
21 dental facilities with 108 operatories. The aggregate consideration for
these transactions consisted of approximately $13.2 million in cash, $1.9
million in subordinated promissory notes and 139,482 shares of Common Stock.
1998 Pending Transactions
Effective January 1, 1998, the Company anticipates it will acquire
substantially all the assets of and simultaneously enter into a 40-year
service agreement with Associated Dental Care. In addition, the Company
currently is in discussions with a number of dentists and owners of dental
group practices about possible affiliations with the Company. The Company
currently has one letter of intent signed with a potential affiliate, which is
subject to due diligence review and completion of final agreements. The
aggregate purchase price for these two pending transactions consists of
approximately $4.9 million in cash, $0.8 million in subordinated promissory
notes and 82,800 shares of Common Stock. There can be no assurance that the
Company will consummate these or any future transactions.
COMPONENTS OF REVENUE AND EXPENSES
Affiliate Adjusted Gross Revenue and Payor Mix. The Company's affiliated
dental group practices generate revenue from patients and third party payors
under fee-for-service, PPO plans and capitated managed care plans. The
affiliated dental group practices record revenue at established rates reduced
by contractual adjustments and allowances for doubtful accounts to arrive at
adjusted gross revenue. Contractual adjustments represent the difference
between gross billable charges at established rates and the portion of those
charges allowable by third party payors pursuant to certain reimbursement and
managed care contracts. While payor mix varies from market to market, the
aggregate payor mix percentage of the Company's affiliated practices is
approximately 36% fee-for-service, 13% PPO plans and 51% capitated managed
care plans for the nine months ended September 30, 1997.
The PC reimburses the Company for expenses incurred on its behalf in
connection with the operation and administration of the dental facilities and
pays fees to the Company for management services. Expenses incurred for the
operation and administration of the dental facilities include salaries and
benefits for non dentist personnel working at the dental facilities (generally
the dental hygienists, dental assistants and administrative staff), lab fees,
dental supplies, office occupancy costs of the dental facilities (rent,
utilities, etc.) and depreciation related to the fixed assets at the dental
facilities. The PC is also responsible for provider expenses, which generally
consist of the salaries, benefits and certain other expenses of the dentists.
Net Revenue. Net revenue for the Company represents the aggregate fees
charged to the affiliated dental practices pursuant to the terms of the long-
term service agreements under which the Company agrees to manage the non-
clinical aspects of the dental practice. Under such agreements, the affiliated
dental group practices reimburse the Company for expenses incurred in
connection with the operation and administration of the dental
18
<PAGE>
facilities and pay fees to the Company for its management services. A portion
of these fees typically includes a fixed monthly amount. The Company typically
receives an additional fee if certain operating objectives are achieved. The
fees payable to the Company are determined prior to each affiliation and
annually thereafter based on a formal budgeting process. Pursuant to the terms
of the service agreements, the Company bills patients and third party payors
on behalf of the affiliated PCs. Such funds are used to pay all operating
expenses, to pay fees to the Company for its management services and are then
used by the PCs to pay their provider expenses.
Operating Expenses. Operating expenses (excluding general corporate
expenses, depreciation and amortization of intangibles) consist of the
expenses incurred by the Company in fulfilling its obligations under the
service agreements. These expenses are operating costs and expenses that would
have been incurred by the affiliated dental groups had they not affiliated
with the Company and include non-dentist salaries and benefits, lab fees and
dental supplies, office occupancy cost and other expenses related to
operations. Salaries and benefits expense are for personnel working for the
Company at the dental facilities, as well as the local operating management.
At the facility level, the Company generally employs the dental hygienists,
dental assistants and administrative staff. The local operating management
team supervises and supports the staff at the dental facilities. Office
occupancy includes rent expense and certain other operating costs such as
utilities associated with dental facilities and the local administrative
offices. Such costs vary based on the size of each facility and the market
rental rate for dental office space in the particular geographic market. Other
expenses consist of professional fees, marketing costs and other general and
administrative expenses. See "Business--Operations--Operating Structure."
General Corporate Expenses. General corporate expenses consist of
compensation expenses for the Company's corporate personnel and administrative
staff, as well as facility and other administrative costs of the Company's
corporate offices. The Company provides management, administrative, third
party contracting and other services to the affiliated groups. The Company has
built its management infrastructure in anticipation of rapid growth. This
included the hiring of key management and support staff in the areas of
finance and operations prior to the completion of any affiliations, and the
further hiring of additional management and support personnel in the areas of
operations and information systems as the Company completed its first
affiliations. The level of general corporate expenses will likely continue to
increase in the future as the Company continues to expand its management
infrastructure. However, it is anticipated that these expenses will decline as
a percentage of net revenue as the Company achieves its growth objectives.
Depreciation; Amortization of Intangibles. Depreciation expense includes
depreciation charges related to leasehold improvements and furniture, fixtures
and equipment used to operate the dental facilities. Depending on the amount
and timing of future capital expenditures, depreciation expense will likely
increase. Amortization of intangibles relates to intangible assets incurred in
connection with the 1996 and 1997 Transactions. The Company expects that
amortization of intangibles will increase in the future as a result of
intangibles recorded in connection with affiliations.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
Overview
The Company conducted no significant operations from January 1996 until
November 1996, when it completed its first affiliation and, accordingly, it
generated no revenue during this period. However, the general corporate
expenses incurred during the nine months ended September 30, 1996 resulted in
a net loss of $1,514,000. During the nine-month period ended September 30,
1997, revenue generated from completed affiliations reduced the impact of
general corporate expenses on the Company's statement of operations resulting
in net income of $754,000. As a result of the Company's recent rapid
expansion, the Company does not believe that a period-to-period comparison and
the percentage relationships of the nine months ended September 30, 1996 as
compared with the nine months ended September 30, 1997 are meaningful.
Results of Operations
Net revenue amounted to $0 for 1996 as compared with $36,620,000 for 1997.
The 1997 period includes revenue derived from service agreements entered into
in connection with the 1996 Transactions for all nine months of 1997, plus
revenue derived from the service agreements entered into in connection with
the 1997 Transactions completed through September 30, 1997.
19
<PAGE>
Operating expenses for 1996 were $0 as compared with $31,917,000 or 87.2% of
net revenue for 1997.
General corporate expenses were $1,521,000 for 1996, as compared with
$2,260,000 or 6.2% of net revenue for 1997. The increase resulted primarily
from the impact of additional corporate personnel hired in finance,
information systems and operations in late 1996 and early 1997 to build
infrastructure in anticipation of the Company's growth.
Depreciation expense was $7,000 for 1996, as compared with $1,154,000 or
3.2% of net revenue for 1997. Depreciation expense for 1996 resulted from
costs incurred in connection with the purchase of furniture, fixtures and
equipment for the corporate office. Depreciation expense for 1997 included
depreciation related primarily to the assets acquired and capital expenditures
incurred in connection with the Company's completed affiliations.
Amortization of intangibles was $259,000 or 0.7% of net revenue for 1997.
Amortization resulted from intangibles recorded in connection with the
Company's seven affiliations completed through September 30, 1997.
Net interest income was $14,000 for 1996, as compared with net interest
expense of $195,000 for 1997. Interest income for 1996 resulted from earnings
on proceeds received from the Company's private sales of equity securities.
Interest expense for 1997 resulted from borrowings under the Company's credit
facility, the issuance of subordinated notes and the assumption of certain
other debt in connection with completed affiliations.
The Company incurred no income tax expense for 1996, as compared with
$81,000 for 1997. The net loss incurred for 1996 resulted in the Company
creating a net operating loss carryforward for financial statement purposes.
For 1997, the Company utilized a portion of its net operating loss
carryforward which resulted in only $81,000 of income tax expense.
PRO FORMA--NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Overview
The following discussion compares on a pro forma basis the Company's results
of operations for the nine month periods ended September 30, 1996 and 1997.
The unaudited pro forma financial information for the 1996 period includes the
1996 and 1997 Transactions as if they were all completed on January 1, 1996.
The unaudited pro forma financial information for the 1997 period includes the
1997 Transactions as if they were all completed on January 1, 1997. This
information does not purport to represent what the Company's results of
operations would actually have been if such transactions had in fact occurred
on this date or to project the Company's results of operations for any future
period. This information is based on certain assumptions and adjustments and
should be read in conjunction with the Unaudited Pro Forma Consolidated
Financial Information included elsewhere in this Prospectus.
The following table sets forth the percentage of net revenue (consisting of
fees earned pursuant to the terms of the Company's service agreements) of
certain items reflected in the Company's unaudited pro forma consolidated
statements of operations.
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Net revenue............................................. 100.0% 100.0%
-------- --------
Operating expenses:
Salaries and benefits................................. 53.3 52.3
Lab fees and dental supplies.......................... 12.0 11.9
Office occupancy...................................... 9.4 9.0
Other operating expenses.............................. 13.4 11.7
General corporate expenses............................ 4.5 4.8
Depreciation.......................................... 3.1 2.8
Amortization of intangibles........................... 1.7 1.5
-------- --------
Total operating expenses................................ 97.4 94.0
-------- --------
Earnings from operations................................ 2.6 6.0
Interest expense (income), net.......................... 3.3 2.7
-------- --------
Earnings (loss) before income taxes..................... (0.7) 3.3
Income taxes............................................ -- 1.3
-------- --------
Net earnings (loss)..................................... (0.7)% 2.0%
======== ========
</TABLE>
20
<PAGE>
Results of Operations
Pro forma net revenue increased from $40,390,000 to $46,862,000, or 16.0%,
from 1996 to 1997. This revenue represents what the Company would have earned
under its service agreements had such agreements commenced January 1, 1996.
The majority of this increase came from the Company's affiliations in the
Minneapolis and Austin markets which had same market net revenue growth of
18.1% and 41.6%, respectively. The increase in revenue from the Company's
affiliate in the Minneapolis market resulted from a combination of increases
in fees, the addition of ten new dentists and the addition of a new facility
which opened in July 1997. The increase in revenue from the Company's
affiliate in the Austin market resulted primarily from the addition of two new
facilities which opened in January and February 1997.
Pro forma salaries and benefits amounted to $21,543,000 or 53.3% of net
revenue for 1996, as compared with $24,503,000 or 52.3% of net revenue for
1997. The decrease in salaries and benefits expense as a percentage of net
revenue resulted primarily from the Company's modification to staffing levels
at several of the Company's facilities.
Pro forma lab fees and dental supplies expense amounted to $4,850,000 or
12.0% of net revenue for 1996 as compared with $5,566,000 or 11.9% of net
revenue for 1997. Lab fees and dental supplies expense varies from affiliate
to affiliate and is affected by the volume and type of procedures performed.
On a pro forma basis, these costs remained constant as a percentage of net
revenue.
Pro forma office occupancy expense amounted to $3,789,000 or 9.4% of net
revenue for 1996, as compared with $4,236,000 or 9.0% of net revenue for 1997.
These costs vary based on the size of each facility and the market rental rate
for dental office space in the particular geographic market. The Company
generally assumes existing lease obligations of the affiliated dental group
practice upon completion of an affiliation.
Pro forma other operating expense amounted to $5,406,000 or 13.4% of net
revenue for 1996, as compared with $5,465,000 or 11.7% of net revenue for
1997. Other expenses decreased as a percentage of net revenue because certain
expenses, such as professional fees and other costs associated with operating
a stand alone dental group practice, have been included in general corporate
expenses after the date of affiliation.
General corporate expenses amounted to $1,797,000 or 4.5% of net revenue for
1996, as compared with $2,260,000 or 4.8% of net revenue for 1997. The
increase resulted primarily from the impact of additional corporate personnel
hired in finance, information systems and operations in late 1996 and early
1997 to build infrastructure to support the Company's growth.
Pro forma depreciation expense amounted to $1,251,000 or 3.1% of net revenue
for 1996, as compared with $1,298,000 or 2.8% of net revenue for 1997. Pro
forma amortization of intangibles decreased from 1.7% of net revenue for 1996
to 1.5% of net revenue for 1997. The dollar amount of amortization, however,
remained constant at $700,000. The decrease as a percentage of net revenue
resulted from the growth in net revenue.
Pro forma net interest expense amounted to $1,332,000 or 3.3% of net revenue
for 1996, as compared with $1,291,000 or 2.7% of net revenue for 1997.
Interest expense for both periods resulted from borrowings under the Company's
credit facility, the issuance of subordinated notes and the assumption of
certain other debt in connection with affiliations.
Pro forma income tax expense amounted to $0 in 1996 as compared with
$625,000 or 1.3% of net revenue for 1997. The Company calculated its pro forma
income tax expense utilizing a combined federal and state statutory rate of
40.5%.
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth unaudited quarterly results of operations of
the Company for each of the quarters in the nine-month period ended September
30, 1997. This information has been prepared on the same
21
<PAGE>
basis as the Consolidated Financial Statements and, in the opinion of the
Company's management, reflects all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information
for the periods presented. The quarterly operating results are not necessarily
indicative of future results of operations. This data should be read in
conjunction with the Consolidated Financial Statements included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
MARCH 31, 1997 JUNE 30, 1997 SEPTEMBER 30, 1997
----------------- ------------- --------------------
$ % $ % $ %
-------- ------- ------- ----- ---------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net revenue............. $ 11,226 100.0% $12,076 100.0% $ 13,318 100.0%
-------- ------ ------- ----- ---------- --------
Operating expenses:
Salaries and
benefits.............. 6,189 55.1 6,339 52.5 7,097 53.3
Lab fees and dental
supplies.............. 1,334 11.9 1,505 12.5 1,652 12.4
Office occupancy....... 1,008 9.0 1,113 9.2 1,247 9.3
Other operating
expenses.............. 1,366 12.2 1,581 13.1 1,486 11.1
General corporate
expenses.............. 735 6.5 689 5.7 836 6.3
Depreciation........... 356 3.2 403 3.3 395 3.0
Amortization of
intangibles........... 64 0.5 94 0.8 101 0.8
-------- ------ ------- ----- ---------- --------
Total operating
expenses............ 11,052 98.4 11,724 97.1 12,814 96.2
-------- ------ ------- ----- ---------- --------
Earnings from
operations............. 174 1.6 352 2.9 504 3.8
Interest expense
(income), net......... (27) (0.2) 107 0.9 115 0.9
-------- ------ ------- ----- ---------- --------
Earnings before income
taxes.................. 201 1.8 245 2.0 389 2.9
Income taxes........... -- -- 7 -- 74 0.5
-------- ------ ------- ----- ---------- --------
Net earnings............ $ 201 1.8% $ 238 2.0% $ 315 2.4%
======== ====== ======= ===== ========== ========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operating and capital needs, including cash
used for acquisitions, capital expenditures and working capital, from its
private sales of equity securities, borrowings under its revolving line of
credit and cash generated from operations. To date, the Company has completed
nine acquisitions and affiliations for aggregate consideration of $24,100,000
in cash, $4,600,000 in subordinated promissory notes and 1,794,234 shares of
Common Stock.
For the year ended December 31, 1996 and the nine months ended September 30,
1997, cash provided by (used for) operating activities amounted to
($1,539,000) and $633,000, respectively. Cash used for operating activities
during 1996 resulted primarily from the Company's start-up activities prior to
the completion of its first affiliation.
For the year ended December 31, 1996 and the nine months ended September 30,
1997, cash used in investing activities amounted to $6,878,000 and $5,360,000,
respectively. For 1996, this included $6,632,000 in cash used for
acquisitions, net of cash acquired, and $386,000 in capital expenditures.
Capital expenditures in 1996 included costs associated with the opening of
dental facilities in Austin and in Milwaukee. For the nine months ended
September 30, 1997, cash used for acquisitions amounted to $3,337,000, net of
cash acquired, and capital expenditures amounted to $2,102,000. Capital
expenditures for 1997 included costs associated with the opening of one new
facility in Minneapolis and two new facilities in Milwaukee. The establishment
of new dental facilities and the expansion of existing dental facilities in
the future will require ongoing capital expenditures.
For the year ended December 31, 1996 and the nine months ended September 30,
1997, cash provided from financing activities amounted to $14,253,000 and
$1,350,000, respectively. Cash provided by financing activities during 1996
resulted primarily from the Company's private sales of Preferred and Common
Stock,
22
<PAGE>
which included $7,900,000 in proceeds from the issuance of Series A
Convertible Preferred Stock, $7,000,000 in proceeds from the issuance of
Series B Redeemable Preferred Stock and $100,000 in proceeds from the issuance
of Common Stock. Cash provided from financing activities for the nine months
ended September 30, 1997 resulted primarily from borrowings under the
Company's revolving credit facility.
In April 1997, the Company entered into a $30 million revolving line of
credit agreement with Fleet National Bank. The credit facility is being used
for general corporate purposes, including acquisitions. Borrowings under this
line of credit bear interest at either prime- or LIBOR-based rates, at the
Company's option, plus a margin based upon the Company's debt coverage ratio,
which ranges up to 0.50% for prime-based loans and up to 2.125% for LIBOR-
based loans. In addition, the Company pays a commitment fee of 0.25% of the
average daily balance of the unused line. Borrowings are limited to an
availability formula based on adjusted EBITDA. The credit facility is secured
by a first lien on substantially all of the Company's assets, including a
pledge of the stock of the Company's subsidiaries. The Company is also
required to comply with certain financial and other covenants. The line of
credit matures in April 2000. At November 30, 1997, $13,700,000 was
outstanding under this line.
The Company will use a portion of the net proceeds from this offering to
redeem the Series B Redeemable Preferred Stock, including unpaid dividends,
and to repay outstanding balances under its revolving credit facility. The
Company believes that the remaining net proceeds from this offering, cash
generated from operations and amounts available under its revolving credit
facility will be sufficient to fund its anticipated cash needs for working
capital, capital expenditures and acquisitions for at least the next 12
months.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"),
which requires presentation of basic earnings per share ("Basic EPS") and
diluted earnings per share ("Diluted EPS") by all entities that have publicly
traded common stock or potential common stock (options, warrants, convertible
securities or contingent stock arrangements). SFAS 128 also requires a
presentation of earnings per share by an entity that has made a filing or is
in the process of filing with a regulatory agency in preparation for the sale
of those securities in a public market. Basic EPS is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted EPS gives effect to all
potentially dilutive common shares outstanding during the period. The
computation of Diluted EPS does not assume conversion, exercise or contingent
exercise of securities that would have an antidilutive effect on earnings.
SFAS 128 is effective for both interim and annual periods ending after
December 15, 1997. The Company does not believe that the effect on the
Company's earnings per share resulting from the adoption of SFAS 128 will be
material.
23
<PAGE>
BUSINESS
OVERVIEW
American Dental Partners, Inc. is a leading provider of dental practice
management services to multi-disciplinary dental group practices in attractive
markets in the United States. The Company seeks to affiliate with leading
dental groups that provide a comprehensive range of dental care services, have
outstanding reputations for quality and have proven records of financial
performance. Since its inception through December 31, 1997, the Company has
successfully completed affiliations with nine dental group practices and
currently operates 77 dental facilities with 554 operatories in five states.
The Company's rapid growth has resulted primarily from these affiliations,
which consisted of three dental group practice affiliations completed in 1996
and six dental group practice affiliations completed in 1997.
The Company's affiliation model is designed to create a partnership in
management between the Company and the affiliated dental group practice that
allows each party to maximize its strengths and retain its autonomy. When
affiliating with a dental group practice, the Company acquires substantially
all of its assets and enters into a long-term service agreement to manage the
non-clinical aspects of the dental operations. The Company supports its
affiliated dental group practices with a broad range of services designed to
enhance practice revenue, improve operating efficiencies and expand operating
margins. The Company shares the best practices of its network with each
affiliate and provides assistance with information systems, budgeting,
financial reporting, facilities management, third-party payor contracting,
supplies and equipment procurement, quality assurance initiatives, billing and
collecting accounts receivable, marketing and recruiting, hiring and training
support staff.
The Company's objective is to be the leading dental practice management
company in the United States. The Company's strategy for achieving this
objective is to: (i) expand into carefully selected and diverse geographic
markets which have favorable demographics and projected economic growth; (ii)
affiliate with leading dental group practices which have reputations for
quality care and proven records of financial performance; (iii) increase
market penetration in each of its markets through additional affiliations,
recruitment of dentists and new facility development; (iv) add value to each
affiliated dental group practice by assisting the practice in improving
operating performance; and (v) pursue various initiatives to ensure the
highest quality of care and service.
DENTAL CARE INDUSTRY
The market for dental care is large, growing and highly fragmented. The
United States Health Care Financing Administration estimates that expenditures
for dental care were approximately $45.8 billion in 1995 and will reach
approximately $79.1 billion by 2005, representing a compound annual growth
rate of approximately 5.6%. The Company believes that the growth in
expenditures for dental care will continue to be driven by both increases in
costs and increases in demand for services due to: (i) improved dental
benefits offered by employers; (ii) increased availability and use of dental
insurance, including preferred provider organization ("PPO") plans and
capitated managed care plans; (iii) increased demand for dental care from an
aging population; and (iv) increased demand for cosmetic and preventative
procedures. The Company believes that this growth will benefit not only
dentists, but companies that provide services to the dental care industry,
such as dental practice management companies.
Unlike many other sectors of the health care services industry, the dental
care industry is in the early stages of consolidation. Although dental care is
typically offered by solo practitioners, the trend towards group practice is
growing. According to the American Dental Association ("ADA"), in 1995, 11.8%
of the approximately 153,300 dentists in the United States were practicing in
groups of three or more, up from 4.1% in 1991. The Company believes this
consolidation trend will continue.
Most dental care performed in the United States is categorized as general
dentistry. Based upon a 1990 survey by the ADA, general dentistry was
estimated to represent approximately 83% of all dental services performed in
the United States. General dentistry includes preventative care, diagnosis and
treatment planning, as well as procedures such as fillings, crowns, bridges,
dentures and extractions. Specialty dentistry, which includes orthodontics,
periodontics, endodontics, prosthodontics and pediatric dentistry, represented
the remaining 17% of dental care services.
24
<PAGE>
Historically, dental care was not covered by insurers and consequently was
paid for by patients on a fee-for-service basis. An increasing number of
employers have responded to the desire of employees for enhanced benefits by
providing coverage from third party payors for dental care. These third party
payors offer indemnity insurance, PPO plans and capitated managed care plans.
Under an indemnity insurance plan, the dental provider charges a fee for each
service provided to the insured patient, which is typically the same as that
charged to a patient not covered by any type of dental insurance. The Company
categorizes indemnity insurance plans as fee-for-service plans. Under a PPO
plan, the dentist charges a discounted fee for each service provided based on
a schedule negotiated with the PPO. Under a capitated managed care plan, the
dentist receives a fixed monthly fee from the managed care organization for
each member covered under the plan who selects that dentist as his or her
provider. Capitated managed care plans also typically require a co-payment by
the patient.
The National Association of Dental Plans estimated that approximately 117
million individuals, or 45.7% of the population of the United States, were
covered by some form of dental care plan in 1995. This compares to
approximately 96 million individuals, or 40.5% of the population of the United
States, in 1990. Of the 117 million individuals with coverage, 70.3% were
covered by indemnity insurance, 17.7% were covered by capitated managed care
plans and 12.0% were covered by PPO plans. The remaining 139 million
individuals, or 54.3% of the population of the United States in 1995, did not
have dental benefit coverage. The Company believes that the number of
individuals with dental benefits will continue to increase and that the
majority of this growth will be in PPO and capitated managed care plans. For
instance, according to the National Association of Dental Plans, the number of
individuals covered by capitated managed care plans increased from 7.8 million
in 1990 to 20.7 million in 1995, representing a 21.6% compound annual growth
rate.
The Company believes that the increased prevalence of dental benefits and
the shift of those benefits from traditional fee-for-service to non-fee-for-
service plans has increased the complexity of operating a dental practice and
has led dental practices to begin to affiliate or consolidate with entities,
such as the Company, that: (i) allow dentists to focus on the clinical aspects
of dentistry by providing management resources to conduct the business and
administrative aspects of dentistry; (ii) provide information and operating
systems that are required to effectively manage in an increasingly complex
reimbursement environment; (iii) assist with third-party payor contracting;
(iv) realize economies of scale in purchasing and provide access to capital;
and (v) provide dentists the opportunity to realize value for their practices.
BUSINESS STRATEGY
The Company's objective is to be the leading dental practice management
company in the United States. In order to achieve this objective, the
Company's business strategy is to:
Expand into carefully selected markets. The Company plans to expand its
network of affiliated dental group practices into carefully selected and
diverse geographic markets. The Company focuses on markets that: (i) offer
the opportunity to gain market share leadership; (ii) have a prevalence of
dental group practices; (iii) have favorable demographics and projected
economic growth; and (iv) have access to dental schools. To date, the
Company has identified approximately 125 markets that currently meet its
market selection criteria. The Company believes that operating in multiple
markets increases the attractiveness of the Company and its affiliated
dental group practices to third party payors who seek to contract with
dental providers that are strategically located in attractive markets and
that offer a comprehensive range of multi-disciplinary dental care
services.
Affiliate with leading dental group practices. In entering a new market,
the Company seeks to affiliate with a leading dental group practice in that
market as a platform for expansion. A "platform" dental group practice is
one which has a reputation for quality care, provides a comprehensive range
of dental services, has a significant market presence and has a proven
record of financial performance. The Company believes
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that by affiliating with leading dental group practices it will become more
attractive to other practices, dentists and payors.
Increase market penetration. The Company seeks to be the market share
leader in each market in which it operates. After affiliating with a
leading dental group practice, the Company seeks to increase its market
share by assisting the affiliate in recruiting new general and specialty
dentists, expanding its patient base and opening new facilities.
Additionally, the Company may affiliate with other dental practices or with
specialty group practices that complement the platform dental group
practice.
Add value to each affiliated dental group practice. The Company supports
its affiliated dental group practices with a broad range of services
designed to enhance their practice revenue, improve operating efficiencies
and expand operating margins. The Company shares the best practices of its
network with each affiliate and assists each affiliate with an analysis of
its revenue and payor mix, capacity, utilization, staffing, scheduling and
productivity. The Company also provides its affiliates assistance with
information systems, budgeting, financial reporting, facilities management,
third-party payor contracting, supplies and equipment procurement, quality
assurance initiatives, billing and collecting accounts receivable,
marketing and recruiting, hiring and training support staff.
Focus on quality care. The Company pursues various initiatives to help
its affiliates provide the highest quality of care and service. The
Company's goal is to have each affiliated dental group practice become
accredited by the Accreditation Association of Ambulatory Health Care, Inc.
("AAAHC"). Through its National Professional Advisory Forum, the Company
provides its affiliated dental group practices with the opportunity to
share clinical knowledge and best clinical practices. The Company also
implements comprehensive patient satisfaction surveys administered by
independent third parties. The Company believes that its focus on quality
care enhances: (i) its affiliates' relationships with patients; (ii) its
affiliates' ability to recruit dentists; (iii) the Company's ability to
attract new dental groups as affiliates; and (iv) the Company's
attractiveness to third party payors.
AFFILIATION PHILOSOPHY
The Company believes that dental care is an important part of an
individual's overall health care. Because the practitioner is best qualified
to manage the clinical aspects of dentistry, the provision of dental care must
be centered around the dentist. However, current market trends in health care
are increasing the complexity of operating a dental practice. Consequently,
dentists are affiliating with professional practice managers who can manage
the non-clinical aspects of dentistry and provide the business skills that can
improve practice operating performance.
The Company believes that, similar to other sectors of the health care
delivery system, the delivery of dental care is fundamentally a local
business. Therefore, the Company operates its business in a decentralized
manner and maintains the identity of the local affiliated practice. In each
affiliation, the Company strives to maintain the local culture of the
affiliated group and encourages it to retain the name of the practice,
continue its presence in community events, maintain its relationship with
patients and local third party payors and, to the extent possible, maintain
the existing management organization.
The Company's affiliation model is designed to create a partnership in
management between the Company and the affiliated dental group practice that
allows each party to maximize its strengths and retain its autonomy. Under the
Company's affiliation model, the affiliated dental group continues to own its
practice and has sole purview over the clinical aspects of the practice while
the Company manages the business aspects of the practice. The Company's method
of affiliation is consistent across practices and, even where permitted by
law, the Company does not employ dentists.
The Company believes that the core values of a business partnership are
shared governance and shared financial objectives and has structured its
affiliation model to achieve these goals. Shared governance is achieved by the
formation of a joint policy board for each affiliated dental group practice
which is comprised of an equal number of representatives from the Company and
the affiliated dental group practice. Together, members of the
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policy board develop strategies and decide on major business initiatives for
the practice. Shared financial objectives are achieved through the joint
implementation of a budgeting process that establishes the financial
performance standards for the dental practice.
The organizational structure of a dental group practice before and after its
affiliation with ADP is as follows:
ADP's AFFILIATION MODEL
[A two-column flow chart. The first column is entitled Before Affiliation, under
which is a box which contains the words Dental Group. The second column is
entitled After Affiliation, under which is a circle which contains the words
Joint Policy Board. Under such circle are three boxes which contain the words
Dentist-owned Professional Corporation (PC), Service Agreement, and ADP-Owned
Management Service Organization (MSO), respectively. Arrows point from each box
to the circle, and two-way arrows point from the Service Agreement box to the
other two boxes.]
MARKET AND GROUP SELECTION
Market Selection
The Company has well-defined market selection criteria. The Company defines
potential markets with reference to one or more Metropolitan Statistical Areas
("MSAs"). An MSA is generally a geographic area consisting of a city of at
least 50,000 people, together with adjacent communities that have a high
degree of economic and social integration with the population center. In 1996,
there were 316 MSAs in the United States. The Company typically focuses on
markets with a population of at least 250,000 people that: (i) offer the
opportunity to gain market share leadership; (ii) have a prevalence of dental
group practices; (iii) have favorable demographics and projected economic
growth; and (iv) have access to dental schools. The Company has identified
approximately 125 MSAs that currently meet its market selection criteria.
Group Selection
The Company seeks to affiliate with leading dental group practices in each
selected market. The Company focuses on group practices because they have
greater potential to be market share leaders. Group practices are also more
likely to have implemented quality assurance and peer review policies and
procedures and are better positioned to operate in an increasingly complex
reimbursement environment. When entering a new market, the Company seeks to
affiliate with a platform dental group with a: (i) reputation for quality
care; (ii) comprehensive range of dental care services; (iii) significant
market presence; and (iv) proven record of financial performance. The Company
believes that, although a limited number of platform dental group practices
exist within any given market, there are a significant number of such groups
nationwide.
Affiliation Process
Once the Company has identified a potential affiliate within a market, the
Company's management seeks to determine whether the group practice and the
Company share a common philosophy about the dental industry and common
strategic goals and objectives. To this end, the Company conducts a series of
meetings, site visits
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and presentations with the potential affiliate about the industry, the Company
and its affiliation model. The Company believes that the existence of shared
philosophical values is a critical element of the affiliation's ultimate
success.
If the Company and a potential affiliate determine that they share common
values, goals and objectives, the Company then undertakes a preliminary due
diligence review of clinical, operating and financial information. Based upon
this review, the Company formulates an offer outlining the basic terms and
conditions of the affiliation which, if accepted by the dental group practice,
is embodied in a letter of intent between the parties.
Upon signing a letter of intent, the Company and its representatives begin a
thorough review of the potential affiliate's clinical systems, processes,
facilities and compliance with licensing and credentialing requirements, as
well as performing legal and accounting due diligence. Acquisition, service
and other agreements are then prepared and the transaction is closed.
Generally, the process of identifying an acceptable affiliation candidate to
closing the transaction takes approximately six to nine months.
Potential Affiliations
Effective January 1, 1998, the Company anticipates it will acquire
substantially all the assets of and simultaneously enter into a 40-year
service agreement with Associated Dental Care in Tucson, Arizona. The Company
is constantly discussing potential affiliations with dental group practices
that meet Company's group selection criteria, which may be at various stages
at any point in time. The Company currently has one letter of intent signed
with a potential affiliate, which is subject to due diligence review and
completion of final agreements. There can be no assurance that the Company
will consummate these or any future transactions.
AFFILIATED NETWORK
Since inception, the Company has successfully affiliated with nine dental
practices in five states consisting of ten selected MSAs. The following table
lists the affiliations completed by the Company as of the date of this
Prospectus:
<TABLE>
<CAPTION>
DENTAL
MARKET FACILITIES OPERATORIES(1) MSA AFFILIATION DATE
------ ---------- -------------- --- ----------------
<S> <C> <C> <C> <C>
AUSTIN, TX
Longhorn Dental....... 8 40 Austin and Killeen December 1996
Malcolm R. Scott,
D.D.S................ 1 6 San Marcos March 1997
MILWAUKEE, WI
Smileage Dental Care.. 13 125 Appleton, Green Bay, December 1996
Kenosha, Madison and
Milwaukee
Northpoint Dental
Group................ 2 23 Milwaukee July 1997
Wilkens Dental Group.. 4 30 Milwaukee October 1997
MINNEAPOLIS, MN
Park Dental........... 27 195 Minneapolis/St. Paul November 1996
Orthocare Group....... 17 78 Minneapolis/St. Paul October 1997
NEW ORLEANS, LA
Lakeside Dental Care.. 1 28 Metairie March 1997
PITTSBURGH, PA
Soster Dental Group... 4 29 Pittsburgh May 1997
--- ---
Total............... 77 554
=== ===
</TABLE>
- --------
(1) An operatory is an area where dental care is performed and generally
contains a dental chair, a hand piece delivery system and other
essential dental equipment.
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MARKET PENETRATION
After affiliating with a platform dental group practice, the Company's
strategy is to increase its market penetration by increasing the market share
of its existing affiliated dental group and by affiliating with other leading
dental groups that complement or add to the dental care provided by its
existing affiliate.
Increase Existing Groups' Market Share
Upon completing an affiliation, the Company prepares a thorough operating
evaluation of the affiliate which builds upon its operational due diligence.
Based on this evaluation, the Company prepares a plan for increasing the
affiliate's market penetration. This plan may include one or more of the
following methods: (i) opening new facilities that are conveniently located in
highly populated areas within the MSA or in contiguous MSAs; (ii) recruiting
additional general and specialty dentists that will complement or enhance the
dental care provided by each affiliated dental group; (iii) expanding physical
capacity by adding new operatories at existing facilities; (iv) increasing the
utilization of existing physical capacity by expanding hours of operation; and
(v) growing its affiliate's patient base through increased marketing efforts
and expanded relationships with third party payors.
Opening New Facilities. The Company has successfully demonstrated its
ability to open new facilities in several of the markets in which it operates.
Since its affiliation with Park Dental in Minneapolis/St. Paul, the Company
has opened two new facilities with eight operatories. Additionally, since its
affiliation with Longhorn Dental in Austin, the Company has opened two new
facilities with a total of nine operatories. Finally, in Wisconsin, the
Company has opened two new facilities with a total of 11 operatories in
Appleton and Madison, two MSAs contiguous to Milwaukee.
Recruiting Dentists. In markets where the Company has available physical
capacity and where the opportunity exists to attract new patients, the Company
assists its affiliates in recruiting new general and/or specialty dentists.
The Company assists its affiliates in recruiting dentists through a variety of
methods including recommendations from existing affiliated dentists,
participating in dental school activities, attending state dental association
meetings and advertisements in dental publications. In 1997, the Company has
assisted in the recruitment of 16 additional dentists for its affiliates.
Expanding Physical Capacity. In some cases, to facilitate an affiliate's
need for additional physical capacity, the Company adds new operatories to an
existing facility. In 1997, the Company added operatories to several of its
facilities located in San Marcos and Minneapolis/St. Paul. The Company
currently expects that in 1998 it will continue to expand capacity at selected
facilities.
Expanding Hours of Operations. The hours of operation at each of the
Company's facilities vary widely depending on patient needs and staffing
availability. In each of the Company's markets, the Company's facilities
operate on an expanded hours basis (i.e., before 8:00 a.m. and after 5:00
p.m.). Additionally, many of the Company's facilities are open on Saturdays.
In cases where the Company and its affiliated dental groups believe they can
enhance patient service and satisfaction by expanding the hours of operation,
a plan is developed to staff the facilities and implement an expanded hours
program.
Growing Patient Base. Although the Company believes that the greatest source
of new patients is referrals from existing patients, the Company proactively
assists each of its affiliates in growing their patient base through local
marketing efforts and by expanding relationships with third party payors. The
Company and its affiliates attend health fairs, sponsor community activities,
educate elementary school children on the merits of good oral health and
sponsor public awareness programs. In addition, the Company actively develops
new relationships with third party payors at the local, regional and national
level, which increases patient flow at its affiliated practices.
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Affiliations in Existing Markets
The Company also increases its market penetration by affiliating with other
leading general dentistry group practices and specialty dental group practices
that complement the platform dental group practice in a given market. These
practices are selected in much the same manner as the platform dental group
practice. The Company identifies those practices which have an outstanding
reputation for quality and provide the type of dental care which will
complement or add to the dental care offered by the platform dental group in
that market.
The Company has demonstrated its ability to affiliate with other leading
dental groups in existing markets. For example, following its affiliation with
Park Dental in Minneapolis/St. Paul, the Company affiliated with the Orthocare
Group in October 1997. The Orthocare Group is a leading provider of
orthodontic care in Minneapolis/St. Paul, operating 17 facilities with 78
operatories. In Milwaukee, the Company expanded its market penetration through
two affiliations with leading dental groups. In July 1997, the Company
affiliated with Northpoint Dental Group, adding two facilities with 23
operatories, and in October 1997, the Company affiliated with the Wilkens
Dental Group, adding four facilities with 30 operatories. In the Austin
market, the Company affiliated with Malcolm R. Scott, D.D.S., and the
principal dentists joined Longhorn Dental. This affiliation expanded the
Company's physical capacity and geographic reach by adding a facility in San
Marcos.
OPERATIONS
Operating Structure
The Company operates under a decentralized organizational structure. At the
facility level, the Company generally employs the dental hygienists, dental
assistants and administrative staff. At each facility, a practice manager
typically oversees the day-to-day business operations. The practice manager
and administrative staff are responsible for, among other things, facility
staffing, patient scheduling, on-site patient invoicing and ordering office
and dental supplies. The Company believes local office scheduling is crucial
because it allows each practice to accommodate the needs of its patients and
increase the productivity of its dentists.
In each market, the Company has a local management team that supervises the
operations of one or more affiliates. This team provides support in areas such
as recruiting, hiring and training facility staff, developing and implementing
quality assurance programs, developing and implementing operating policies and
procedures, billing and collecting accounts receivable, processing payroll,
information systems, accounting, marketing and facilities development and
management.
Each local management team reports to one of the Company's operating vice
presidents. An operating vice president is responsible for monitoring the
operating performance of multiple affiliated dental groups in multiple
markets. Each operating vice president participates as a member of the policy
board of the affiliated dental groups for which he or she has management
oversight responsibilities. The operating vice presidents are responsible for
overseeing the development of operating plans and annual budgets and
monitoring actual results. Additionally, the Company supports each of its
dental group practices with analysis of the capacity, utilization and
productivity of each dental facility. This analysis assists each practice in
improving its operating performance from both a clinical and financial
perspective.
On a national level, the Company supports its affiliated network in several
ways. The Company assists its affiliates with: (i) sharing best clinical
practices through its National Professional Advisory Forum; (ii) evaluating
and negotiating third party contracts; (iii) designing, locating and leasing
new facilities; (iv) developing budgets and implementing accounting and
financial systems; and (v) developing and implementing practice management and
other information systems. The Company also takes advantage of economies of
scale by contracting for various goods and services. For example, the Company
has arranged for national contracts for the purchase of dental supplies and
equipment, professional, casualty, and general liability insurance and payroll
processing.
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National Professional Advisory Forum
The Company has organized the National Professional Advisory Forum ("NPAF")
to provide guidance to its affiliated dental group practices with respect to
the clinical aspects of dentistry. Leading dentists from the Company's
affiliated dental groups are selected to participate in the NPAF. The NPAF
meets quarterly and provides a forum for dentists to share the best clinical
practices of their respective dental groups and an opportunity for them to
build professional relationships with other dentists affiliated with the
Company. These dentists, as a result of their affiliation with the Company,
share common long-term goals. This enables the discussion at the NPAF to be
more open than it may be in other professional settings. While the primary
emphasis of the NPAF is on the clinical aspects of dentistry, it also provides
the Company's management an opportunity to communicate with affiliated
dentists. This enables the Company to continue to build strong, mutually
beneficial partner relationships with its affiliated dental groups.
Payor Relationships and Reimbursement Mix
The Company and its affiliates believe that clinical and economic decisions
should be made separately. However, the Company recognizes that the source of
payment for services affects operating and financial performance. The Company
assists its affiliates in analyzing their revenue and payor mix on an ongoing
basis and recommends methods by which the affiliated dental group practices
can improve operating efficiency by improving their revenue and payor mix. As
a general rule, the Company believes that growth in a market is best
facilitated where the payor mix of its affiliates mirrors the payor mix for
that market. The Company assists each of its affiliated dental groups in
evaluating and negotiating third-party payor contracts on a local, regional
and national level. The aggregate payor mix percentage of the Company's
affiliated practices was approximately 36% fee-for-service, 13% PPO plans and
51% capitated managed care plans for the nine month period ended September 30,
1997.
The Company believes it is advantageous to be affiliated with dental groups
that have successfully provided care to patients under all reimbursement
methodologies. Since a shift is taking place in the dental benefits market
from traditional fee-for-service to PPO and capitated managed care dental
plans, the Company believes that its affiliates' experience in operating under
all of these plans provides them with a competitive advantage. All of the
Company's affiliated dental groups have provided care under traditional fee-
for-service plans and non-fee-for-service plans. Several of the Company's
affiliated dental groups have been providing care to patients with capitated
managed care dental benefits for more than 20 years.
Facilities Development and Management
The Company believes an inviting professional environment is a critical
aspect of overall patient satisfaction. Each of the Company's facilities is
constructed to be warm, attractive and inviting to the patients in addition to
being highly functional. The Company's dental facilities have from three to 28
operatories, and typically accommodate general and specialty dentists, dental
hygienists and dental assistants, a business manager and a receptionist.
Generally the Company's facilities are either stand alone or located within a
professional office building or medical facility and range in size from
approximately 1,500 to 10,000 square feet.
The Company works with each of its affiliated dental groups in analyzing
utilization of existing capacity and identifying facility upgrade and
expansion priorities. The Company also provides its affiliates guidance in the
site selection process. The Company initially constructs each facility as
appropriate for the market and adds and equips additional operatories as
necessary through a capacity and utilization analysis.
The Company uses architectural design services to improve the facility
design process and to further ensure that all facilities are properly
constructed and meet the standards set forth by the AAAHC. To this end, the
Company works with each affiliated dental group to establish a defined set of
standards for each facility, such as operatory design and dental equipment,
which are consistent with the desires of the dental group. The Company
believes such facility standards are necessary to speed the site development
process and create consistency across newly developed facilities, leading to
enhanced staff and provider productivity.
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Budgeting and Planning; Financial Information Systems
The Company assists each affiliate with budgeting and planning. The Company
and each affiliate develop a strategic plan for increased market penetration
on an annual basis. The Company and each affiliated dental group then jointly
develop a budget which sets specific goals for revenue growth, operating
expenses and capital expenditures. Once a budget has been approved, the
Company measures the financial performance of each affiliated dental group on
a monthly basis and compares actual performance to budget.
The Company's financial information system enables it to measure, monitor
and compare the financial performance of affiliated dental groups on a
standardized basis across its entire network. The system also allows the
Company to track and control costs and facilitates the accounting and
financial reporting process. This financial system is installed in all
affiliated dental group practices. Historically, the Company has converted all
affiliates to its system within 90 days of affiliation and intends to continue
this practice with new affiliates.
Practice Management Systems
The Company uses various dental practice management software systems to
facilitate patient scheduling, to invoice patients and insurance companies, to
assist with facility staffing and for other practice related activities. In
connection with its affiliation with Park Dental, the Company acquired the
rights to Comdent, a proprietary practice management software system which has
been used and continuously enhanced at Park Dental since 1987. The Company
believes that Comdent's scheduling, electronic data interchange and data
management features are superior to others that are commercially available. In
addition, Comdent is scalable and capable of accommodating large multi-site
dental group practices. The Company intends, when appropriate, to convert its
affiliated dental group practices to the Comdent practice management software
system. The Company is also developing a data warehouse and decision support
system to analyze information across its entire network.
AFFILIATION STRUCTURE
Service Agreement
The Company has entered into a service agreement with each of its affiliated
PCs pursuant to which the Company performs all administrative, non-clinical
aspects of such PC's dental practice. The Company expects that each new
affiliated PC will enter into a similar service agreement or become a party to
an existing service agreement at the time of its affiliation. The Company is
dependent on its service agreements for all of its operating revenue. The
termination of one or more of these service agreements could have a material
adverse effect on the Company. See "Risk Factors--Dependence Upon Service
Agreements."
The Company is responsible for providing all services necessary for the
administration of the non-clinical aspects of the dental operations. These
services include assisting its affiliates with information systems, budgeting
and financial reporting, facilities management, third-party contracting,
supplies and equipment procurement, quality assurance initiatives, billing and
collecting accounts receivable, marketing and recruiting, hiring and training
support staff.
The PC is responsible for recruiting and hiring all of the dentists
necessary to provide dental care. The Company does not assume any authority,
responsibility, supervision or control over the provision of dental care to
patients. The service agreement requires the PC to enter into employment or
independent contractor agreements with each dentist retained by the PC. The
service agreement also requires the PC to implement and maintain quality
assurance and peer review programs, maintain professional and comprehensive
general liability insurance covering the PC and each of its dentists and abide
by non-competition and confidentiality provisions.
The Company and each PC establish a joint policy board which is responsible
for developing and implementing management and administrative policies for the
dental operation. The policy board consists of an equal number of
representatives designated by the Company and the PC. The policy board members
designated by the PC must be licensed dentists employed by the PC. The policy
board's responsibilities include the review
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and approval of all renovation and expansion plans and capital equipment
expenditures with respect to the dental facilities affiliated with the PC, all
annual capital and operating budgets, all advertising and marketing services,
the long-term strategic and short-term operational goals, objectives, and
plans for the dental facilities and staffing plans regarding provider and
support personnel for the dental facilities. The policy board also reviews and
monitors the financial performance of the PC with respect to the attainment of
the PC's budgeted goals. The policy board also has the authority to approve or
disapprove any merger or combination with, or acquisition of, any dental
practice by the PC. Finally, the policy board reviews and makes
recommendations with respect to contractual relationships between the PC and
third-party payors. However, the PCs have final approval over matters relating
to dental care including all third-party payor contracts and fee practices and
schedules.
The PC reimburses the Company for expenses incurred on its behalf in
connection with the operation and administration of the dental facilities and
pays fees to the Company for management services. A portion of these fees
typically includes a fixed monthly amount. The Company typically receives an
additional fee if certain operating objectives are achieved. The PC is also
responsible for provider expenses, which generally consist of the salaries,
benefits, and certain other expenses of the dentist. The fees payable to the
Company are determined prior to each affiliation and annually thereafter based
on a formal budgeting process.
Each of the Company's current service agreements is for an initial term of
40 years and automatically renews for successive five-year terms, unless
terminated by notice given at least 120 days prior to the end of the initial
term or any renewal term. In addition, the service agreement may be terminated
earlier by either party upon the occurrence of certain events involving the
other party, such as its dissolution, bankruptcy, liquidation, or its failure
to perform its material duties and obligations under the service agreement.
Employment Agreements with Dentists
All dentists practicing at the dental facilities have entered into
employment agreements or independent contractor agreements with their
respective PCs. Such agreements typically contain a non-competition agreement
within a specified geographic area, usually a specified number of miles from
the relevant dental facility, following termination. The non-competition
restrictions are generally for one to two years following termination.
COMPETITION
The dental practice management industry, currently in its formative stage,
is highly competitive and is expected to become more competitive. The Company
competes with other dental practice management companies which seek to
affiliate with existing dental practices. The Company believes that the
principal factors of competition between dental practice management companies
are their affiliation methods and models, the reputation of their existing
affiliates, the scope of their dental care networks, their management
expertise and experience, the sophistication of their management information,
accounting, finance and other systems and their operating methods. The Company
believes that it competes effectively with other dental practice management
companies with respect to these factors. See "Risk Factors--Competition."
GOVERNMENT REGULATION
General
The practice of dentistry is highly regulated, and the operations of the
Company and its affiliated dental practices are subject to numerous state and
federal laws and regulations. Furthermore, the Company may become subject to
additional laws and regulations as it expands into new markets. There can be
no assurance that the regulatory environment in which the Company and its
affiliated dental group practices operate will not change significantly in the
future. The ability of the Company to operate profitably will depend, in part,
upon the Company and its affiliated dental group practices obtaining and
maintaining all necessary licenses, certifications and other approvals and
operating in compliance with applicable laws. See "Risk Factors--Government
Regulation."
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State Regulation
Every state imposes licensing and other requirements on individual dentists
and dental facilities and services. Except for Wisconsin, the laws of the
states in which the Company currently operates prohibit, either by specific
statutes, case law or as a matter of general public policy, entities not
wholly owned or controlled by dentists, such as the Company, from practicing
dentistry, from employing dentists and, in certain circumstances, dental
assistants and dental hygienists, or from exercising control over the
provision of dental services. Many states prohibit or restrict the ability of
a person other than a licensed dentist to own, manage or control the assets,
equipment or offices used in a dental practice. The laws of some states
prohibit the advertising of dental services under a trade or corporate name
and require all advertisements to be in the name of the dentist. A number of
states also regulate the content of advertisements of dental services and the
use of promotional gift items. These laws and their interpretation vary from
state to state and are enforced by regulatory authorities with broad
discretion.
There are certain regulatory issues associated with the Company's role in
negotiating and administering managed care contracts. To the extent that the
Company or any affiliated dental group practice contracts with third party
payors, including self-insured plans, under a capitated or other arrangement
which causes the Company or such affiliated dental group practice to assume a
portion of the financial risk of providing dental care, the Company or such
affiliated dental group practice may become subject to state insurance laws.
If the Company or any affiliated dental group practice is determined to be
engaged in the business of insurance, the Company may be required to change
the method of payment from third party payors or to seek appropriate
licensure. Any regulation of the Company or its affiliated dental group
practices under insurance laws could have a material adverse effect on the
Company's business, financial condition and results of operations.
Many states have fraud and abuse laws, including anti-kickback laws, which
are similar to the federal laws, discussed below, and in many cases these laws
apply to all referrals for items or services reimbursable by any payor. A
number of states also impose significant criminal and civil penalties for
false claims, false or improper billings, or inappropriate coding for dental
services. Many states either prohibit or require disclosure of self-referral
arrangements and impose criminal and civil penalties for violations of these
laws.
Many states also prohibit a dentist from paying a portion of fees received
for dental services to another person or entity. In some states, this "fee-
splitting" prohibition applies only to payments in exchange for referrals.
Other states flatly prohibit any rebates or split fees regardless of whether
referrals are involved. There can be no assurance that management fees paid to
the Company, to the extent based on a percentage of dental service revenues or
profits, will not be deemed to violate such laws.
Many states have antitrust laws which prohibit agreements in restraint of
trade, the exercise of monopoly power and other practices that are considered
to be anti-competitive, including cooperation by separate economic entities to
fix the prices of services. Dental practices are also subject to compliance
with state and local regulatory standards in the areas of safety and health.
Federal Regulation
The dental industry is also regulated at the federal level to the extent
that dental services are reimbursed under federal programs. Participation by
the affiliated dental group practices and their dentists in such programs
subject them, and potentially the Company, to significant regulation regarding
the provision of services to beneficiaries, submission of claims and related
matters, including the types of regulations discussed below. Violation of
these laws or regulations can result in civil and criminal penalties,
including possible exclusion of individuals and entities from participation in
federal payment programs.
The federal anti-kickback statutes prohibit, in part, and subject to certain
safe harbors, the payment or receipt of remuneration in return for, or in
order to induce, referrals, or arranging for referrals, for items or services
which are reimbursable under federal payment programs. Other federal laws
impose significant penalties for false or improper billings or inappropriate
coding for dental services regardless of the payor source. The
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federal self-referral law, or "Stark law," prohibits dentists from making
referrals for certain designated health services reimbursable under federal
payment programs to entities with which they have financial relationships
unless a specific exception applies. The Stark law also prohibits the entity
receiving such referrals from submitting a claim for services provided
pursuant to such referral. The Company may be subject to federal payor rules
prohibiting the assignment of the right to receive payment for services
rendered unless certain conditions are met. These rules prohibit a billing
agent from receiving a fee based on a percentage of collections and may
require payments for the services of the dentists to be made directly to the
dentist providing the services or to a lock-box account held in the name of
the dentist or his or her dental group. In addition, these rules provide that
accounts receivables from federal payors are not saleable or assignable.
Federal antitrust laws prohibit agreements in restraint of trade, the
exercise of monopoly power and other practices that are considered to be anti-
competitive, including cooperation by separate economic entities to fix the
prices of services. Finally, dental practices are also subject to compliance
with federal regulatory standards in the areas of safety and health.
INSURANCE
The Company maintains property-casualty insurance covering its corporate
offices and dental facilities on a replacement cost basis. Each affiliated PC
maintains, or causes to be maintained, professional liability insurance
covering itself and its employees and contractors, including the dentists,
hygienists and dental assistants employed by, or contracted by such affiliated
PC in the amount of $1 million per occurrence and $3 million annual aggregate.
The Company generally is a named insured under such policies. The Company also
maintains umbrella liability coverage for its property-casualty policies in
the amount of $10 million. Certain types of risks and liabilities may not be
covered by insurance, however, and there can be no assurance that coverage
will continue to be available upon terms satisfactory to the Company or that
the coverage will be adequate to cover losses. Malpractice insurance,
moreover, can be expensive and varies from state to state. Successful
malpractice claims asserted against the dentists, the PCs or the Company may
have a material adverse effect on the Company's business, financial condition
and operating results. While the Company believes its insurance policies are
adequate in amount and coverage for its current operations, there can be no
assurance that the coverage maintained by the Company will be sufficient to
cover all future claims or will continue to be available in adequate amounts
or at a reasonable cost.
LEGAL PROCEEDINGS
From time to time, the Company may be subject to litigation incidental to
its business. The Company is not presently a party to any material litigation.
The dentists employed by, or independent contractors of, the Company's
affiliated PCs are from time to time subject to malpractice claims. Such
claims, if successful, could result in damage awards exceeding applicable
insurance coverage.
FACILITIES AND EMPLOYEES
The Company's corporate office is located at 301 Edgewater Place, Suite 320,
Wakefield, Massachusetts, in approximately 5,300 square feet occupied under a
lease which expires in June 1999. The Company leases most of its dental
facilities. Typically, each acquired dental facility is located at the site
used by the dental group practice prior to affiliating with the Company.
As of December 31, 1997, the Company had approximately 818 employees,
including 426 hygienists and dental assistants and 376 administrative and
management employees located at the Company's 77 dental facilities and local
management offices. In addition, the Company was affiliated with 165 dentists,
as well as six hygienists and ten dental assistants located in states which
prohibit the Company's employment of hygienists and dental assistants, all of
whom were employees or independent contractors of their respective affiliated
PCs. The Company considers its relations with its employees to be good.
35
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning each of the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Gregory A. Serrao....... 34 Chairman, President and Chief Executive Officer
Ronald M. Levenson...... 41 Senior Vice President, Chief Financial Officer
and Treasurer
George W. Robinson...... 60 Senior Vice President--Operations
William H. Bottlinger... 53 Vice President--Regional Operations and Chief
Information Officer
Forrest M. Flint........ 45 Vice President--Business Development
Michael F. Frisch....... 39 Vice President--Regional Operations
Kathryn A. Russell...... 45 Vice President--Finance
Dr. Gregory T. Swenson.. 63 President of PDHC, Ltd. and Director
James T. Kelly (1)...... 50 Director
Martin J. Mannion
(1)(2)................. 38 Director
Derril W. Reeves
(1)(2)................. 54 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mr. Serrao, the founder of the Company, has served as President, Chief
Executive Officer and a Director of the Company since December 1995 and as
Chairman since October 1997. From 1992 through December 1995, Mr. Serrao
served as the President of National Specialty Services, Inc., a subsidiary of
Cardinal Health, Inc. ("Cardinal Health"). From 1991 to 1992, Mr. Serrao
served as Vice President--Corporate Development of Cardinal Health. Before
joining Cardinal Health, Mr. Serrao was an investment banker at Dean Witter
Reynolds Inc. where he co-founded its health care investment banking group and
specialized in mergers, acquisitions and public equity offerings.
Mr. Levenson has served as Senior Vice President, Chief Financial Officer
and Treasurer of the Company since April 1996. Prior to joining the Company,
Mr. Levenson was employed by American Medical Response, Inc. ("AMR"), a
national provider of ambulance services, where he served as Senior Vice
President and Chief Accounting Officer from October 1992 through April 1996
and also served as Treasurer from August 1995 through April 1996. Prior to
joining AMR, Mr. Levenson was a Senior Manager at KPMG Peat Marwick LLP, a
public accounting firm, where he was employed from 1979 through 1992.
Mr. Robinson has served as Senior Vice President--Operations of the Company
since May 1996. From 1994 through May 1996, Mr. Robinson served as the
President of Nanston Dental Group, a dental provider network located in
Georgia and North Carolina. From 1979 to 1994, Mr. Robinson served as an
Administrator of Kaiser Permanente's Dental Division, which was affiliated
with over 200 providers in two states and provided dental care to over 140,000
members.
Mr. Bottlinger has served as Vice President and Chief Information Officer of
the Company since January 1997 and as Vice President--Regional Operations
since November 1997. From 1985 through 1996, Mr. Bottlinger served as Senior
Vice President and Chief Information Officer for Cardinal Health and Senior
Vice President and General Manager of CORD Logistics, Inc., a Cardinal Health
subsidiary which provided pharmaceutical distribution and information
technology services for emerging biotechnical manufacturing companies. During
his career, Mr. Bottlinger has initiated the use of state of the art
information system technology in a variety of businesses engaged in retailing,
food wholesaling, pharmaceutical manufacturing and distribution, pharmacy
operations and financial services.
36
<PAGE>
Mr. Flint has served as Vice President--Business Development of the Company
since November 1996. From 1985 through November 1996, Mr. Flint served as the
Executive Director of PDHC, Ltd ("Park"), prior to its affiliation with the
Company. At Park, Mr. Flint was responsible for managing all external
relationships and contracting with third party payors. From 1984 to 1985, Mr.
Flint was an investment banker in the health care finance group of Dain
Bosworth, Inc. From 1977 to 1984, Mr. Flint was the Director of the South
Dakota Division of Health Services. Mr. Flint is a past Board Member of the
Accreditation Association for Ambulatory Health Care, Inc.
Mr. Frisch has served as Vice President--Regional Operations of the Company
since June 1997. From January 1997 to June 1997, Mr. Frisch served as the
Company's Director-National Support Initiatives. From July 1996 to January
1997, Mr. Frisch was an independent consultant to the Company. From June 1993
to July 1996, Mr. Frisch served as Vice President and General Manager of
National Specialty Services, Inc., a subsidiary of Cardinal Health. From July
1986 to June 1993, Mr. Frisch was employed by VHA, Inc., a national health
care alliance, in a variety of marketing, business development and management
positions.
Ms. Russell has served as Vice President--Finance of the Company since
December 1996. Prior to joining the Company, Ms. Russell was employed by
Heartland Foods Systems, Inc., a multi-concept food retailer with 230
locations, where she served as Vice President and Assistant Secretary from
1993 through 1995. From 1991 to 1992, Ms. Russell was Manager of Sales Audit
for The Limited, Inc., a publicly-held retailer. From 1983 to 1991, Ms.
Russell held management positions with publicly held financial services
companies. Prior to 1983, Ms. Russell was a Senior Manager at Deloitte &
Touche, a public accounting firm, where she was employed from 1974 through
1983.
Dr. Swenson has served as President of PDHC, Ltd., President of Park Dental
and a Director of the Company since November 1996. From 1983, when he co-
founded Park, to November 1996, Dr. Swenson served as Chairman and Chief
Executive Officer of Park. Dr. Swenson was a member of the American Academy of
Dental Group Practices ("AADGP") from 1980 until 1995, serving on many
occasions as a practice auditor in the AADGP's accreditation program. In 1978,
Park's predecessor was the second group practice to receive AADGP's
accreditation certificate. In 1973, a national referee committee selected Dr.
Swenson to the American Association of Endodontics, a society with which he
maintained a membership until 1989. In 1972, after practicing solo dentistry
for ten years, he formed a partnership with colleagues and helped build Park's
predecessor group practice. Dr. Swenson is a member of the Minnesota State
Dental Association, the American Dental Association, and Federation Dentaire
Internationale. From 1980 to 1996, Dr. Swenson served on the Board of
Directors of Marquette Bank Brookdale.
Mr. Kelly has served as a Director of the Company since February 1997. Mr.
Kelly has served as Chairman of the Board of Lincare Holdings Inc., a provider
of home respiratory therapy services, since April 1994. Mr. Kelly served as
the Chief Executive Officer of Lincare from June 1986 through December 1996.
Prior to 1986, Mr. Kelly served in a number of capacities within the Mining
and Metals Division of Union Carbide Corporation over a 19-year period.
Mr. Mannion has served as a Director of the Company since January 1996 and
served as Chairman from January 1996 to October 1997. Mr. Mannion is a general
partner with Summit Partners, a private equity capital firm, where he has been
employed since 1985. Through his work with Summit Partners, Mr. Mannion
currently serves as a director of Suburban Ostomy Supply Company and numerous
private companies.
Mr. Reeves has served as a Director of the Company since February 1997. Mr.
Reeves is a founder, Executive Vice President for Development and Director of
PhyCor, Inc. and has served in various positions with PhyCor since 1987. From
1974 to 1976, Mr. Reeves was with Hospital Affiliates International ("HAI")
where he served as Vice President of Hospital Management Corporation, the
hospital management subsidiary of HAI. In 1977, he joined Hospital Corporation
of America ("HCA") to head the growth function for HCA's management company.
Mr. Reeves was a Vice President of HCA and also Vice President of Development
for HCA Management Company until 1985. In 1985, he moved to HCA Health Plans
as Vice President of Sales and Marketing and was instrumental in the creation
of Equicor where was Senior Vice President, National Sales.
37
<PAGE>
BOARD OF DIRECTORS
The Company's Board of Directors is divided into three classes, with each
class elected to serve a staggered three-year term. The Class I director,
whose term will expire at the 1998 annual meeting of stockholders, is Dr.
Swenson. The Class II directors, whose terms will expire at the 1999 annual
meeting of stockholders, are Messrs. Mannion and Kelly. The Class III
directors, whose terms will expire at the 2000 annual meeting of stockholders,
are Messrs. Serrao and Reeves. The classified Board of Directors may increase
the difficulty of consummating or discourage a business combination or an
attempt to gain control of the Company that is not approved by the Board of
Directors. The Company's executive officers are elected annually by and serve
at the discretion of the Board of Directors. See "--Employment Agreements."
COMPENSATION OF DIRECTORS
Directors who are also employees of the Company or one of its subsidiaries
do not receive additional compensation for serving as directors. Each director
who is not an employee of the Company or one of its subsidiaries receives a
fee of $1,000 for attending each Board of Directors' meeting and $500 for
attending each committee meeting. In addition, each non-employee director who
is not an officer of the Company is eligible to receive options under the
Company's 1996 Amended and Restated Directors Stock Plan. These options are
issued at such times and in such amounts as may be determined by the Directors
Stock Option Plan Committee, at their discretion. See "Stock Plans--1996
Directors Stock Option Plan." Directors are also reimbursed for out-of-pocket
expenses incurred in attending meetings of the Board of Directors or
committees thereof.
38
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information with respect to compensation paid
to or accrued on behalf of (i) the Chief Executive Officer and (ii) the other
most highly compensated executive officers of the Company whose aggregate base
salary and bonus exceeded $100,000 (the "Named Executive Officers") in 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM AWARDS
----------------------------------------- ------------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING ALL OTHER
YEAR SALARY ($)(1) BONUS ($) COMPENSATION STOCK OPTIONS (#) COMPENSATION(5)
---- ------------- --------- ------------ ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gregory A. Serrao....... 1996 $144,000 $90,000 $136,461(2) $99,500(4) 270,270 $519
Chairman, President and
Chief Executive Officer
Ronald M. Levenson...... 1996 $103,000 $41,600 $ 23,000(3) -- 81,000 --
Senior Vice President,
Chief Financial Officer
and Treasurer
George W. Robinson...... 1996 $ 72,000 $43,750 $ 41,000(3) -- 60,000 $433
Senior Vice President--
Operations
</TABLE>
- --------
(1) Represents less than one full year's compensation.
(2) Consists of a tax offset bonus in the amount of $84,461 paid with respect
to the restricted Common Stock issued to Mr. Serrao in January 1996, and
moving and relocation expenses in the amount of $52,000.
(3) Consists of moving and relocation expenses.
(4) Represents the dollar value (net of consideration paid) of 300,000 shares
of restricted Common Stock issued to Mr. Serrao in January 1996, based
upon the fair market value of such shares on the date of issuance. Such
shares are subject to repurchase rights in favor of the Company upon the
occurrence of certain events, including the termination of Mr. Serrao's
employment. Such repurchase rights lapse ratably during the first four
years of Mr. Serrao's employment and upon the occurrence of certain other
events. As of December 31, 1996, 231,228 shares of restricted Common Stock
with a fair market value on such date of $2,890,350 were held by Mr.
Serrao. Dividends, if declared and paid upon the Common Stock, will be
paid on such restricted stock.
(5) Represents matching contributions under the Company's 401(k) plan.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information about options to purchase
Common Stock which were granted during the year ended December 31, 1996.
<TABLE>
<CAPTION>
POTENTIAL REALIZEABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
---------------------------------------------------- ----------------------
NUMBER OF SECURITIES EXERCISE
UNDERLYING OPTIONS % OF TOTAL PRICE EXPIRATION
GRANTED (#) OPTIONS ($/SHARE) DATE 5% ($) 10% ($)
-------------------- ---------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gregory A. Serrao....... 270,270(1) 47% $0.33 07/08/05 $ 52,632 $ 131,629
Ronald M. Levenson...... 60,000(2) 11% $0.33 04/22/06 $ 12,452 $ 31,556
21,000(1) 4% $0.33 10/22/05 $ 4,089 $ 10,228
George W. Robinson...... 43,800(2) 8% $8.33 06/03/06 $ 229,455 $ 581,483
16,200(1) 3% $8.33 12/03/05 $ 79,633 $199,159
</TABLE>
- --------
(1) Options issued under the 1996 Time Accelerated Restricted Stock Option
Plan. The exercise price of the options is equal to the fair market value
of the Company's Common Stock on the date of grant. These options will
become exercisable upon completion of this offering.
(2) Options issued under the 1996 Stock Option Plan. The exercise price of the
options is equal to the fair market value of the Company's Common Stock on
the date of grant. Options become exercisable in equal annual installments
over a four-year period.
39
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table presents information about the value of options
outstanding for each of the Named Executive Officers as of December 31, 1996.
No options were exercised during the year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1996 (#) AT DECEMBER 31, 1996 ($)
------------------------------------ ----------------------------
EXERCISABLE(1) UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE
---------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Gregory A. Serrao....... 270,270 -- $3,289,186 --
Ronald M. Levenson...... 21,000 60,000 $ 255,575 $730,200
George W. Robinson...... 16,200 43,800 $ 67,540 $182,646
</TABLE>
- --------
(1) Although not exercisable at December 31, 1996, these options will become
exercisable upon the completion of this offering.
EMPLOYMENT AGREEMENTS
The Company has a five-year employment agreement with Mr. Serrao which
terminates in January 2001. Under his employment agreement, Mr. Serrao
receives an annual base salary of $150,000 (subject to potential annual salary
increases) and a bonus in an amount up to 60% of his then current base salary.
Mr. Serrao is also subject to non-competition and confidentiality provisions
in the employment agreement. If Mr. Serrao's employment is terminated prior to
the end of the five-year term by the Company without cause or by Mr. Serrao
for "good reason" (as defined in the employment agreement) he is entitled to
receive severance benefits which include severance payments in an amount equal
to his then current annual base salary and health care benefits for one year
after termination.
The Company has a three-year employment agreement with Mr. Levenson which
terminates in April 1999. Under his employment agreement, Mr. Levenson
receives an annual base salary of $150,000 (subject to potential annual salary
increases) and a bonus in an amount up to 40% of his then current base salary.
Mr. Levenson is also subject to non-competition and confidentiality provisions
in the employment agreement. If Mr. Levenson's employment is terminated prior
to the end of the three-year term by the Company without cause or by Mr.
Levenson for "good reason" (as defined in the employment agreement) he is
entitled to receive severance benefits which include severance payments in an
amount equal to his then current annual base salary and health care benefits
for one year after termination.
The Company has a three-year employment agreement with Mr. Robinson which
terminates in May 1999. Under his employment agreement, Mr. Robinson receives
an annual base salary of $125,000 and a bonus in an amount up to $75,000. Mr.
Robinson is also subject to non-competition and confidentiality provisions in
the employment agreement. If Mr. Robinson's employment is terminated prior to
the end of the three-year term by the Company without cause, he is entitled to
receive severance benefits which include severance payments in an amount equal
to his base salary for the shorter of one year or the remainder of the term of
the agreement.
STOCK PLANS
1996 Stock Option Plan
The 1996 Stock Option Plan, as amended (the "1996 Plan"), was originally
adopted in January 1996. The purpose of the 1996 Plan is to provide options to
officers and key employees of the Company and its subsidiaries. Options are
granted at a price per share which is equal to the fair market value of the
Common Stock at the time of the grant. Options granted pursuant to the 1996
Plan expire ten years from the date of grant, or may expire earlier upon
termination of the grantee's employment with the Company. The total number of
shares of Common Stock subject to the 1996 Plan is 873,246, of which options
for 648,420 shares were outstanding at October 31, 1997.
40
<PAGE>
1996 Time Accelerated Restricted Stock Option Plan
The 1996 Time Accelerated Restricted Stock Option Plan, as amended (the
"TARSOP"), was originally adopted in January 1996. The total number of shares
subject to the TARSOP is 360,360. Options to purchase all such shares have
been granted and will become exercisable upon completion of this offering.
1996 Affiliate Stock Option Plan
The Amended and Restated 1996 Affiliate Stock Option Plan (the "Affiliate
Plan") was originally adopted in September 1996. The purpose of the Affiliate
Plan is to provide options to certain persons associated with the affiliated
dental practices. Options are granted at a price per share which is equal to
the fair market value of Common Stock at the time of grant. The total number
of shares of Common Stock subject to the Affiliate Plan is 210,000, of which
options for 89,586 shares were outstanding at October 31, 1997.
1996 Directors Stock Option Plan
The 1996 Amended and Restated Directors Stock Option Plan, as amended (the
"Directors Plan"), was originally adopted in September 1996. The purpose of
the Directors Plan is to grant options to those directors of the Company who
are not employees or officers of the Company or any subsidiary of the Company.
Options are granted at a price per share which is equal to the fair market
value of Common Stock at the date of the time of grant. The total number of
shares of Common Stock subject to the Directors Plan is 60,000, of which
options for 19,800 shares were outstanding at October 31, 1997.
1997 Employee Stock Purchase Plan
On October 27, 1997, the Company approved the 1997 Employee Stock Purchase
Plan (the "Employee Stock Purchase Plan"), effective December 1, 1997. The
Employee Stock Purchase Plan is designed to enable eligible employees to
purchase shares of Common Stock at a discount on a periodic basis through
payroll deductions and is intended to meet the requirements of Section 423 of
the Internal Revenue Code. Purchases will occur at the end of option periods,
each of six months' duration, except that the first such option period will
begin concurrent with the commencement of this offering and end on June 30,
1998. The purchase price of Common Stock under the Employee Stock Purchase
Plan will be 85% of the lesser of the value of the Common Stock at the
beginning of an option period and the value of the Common Stock at the end of
the option period. Participants may elect under the Employee Stock Purchase
Plan, prior to each option period, to have from 2% to 10% of their pay
withheld and applied to the purchase of shares at the end of the option
period. However, the Employee Stock Purchase Plan imposes a maximum of $10,000
on the amount that may be withheld from any participant in any option period.
A total of 200,000 shares of Common Stock has been reserved for issuance under
the Employee Stock Purchase Plan.
41
<PAGE>
CERTAIN TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to October 27, 1997, the Company did not have a separate Compensation
Committee or other committee performing equivalent functions. As a result,
compensation decisions prior to that time were made by the Company's Board of
Directors consisting of Messrs. Serrao, Kelly, Mannion, Reeves and Dr.
Swenson. Messrs. Mannion and Reeves serve as the current members of the
Company's Compensation Committee. There are no interlocking relationships
between any executive officers of the Company and any entity whose directors
or executive officers serve on the Company's Board of Directors or
Compensation Committee.
The Company and a group of investors (collectively, the "Purchasers") are
parties to various agreements and transactions which were entered into in
connection with the initial capitalization of the Company. The Purchasers
include, among others, Mr. Serrao and certain limited partnerships which are
affiliated with Summit Partners. Mr. Mannion, a Director of the Company, is a
general partner of Summit Partners. Summit Partners and its affiliated limited
partnerships are hereinafter collectively referred to as "Summit Partners."
The Company and the Purchasers are parties to a Series A and Series B
Preferred Stock Purchase Agreement dated January 8, 1996, as amended (the
"Preferred Stock Purchase Agreement"), pursuant to which the Purchasers
purchased, in the aggregate, 400,000 shares of Series A Convertible Preferred
Stock at a price of $19.75 per share and 70,000 shares of Series B Redeemable
Preferred Stock at a price of $100 per share. In addition, in connection with
entering into the Preferred Stock Purchase Agreement, the Purchasers purchased
an aggregate of 300,000 shares of Common Stock at $0.33 per share. The
aggregate purchase price for all Preferred and Common Stock purchased by the
Purchasers was $15,000,000. The proceeds from the sale of such shares were
used by the Company for the acquisition of dental practices and for general
working capital purposes. The following table describes the number of shares
of Series A and Series B Preferred Stock and Common Stock purchased by Mr.
Serrao and Summit Partners:
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------------------------------
SERIES A CONVERTIBLE SERIES B REDEEMABLE COMMON
PREFERRED STOCK PREFERRED STOCK STOCK
-------------------- ------------------- -------
<S> <C> <C> <C>
Gregory A. Serrao........... 2,933 513 2,200
Summit Partners............. 349,600 61,180 278,564
</TABLE>
The Series A Convertible Stock will convert into 17,600 and 2,097,600 shares
of Common Stock for Mr. Serrao and Summit Partners, respectively, upon
completion of this offering. Approximately $7.7 million of the proceeds of
this offering will be used to redeem all of the Series B Preferred Stock,
including unpaid dividends. See "Use of Proceeds." In connection with such
redemption, Mr. Serrao and Summit Partners will receive $56,496 and
$6,733,704, respectively. The Preferred Stock Purchase Agreement also grants
to the Purchasers preemptive rights with respect to the Company's issuance of
certain securities, which rights will expire immediately prior to, and will
not apply in connection with, this offering.
The Company and Summit Partners are parties to a Subordinated Debenture
Purchase Agreement dated January 8, 1996, as amended, pursuant to which Summit
Partners has committed to purchase up to $15,000,000 of 12% subordinated
debentures of the Company (the "Debentures") upon the Company's request. To
date, the Company has not requested that Summit Partners purchase any of the
Debentures, and the Company does not anticipate that any such request will be
made. Furthermore, the obligations of Summit Partners to purchase the
Debentures will automatically terminate upon the completion of this offering.
The Company and the Purchasers are parties to a Registration Rights
Agreement dated January 8, 1996, as amended (the "Purchasers Registration
Rights Agreement"), pursuant to which the Purchasers have the right, subject
to certain restrictions, to cause the Company to effect a registration of
their shares of Common Stock under the Securities Act of 1933, as amended (the
"Securities Act"). The Purchasers also have certain "piggy back" registration
rights in the event the Company registers any of its securities for either
itself or for security holders exercising their registration rights. The
Purchasers have waived their piggy back registration rights in connection with
this offering.
42
<PAGE>
The Company and the Purchasers are parties to a Shareholders' Agreement
dated January 8, 1996, as amended (the "Shareholders' Agreement"). The
Shareholders' Agreement contains provisions granting the non-management
Purchasers (the "Investors") a right of first refusal with respect to stock
sales by management Purchasers, including Messrs. Serrao and Levenson, as well
as granting the Purchasers "drag-along" and "tag-along" rights under certain
circumstances with respect to stock sales to third parties by other
Purchasers. Finally, the Shareholders' Agreement contains provisions regarding
the composition of the Company's Board of Directors and the rights of Mr.
Serrao and Summit Partners to designate certain members to the Board of
Directors. The Shareholders' Agreement will terminate immediately prior to the
completion of this offering.
The Company acquired Park pursuant to the terms of an Acquisition and
Exchange Agreement effective November 12, 1996 (the "Acquisition Agreement"),
among the Company, Park, and all of the shareholders of Park, including Dr.
Swenson. Under the Acquisition Agreement, the shareholders of Park received an
aggregate of $3.3 million in cash, $1.5 million principal amount of
subordinated promissory notes of the Company and 1,260,000 shares of Common
Stock in consideration for the exchange of all of their Park shares. The
consideration received by Dr. Swenson for the exchange of his Park shares was
on a pro rata basis with all other shareholders of Park. The terms and
conditions of the acquisition of Park, including the consideration received
for the exchange of the Park shares, were based upon arms-length negotiations
between representatives of the Company and representatives of Park, including
Dr. Swenson. Dr. Swenson was elected as a member of the Company's Board of
Directors pursuant to the terms of the Acquisition Agreement.
The Company entered into a registration rights agreement with the former
shareholders of Park. This registration rights agreement contains provisions
which grant the former shareholders of Park piggy back registration rights,
exercisable only after an initial public offering by the Company, in the event
the Company registers any of its securities for either itself or for security
holders exercising their registration rights. In addition, this registration
rights agreement contains a provision under which the former Park shareholders
may require registration of their shares of Common Stock (subject to the other
general applicable limitations on the Company's registration obligations) on
one occasion if and to the extent that they have not otherwise had the
opportunity to register their shares during the three-year period following
the completion of an initial public offering by the Company.
The Company entered into a shareholders' agreement with the former
shareholders of Park. This agreement provides a right of first refusal in
favor of the Company or its assignee with respect to stock sales by such
shareholders. This agreement also contains drag-along rights in favor of the
Investors with respect to any stock sales by such shareholders to third
parties. Finally, so long as the Investors own a majority of the shares of
voting stock of the Company or have the right to control the vote of a
majority of the shares of such voting stock with respect to the election of
the directors of the Company, the former Park shareholders are required to
vote all of their Common Stock for the election of the directors of the
Company in such manner as may be designated by Investors holding not less than
a majority of the shares of such voting stock then owned by all Investors.
This shareholders' agreement will terminate immediately prior to the
completion of this offering.
The Company entered into a service agreement with the professional
corporation formed by the former dentist shareholders of Park, including Dr.
Swenson. This service agreement is on substantially the same terms and
conditions as all of the Company's other service agreements. See "Business--
Affiliation Structure--Service Agreement."
INITIAL CAPITALIZATION ARRANGEMENTS
Mr. Serrao and Summit Partners, of which Mr. Mannion is a general partner,
were parties to various agreements and transactions which were entered into in
connection with the initial capitalization of the Company. In addition, Mr.
Levenson, the Company's Senior Vice President and Chief Financial Officer, was
a party to such agreements and transactions. Pursuant to the Preferred Stock
Purchase Agreement, Mr. Levenson purchased 5,600 shares of Series A
Convertible Preferred Stock at a price of $19.75 per share and 980 shares of
Series B Redeemable Preferred Stock at a price of $100 per share. In addition,
in connection with entering into the
43
<PAGE>
Preferred Stock Purchase Agreement, Mr. Levenson purchased 4,199 shares of
Common Stock at $0.33 per share. The Series A Convertible Stock will convert
into 33,600 shares of Common Stock upon completion of this offering. As part
of the redemption of the Series B Redeemable Preferred Stock with a portion of
the proceeds of this offering, Mr. Levenson will receive $107,611. See "Use of
Proceeds." Mr. Levenson is also a party to the Purchasers Registration Rights
Agreement and the Shareholders' Agreement, and he is a management Purchaser
under the Shareholders' Agreement. Mr. Levenson has waived his piggy back
registration rights in connection with this offering. See "--Compensation
Committee Interlocks and Insider Participation."
AFFILIATION WITH PARK DENTAL
Dr. Swenson was a party to various agreements and transactions which were
entered into in connection with the Company's affiliation with Park. In
addition to Dr. Swenson, Delta Associates, Ltd. ("DAL"), a greater than 5%
stockholder of the Company, was a stockholder of Park and received its pro
rata share of the consideration paid by the Company for the exchange of its
Park stock. DAL is also a party to the registration rights agreement and the
shareholders' agreement with the former shareholders of Park. See "--
Compensation Committee Interlocks and Insider Participation."
44
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of December 31, 1997, and as adjusted to reflect
the sale of Common Stock offered hereby, by: (i) each person who is known to
the Company to own beneficially more than 5% of the outstanding shares of
Common Stock; (ii) each director; (iii) the Named Executive Officers; and (iv)
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 the
beneficial owner of the same security. All persons listed have sole voting and
investment power with respect to their shares unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
----------------------------------
PERCENTAGE OWNED
---------------------
BEFORE AFTER
NUMBER OFFERING OFFERING
------------ ---------- ----------
<S> <C> <C> <C>
Summit Ventures(2).......................... 2,376,163 49.6% 35.0%
Martin J. Mannion(2)........................ 2,376,163 49.6% 35.0%
Gregory A. Serrao(3)(6)..................... 602,880 12.6% 8.9%
Delta Associates, Ltd.(4)................... 378,001 7.9% 5.6%
Dr. Gregory T. Swenson(5)(6)................ 333,885 7.0% 4.9%
Ronald M. Levenson(6)....................... 85,709 1.8% 1.3%
George W. Robinson(6)....................... 28,020 * *
James T. Kelly.............................. 1,725 * *
Derril W. Reeves............................ 1,725 * *
All executive officers and directors as a
group (11 persons)(7)....... .............. 3,436,047 71.7% 50.6%
</TABLE>
- --------
* less than 1%
(1) This table includes for each person or group of persons shares of Common
Stock that may be purchased by such person or group pursuant to options
which will become exercisable upon the completion of this offering or
within 60 days of the estimated effective date of this offering. As of
December 31, 1997, a total of 4,794,217 shares of Common Stock were issued
and outstanding and options for 404,256 shares were exercisable.
(2) Represents 2,285,869 and 90,294 shares of Common Stock owned by Summit
Ventures IV, L.P. and Summit Investors II, L.P., respectively. Summit
Partners is affiliated with both limited partnerships. Mr. Mannion, a
Director of the Company, is a general partner of Summit Partners. The
address of Summit Partners is 600 Atlantic Avenue, Suite 2800, Boston,
Massachusetts 02110.
(3) The address for Mr. Serrao is American Dental Partners, Inc. 301 Edgewater
Place, Suite 320, Wakefield, Massachusetts 01880.
(4) Represents shares received by Delta Associates, Ltd. in connection with
the Company's affiliation with PDHC, Ltd. The address of Delta Associates,
Ltd. is 7807 Creekridge Circle, Minneapolis, Minnesota 55439.
(5) Includes 96,000 shares owned by a family trust. The address for Dr.
Swenson is PDHC, Ltd., 6415 Brooklyn Blvd., Minneapolis, Minnesota 55429.
(6) Includes options for 283,808 shares for Mr. Serrao, 4,050 shares for Dr.
Swenson, 47,910 shares for Mr. Levenson and 28,020 shares for Mr.
Robinson, respectively, which will become exerciseable upon the completion
of this offering or within 60 days of the estimated effective date of this
offering.
(7) Includes options for 372,450 shares for all executive officers and
directors as a group which will become exerciseable upon the completion of
this offering or within 60 days of the estimated effective date of this
offering.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 26,000,000 shares of capital stock,
consisting of 25,000,000 shares of Common Stock, $0.01 par value (the "Common
Stock"), and 1,000,000 shares of Preferred Stock, $0.01 par value (the
"Preferred Stock"). Of the Preferred Stock, 400,000 shares have been
designated Series A Convertible Preferred Stock, all of which are currently
outstanding and will be converted into an aggregate of 2,400,000 shares of
Common Stock upon completion of this offering, and 70,000 shares have been
designated Series B Redeemable Preferred Stock, all of which are currently
outstanding and will be redeemed upon completion of this offering. Upon the
closing of this offering, the Series A Convertible Preferred Stock and the
Series B Redeemable Preferred Stock will be restored to the status of
undesignated preferred stock available for issuance. As of the date hereof,
there were 4,794,217 shares of Common Stock outstanding, which assumes
conversion of the Series A Convertible Preferred Stock, and as of the
completion of this offering there will be 6,794,217 shares of Common Stock
outstanding.
Common Stock
The holders of shares of Common Stock are entitled to one vote per share for
the election of directors and on all other matters submitted to a vote of
stockholders. Holders of shares of Common Stock are not entitled to preemptive
rights or to cumulative voting for the election of directors. Subject to any
senior rights of the Preferred Stock which may from time to time be
outstanding, holders of the Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." Upon dissolution and liquidation of
the Company, holders of the Common Stock are entitled to a ratable share of
the net assets of the Company remaining after payments to creditors of the
Company and to the holders of the Preferred Stock of the full preferential
amounts to which they may be entitled. All outstanding shares of Common Stock
are, and the shares of Common Stock offered hereby will be, validly issued,
fully paid and nonassessable.
Preferred Stock
The Preferred Stock may be issued in one or more series as determined by the
Board of Directors without further stockholder approval, and the Board of
Directors is authorized to fix and determine the terms, limitations, and
relative rights and preferences of the Preferred Stock, and to fix and
determine the variations among series of the Preferred Stock. If any Preferred
Stock is issued following this offering, such Preferred Stock would have
priority over the Common Stock with respect to dividends and to other
distributions, including the distribution of assets upon liquidation and
dissolution. The Preferred Stock may be subject to repurchase or redemption by
the Company. The Board of Directors, without stockholder approval, could issue
Preferred Stock with voting and conversion rights that could adversely affect
the voting power of the holders of Common Stock and the issuance of which
could be used by the Board of Directors in defense of a hostile takeover of
the Company.
Certain Provisions of Certificate of Incorporation and By-laws
The Certificate of Incorporation and By-laws provide that directors may not
be removed from office by the stockholders except by the affirmative vote of
stockholders exercising at least two-thirds of the voting power in the
election of directors; provided that if two-thirds of the entire Board of
Directors recommend to the stockholders that a director be removed, then such
director may be removed by the stockholders exercising at least a majority of
the voting power in the election of directors. The Certificate of
Incorporation requires all actions by stockholders to be taken at annual or
special meetings. The By-laws divide the Board of Directors into three
classes, each with a term of three years, with the term of one class expiring
each year. No provision of the Certificate of Incorporation nor certain
provisions of the By-laws, including those relating to indemnification and
election and removal of directors, may be altered, amended or repealed nor may
any inconsistent provision be adopted except by the affirmative vote of
stockholders exercising at least two-thirds of the voting power of the
Company; provided that if any such action was previously approved by at least
two-thirds of the directors, then such action may be taken by the stockholders
exercising a majority of the voting power. The By-laws also provide than any
vacancy on the Board of Directors may be filled by a majority of the directors
than in office even though less than a quorum exits. The foregoing provisions
could have an anti-takeover effect by delaying, averting or preventing a
change in control or management of the Company.
46
<PAGE>
Statutory Business Combination Provision
The Company is subject to Section 203 of the DGCL 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 two-thirds of the outstanding voting stock which is not owned by the
interested stockholder. An "interested stockholder" is defined as any person
that is (a) the owner of 15% or more of the outstanding voting stock of the
corporation or (b) an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the three-year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder.
Transfer Agent and Registrar
The Company has selected BankBoston, N.A. as the transfer agent and
registrar for its Common Stock.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts
of such shares in the public market, or the perception that such sales could
occur, could materially and adversely affect the market price of the Common
Stock and could impair the Company's future ability to raise capital through
an offering of its equity securities. See "Risk Factors--Shares Eligible for
Future Sale."
SALES OF RESTRICTED SHARES
Upon completion of the offering, the Company will have a total of 6,794,217
shares of Common Stock outstanding. Of these shares, the 2,000,000 shares of
Common Stock offered hereby will be freely tradable without restriction or
registration under the Securities Act by persons other than "affiliates" of
the Company, as defined in the Securities Act, who would be required to sell
such shares under Rule 144 under the Securities Act. The remaining 4,794,217
shares of Common Stock outstanding will be "restricted securities" as that
term is defined by Rule 144 (the "Restricted Shares"). The Restricted Shares
were issued and sold by the Company in private transactions in reliance upon
exemptions from registration under the Securities Act.
Of the Restricted Shares, 4,621,328 Restricted Shares will be eligible for
sale in the public market pursuant to Rule 144 beginning 90 days after the
date of this Prospectus. All such shares are subject to the lock-up agreements
described below. In general, under Rule 144 as currently in effect, a person
(or persons whose shares are aggregated) who has beneficially owned restricted
securities for at least one year (including the holding period of any prior
owner except an affiliate), including persons who may be deemed "affiliates"
of the Company, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately 67,942 shares
upon completion of the offering) or (ii) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the filing of a Form
144 with respect to such sale. Sales under Rule 144 are also subject to
certain manner-of-sale provisions and notice requirements, and to the
availability of current public information about the Company. In addition, a
person who is not deemed to have been an affiliate of the Company at the time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of
any prior owner except an affiliate), would be entitled to sell such shares
under Rule 144 (k) without regard to the requirements described above. Rule
144 also provides that affiliates who are selling shares that are not
Restricted Shares must nonetheless comply with the same restrictions
applicable to Restricted Shares with the exception of the holding period
requirement.
Upon completion of this offering, the Company will have options for 404,256
shares of Common Stock outstanding and exercisable. Under Rule 701 promulgated
under the Securities Act, shares of Common Stock acquired pursuant to the
exercise of these options may be resold by persons other than affiliates
beginning 90 days after the date of this Prospectus, subject only to the
manner of sale provisions of Rule 144, and by affiliates, beginning 90 days
after the date of this Prospectus, subject to all provisions of Rule 144
except its one-year minimum holding period requirements.
LOCK-UP AGREEMENTS
All of the stockholders of the Company, including the executive officers and
directors, who will own in the aggregate 4,794,217 shares of Common Stock
after the offering, have agreed that they will not, directly or indirectly,
sell, offer, contract to sell, transfer the economic risk of ownership in,
make any short sale, pledge or otherwise dispose of any shares of Common Stock
of any securities convertible into or exchangeable or exercisable for or any
other rights to purchase or acquire Common Stock beneficially owned by them
during the 180-day period following the date of this Prospectus, except for
certain permitted transfers or with the prior written consent of BT Alex.
Brown Incorporated.
48
<PAGE>
STOCK OPTION AND PURCHASE PLANS
As of October 31, 1997, 1,503,606 shares of Common Stock were reserved for
issuance under the Company's stock plans, of which 1,118,166 shares were
issuable upon the exercise of outstanding stock options, and 200,000 shares of
Common Stock were reserved for issuance under the Employee Stock Purchase
Plan. See "Management--Stock Plans." The Company intends to file registration
statements on Form S-8 under the Securities Act to register all shares of
Common Stock issuable pursuant to its stock option and stock purchase plans.
The Company expects to file these registration statements within approximately
90 days following the date of this Prospectus and such registration statements
will become effective upon filing. Shares covered by these registration
statements will thereupon be eligible for sale in the public markets, subject
to Rule 144 limitations applicable to affiliates and the lock-up agreements
described above.
REGISTRATION RIGHTS
The holders of 3,959,987 shares of Common Stock have the right under certain
circumstances to require the Company to register their shares under the
Securities Act for resale to the public, and holders of approximately
4,794,217 shares have the right to include their shares in a registration
statement filed by the Company. See "Certain Transactions."
SHELF REGISTRATION FOR FUTURE AFFILIATIONS
The Company intends to register 500,000 shares of Common Stock under a shelf
registration for use in connection with future affiliations. These shares
generally will be eligible for resale in compliance with the volume and
manner-of-sale restrictions of Rule 145 after their issuance, unless the
Company contractually restricts their sale. The Company anticipates that the
agreements entered into in connection with its future acquisitions will
contractually restrict the resale of all or a portion of the shares issued in
those transactions for varying periods of time. Initially, the Company will
issue such shares subject to a lock-up period of up to 180 days following the
date of this Prospectus.
49
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their representatives, BT Alex. Brown
Incorporated, BancAmerica Robertson Stephens and Piper Jaffray Inc. (the
"Representatives"), have severally agreed to purchase from the Company the
following respective number of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER
OF SHARES
---------
<S> <C>
BT Alex. Brown Incorporated.......................................
BancAmerica Robertson Stephens....................................
Piper Jaffray Inc.................................................
---------
Total.......................................................... 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the shares of Common Stock offered hereby if any of such
shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial
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 re-allow, a concession
not in excess of $ per share to certain other dealers. After commencement
of this offering, the offering price and other selling terms may be changed by
the Representatives.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock at the initial public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it in the above table bears to 2,000,000, 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 Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 2,000,000 shares are being offered.
The Underwriting Agreement contains covenants of indemnity and contribution
between the Underwriters and the Company regarding certain liabilities,
including liabilities under the Securities Act.
To facilitate the offering of the Common Stock, the Underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price
of the Common Stock. Specifically, the Underwriters may over-allot shares of
the Common Stock in connection with this offering, thereby creating a short
position in the Underwriters' syndicate account. Additionally, to cover such
over-allotments or to stabilize the market price of the Common Stock, the
Underwriters may bid for, and purchase, shares of the Common Stock in the open
market. Any of these activities may maintain the market price of the Common
Stock at a level above that which might otherwise prevail in the open market.
The Underwriters are not required to engage in these activities, and, if
commenced, any such activities may be discontinued at any time. The
Representatives, on behalf of the Underwriters, also may reclaim selling
concessions allowed to an Underwriter or dealer, if the syndicate repurchases
shares distributed by that Underwriter or dealer.
The Company has agreed that it will not sell or offer any shares of Common
Stock or options, rights or warrants to acquire any Common Stock for a period
of 180 days after the date of this Prospectus without the prior written
consent of BT Alex. Brown Incorporated, except for shares issued: (i) in
connection with acquisitions, provided that the recipients agree not to sell
or dispose of such shares during the 180-day period;
50
<PAGE>
(ii) pursuant to the exercise of options granted under the Company's stock
plans; and (iii) upon conversion of shares of Series A Convertible Preferred
Stock. Further, the Company's directors, officers, and all other stockholders,
who beneficially own 4,794,217 shares in the aggregate, have agreed not to
directly or indirectly sell or offer for sale or otherwise dispose of any
Common Stock for a period of 180 days after the date of this Prospectus,
except for certain permitted transfers or with the prior written consent of BT
Alex. Brown Incorporated.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
PRICE OF THIS OFFERING
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock
will be determined by negotiations between the Company and the
Representatives. Among the factors to be considered in such negotiations are
prevailing market conditions, the results of operations of the Company in
recent periods, the market capitalization and stages of development of other
companies which the Company and the Representatives believe to be comparable
to the Company, estimates of the business potential of the Company, the
present state of the Company's development and other factors deemed relevant
by the Company and the Representatives.
51
<PAGE>
VALIDITY OF COMMON STOCK
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Baker & Hostetler LLP, Columbus, Ohio. Certain legal
matters related to the offering will be passed upon for the Underwriters by
Ropes & Gray, Boston, Massachusetts. Gary A. Wadman, a partner of Baker &
Hostetler LLP, is the Secretary of the Company.
EXPERTS
The consolidated financial statements of American Dental Partners, Inc. as
of December 31, 1996 and September 30, 1997 and for the year ended December
31, 1996 and the nine months ended September 30, 1997, and the financial
statements of PDHC, Ltd. as of November 12, 1996 and for the period from
January 1, 1996 to November 12, 1996 have been included herein and in the
registration statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The financial statements of PDHC, Ltd. as of December 31, 1995 and for the
years ended December 31, 1994 and 1995 included herein and in the registration
statement in reliance upon the report of Stirtz Bernards Boyden Surdel &
Larter, P.A., independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The combined financial statements of the Orthocare Companies as of December
31, 1996 and September 30, 1997 and for the year ended December 31, 1996 and
the nine months ended September 30, 1997 have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission ("SEC") a
Registration Statement (which term shall encompass any and all amendments
thereto) on Form S-1 (the "Registration Statement") under 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 SEC. Statements made in this Prospectus as to the contents
of any contact, 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 SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the SEC 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 SEC
maintains a web site that contains reports, proxy and information statements
regarding registrants that file electronically with the SEC. 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 SEC, upon payment of the prescribed fees.
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AMERICAN DENTAL PARTNERS, INC. AND SUBSIDIARIES--UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
Introduction to Unaudited Pro Forma Consolidated Financial
Information........................................................... F-3
Unaudited Pro Forma Consolidated Balance Sheet at September 30, 1997... F-4
Unaudited Pro Forma Consolidated Statement of Operations for the Year
Ended December 31, 1996............................................... F-5
Unaudited Pro Forma Consolidated Statement of Operations for the Nine
Months Ended September 30, 1996....................................... F-6
Unaudited Pro Forma Consolidated Statement of Operations for the Nine
Months Ended September 30, 1997....................................... F-7
Notes to Unaudited Pro Forma Consolidated Financial Information........ F-8
AMERICAN DENTAL PARTNERS, INC. AND SUBSIDIARIES--CONSOLIDATED FINANCIAL
STATEMENTS
Independent Auditors' Report........................................... F-10
Consolidated Balance Sheets as of December 31, 1996 and September 30,
1997.................................................................. F-11
Consolidated Statements of Operations for the Year Ended December 31,
1996 and the Nine Months Ended September 30, 1997 and the Nine Months
Ended September 30, 1996 (unaudited).................................. F-12
Consolidated Statements of Stockholders' Equity for the Year Ended
December 31, 1996 and the Nine Months Ended September 30, 1997........ F-13
Consolidated Statements of Cash Flows for the Year Ended December 31,
1996 and the Nine Months Ended September 30, 1997 and the Nine Months
Ended September 30, 1996 (unaudited).................................. F-14
Notes to Consolidated Financial Statements............................. F-15
AMERICAN DENTAL PARTNERS, INC. AND SUBSIDIARIES--ACQUISITIONS AND
AFFILIATIONS
PDHC, Ltd. ("Park")
The combined financial information presented for PDHC, Ltd. presents
the financial position and results of operations of the dental group
practice prior to its affiliation with the Company. Prior to its
affiliation with the Company, PDHC, Ltd. existed as a dental group
practice. After its affiliation, the dentist employees formed a new PC
and PDHC, Ltd. became a MSO. These financial statements are presented for
information purposes only and are not necessarily indicative of the
results of operations or financial position that would have been achieved
by PDHC, Ltd. pursuant to the service agreement with the Company, had
such service agreement been in place during the periods presented. The
information should be read in conjunction with "The Company,"
"Management's Discussion and Analysis of Financial Condition and Results
of Operations," Unaudited Pro Forma Consolidated Financial Information
and the Consolidated Financial Statements of the Company.
Financial Information
Independent Auditors' Report........................................... F-30
Independent Auditors' Report........................................... F-31
Combined Balance Sheets as of December 31, 1995 and November 12, 1996.. F-32
Combined Statements of Operations for the Years Ended December 31, 1994
and 1995 and the Period Ended November 12, 1996....................... F-33
Combined Statements of Stockholders' Equity for the Years Ended
December 31, 1994 and 1995 and the Period Ended November 12, 1996..... F-34
Combined Statements of Cash Flows for the Years Ended December 31, 1994
and 1995 and the Period Ended November 12, 1996....................... F-35
Notes to Combined Financial Statements................................. F-36
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<S> <C>
The Orthocare Companies
The combined financial information presented for The Orthocare
Companies presents the financial position and results of operations of
the dental group practice that provides orthodontic services, an MSO and
a related entity that arranges for orthodontic services for insurance
companies, all of which
were under common ownership prior to their affiliation with the Company.
After affiliation, the dentists employees formed a new PC which
affiliated with the MSO and the related entity became a wholly-owned
subsidiary of the Company. These financial statements are presented for
information purposes only and are not necessarily indicative of the
results of operations or financial position that would have been achieved
by The Orthocare Companies pursuant to the service agreement with the
Company, had such service agreement been in place during the periods
presented. The information should be read in conjunction with "The
Company," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," Unaudited Pro Forma Consolidated Financial
Information and the Consolidated Financial Statements of the Company.
Financial Information
Independent Auditors' Report........................................... F-45
Combined Balance Sheets as of December 31, 1996 and September 30,
1997.................................................................. F-46
Combined Statements of Operations for the Year Ended December 31, 1996
and the Nine Months Ended September 30, 1997.......................... F-47
Combined Statements of Stockholders' Equity for the Year Ended December
31, 1996 and the Nine Months Ended September 30, 1997................. F-48
Combined Statements of Cash Flows for the Year Ended December 31, 1996
and the Nine Months Ended September 30, 1997.......................... F-49
Notes to Combined Financial Statements................................. F-50
</TABLE>
F-2
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
INTRODUCTION TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
Basis of Presentation
During 1996, the Company acquired substantially all the assets of three
dental practices, except those required by law to be owned or maintained by
dentists, and simultaneously entered into 40-year service agreements with the
affiliated dental groups. These transactions are referred to as the "1996
Transactions." For the nine-month period ended September 30, 1997, the Company
acquired substantially all the assets of four dental practices and
simultaneously entered into 40-year service agreements with three of the
affiliated dental groups (one practice joined an existing affiliate). In
October 1997, the Company acquired substantially all the assets of two dental
practices and a related entity associated with one of these practices and
simultaneously entered into a 40-year service agreement with one of the
affiliated dental groups (one practice joined an existing affiliate). These
transactions are referred to as the "1997 Transactions."
The unaudited pro forma consolidated balance sheet at September 30, 1997
gives effect to (i) the 1997 Transactions completed subsequent to September
30, 1997, as if these transactions occurred on September 30, 1997 and (ii)
this offering and the application of the estimated net proceeds therefrom as
set forth in "Use of Proceeds," as if completed on September 30, 1997.
The unaudited pro forma consolidated statements of operations for the nine
months ended September 30, 1996 and 1997 and for the year ended December 31,
1996, give effect to the 1996 and 1997 Transactions and the effect of this
offering and the application of the estimated net proceeds therefrom, as if
all of these events had occurred on January 1, 1996.
The unaudited pro forma consolidated financial information does not purport
to represent what the Company's financial position or results of operations
would actually have been if such transactions had in fact occurred on those
dates or to project the Company's financial position or results of operations
for any future period. The unaudited pro forma consolidated financial
information is based on certain assumptions and adjustments described in the
notes hereto and should be read in conjunction therewith. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related notes thereto for American
Dental Partners, Inc. and the Combined Financial Statements for PDHC, Ltd.
included elsewhere in this Prospectus.
F-3
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACQUISITION PRO OFFERING PRO FORMA
ACTUAL ADJUSTMENTS(1) FORMA ADJUSTMENTS(2) AS ADJUSTED
------- -------------- ------- -------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 2,459 $ (606) $ 1,853 $ 7,614 $ 9,467
Accounts receivable... 24 202 226 -- 226
Receivables due from
affiliated
practices............ 3,186 -- 3,186 -- 3,186
Inventories........... 324 58 382 -- 382
Prepaid expenses and
other receivables.... 1,313 27 1,340 (71) 1,269
------- ------- ------- -------- -------
Total current
assets............. 7,306 (319) 6,987 7,543 14,530
------- ------- ------- -------- -------
Property and equipment,
net.................... 7,683 486 8,169 -- 8,169
------- ------- ------- -------- -------
Non-current assets:
Intangible assets,
net.................. 13,091 15,909 29,000 -- 29,000
Other assets.......... 213 14 227 -- 227
------- ------- ------- -------- -------
Total non-current
assets............. 13,304 15,923 29,227 -- 29,227
------- ------- ------- -------- -------
Total assets........ $28,293 $16,090 $44,383 $ 7,543 $51,926
======= ======= ======= ======== =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 1,945 $ 623 $ 2,568 $ -- $ 2,568
Accrued compensation,
benefits and taxes... 2,269 508 2,777 -- 2,777
Accrued expenses...... 1,815 655 2,470 -- 2,470
Current maturities of
debt................. 534 -- 534 -- 534
------- ------- ------- -------- -------
Total current
liabilities........ 6,563 1,786 8,349 -- 8,349
------- ------- ------- -------- -------
Non-current liabilities:
Long-term debt........ 5,490 13,300 18,790 (13,700) 5,090
Other liabilities..... 27 16 43 -- 43
------- ------- ------- -------- -------
Total non-current
liabilities........ 5,517 13,316 18,833 (13,700) 5,133
------- ------- ------- -------- -------
Total liabilities... 12,080 15,102 27,182 (13,700) 13,482
------- ------- ------- -------- -------
Series A convertible
preferred stock........ 8,483 -- 8,483 (8,483)(3) --
Series B redeemable
preferred stock........ 7,517 -- 7,517 (7,517) --
Stockholders' equity:
Common stock.......... 23 1 24 44 (3) 68
Additional paid-in
capital.............. 1,936 987 2,923 37,199 (3) 40,122
Unearned
compensation......... (57) -- (57) -- (57)
Accumulated deficit... (1,689) -- (1,689) -- (1,689)
------- ------- ------- -------- -------
Total stockholders'
equity............. 213 988 1,201 37,243 38,444
------- ------- ------- -------- -------
Total liabilities
and stockholders'
equity............. $28,293 $16,090 $44,383 $ 7,543 $51,926
======= ======= ======= ======== =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial
information.
F-4
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACQUISITION PRO OFFERING PRO FORMA
ACTUAL ADJUSTMENTS(4) FORMA ADJUSTMENTS(5) AS ADJUSTED
------- -------------- ------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Net revenue............. $ 3,933 $50,991 $54,924 $ -- $54,924
------- ------- ------- ------- -------
Operating expenses:
Salaries and
benefits............. 2,098 27,204 29,302 -- 29,302
Lab fees and dental
supplies............. 534 6,062 6,596 -- 6,596
Office occupancy...... 389 4,764 5,153 -- 5,153
Other operating
expenses............. 773 6,611 7,384 -- 7,384
General corporate
expenses............. 2,395 -- 2,395 -- 2,395
Depreciation.......... 177 1,531 1,708 -- 1,708
Amortization of
intangibles.......... 48 890 938 -- 938
------- ------- ------- ------- -------
Total operating
expenses........... 6,414 47,062 53,476 -- 53,476
------- ------- ------- ------- -------
Earnings (loss) from
operations............. (2,481) 3,929 1,448 -- 1,448
Interest expense
(income), net........ (38) 1,814 1,776 (1,233) 543
------- ------- ------- ------- -------
Earnings (loss) before
income taxes........... (2,443) 2,115 (328) 1,233 905
Income taxes.......... -- -- -- 367 367
------- ------- ------- ------- -------
Net earnings (loss)..... $(2,443) $ 2,115 (328) $ 866 $ 538
======= ======= ======= ======= =======
Net earnings (loss) per
common share........... $ (0.55) $ (0.09) $ 0.08
Weighted average common
shares outstanding..... 4,625 4,625(6) 6,567(7)
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial
information.
F-5
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACQUISITION PRO OFFERING PRO FORMA
ACTUAL ADJUSTMENTS(8) FORMA ADJUSTMENTS(9) AS ADJUSTED
------- -------------- ------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Net revenue............. $ -- $40,390 $40,390 $ -- $40,390
------- ------- ------- ----- -------
Operating expenses:
Salaries and
benefits............. -- 21,543 21,543 -- 21,543
Lab fees and dental
supplies............. -- 4,850 4,850 -- 4,850
Office occupancy...... -- 3,789 3,789 -- 3,789
Other operating
expenses............. -- 5,406 5,406 -- 5,406
General corporate
expenses............. 1,521 276 1,797 -- 1,797
Depreciation.......... 7 1,244 1,251 -- 1,251
Amortization of
intangibles.......... -- 700 700 -- 700
------- ------- ------- ----- -------
Total operating
expenses........... 1,528 37,808 39,336 -- 39,336
------- ------- ------- ----- -------
Earnings (loss) from
operations............. (1,528) 2,582 1,054 -- 1,054
Interest expense
(income), net........ (14) 1,346 1,332 (925) 407
------- ------- ------- ----- -------
Earnings (loss) before
income taxes........... (1,514) 1,236 (278) 925 647
Income taxes.......... -- -- -- 262 262
------- ------- ------- ----- -------
Net earnings (loss)..... $(1,514) $ 1,236 $ (278) $ 663 $ 385
======= ======= ======= ===== =======
Net earnings (loss) per
common share........... $ (0.33) $ (0.07) $ 0.06
Weighted average common
shares outstanding..... 4,606 4,606(10) 6,553(11)
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial
information.
F-6
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACQUISITION PRO OFFERING PRO FORMA
ACTUAL ADJUSTMENTS(12) FORMA ADJUSTMENTS(13) AS ADJUSTED
------- --------------- ------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Net revenue............. $36,620 $10,242 $46,862 $ -- $46,862
------- ------- ------- ----- -------
Operating expenses:
Salaries and
benefits............. 19,625 4,878 24,503 -- 24,503
Lab fees and dental
supplies............. 4,491 1,075 5,566 -- 5,566
Office occupancy...... 3,368 868 4,236 -- 4,236
Other operating
expenses............. 4,433 1,032 5,465 -- 5,465
General corporate
expenses............. 2,260 -- 2,260 -- 2,260
Depreciation.......... 1,154 144 1,298 -- 1,298
Amortization of
intangibles.......... 259 441 700 -- 700
------- ------- ------- ----- -------
Total operating
expenses........... 35,590 8,438 44,028 -- 44,028
------- ------- ------- ----- -------
Earnings from
operations............. 1,030 1,804 2,834 -- 2,834
Interest expense
(income), net........ 195 1,096 1,291 (925) 366
------- ------- ------- ----- -------
Earnings before income
taxes.................. 835 708 1,543 925 2,468
Income taxes.......... 81 544 625 375 1,000
------- ------- ------- ----- -------
Net earnings............ $ 754 $ 164 $ 918 $ 550 $ 1,468
======= ======= ======= ===== =======
Net earnings per common
share.................. $ 0.07 $ 0.10 $ 0.22
Weighted average common
shares outstanding..... 5,025 5,025(14) 6,606(15)
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial
information.
F-7
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997
(1) To include the 1997 Transactions which occurred subsequent to September
30, 1997. The aggregate consideration for these transactions consisted of
approximately $13.2 million in cash, $1.9 million in subordinated promissory
notes and 139,482 shares of the Company's Common Stock.
(2) Gives effect to the sale of 2,000,000 shares of Common Stock at an
assumed initial public offering price of $16.00 per share and receipt and
application of the net proceeds therefrom, estimated to be approximately
$28,760,000 after deducting underwriters discounts and commissions and
offering expenses, to (i) redeem the Series B Redeemable Preferred Stock in
the amount of $7,517,000 and (ii) repay indebtedness of $13,700,000 under the
revolving credit facility.
(3) Gives effect to the conversion of 400,000 shares Series A Convertible
Preferred Stock into 2,400,000 shares of Common Stock.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1996
(4) To include the effects of the 1996 and 1997 Transactions as if such
transactions occurred on January 1, 1996, including: (i) the impact of
applying the Company's service fee to the historical adjusted gross revenue of
each dental practice in accordance with the service agreements entered into
between the Company and the affiliated dental practices, as if such service
agreements were in place at the beginning of the periods presented; (ii) the
following significant adjustments made to the operating results of Park for
periods prior to its acquisition on November 12, 1996: (a) reduction of salary
and bonus expense of $2,275,000; (b) the elimination of costs of $320,000
incurred in connection with the transaction; and (c) the write-off of property
and equipment of $1,199,000; (iii) increased interest expense associated with
additional borrowings; (iv) increased amortization of intangibles; and (v)
increased income tax expense.
(5) Gives effect to the offering of 1,506,000 shares which would have
necessary to redeem the Series B Redeemable Preferred Stock of $7,706,000, to
pay the $13,700,000 in outstanding indebtedness under the Company's revolving
credit facility and to pay approximately $1,000,000 of offering costs. Also
includes an increase in income tax expense as a result of the increase in
earnings before income taxes to arrive at an effective rate of 40.6% on a pro
forma as adjusted basis.
(6) Reflects an increase in weighted average shares of 1,608,000 resulting
from the issuance of shares issued in connection with the 1996 and 1997
Transactions to arrive at pro forma earnings per share.
(7) Pro forma as adjusted earnings per share includes the issuance of an
additional 1,506,000 shares which would have necessary to redeem the Series B
Redeemable Preferred Stock of $7,706,000, to pay the $13,700,000 in
outstanding indebtedness under the Company's revolving credit facility and to
pay approximately $1,000,000 of offering costs.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996
(8) To include the effects of the 1996 and 1997 Transactions as if such
transactions occurred on January 1, 1996, including: (i) the impact of
applying the Company's service fee to the historical adjusted gross revenue of
each dental practice in accordance with the service agreements entered into
between the Company and the affiliated dental practices, as if such service
agreements were in place at the beginning of the periods presented; (ii) the
following significant adjustments made to the operating results of Park for
periods prior to its acquisition on November 12, 1996: (a) reduction of salary
and bonus expense of $275,000; (b) the elimination of costs of $320,000
incurred in connection with the transaction and (c) the write-off of property
and equipment of $1,199,000; (iii) increased interest expense; (iv) increased
amortization of intangibles; and (v) increased tax expense associated with
these transactions.
F-8
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION--(CONTINUED)
(9) Gives effect to the offering of 1,506,000 shares which would have
necessary to redeem the Series B Redeemable Preferred Stock of $7,706,000, to
pay the $13,700,000 in outstanding indebtedness under the Company's revolving
credit facility and to pay approximately $1,000,000 of offering costs. Also
includes an increase in income tax expense as a result of the increase in
earnings before income taxes to arrive at an effective rate of 40.6% on a pro
forma as adjusted basis.
(10) Reflects actual weighted average shares and an increase in weighted
average shares of 1,794,000 resulting from the shares issued in connection
with the 1996 and 1997 Transactions to arrive at pro forma earnings per share.
(11) Pro forma as adjusted earnings per share includes the issuance of an
additional 1,506,000 shares which would have necessary to redeem the Series B
Redeemable Preferred Stock of $7,706,000, to pay the $13,700,000 in
outstanding indebtedness under the Company's revolving credit facility and to
pay approximately $1,000,000 of offering costs.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997
(12) To include the effects of the 1997 Transactions as if such transactions
occurred on January 1, 1996, including: (i) the impact of applying the
Company's service fee to the historical adjusted gross revenue of each dental
practice in accordance with the service agreements entered into between the
Company and the affiliated dental practices, as if such service agreements
were in place at the beginning of the periods presented; (ii) increased
interest expense; (iii) increased amortization of intangibles; and (iv)
increased tax expense associated with these transactions.
(13) Gives effect to the offering of 1,506,000 shares which would have
necessary to redeem the Series B Redeemable Preferred Stock of $7,706,000, to
pay the $13,700,000 in outstanding indebtedness under the Company's revolving
credit facility and to pay approximately $1,000,000 of offering costs. Also
includes an increase in income tax expense as a result of the increase in
earnings before income taxes to arrive at an effective rate of 40.6% on a pro
forma as adjusted basis.
(14) Reflects actual weighted average shares and an increase in weighted
average shares of 162,000 to reflect the shares issued in connection with the
1996 and 1997 Transactions to arrive at pro forma earnings per share.
(15) Pro forma as adjusted earnings per share includes the issuance of an
additional 1,506,000 shares which would have necessary to redeem the Series B
Redeemable Preferred Stock of $7,706,000, to pay the $13,700,000 in
outstanding indebtedness under the Company's revolving credit facility and to
pay approximately $1,000,000 of offering costs.
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American Dental Partners, Inc.:
We have audited the accompanying consolidated balance sheets of American
Dental Partners, Inc. and subsidiaries (the "Company") as of December 31, 1996
and September 30, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1996 and
the nine months ended September 30, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of American Dental Partners, Inc. and subsidiaries as of December 31, 1996 and
September 30, 1997, and the results of their operations and their cash flows
for the year ended December 31, 1996 and the nine months ended September 30,
1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
October 27, 1997, except for Note 13
as to which date is November 7, 1997
F-10
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 5,836 $ 2,459
Accounts receivable............................... 996 24
Receivables due from affiliated practices......... 1,595 3,186
Inventories....................................... 174 324
Prepaid expenses and other receivables............ 1,405 1,313
------- -------
Total current assets............................ 10,006 7,306
------- -------
Property and equipment, net......................... 5,943 7,683
------- -------
Non-current assets:
Intangible assets, net............................ 9,173 13,091
Other assets...................................... 172 213
------- -------
Total non-current assets........................ 9,345 13,304
------- -------
Total assets.................................... $25,294 $28,293
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 1,730 $ 1,945
Accrued compensation, benefits and taxes.......... 2,154 2,269
Accrued expenses.................................. 2,396 1,815
Current maturities of debt........................ 537 534
------- -------
Total current liabilities....................... 6,817 6,563
------- -------
Non-current liabilities:
Long-term debt.................................... 3,063 5,490
Other liabilities................................. 145 27
------- -------
Total non-current liabilities................... 3,208 5,517
------- -------
Total liabilities............................... 10,025 12,080
------- -------
Series A convertible preferred stock, par value
$0.01 per share, 400,000 shares authorized, issued
and outstanding.................................... 8,009 8,483
Series B redeemable preferred stock, par value $0.01
per share, 70,000 shares authorized, issued and
outstanding........................................ 7,096 7,517
Stockholders' equity:
Common stock, par value $0.01 per share,
25,000,000 shares authorized, 2,213,384 and
2,254,736 shares issued and outstanding at
December 31, 1996 and September 30, 1997,
respectively..................................... 22 23
Additional paid-in capital........................ 2,659 1,936
Unearned compensation............................. (74) (57)
Accumulated deficit............................... (2,443) (1,689)
------- -------
Total stockholders' equity...................... 164 213
------- -------
Commitments and contingencies
Total liabilities and stockholders' equity...... $25,294 $28,293
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------
1996 1996 1997
------------ ----------- -------
(UNAUDITED)
<S> <C> <C> <C>
Net revenue................................... $ 3,933 $ -- $36,620
------- ------- -------
Operating expenses:
Salaries and benefits....................... 2,098 -- 19,625
Lab fees and dental supplies................ 534 -- 4,491
Office occupancy............................ 389 -- 3,368
Other operating expenses.................... 773 -- 4,433
General corporate expenses.................. 2,395 1,521 2,260
Depreciation................................ 177 7 1,154
Amortization of intangibles................. 48 -- 259
------- ------- -------
Total operating expenses.................. 6,414 1,528 35,590
------- ------- -------
Earnings (loss) from operations............... (2,481) (1,528) 1,030
Interest expense (income), net.............. (38) (14) 195
------- ------- -------
Earnings (loss) before income taxes........... (2,443) (1,514) 835
Income taxes................................ -- -- 81
------- ------- -------
Net earnings (loss)........................... $(2,443) $(1,514) $ 754
======= ======= =======
Net earnings (loss) per common share.......... $ (0.55) $ (0.33) $ 0.07
Weighted average common shares outstanding.... 4,625 4,606 5,025
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------- PAID-IN UNEARNED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
------ ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... -- $-- $ -- $-- $ -- $ --
Issuance of common
stock for
acquisitions......... 1,613 16 2,673 -- -- 2,689
Sale of common stock.. 600 6 191 (97) -- 100
Amortization of
unearned
compensation......... -- -- -- 23 -- 23
Dividends on Series A
convertible preferred
stock................ -- -- (109) -- -- (109)
Dividends on Series B
redeemable preferred
stock................ -- -- (96) -- -- (96)
Net loss.............. -- -- -- -- (2,443) (2,443)
----- ---- ------ ---- ------- -------
Balance at December 31,
1996................... 2,213 22 2,659 (74) (2,443) 164
Issuance of common
stock for
acquisitions......... 42 1 171 -- -- 172
Amortization of
unearned
compensation......... -- -- -- 17 -- 17
Dividends on Series A
convertible preferred
stock................ -- -- (474) -- -- (474)
Dividends on Series B
redeemable preferred
stock................ -- -- (420) -- -- (420)
Net earnings.......... -- -- -- -- 754 754
----- ---- ------ ---- ------- -------
Balance at September 30,
1997................... 2,255 $ 23 $1,936 $(57) $(1,689) $ 213
===== ==== ====== ==== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------
1996 1996 1997
------------ ----------- -------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)........................ $ (2,443) $(1,514) $ 754
Adjustments to reconcile net earnings
(loss) to net cash provided by (used for)
operating activities:
Depreciation............................. 177 7 1,154
Amortization of intangible assets........ 48 -- 259
Other amortization....................... 23 18 49
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable.................... 1,417 -- 1,778
Receivables due from affiliated
practices............................. (1,707) -- (1,820)
Other current assets................... 237 (7) 56
Accounts payable and accrued expenses.. 941 199 (1,431)
Accrued compensation, benefits and
taxes................................. (232) 169 (166)
-------- ------- -------
Net cash provided by (used for)
operating activities................ (1,539) (1,128) 633
-------- ------- -------
Cash flows from investing activities:
Acquisitions, net of cash acquired......... (6,632) -- (3,337)
Capital expenditures, net.................. (386) (139) (2,102)
Other assets............................... 140 (14) 79
-------- ------- -------
Net cash used for investing
activities.......................... (6,878) (153) (5,360)
-------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of Series A
convertible preferred stock............... 7,900 1,023 --
Proceeds from issuance of Series B
redeemable preferred stock................ 7,000 907 --
Proceeds from issuance of common stock..... 100 100 --
Borrowings under revolving line of credit,
net....................................... -- -- 2,300
Repayment of borrowings.................... (747) -- (708)
Payment of debt issuance costs............. -- -- (242)
-------- ------- -------
Net cash provided by financing
activities.......................... 14,253 2,030 1,350
-------- ------- -------
Increase (decrease) in cash and cash
equivalents................................. 5,836 749 (3,377)
Cash and cash equivalents at beginning of
period...................................... -- -- 5,836
-------- ------- -------
Cash and cash equivalents at end of period... $ 5,836 $ 749 $ 2,459
======== ======= =======
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest... $ 3 $ -- $ 112
======== ======= =======
Cash paid during the period for income
taxes..................................... $ -- $ -- $ 60
======== ======= =======
Acquisitions:
Assets acquired............................ $ 20,099 $ -- $ 5,816
Liabilities assumed and issued............. (10,063) -- (2,061)
Common stock issued........................ (2,689) -- (172)
-------- ------- -------
Cash paid.................................. 7,347 -- 3,583
Less cash acquired......................... (715) -- (246)
-------- ------- -------
Net cash paid for acquisitions....... $ 6,632 $ -- $ 3,337
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
(1) DESCRIPTION OF BUSINESS
American Dental Partners, Inc. (the "Company") was formed in December 1995
to provide management services to dental practices and commenced operations in
January 1996. The Company acquires substantially all the assets of the dental
practices with which it affiliates, except those required by law to be owned
or maintained by dentists (such as third party contracts, certain governmental
receivables and patient records), and enters into long-term service agreements
with these affiliated dental practices. The Company provides all services
necessary for the administration of the non-clinical aspects of the dental
operations. Services provided to the affiliated dental practices include
assistance with information systems, budgeting, financial reporting,
facilities management, third-party payor contracting, supplies and equipment
procurement, billing and collecting accounts receivable, marketing and
recruiting, hiring and training support staff.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the
accrual basis of accounting. The Company does not own any interests in or
control the activities of the affiliated dental practices. Accordingly, the
consolidated financial statements of the affiliated dental practices are not
consolidated with those of the Company.
The consolidated statements of operations and cash flows for the nine months
ended September 30, 1996 are unaudited, but in the opinion of management
include all adjustments, which consist only of normal and recurring
adjustments, necessary for a fair presentation of the unaudited interim
financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of these consolidated 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 at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments with an original maturity of three months or less to
be cash equivalents.
Fair Value of Financial Instruments
The Company believes the carrying amount of cash and cash equivalents,
accounts receivable, receivables due from affiliated practices, accounts
payable and accrued expenses approximate fair value because of the short-term
nature of these items. The carrying amount of long-term debt approximates fair
value because the interest rates approximate rates at which similar types of
borrowing arrangements could be obtained by the Company.
F-15
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
Net Revenue
The Company's net revenue represents the aggregate amounts charged to
affiliated dental practices pursuant to the terms of the service agreements.
Under such agreements, the affiliated dental practices reimburse the Company
for expenses incurred on their behalf in connection with the operation and
administration of the dental facilities and pay fees to the Company for its
management services. A portion of these fees typically includes a fixed
monthly amount. The Company typically receives an additional fee if certain
operating objectives are achieved. The Company records all revenue monthly as
earned.
Inventories
Inventories consist primarily of dental supplies and are stated at the lower
of cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
recorded using the straight-line method over the estimated useful lives of the
related assets which are 30-40 years for buildings, 3-7 years for equipment
and 3-7 years for furniture and fixtures.
Property and equipment under capital leases are stated at the present value
of minimum lease payments at inception of the lease. Equipment held under
capital leases and leasehold improvements are amortized over the shorter of
the lease term or estimated useful life of the asset. Amortization of assets
subject to capital leases is included in depreciation expense.
Intangible Assets
Identifiable intangible assets result from management service agreements
with the affiliated dental groups. The estimated fair value of the management
service agreements is the excess of the purchase price over the estimated fair
value of the tangible assets acquired and liabilities assumed of dental
practices. Intangible assets associated with management service agreements are
generally amortized over the period of expected benefit, which ranges from 25
to 40 years. Accumulated amortization amounted to $48,000 and $282,000 at
December 31, 1996 and September 30, 1997, respectively.
The Company reviews the carrying value of intangible assets on an entity by
entity basis to determine if facts and circumstances exist which would suggest
that the intangible assets may be impaired or that the amortization period
needs to be modified. Among the factors the Company considers in making the
evaluation are changes in the practices' market position, reputation,
profitability and geographical penetration. If conditions are present which
indicate impairment is probable, the Company will prepare a projection of the
undiscounted cash flows of the specific practice and determine if the
intangible assets are recoverable based on these undiscounted cash flows. If
impairment is indicated, then an adjustment will be made to reduce the
carrying amount of the intangible assets to their fair value.
Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. The effect on deferred taxes of
changes in the tax rate is recognized in operations in the period that
includes the enactment date.
F-16
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
Stock Option Plans
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting
for Stock-Based Compensation, allows companies to recognize expense for the
fair value of stock-based awards or to continue to apply the provisions of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and disclose the
effects of SFAS 123 as if the fair-value-based method defined in SFAS No. 123
had been applied. Under APB Opinion No. 25, compensation expense is recognized
only if on the measurement date the fair value of the underlying stock exceeds
the exercise price. The Company has elected to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS 123.
Earnings Per Share
Earnings per share are computed based on the weighted average number of
shares outstanding during the period plus common stock equivalents related to
stock options, if such common stock equivalents cause dilution in earnings per
share in excess of 3% and if their inclusion is not anti-dilutive. In
accordance with Securities and Exchange Commission Staff Accounting Bulletin
No. 83, Common Stock issued and stock options granted at prices lower than the
assumed initial public offering price within a one-year period prior to the
initial filing date of the offering have been included in the earnings per
share calculation (using the treasury stock method) as if they were
outstanding for all periods presented. The number of shares outstanding for
all periods presented have been retroactively adjusted to reflect the issuance
of Common Stock upon the contemplated conversion of Series A Convertible
Preferred Stock in connection with the planned public offering (see Note 13).
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128")
which requires presentation of basic earnings per share ("Basic EPS") and
diluted earnings per share ("Diluted EPS") by all entities that have publicly
traded common stock or potential common stock (options, warrants, convertible
securities or contingent stock arrangements). SFAS 128 also requires
presentation of earnings per share by an entity that has made a filing or is
in the process of filing with a regulatory agency in preparation for the sale
of those securities in a public market. Basic EPS is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period. The
computation of Diluted EPS does not assume conversion, exercise or contingent
exercise of securities that would have an antidilutive effect on earnings. The
statement is effective for both interim and annual periods ending after
December 15, 1997. The Company does not believe that the effect on the
Company's earnings per share resulting from the adoption of SFAS 128 will be
material.
Pending Pronouncements
The Emerging Issues Task Force ("EITF") has issued EITF Issue No. 97-2 which
addresses certain matters relating to the physician practice management
industry, which include the criteria for the consolidation of professional
service corporation revenue and the accounting for business combinations. The
Company is unable to predict the impact, if any, that this EITF issue may have
on the Company's financial statements.
(3) ACCOUNTS RECEIVABLE AND NET REVENUE
Accounts Receivable
Accounts receivable represent amounts due from patients and third party
payors for dental services provided by affiliated dental practices that were
outstanding at the time the Company acquired the assets of the practice.
Receivables Due From Affiliated Dental Practices
Receivables due from affiliated practices represent amounts due pursuant to
the terms of the service agreements as described below.
F-17
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
Net Revenue--Management Services
The Company's net revenue represents the aggregate fees charged to
affiliated dental practices pursuant to the terms of the service agreements.
Under such agreements, the affiliated dental practices reimburse the Company
for expenses incurred on their behalf in connection with the operation and
administration of the dental facilities and pay fees to the Company for its
management services. A portion of these fees typically includes a fixed
amount. The Company typically receives an additional fee if certain operating
objectives are achieved. The Company records this revenue monthly as earned.
Revenue--Affiliated Dental Practices
The affiliated dental practices record revenue at established rates reduced
by contractual adjustments and allowances for doubtful accounts to arrive at
adjusted gross revenue. Contractual adjustments represent the difference
between gross billable charges at established rates and the portion of those
charges allowable by third party payors pursuant to certain reimbursement and
managed care contracts.
The Company does not consolidate the financial statements of its affiliated
dental practices with those of the Company. The adjusted gross revenue and
amounts retained by the affiliated dental practices are presented below for
illustrative purposes only:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Adjusted gross revenue--affiliated dental
practices.................................. $4,958 $47,521
Amounts retained by affiliated dental
practices.................................. 1,025 10,901
------ -------
Net revenue (amounts earned by the Company
under service agreements).................. $3,933 $36,620
====== =======
</TABLE>
(4) ACQUISITIONS AND AFFILIATIONS
During the year ended December 31, 1996, the Company acquired substantially
all the assets of three dental practices and simultaneously entered into 40-
year service agreements with the affiliated dental groups. The aggregate
purchase price paid in connection with these transactions (the "1996
Transactions") consisted of approximately $7.3 million in cash, $2.2 million
in subordinated promissory notes and 1,613,400 shares of Common Stock.
During the nine months ended September 30, 1997, the Company acquired
substantially all the assets of four dental practices and simultaneously
entered into 40-year service agreements with three of the affiliated dental
groups (one practice joined an existing affiliate). The aggregate purchase
price paid in connection with these transactions consisted of approximately
$3.6 million in cash, $0.5 million in subordinated promissory notes and 41,352
shares of Common Stock.
Subsequent to September 30, 1997, the Company acquired substantially all the
assets of two dental practices and a related entity associated with one of
these practices and simultaneously entered into a 40-year service agreement
with one of the affiliated dental groups (one practice joined an existing
affiliate). The aggregate purchase price paid in connection with these
transactions consisted of $13.2 million in cash, $1.9 million in subordinated
promissory notes and 139,482 shares of Common Stock. All transactions
completed in 1997 are referred to as the "1997 Transactions."
F-18
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
The excess of the purchase price and expenses associated with the 1996 and
1997 Transactions over the estimated fair value of the net assets acquired has
been recorded as intangible assets. The accompanying consolidated financial
statements include the results of operations under the service agreements from
the date of acquisition. These transactions are as follows.
<TABLE>
<CAPTION>
DATE AFFILIATED DENTAL GROUP LOCATION
---- ----------------------- --------
<S> <C> <C>
November 1996..................... Park Dental Minneapolis, MN
December 1996..................... Longhorn Dental Austin, TX
December 1996..................... Smileage Dental Care Milwaukee, WI
March 1997........................ Malcolm R. Scott D.D.S. San Marcos, TX
March 1997........................ Lakeside Dental Care Metaire, LA
May 1997.......................... Soster Dental Group Pittsburgh, PA
July 1997......................... Northpoint Dental Group Milwaukee, WI
October 1997...................... Wilkens Dental Group Milwaukee, WI
October 1997...................... Orthocare Group Minneapolis, MN
</TABLE>
(5) PROPERTY AND EQUIPMENT
Property and Equipment
Property and equipment consisted of the following at December 31, 1996 and
September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Land, buildings and leasehold improvements....... $ 3,938 $ 5,403
Equipment........................................ 3,768 5,982
Furniture and fixtures........................... 1,450 2,595
------- -------
Total property and equipment..................... 9,156 13,980
Less accumulated depreciation.................... (3,213) (6,297)
------- -------
Property and equipment, net...................... $ 5,943 $ 7,683
======= =======
</TABLE>
Operating Leases
The Company is obligated under non-cancelable operating leases for premises
and equipment expiring in various years through the year 2009. Rent expense
for the year ended December 31, 1996 and nine months ended September 30, 1997
amounted to $319,000 and $2,751,000, respectively, of which $267,000 and
$2,416,000 were reimbursed under service agreements. The Company has several
leases with stockholders that were assumed in connection with its 1996 and
1997 Transactions. Such amounts are generally reimbursed pursuant to the terms
of the service agreements.
F-19
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
Minimum future rental payments and amounts to be reimbursed under service
agreements under non-cancelable operating leases as of September 30, 1997 are
as follows:
<TABLE>
<CAPTION>
AMOUNT TO BE
TOTAL REIMBURSED
AMOUNT UNDER SERVICE NET
DUE AGREEMENTS AMOUNT
------- ------------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Quarter ending December 31, 1997................ $ 774 $ 725 $ 49
Fiscal year ending:
1998.......................................... 2,965 2,801 164
1999.......................................... 2,721 2,618 103
2000.......................................... 2,274 2,211 63
2001.......................................... 1,608 1,540 68
2002.......................................... 1,373 1,373 --
Thereafter.................................... 4,648 4,648 --
------- ------- ----
Total minimum lease payments................ $16,363 $15,916 $447
======= ======= ====
</TABLE>
(6) INCOME TAXES
Income tax expense attributable to income from continuing operations consists
of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Year ended December 31, 1996:
Federal............................................ $ -- $ -- $ --
State.............................................. -- -- --
----- ----- -----
$ -- $ -- $ --
===== ===== =====
Nine months ended September 30, 1997:
Federal............................................ $ -- $ -- $ --
State.............................................. 81 -- 81
----- ----- -----
$ 81 $ -- $ 81
===== ===== =====
</TABLE>
F-20
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities as of December
31, 1996 and September 30, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Operating loss carryforward........... $ 1,882 $ 1,824
Property and equipment................ 366 418
Organization and start-up costs....... 251 195
Accrued expenses and other
liabilities.......................... 831 148
Other................................. 168 --
------- -------
Total gross deferred tax assets....... 3,498 2,585
Valuation allowance................... (3,498) (2,398)
------- -------
Net deferred tax asset................ $ -- $ 187
------- -------
Deferred tax liabilities:
Intangibles........................... $ -- $ (184)
Other................................. -- (3)
------- -------
Total gross deferred tax liabilities.. $ -- $ (187)
------- -------
Net deferred tax asset.................. $ -- $ --
======= =======
</TABLE>
The valuation allowance for deferred tax assets was $3,498,000 and
$2,398,000 as of December 31, 1996 and September 30, 1997, respectively. The
net change in the total valuation allowance for the year ended December 31,
1996 and the nine months ended September 30, 1997 was an increase of
$3,498,000 and a decrease of $1,100,000, respectively. The valuation allowance
has been established because, based on the limited operating history of the
Company and other available evidence, it is more likely than not that the
deferred tax asset will not be realized.
Subsequent recognized tax benefits relating to the valuation allowance for
deferred tax assets as of December 31, 1996 and September 30, 1997 will be
allocated as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Income tax benefit to be reported in
the consolidated statement of
operations............................ $2,185 $1,666
Intangibles............................ 1,313 732
------ ------
$3,498 $2,398
====== ======
</TABLE>
F-21
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
At December 31, 1996 and September 30, 1997, the net deferred tax asset
consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------------- -----------------------
FEDERAL STATE TOTAL FEDERAL STATE TOTAL
------- ----- ------- ------- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Deferred tax liability:
Current..................... $ -- $ -- $ -- $ -- $ -- $ --
Non-current................. -- -- -- (158) (29) (187)
------- ----- ------- ------- ----- -------
$ -- $ -- $ -- $ (158) $ (29) $ (187)
------- ----- ------- ------- ----- -------
Deferred tax asset:
Current..................... $ 240 $ 46 $ 286 $ 978 $ 177 $ 1,155
Non-current................. 2,712 500 3,212 1,049 194 1,243
Valuation allowance......... (2,952) (546) (3,498) (2,027) (371) (2,398)
------- ----- ------- ------- ----- -------
Net deferred tax asset.... $ -- $ -- $ -- $ -- $ -- $ --
======= ===== ======= ======= ===== =======
</TABLE>
At December 31, 1996 and September 30, 1997, the Company has net operating
loss carryforwards for Federal income tax purposes of approximately $4,706,000
and $4,561,000, respectively which are available to offset future Federal
taxable income. The net operating loss carryforward begins to expire in the
year 2012 unless utilized.
The following table reconciles the Federal statutory income tax rate and the
Company's effective income tax rate for the year ended December 31, 1996 and
nine months ended September 30, 1997:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------------
<S> <C> <C>
Income taxes at Federal
statutory rate......... (34.0)% 34.0%
State taxes, net of
Federal benefit........ (6.0) 6.0
Valuation reserve and
other changes.......... 33.0 (36.0)
Intangibles and other
permanent differences.. 7.0 6.0
----- -----
Effective income tax
rate................... -- % 10.0%
===== =====
</TABLE>
F-22
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
(7) DEBT
Long-term debt and capital lease obligations consist of the following at
December 31, 1996 and September 30, 1997 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Revolving line of credit advances, collaterized
by substantially all assets of the Company, all
at a LIBOR based rate of approximately 7.5%.... $ -- $2,300
Mortgages payable, secured, interest rates
ranging from 8.6% to 8.8% payable in
installments through 2015...................... 788 741
Notes payable, unsecured, interest rates ranging
from 8.0% to 8.9% payable in installments,
maturing in 2004............................... 524 48
Subordinated notes payable to stockholders and
former owners, bearing interest at 7%, maturing
through 2003................................... 2,182 2,673
Capital lease obligations....................... 106 262
------ ------
Total long-term debt and capital lease
obligations.................................... 3,600 6,024
Less current maturities......................... 537 534
------ ------
Long-term debt and capital lease obligations,
excluding current maturities................... $3,063 $5,490
====== ======
</TABLE>
Annual maturities of long-term debt and future minimum lease payments under
capital leases as of September 30, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
LONG-TERM CAPITAL
DEBT LEASES
--------- -------
<S> <C> <C>
Quarter Ending December 31, 1997........................... $ 328 $ 20
Fiscal Year Ending:
1998..................................................... 453 103
1999..................................................... 459 66
2000..................................................... 2,767 50
2001..................................................... 474 50
2002..................................................... 483 33
Thereafter............................................... 798 --
------ ----
Total payments......................................... $5,762 322
======
Less amounts representing interest....................... 60
----
Total obligations under capital leases................. $262
====
</TABLE>
Revolving Line of Credit
In April 1997, the Company entered into a $30 million revolving line of
credit agreement with a bank. The credit facility is being used for general
corporate purposes including acquisitions. Borrowings under this line of
credit bear interest at either prime- or LIBOR-based rates, at the Company's
option, plus a margin based upon the Company's debt coverage ratio, which
ranges up to 0.50% for prime-based loans and up to 2.125% for LIBOR-based
loans. In addition, the Company pays a commitment fee of 0.25% of the average
daily balance of the unused line. Borrowings are limited to an availability
formula based on adjusted EBITDA. The credit facility
F-23
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
is secured by a first lien on substantially all of the Company's assets,
including a pledge of the stock of the Company's subsidiaries. The Company is
also required to comply with certain financial and other covenants. The line
of credit matures in April 2000.
Subordinated Debentures
The Company is a party to a Subordinated Debenture Purchase Agreement dated
January 8, 1996 pursuant to which it has received a commitment from a
principal stockholder for the purchase of up to $15,000,000 of 12%
subordinated debentures. The purchase of such debentures is contingent upon
the satisfaction of certain conditions. For each debenture issued, the Company
is also obligated to issue Common Stock at a purchase price equal to the $0.01
per share par value of the Company's Common Stock. The number of shares of
Common Stock to be issued is subject to a predetermined formula.
The principal amount of the debentures, if issued, will be payable in three
equal installments due in the years 2002, 2003 and 2004 or upon the occurrence
of a Liquidity Event, as defined. Any debentures outstanding are subordinated
to any indebtedness owed to any bank. The Company is not obligated to issue
any debentures and has not issued any debentures through December 31, 1996 and
September 30, 1997. The obligation to purchase any debentures will
automatically terminate upon completion of an initial public offering.
(8) CONVERTIBLE AND REDEEMABLE PREFERRED STOCK
Series A Convertible Preferred Stock
The Company is authorized to issue up to 400,000 shares of Series A
convertible preferred stock, $0.01 par value, all of which were issued and
outstanding at December 31, 1996 and September 30, 1997.
Holders of Series A convertible preferred stock have the same number of
votes as the shares of Common Stock into which their Series A convertible
preferred stock could be converted. The Series A convertible preferred stock
is entitled to receive dividends at a cumulative rate of $1.58 per share,
compounded annually ($109,000 and $474,000 for the year ended December 31,
1996 and nine months ended September 30, 1997, respectively) which have not
been declared. Such dividends will be paid when, as and if declared by the
Board of Directors. In the event of liquidation, dissolution, or winding up of
the Company, holders of the Series A convertible preferred stock will be
entitled to receive, prior to any distribution to holders of Common Stock, all
accumulated unpaid dividends plus $19.75 per share. However, if holders of the
Series A convertible preferred stock would, receive a greater amount if their
stock had been converted to Common Stock immediately prior to such
liquidation, dissolution, or winding up, then they will be entitled to receive
such greater amount. The Series A convertible preferred stock is recorded at
$8,009,000 and $8,483,000 at December 31, 1996 and September 30, 1997,
respectively, and includes accrued but unpaid dividends.
The Series A convertible preferred stock may be converted into shares of
Common Stock at any time at the option of the holder. The 400,000 shares of
Series A convertible preferred stock will convert to 2,400,000 shares of
Common Stock upon completion of the Company's initial public offering and all
accrued dividends will be canceled. This same conversion ratio applies in the
event a holder of this preferred stock converts such shares into Common Stock
prior to the completion of this offering.
If not previously converted, the Series A convertible preferred stock will
be subject to redemption at the option of the Company or a majority of the
holders of the Series A convertible preferred stock in three equal
installments in the years 2002, 2003 and 2004.
F-24
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
Series B Redeemable Preferred Stock
The Company is authorized to issue 70,000 shares of Series B redeemable
preferred stock, par value $0.01 per share, all of which were issued and
outstanding at December 31, 1996 and September 30, 1997.
Holders of Series B redeemable preferred stock have no voting rights. The
Series B redeemable preferred stock is entitled to receive dividends at a
cumulative rate of $8.00 per share, compounded annually ($96,000 and $421,000
for the year ended December 31, 1996 and nine months ended September 30, 1997,
respectively) which have not been declared. Such dividends will be paid when,
as and if declared by the Board of Directors. In the event of liquidation,
dissolution, or winding up of the Company, holders of the Series B redeemable
preferred stock will be entitled to receive, prior to any distributions to
holders of Common Stock, all accumulated unpaid dividends plus $100 per share.
The Series B redeemable preferred stock is recorded at $7,096,000 and
$7,517,000 at December 31, 1996 and September 30, 1997, respectively and
includes accrued but unpaid dividends.
The Series B redeemable preferred stock will be redeemed concurrently, or
within 90 days thereafter, of the consummation of the first sale of securities
by the Company pursuant to a registration statement filed under the Securities
Act of 1933, as amended. If not previously redeemed, the Series B redeemable
preferred stock will be subject to redemption at the option of the Company or
of holders of a majority of the Series B redeemable preferred stock in three
equal installments in the years 2002, 2003 and 2004.
(9) STOCKHOLDERS' EQUITY
Common Stock
The Company is authorized to issue up to 25,000,000 shares of Common Stock,
$0.01 par value, of which 2,213,384 and 2,254,736 shares were issued and
outstanding at December 31, 1996 and September 30, 1997, respectively. In
January and February of 1996, the Company sold 300,000 shares of its Common
Stock for $100,000. Additionally, in January 1996, the Company sold 300,000
shares of its Common Stock, which were subject to certain restrictions, for
$500. In connection with this transaction, the Company is recording
compensation expense ratably as the restrictions lapse. Compensation expense
amounted to $18,662 and $22,809 for the year ended December 31, 1996 and the
nine months ended September 30, 1997, respectively.
Dividend Restriction
The Company has not paid any cash dividends on its Common Stock and does not
plan to pay any cash dividends on its Common Stock in the foreseeable future.
Additionally, no dividends may be paid on the Common Stock (other than
dividends paid solely in Common Stock) without the consent of at least 51% of
the then current holders of the Series A convertible and Series B redeemable
preferred stock.
(10) COMMITMENTS AND CONTINGENCIES
Letters of Credit
At December 31, 1996 and September 30, 1997, the Company had an outstanding
letter of credit in the amount of $75,000 which expires on November 15, 1999.
F-25
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
(11) STOCK OPTION PLANS
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "1996 Plan") provides for the
grant of stock options to key employees. The 1996 Plan permits the granting of
options that qualify as incentive stock options and non-qualified options. The
exercise price of such options is no less than the fair market value of the
Common Stock at the time of grant. Options granted pursuant to the 1996 Plan
expire ten years after the date of grant. At September 30, 1997, options for a
total of 873,246 shares were reserved for issuance under the 1996 Plan. At
September 30, 1997, options for 627,420 shares were outstanding under the 1996
Plan.
1996 Time Accelerated Restricted Stock Option Plan
The Company's 1996 Time Accelerated Restricted Stock Option Plan ("TARSOP
Plan") provides for the grant of stock options to key employees. Only non-
qualified options may be granted pursuant to the TARSOP Plan. The exercise
price of such options is no less than the fair market value of the Common
Stock at the time of grant. These options vest at the end of the ninth year,
but are subject to accelerated vesting based on achievement of certain
performance measures. Options granted pursuant to the TARSOP Plan expire nine
and one-half years after the date of grant. At September 30, 1997, options for
a total of 360,360 shares were reserved for issuance under the TARSOP Plan,
all of which have been issued.
1996 Affiliate Stock Option Plan
The Company's 1996 Affiliate Stock Option Plan (the "Affiliate Plan")
provides for the grant of stock options to certain persons associated with the
affiliated dental practices. Only non-qualified options may be granted
pursuant to the Affiliate Plan. The exercise price of such options is no less
than the fair market value of the Common Stock at the time of grant. Options
granted pursuant to the Affiliate Plan expire ten years after the date of
grant. At September 30, 1997, options for a total of 210,000 shares were
reserved for issuance under the Affiliate Plan. At September 30, 1997, options
for 87,186 shares were outstanding under the Affiliate Plan.
1996 Directors Stock Option Plan
The Company's 1996 Directors Stock Option Plan (the "Directors Plan")
provides for the granting of options to outside directors. Only non-qualified
options may be granted pursuant to the Directors Plan. The exercise price of
such options is no less than the fair market value of the Common Stock at the
time of grant. Options granted pursuant to the Directors Plan expire ten years
after the date of grant. At September 30, 1997, options for a total of 60,000
shares were reserved for issuance under the Directors Plan. At September 30,
1997, options for 19,800 shares were outstanding under the Directors Plan.
F-26
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
Stock Option Activity
A summary of stock option activity under all the Company's stock option
plans for the year ended December 31, 1996 and the nine months ended September
30, 1997 follows:
<TABLE>
<CAPTION>
EXERCISE PRICES
-----------------------
NUMBER WEIGHTED
OF OPTIONS RANGE AVERAGE
---------- -------------- --------
<S> <C> <C> <C>
Outstanding at January 1, 1996.............. -- --
Granted..................................... 571,170 $0.33 - $12.50 $ 3.50
Cancelled................................... (4,500) 0.33 0.33
--------- -------------- ------
Outstanding at December 31, 1996............ 566,670 $0.33 - $12.50 $ 3.50
Granted..................................... 528,696 12.50 - 14.17 14.03
Cancelled................................... (600) 14.17 14.17
--------- -------------- ------
Outstanding at September 30, 1997........... 1,094,766 $0.33 - $14.17 $ 8.58
========= ============== ======
Options exercisable at:
December 31, 1996......................... 16,320
=========
September 30, 1997........................ 42,798
=========
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for stock options
issued. In accordance with the provisions of SFAS No. 123, there would be no
compensation cost using the minimum value method with the following
assumptions: risk free interest rate of 6.7%, expected life of four years, and
no dividends.
F-27
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
The following table summarizes information about stock options outstanding
at December 31, 1996 and September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Range of Exercise Prices.............. $0.33-$12.50 $0.33-$14.17
OPTIONS OUTSTANDING:
Number Outstanding.................... 566,670 1,094,766
Weighted Average Remaining Contractual
Life (in years)...................... 8.3-9.9 7.5-9.8
Weighted Average Exercise Price....... $0.33-$12.50 $0.33-$14.17
OPTIONS EXERCISABLE:
Number Exercisable.................... 16,320 42,798
Weighted Average Exercise Price....... $0.33-$8.33 $0.33-$8.33
</TABLE>
(12) EMPLOYEE BENEFIT PLANS
Retirement Plans
The Company has a Savings and Retirement Plan (401(k) Plan), adopted October
1, 1996, which is the Company's principal defined contribution retirement
plan, which provides for a match of up to 3% of an employee's compensation.
Additionally, at September 30, 1997, the Company had three other defined
contribution retirement plans. Total plan expense for the year ended December
31, 1996 and the nine months ended September 30, 1997 was $20,000 and
$136,000, respectively.
(13) SUBSEQUENT EVENTS
Letters of Intent
At October 31, 1997, the Company had two letters of intent signed with
potential affiliates to acquire substantially all the assets and enter into
long-term service agreements with these dental practices. The aggregate
purchase price under these letters of intent consists of approximately $5.9
million in cash, $0.8 million in subordinated promissory notes and 82,236
shares of Common Stock. Completion of these transactions is subject to due
diligence review and completion of final agreements. There can be no assurance
that the Company will consummate these transactions.
Initial Public Offering
Effective October 27, 1997, the Company authorized the filing of a
registration statement for an initial public offering of the Company's Common
Stock.
Stock Split and Authorized Shares
Effective October 31, 1997, the Company increased its authorized shares of
Common Stock from 2,500,000 to 25,000,000 shares. The increase in authorized
shares has been reflected retroactively in the accompanying consolidated
financial statements.
Additionally, effective October 31, 1997, the Company increased its
authorized shares of Preferred Stock from 470,000 to 1,000,000 shares. The
additional 530,000 shares are undesignated Preferred Stock which can be issued
in one or more series.
F-28
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 UNAUDITED
On November 7, 1997, the Company approved a 6-for-1 split of the Company's
Common Stock effected in the form of a stock dividend. All share and per share
amounts in the accompanying consolidated financial statements have been
retroactively restated to reflect this split.
1997 Employee Stock Purchase Plan
On October 27, 1997, the Company approved the 1997 Employee Stock Purchase
Plan (the "Employee Stock Purchase Plan"), effective December 1, 1997. The
Employee Stock Purchase Plan is designed to enable eligible employees to
purchase shares of Common Stock at a discount on a periodic basis through
payroll deductions and is intended to meet the requirements of Section 423 of
the Internal Revenue Code. Purchases will occur at the end of option periods,
each of six months' duration, except that the first such option period will
begin concurrent with the commencement of the Company's initial public
offering and end on June 30, 1998. The purchase price of Common Stock under
the Employee Stock Purchase Plan will be 85% of the lesser of the value of the
Common Stock at the beginning of an option period and the value of the Common
Stock at the end of the option period. Participants may elect under the
Employee Stock Purchase Plan, prior to each option period, to have from 2% to
10% of their pay withheld and applied to the purchase of shares at the end of
the option period. However, the Employee Stock Purchase Plan imposes a maximum
of $10,000 on the amount that may be withheld from any participant in any
option period. A total of 200,000 shares of Common Stock has been reserved for
issuance under the Employee Stock Purchase Plan.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PDHC, Ltd.:
We have audited the accompanying balance sheet of PDHC, Ltd. as of November
12, 1996 and the related statements of operations, stockholders' equity and
cash flows for the period from January 1, 1996 to November 12, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PDHC, Ltd. and the results
of its operations and its cash flows for the period January 1, 1996 to
November 12, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 26, 1997
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PDHC, Ltd.:
We have audited the accompanying balance sheet of PDHC, Ltd. as of December
31, 1995, and the related statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1994 and 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 PDHC, Ltd. as of December
31, 1995, and the results of its operations and its cash flows for the years
ended December 31, 1994 and 1995, in conformity with generally accepted
accounting principles.
Stirtz Bernards Boyden
Surdel & Larter, P.A.
Edina, Minnesota
October 16, 1997
F-31
<PAGE>
PDHC, LTD.
BALANCE SHEETS
DECEMBER 31, 1995 AND NOVEMBER 12, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 12,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 3,034 $ 8
Accounts receivable, net of allowances for doubtful
accounts and contractual adjustments of $250 in
1995 and $702 in 1996............................. 1,817 2,345
Refundable income taxes............................ -- 1,000
Supplies........................................... 113 111
Prepaid expenses and other receivables............. 294 234
Deferred income taxes.............................. 210 430
------- ------
Total current assets............................. 5,468 4,128
------- ------
Property and equipment, net.......................... 5,144 4,045
------- ------
Non-current assets:
Deferred income taxes.............................. 420 600
Other assets....................................... 98 97
------- ------
Total non-current assets......................... 518 697
------- ------
Total assets..................................... $11,130 $8,870
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 705 $ 532
Income taxes payable............................... 737 --
Accrued compensation, benefits and taxes........... 1,205 1,568
Accrued expenses................................... 321 543
Customer prepayments............................... -- 540
Current maturities of long-term debt............... 536 158
------- ------
Total current liabilities........................ 3,504 3,341
------- ------
Non-current liabilities:
Long-term debt, less current maturities............ 601 721
Other liabilities.................................. 68 118
------- ------
Total non-current liabilities.................... 669 839
------- ------
Total liabilities................................ 4,173 4,180
------- ------
Stockholders' equity:
Common stock, par value $1 per share, 50,000 shares
authorized, 12,057 shares issued and outstanding.. 12 12
Additional paid-in capital......................... 3,648 3,415
Notes receivable from stock sales.................. -- (155)
Retained earnings.................................. 3,297 1,418
------- ------
Total stockholders' equity....................... 6,957 4,690
------- ------
Commitments and contingencies
Total liabilities and stockholders' equity....... $11,130 $8,870
======= ======
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
PDHC, LTD.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD ENDED NOVEMBER 12, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD ENDED
--------------- NOVEMBER 12,
1994 1995 1996
------- ------- ------------
<S> <C> <C> <C>
Net revenue........................................ $26,139 $30,211 $27,680
------- ------- -------
Operating expenses:
Salaries and benefits............................ 13,457 17,117 16,731
Special bonuses.................................. -- -- 2,000
Lab fees and dental supplies..................... 2,444 2,642 2,771
Office occupancy................................. 2,149 2,185 2,120
Other expenses................................... 6,247 5,877 5,738
Depreciation..................................... 1,106 1,265 1,124
Amortization of intangibles...................... 10 18 26
------- ------- -------
Total operating expenses....................... 25,413 29,104 30,510
------- ------- -------
Earnings (loss) from operations.................... 726 1,107 (2,830)
Interest expense (income), net................... 228 67 (31)
------- ------- -------
Earnings (loss) before income taxes................ 498 1,040 (2,799)
Income taxes expense (benefit)................... 210 460 (920)
------- ------- -------
Net earnings (loss)................................ $ 288 $ 580 $(1,879)
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
PDHC, LTD.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD ENDED NOVEMBER 12, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
$1 PAR VALUE ADDITIONAL NOTE
------------- PAID-IN RECEIVABLE RETAINED
SHARES AMOUNT CAPITAL STOCK SALES EARNINGS TOTAL
------ ------ ---------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993, as previously
stated................. 6 $ 6 $ 118 $ -- $ 1,766 $ 1,890
Pooling of interests
with Brookpark Dental
Center, P.A.......... 3 3 (1) -- 744 746
--- ---- ------ ----- ------- -------
Balance at December 31,
1993, as restated...... 9 9 117 -- 2,510 2,636
Issuance of common
stock................ -- -- 105 -- -- 105
Purchase of common
stock................ -- -- (106) -- (81) (187)
Net earnings.......... -- -- -- -- 288 288
--- ---- ------ ----- ------- -------
Balance at December 31,
1994................... 9 9 116 -- 2,717 2,842
Issuance of common
stock................ 3 3 3,616 -- -- 3,619
Purchase of common
stock................ -- -- (84) -- -- (84)
Net earnings.......... -- -- -- -- 580 580
--- ---- ------ ----- ------- -------
Balance at December 31,
1995................... 12 12 3,648 -- 3,297 6,957
Issuance of common
stock................ 1 1 185 (155) -- 31
Purchase of common
stock................ (1) (1) (418) -- -- (419)
Net loss.............. -- -- -- -- (1,879) (1,879)
--- ---- ------ ----- ------- -------
Balance at November 12,
1996................... 12 $ 12 $3,415 $(155) $ 1,418 $ 4,690
=== ==== ====== ===== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
PDHC, LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD ENDED NOVEMBER 12, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD ENDED
---------------- NOVEMBER 12,
1994 1995 1996
------- ------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)............................ $ 288 $ 580 $(1,879)
Adjustments to reconcile net earnings (loss) to
net cash provided by (used for) operating
activities:
Depreciation and amortization................ 1,116 1,283 1,150
Deferred income taxes........................ (50) (430) (400)
Loss on disposition of assets................ -- -- 924
Accounts receivable.......................... (133) (335) (528)
Other current assets......................... (50) 85 62
Other assets................................. (11) (40) 1
Accounts payable and accrued expenses........ 682 353 (785)
Other........................................ -- 68 63
------- ------- -------
Net cash provided by (used for) operating
activities................................ 1,842 1,564 (1,392)
------- ------- -------
Cash flows used for investing activities:
Capital expenditures, net...................... (1,793) (1,162) (988)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock......... 105 3,619 31
Issuance of subordinated debenture............. -- 10 (35)
Net change in note payable--bank............... 360 (460) --
Purchase of common stock....................... (45) -- (419)
Repayment of borrowings........................ (557) (474) (223)
Repayment of capital lease obligations......... (172) (199) --
------- ------- -------
Net cash provided by (used for) financing
activities................................ (309) 2,496 (646)
------- ------- -------
Net change in cash and cash equivalents.......... (260) 2,898 (3,026)
Cash and cash equivalents at beginning of
period.......................................... 396 136 3,034
------- ------- -------
Cash and cash equivalents at end of period....... $ 136 $ 3,034 $ 8
======= ======= =======
Cash paid during the period for:
Interest....................................... $ 149 $ 157 $ 78
======= ======= =======
Income taxes................................... $ 338 $ 199 $ 1,214
======= ======= =======
Non-cash investing and financing activities:
Purchase of common stock with note payable..... $ 142 $ 84 $ --
======= ======= =======
Purchase of equipment with capital lease
obligation.................................... $ -- $ 5 $ --
======= ======= =======
Issuance of common stock for note receivable... $ -- $ -- $ 155
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
PDHC, LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD ENDED NOVEMBER 12, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company provides dental services to patients throughout the greater
Minneapolis/St. Paul, Minnesota area.
Estimates and Assumptions
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 period. Actual results could differ from those estimates.
Net Patient Service Revenue
The Company generates its revenue from patients and third party payors under
fee for service, preferred provider and capitation arrangements. The Company's
preferred provider agreements and capitation agreements with health
maintenance organizations are generally on a yearly basis subject to
cancellation by either party upon advance written notice.
Preferred provider revenue is recognized when the service is provided based
on predetermined rates for the respective service. Capitation revenue is due
monthly and recognized as revenue in the month the Company is obligated to
provide service to the patients under the capitation agreement.
Cash Equivalents
The Company considers all highly liquid instruments purchased with a
maturity of less than three months to be cash equivalents.
Supplies
Supplies consist of dental supplies and are stated at the lower of cost or
market. Cost is determined by the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets which
are 31 years for buildings, 5 years for equipment and 7 years for furniture
and fixtures and leasehold improvements. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is recognized. The cost of
maintenance and repairs is expensed as incurred and significant renewals and
betterments are capitalized.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs (including
yellow pages) charged to operations were $265,000 in 1994, $336,000 in 1995
and $455,000 in 1996.
F-36
<PAGE>
PDHC, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD ENDED NOVEMBER 12, 1996
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of income taxes currently due plus
deferred income taxes. Deferred income taxes relate to differences between the
financial and tax bases of certain assets and liabilities. Temporary
differences that result in significant deferred income taxes are allowance for
doubtful accounts, accrual for vacation pay and book accumulated depreciation
in excess of tax accumulated depreciation.
Concentrations of Credit Risk
The Company has cash and cash equivalents which exceed the federally insured
limit. These consist principally of demand deposits and money market funds.
These deposits generally have maturities of three months or less. The Company
has not experienced any losses on its cash deposits.
The Company grants credit to patients and third party payors without
collateral. Net patient service revenue from patients and third party payors
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER
31, PERIOD ENDED
------------ NOVEMBER 12,
1994 1995 1996
----- ----- ------------
<S> <C> <C> <C>
Fee-for-service plans............................. 37.3% 40.6% 43.8%
Preferred provider organization plans............. 13.6 12.2 12.4
Capitated managed care plans...................... 49.1 47.2 43.8
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Net patient service revenue from patients under a major dental benefit
carrier and affiliated entities' plan was 21.1% in 1994, 22.9% in 1995 and
20.2% in 1996. The major dental benefit carrier became a stockholder of the
Company in 1995.
(2) MERGER
On March 31, 1995, the Company completed a merger with Brookpark Dental
Center, P.A. whereby Brookpark was merged directly into PDHC, Ltd. Under the
terms of the agreement, Brookpark stockholders received 0.158 of a share of
the Company's common stock for each Brookpark share. Accordingly, the Company
issued 2,733 shares of its common stock for all the outstanding common stock
of Brookpark. In addition, outstanding employee stock options to purchase
Brookpark common stock were converted into options to purchase 58 shares of
the Company's common stock. Prior to the merger, certain stockholders of the
Company were also stockholders of Brookpark.
F-37
<PAGE>
PDHC, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD ENDED NOVEMBER 12, 1996
The transaction has been accounted for as pooling of interests and therefore
the financial statements are presented as if the merger took place at the
beginning of 1994. Separate and combined results of PHDC, Ltd. and Brookpark
during the year ended December 31, 1994 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C>
Net revenue:
PDHC, Ltd.............................................. $21,828
Brookpark Dental Center, P.A........................... 4,714
Less intercompany sales................................ (403)
-------
$26,139
=======
Net earnings:
PDHC, Ltd.............................................. $ 164
Brookpark Dental Center, P.A........................... 124
-------
$ 288
=======
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 12,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Land, buildings and leasehold improvements......... $ 5,376 $ 5,773
Equipment.......................................... 4,497 3,661
Furniture and fixtures............................. 1,443 2,775
------- -------
Total property and equipment....................... 11,316 12,209
Less accumulated depreciation...................... (6,172) (8,164)
------- -------
Property and equipment, net........................ $ 5,144 $ 4,045
======= =======
</TABLE>
(4) NOTE PAYABLE--BANK
The Company had a $1.2 million line of credit with interest payable monthly
at 1% above the prime rate. The Company paid off the note in 1995 and elected
not to renew the note. The note was secured by the assets of the Company.
F-38
<PAGE>
PDHC, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD ENDED NOVEMBER 12, 1996
(5) LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 12,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Note payable to bank bears interest at 8.63%. The
note is payable in monthly installments of $6,684,
including principal and interest due March, 2003.
The note is secured by property.................... $ 429 $ 392
Note payable to bank bears interest at 7.36%. The
note is payable in monthly installments of $3,617,
including principal and interest due March, 1997.
The note is secured by property.................... 49 14
Note payable to bank bears interest at 9.75%. The
note is payable in monthly installments of $21,436,
including principal and interest due November,
1996. The note is secured by the assets of the
Company............................................ 214 --
Notes payable to related parties bear interest at 8%
to 9%. The notes are payable in monthly
installments through October, 2004. The notes are
unsecured.......................................... 271 473
Capital lease obligations (Note 6).................. 132 --
Subordinated debentures to three employees bear
interest at 8%. The debentures are payable over
five to ten years after the employees' termination.
(Note 8)........................................... 35 --
Covenant not to compete, payable in monthly
installments of $683 through October, 1996......... 7 --
------ -----
1,137 879
Less current maturities............................. (536) (158)
------ -----
$ 601 $ 721
====== =====
</TABLE>
Future maturities of long-term obligations are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Years Ending December 31:
1997..................................................... $158
1998..................................................... 119
1999..................................................... 129
2000..................................................... 141
2001..................................................... 154
Thereafter............................................... 178
----
$879
====
</TABLE>
(6) LEASE COMMITMENTS
The Company leases its facilities under non-cancelable long-term operating
lease agreements ranging from one to fourteen years with certain leases
containing renewal options exercisable at the end of the lease term. Certain
lease agreements provide for the Company to pay their proportionate share of
real estate taxes, insurance and other operating costs. In addition, parts of
the leased facilities have been subleased with one-year terms. Rent expense
under facility leases was $1,282,000 in 1994, $1,044,000 in 1995 and $956,000
in 1996, which is net of sublease income of $32,000 in 1994, $72,000 in 1995
and $123,000 in 1996.
F-39
<PAGE>
PDHC, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD ENDED NOVEMBER 12, 1996
The Company leases copiers, fax machines and various other equipment under
non-cancelable operating lease agreements. Rent expense for equipment under
operating leases was $97,000 in 1994, $111,000 in 1995 and $32,000 in 1996.
Future minimum lease payments for operating leases as of November 12, 1996
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Years Ending December 31:
1997..................................................... $1,340
1998..................................................... 1,186
1999..................................................... 994
2000..................................................... 751
2001..................................................... 619
Thereafter............................................... 3,006
------
$7,896
======
</TABLE>
Future minimum rentals to be received under subleases in the remainder of
1996 was $11,000. The subleases expired as of December 31, 1996.
The Company leased computer equipment and software under a capital lease
that required monthly payments of $13,772 including interest through August,
1996. The Company had an option to purchase the equipment and software at fair
market value at the end of the lease term. The Company leased telephone
equipment under a capital lease that required monthly payments of $2,036
through May, 1996.
Assets recorded under capital leases consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
--------------
(IN THOUSANDS)
<S> <C>
Computer equipment and software............................. $ 515
Telephone equipment......................................... 63
-----
578
(156)
-----
Less accumulated depreciation............................... $ 422
=====
</TABLE>
F-40
<PAGE>
PDHC, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD ENDED NOVEMBER 12, 1996
(7) INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER
31, PERIOD ENDED
----------- NOVEMBER 12,
1994 1995 1996
---- ----- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................ $190 $ 670 $(467)
State.......................................... 70 220 (53)
---- ----- -----
260 890 (520)
---- ----- -----
Deferred:
Federal........................................ (38) (330) (260)
State.......................................... (12) (100) (140)
---- ----- -----
(50) (430) (400)
---- ----- -----
$210 $ 460 $(920)
==== ===== =====
</TABLE>
Deferred income taxes reflect temporary differences in the recognition of
revenue and expense for tax reporting and financial statement purposes.
Deferred tax assets were comprised of the following at December 31, 1994,
1995, and November 12, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 12,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Depreciation and amortization.................... $392 $ 485
Reserves deductible in future years.............. 101 199
Accrued expenses................................. 109 172
Other............................................ 28 174
---- ------
Total deferred tax asset....................... $630 $1,030
==== ======
</TABLE>
A reconciliation between the federal statutory tax rate and the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, NOVEMBER 12,
1994 1995 1996
-------------- -------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income taxes at federal
statutory tax rate............ $174 35.0% $364 35.0% $(898) (34.0)%
Acquisition costs.............. -- -- -- -- 82 3.0
Officers' life insurance....... 9 1.6 22 2.1 24 1.0
Meals and entertainment........ 7 1.4 27 2.6 2 0.0
State income taxes, net of
federal tax benefit........... 20 4.2 47 4.5 (130) (5.0)
---- ---- ---- ---- ----- -----
$210 42.2% $460 44.2% $(920) (35.0)%
==== ==== ==== ==== ===== =====
</TABLE>
F-41
<PAGE>
PDHC, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD ENDED NOVEMBER 12, 1996
(8) SUBORDINATED DEBENTURES
The Company had issued $35,000 of subordinated debentures to three
employees. The debentures accrued interest at 8% and were to be redeemed by
the Company at the employee's termination of employment. The debentures were
payable over either a five or ten-year period with interest at 8%, as
determined under the agreements. The Company had also issued options to three
employees and a consultant to the Company to purchase a total of $374,000 of
additional subordinated debentures. Employees had committed to purchase
$58,000 of these debentures.
The subordinated debentures carried with them stock appreciation rights.
Under the agreements, the debenture holders participated in the common stock
appreciation over a base price per share as determined in each of the
respective agreements. The number of shares available for appreciation rights
were determined by the amount of debentures purchased divided by the base
price per share. The rights vested over periods ranging from six to ten years
and were payable when services were no longer performed for the company or
employment was terminated. The amount payable to the debenture holders would
have been equal to the value of such specific number of shares less the amount
of the debentures which would have been paid less accrued and paid interest on
the debentures. The amounts were payable over a five or ten-year period with
interest at 8%, as determined under the agreements. Compensation expense
charged to operations related to these stock appreciation rights was $0 in
1994, $18,000 in 1995 and $0 in 1996. These agreements were terminated
November 11, 1996.
(9) STOCKHOLDERS' EQUITY
Stock Options
The Company has granted nonqualified stock options to key employees at an
exercise price not less than market price as of the date of grant. Each grant
awarded specifies the period for which the stock options are exercisable and
provides that the stock options shall expire at the end of such period. Option
transactions for the years ended December 31, 1994 and 1995 and period ended
November 12, 1996 are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
SHARES PRICES
--------- --------
<S> <C> <C>
Outstanding at December 31, 1993......................... -- $ --
Granted.................................................. 332 255
---- --------
Outstanding at December 31, 1994......................... 332 255
Brookpark options converted to Company options........... 58 350
Granted.................................................. 69 291
---- --------
Outstanding at December 31, 1995......................... 459 255-350
Granted.................................................. 69 350
Cancelled................................................ (528) 255-350
---- --------
Outstanding at November 12, 1996......................... -- $ --
==== ========
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123, and
applies APB Opinion 25 and related interpretations in accounting for its plan.
Under APB Opinion 25, when the exercise price of employee stock options equals
the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.
F-42
<PAGE>
PDHC, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD ENDED NOVEMBER 12, 1996
The effect of applying SFAS No. 123's fair value method to the Company's
stock-based awards results in net income that is not materially different from
amounts reported.
Stock Redemption Agreement
The Company has a stock redemption agreement with its individual
stockholders. The agreement requires the Company to purchase the stockholders'
share upon termination of employment, in the event of death or total
disability. The stockholders will receive payment for their stock from life
insurance proceeds and/or in 120 monthly installments, including interest at
9%. The Company has approximately $5,990,000 of life insurance on its
individual stockholders at December 31, 1995 and at November 12, 1996 to
provide partial, and in some cases full, funding for this agreement.
Stock Redemption Commitment
The Company has an agreement to purchase 788 shares of common stock at
November 12, 1996 from a current stockholder as follows:
<TABLE>
<CAPTION>
PRICE
NUMBER PER AGGREGATE
OF SHARES SHARE PRICE PAYMENT TERMS
--------- ------- --------- -------------
<S> <C> <C> <C>
50 $556.80 $ 27,840 12 monthly installments with interest at 9% beginning
December 1, 1996
100 $560.00 $ 56,000 12 monthly installments with interest at 9% beginning
December 1, 1996
638 $569.76 $363,510 60 monthly installments with interest at 9% beginning
December 1, 1997
</TABLE>
(10) DEFERRED COMPENSATION AGREEMENT
In August, 1995, the Company entered into an agreement with an officer of
the Company which calls for the officer to be credited with $50,000 of
deferred compensation on August 17, 1995, and an additional $50,000 on each
anniversary date up to and including the tenth anniversary date. The deferred
compensation becomes fully vested upon the earlier of termination of
employment or August, 2005. Amounts payable under the agreement are to be paid
in a lump sum in cash, as soon as administratively practicable. Compensation
expense charged to operations under this agreement was $0 in 1994, $50,000 in
1995 and 1996.
(11) BENEFIT PLANS
Defined Benefit Pension Plan
The Company had a defined benefit pension plan which covered substantially
all employees after certain age and service requirements were met. In July,
1994, the plan was terminated effective September 30, 1994. Participants
became 100% vested in their accrued benefits through the date of termination
and were paid the value of those benefits in September, 1995. Plan expenses
charged to operations were $696,000 in 1994 and $533,000 in 1995.
F-43
<PAGE>
PDHC, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE PERIOD ENDED NOVEMBER 12, 1996
Profit Sharing Plan
The Company had a profit sharing plan which covered employees who had
attained the age of 21 and completed 12 months of service. No contributions
had been made to the plan since July, 1984 and no contributions were permitted
by the participants. The plan was terminated effective June 30, 1995 and
participants became 100% vested in their account balances. All participant
balances were paid out in 1995.
401(k) Profit Sharing Plan
The Company has a 401(k) profit sharing plan that covers employees who have
attained the age of 21 and completed 6 months of service. Eligible employees
can contribute up to 15% of their compensation. The Company makes matching
contributions of 30% on the first 6% of employee deferrals. The Company can
also make discretionary contributions to the plan as determined by the Board
of Directors. Contributions to the plan were $36,000 in 1994, $60,000 in 1995
and $133,000 in 1996.
(12) OTHER RELATED PARTY TRANSACTION
The Company paid provider fees of $173,000 in 1994, $82,000 in 1995 and
$11,000 in 1996 to a related entity. Provider fees payable to the related
entity were $5,000 at December 31, 1995 and $0 at November 12, 1996. Certain
stockholders of the Company are also stockholders in the related entity and
the related entity is a stockholder of the Company.
(13) FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December
31, 1995 and November 12, 1996, and the methods and assumptions used to
estimate such fair values, are as follows:
The fair values of cash and cash equivalents, accounts receivable and
accounts payable approximate the carrying amounts because of the short
maturity of those financial instruments.
The fair values of long-term obligations, long-term capital lease
obligations and subordinated debentures approximate the carrying amounts, as
their interest rates approximate current interest rates.
(14) RECLASSIFICATIONS
Certain reclassifications were made to the 1995 statement of operations to
conform with the 1994 and 1996 presentations which had no effect on net
earnings.
(15) SUBSEQUENT EVENTS
Effective November 12, 1996, substantially all the assets and liabilities of
PDHC, Ltd. were acquired by American Dental Partners, Inc. In connection with
this transaction (i) the dentists employees formed a new professional
corporation, PDG, P.A. and (ii) PDHC, Ltd. simultaneously entered into a 40-
year service agreement with PDG, P.A. Immediately prior to the completion of
this transaction, PDHC, Ltd. paid special bonuses of $2,000,000 to
shareholders and certain employees which are recorded as expense in the
accompanying statement of operations.
F-44
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Orthocare Companies:
We have audited the accompanying combined balance sheets of The Orthocare
Companies (the "Company") as of December 31, 1996 and September 30, 1997, and
the related combined statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1996 and the nine months ended September
30, 1997. 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 combined financial position of The
Orthocare Companies as of December 31, 1996 and September 30, 1997, and the
results of their operations and their cash flows for the year ended December
31, 1996 and the nine months ended September 30, 1997, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
December 29, 1997
F-45
<PAGE>
THE ORTHOCARE COMPANIES
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $1,558 $2,101
Accounts receivable, net of allowance for
uncollectible billings of $50,000 in 1996 and
1997............................................. 1,001 852
Inventories....................................... 46 48
Prepaid expenses.................................. 26 43
------ ------
Total current assets............................ 2,631 3,044
------ ------
Property and equipment, net......................... 252 240
------ ------
Total assets.................................... $2,883 $3,284
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 48 $ 134
Accrued compensation, benefits and taxes.......... 195 456
Accrued and deferred income tax liability......... 96 226
Amounts payable to providers...................... 250 241
Deferred revenue.................................. 703 816
Notes payable to stockholders..................... 103 22
------ ------
Total current liabilities....................... 1,395 1,895
------ ------
Noncurrent liabilities:
Deferred income tax liability..................... 326 231
------ ------
Total liabilities............................... 1,721 2,126
------ ------
Stockholders' equity:
Common stock...................................... 181 181
Additional paid-in capital........................ 105 105
Retained earnings................................. 876 872
------ ------
Total stockholders' equity...................... 1,162 1,158
------ ------
Commitments and contingencies
Total liabilities and stockholders' equity...... $2,883 $3,284
====== ======
</TABLE>
See accompanying notes to combined financial statements.
F-46
<PAGE>
THE ORTHOCARE COMPANIES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------------
<S> <C> <C>
Revenue.......................................... $8,868 $7,208
Operating expenses:
Salaries and benefits.......................... 6,821 5,671
Lab fees and dental supplies................... 404 326
Office occupancy............................... 599 460
Other operating expenses....................... 528 535
Depreciation................................... 129 51
------ ------
Total operating expenses..................... 8,481 7,043
------ ------
Earnings from operations..................... 387 165
Interest (income), net........................... (35) (40)
------ ------
Earnings before income taxes................. 422 205
Income taxes..................................... 152 144
------ ------
Net earnings..................................... $ 270 $ 61
====== ======
</TABLE>
See accompanying notes to combined financial statements.
F-47
<PAGE>
THE ORTHOCARE COMPANIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
COMMON STOCK CAPITAL EARNINGS EQUITY
------------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.... $181 $105 $709 $995
Net earnings.................. -- -- 270 270
Dividends paid................ -- -- (103) (103)
---- ---- ---- ------
Balance at December 31, 1996.... 181 105 876 1,162
Net earnings.................. -- -- 61 61
Dividends paid................ -- -- (65) (65)
---- ---- ---- ------
Balance at September 30, 1997... $181 $105 $872 $1,158
==== ==== ==== ======
</TABLE>
See accompanying notes to combined financial statements.
F-48
<PAGE>
THE ORTHOCARE COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings.................................. $ 270 $ 61
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation................................ 129 51
Deferred income tax liability............... 82 (95)
Changes in assets and liabilities:
Accounts receivable....................... 12 149
Other current assets...................... 86 (19)
Accounts payable.......................... 8 86
Accrued compensation, benefits and taxes.. 7 261
Accrued and deferred income tax
liability................................ 19 130
Amounts payable to providers.............. 1 (9)
Deferred revenue.......................... 96 113
------ -------
Net cash provided by operating activi-
ties................................... 710 728
------ -------
Cash flows from investing activities:
Capital expenditures, net..................... (245) (39)
------ -------
Net cash used for investing activities.. (245) (39)
------ -------
Cash flows from financing activities:
Proceeds (repayments) of notes payable to
stockholders, net............................ 59 (81)
Dividends paid................................ (103) (65)
------ -------
Net cash used for financing activities.. (44) (146)
------ -------
Increase in cash and cash equivalents........... 421 543
Cash and cash equivalents at beginning of
period......................................... 1,137 1,558
------ -------
Cash and cash equivalents at end of period...... $1,558 $ 2,101
====== =======
Supplemental disclosure of cash flow
information:
Cash paid during the period for income taxes.. $ 51 $ 109
====== =======
Cash paid during the period for interest...... $ 2 $ 3
====== =======
</TABLE>
See accompanying notes to combined financial statements.
F-49
<PAGE>
THE ORTHOCARE COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS
The accompanying combined financial statements include Orthodontic Care
Specialists ("OCS"), Apple Park Associates, Inc. ("APA") and Orthocare Limited
("Orthocare"), collectively the ("Orthocare Companies", or the "Company"). The
Orthocare Companies provide orthodontic services to patients in the
Minneapolis/St. Paul, Minnesota area and arrange for the provision of
orthodontic services for insurance companies in Minnesota and Wisconsin.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined financial statements have been prepared on the
accrual basis of accounting. The operations of all entities described in Note
1 are combined for reporting purposes due to their common ownership.
Intercompany balances and transactions have been eliminated upon the
combination.
Use of Estimates
The preparation of these combined 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 at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
Revenue is recognized in accordance with the proportional performance method
of accounting for service contracts. Under this method, revenue is recognized
as services are performed and the costs associated therewith are incurred,
under the terms of contractual agreements with each patient. A significant
portion, approximately 20% of the services are performed and revenue
recognized in the initial month of the contract. Billings under each contract,
which vary in duration from 12 to 30 months, are made throughout the term of
the contract. Patient prepayments represent collections from patients or their
insurance companies which are received in advance of the performance of the
related services.
Accounts receivable represent billed and unbilled amounts due from patients
and third party payors for orthodontic services provided.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid instruments with an original maturity of three months or less to
be cash equivalents.
Fair Value of Financial Instruments
The Company believes the carrying amount of cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses, deferred revenue and
notes payable to stockholders approximate fair value because of the short-term
nature of these items.
Inventories
Inventories consist primarily of dental supplies and are stated at the lower
of FIFO cost or market.
F-50
<PAGE>
THE ORTHOCARE COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
recorded using the straight-line method over the estimated useful lives of the
related assets which are 5 years for leasehold improvements, equipment and
furniture and fixtures.
Income Taxes
OCS and APA have elected to be treated as an "S Corporation" under Section
1362 of the Internal Revenue Code. As such, taxable income earned or taxable
losses incurred by these entities passes through to the shareholders and is
not subject to federal income tax at the corporate level. Accordingly, these
entities do not have a federal tax expense or benefit. Orthocare is a "C
Corporation" and is subject to federal and state income taxes.
Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. The effect on the deferred taxes of
changes in the tax rate is recognized in operations in the period that
includes the enactment date.
(3) PROPERTY AND EQUIPMENT
Property and Equipment
Property and equipment consisted of the following at December 31, 1996 and
September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Leasehold improvements............................ $ 337 $ 337
Equipment......................................... 337 376
Furniture and fixtures............................ 120 120
----- -----
Total property and equipment...................... 794 833
Less accumulated depreciation..................... (542) (593)
----- -----
Property and equipment, net....................... $ 252 $ 240
===== =====
</TABLE>
Operating Leases
The Company is obligated under non-cancelable operating leases for premises
and equipment expiring in various years through the year 2001. Rent expense
for the year ended December 31, 1996 and nine months ended September 30, 1997
amounted to $552,000 and $416,000, respectively (see Note 7).
Minimum future rental payments under non-cancelable operating leases as of
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Quarter ending December 31, 1997.............................. $ 101
Fiscal year ending:
1998.......................................................... 415
1999.......................................................... 317
2000.......................................................... 260
2001.......................................................... 200
------
Total minimum lease payments.................................. $1,293
======
</TABLE>
F-51
<PAGE>
THE ORTHOCARE COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(4) INCOME TAXES
Income tax expense (benefit) attributable to earnings before income taxes
consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Year ended December 31, 1996:
Federal............................................. $ 54 $ 65 $119
State............................................... 16 17 33
---- ---- ----
$ 70 $ 82 $152
==== ==== ====
Nine months ended September 30, 1997:
Federal............................................. $188 $(75) $113
State............................................... 51 (20) 31
---- ---- ----
$239 $(95) $144
==== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities as of December
31, 1996 and September 30, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Property and equipment.......................... $ 4 $ 2
---- ----
Total gross deferred tax assets................. 4 2
---- ----
Deferred tax liabilities:
Cash to accrual adjustments..................... 407 310
---- ----
Total gross deferred tax liabilities............ 407 310
---- ----
Net deferred tax liability........................ $403 $308
==== ====
</TABLE>
The following table reconciles the Federal statutory income tax rate and the
Company's effective income tax rate for the year ended December 31, 1996 and
nine months ended September 30, 1997:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Income taxes at Federal statutory rate............ 34% 34%
State taxes, net of Federal benefit............... 9 9
Effective S corporation losses.................... (7) 27
--- ---
Effective income tax rate......................... 36% 70%
=== ===
</TABLE>
(5) NOTES PAYABLE TO STOCKHOLDERS
Notes payable to stockholders consisted of the following at December 31,
1996 and September 30, 1997 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Notes payable, unsecured, interest rate 8%,
payable in installments, maturing in February
1998.......................................... $ 63 $22
Notes payable, unsecured, non-interest bearing,
payable on demand............................. 40 --
---- ---
$103 $22
==== ===
</TABLE>
F-52
<PAGE>
THE ORTHOCARE COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(6) STOCKHOLDERS' EQUITY
Common Stock
Common stock for each of the combined entity's consisted of the following at
December 31, 1996 and September 30, 1997:
<TABLE>
<CAPTION>
SHARES
----------------------
PAR VALUE AUTHORIZED OUTSTANDING AMOUNT
--------- ---------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Orthocare.................... No Par 25,000 1,000 $ 1
OCS.......................... No Par 50,000 28,484 95
APA.......................... No Par 25,000 1,000 66
DSM.......................... No Par 25,000 600 19
------ ----
31,084 $181
====== ====
</TABLE>
(7) RELATED PARTY TRANSACTIONS
The Company has an Orthodontists Service Agreement with Midwest Dental Care
to provide orthodontic services to participants in Midwest Dental Plan.
Midwest Dental Plan, a Wisconsin corporation, is partially owned by Company
stockholders. The Company received capitated revenue of approximately $290,000
and $217,000 for the year ended December 31, 1996 and the nine months ended
September 30, 1997, respectively.
The Company leases space from Apple Park Partners, which is 100% owned by
the Company's majority stockholder. Payments made to Apple Park Partners under
the lease were approximately $178,000 and $157,000 for the year ended December
31, 1996 and the nine months ended September 30, 1997, respectively.
The Company has an informal agreement with College Park Lab, a Wisconsin
corporation, to contract labor for four administrative employees in its
Wisconsin office. Under the agreement, College Park Lab performs the hiring
and all payroll and benefit administration for the Company's administrative
staff. The Company reimburses College Park Lab for the cost of salaries and
benefits plus a 11% markup to cover administrative costs. Total amounts paid
to College Park Lab were approximately $99,000 and $91,000 for the year ended
December 31, 1996 and the nine months ended September 30, 1997, respectively.
College Park Lab is partially owned by a minority stockholder of the Company.
(8) SUBSEQUENT EVENTS
Effective October 1, 1997, substantially all the assets of the Company were
acquired by American Dental Partners, Inc. In connection with this transaction
Apple Park Associates, Inc. entered into a 40-year service agreement with
Orthodontic Care Specialists, Ltd.
F-53
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PRO-
SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Company.............................................................. 11
Use of Proceeds.......................................................... 12
Dividend Policy.......................................................... 12
Capitalization........................................................... 13
Dilution................................................................. 14
Selected Historical and Pro Forma Consolidated Financial Data............ 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 24
Management............................................................... 36
Certain Transactions..................................................... 42
Principal Stockholders................................................... 45
Description of Capital Stock............................................. 46
Shares Eligible for Future Sale.......................................... 48
Underwriting............................................................. 50
Validity of Common Stock................................................. 52
Experts.................................................................. 52
Additional Information................................................... 52
Index to Financial Statements............................................ F-1
</TABLE>
-----------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY, WHETHER OR NOT PARTICI-
PATING 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,000,000 Shares
[AMERICAN DENTAL PARTNERS LOGO]
Common Stock
-----------
PROSPECTUS
-----------
BT ALEX. BROWN
BANCAMERICA ROBERTSON STEPHENS
PIPER JAFFRAY INC.
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting
compensation expected to be incurred) in connection with the offering
described in this Registration Statement. All of such amounts (except the SEC
Registration Fee, NASD Filing Fee and Nasdaq National Market Listing Fee) are
estimated.
<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 11,849
NASD Filing Fee................................................ 4,410
Nasdaq National Market Listing Fee............................. 40,500
Blue Sky Fees and Expenses.....................................
Printing and Engraving Costs...................................
Legal Fees and Expenses........................................
Accounting Fees and Expenses...................................
Transfer Agent and Registrar Fees and Expenses.................
Miscellaneous..................................................
----------
Total........................................................ $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law, as amended (the
"DGCL"), provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amount paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
if he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Section 145 further provides that a corporation similarly may
indemnify any such person serving in any such capacity who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor, against expenses actually and reasonably incurred in connection
with the defense or settlement of such action or suit if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect to any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Delaware Court of Chancery or such other court in which such
action or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Article 6 of the Amended and Restated By-Laws of the Company, a copy of
which is filed as Exhibit 3(b), contains certain indemnification provisions
adopted pursuant to authority contained in Section 145 of the DGCL. The By-
Laws provide for the indemnification of its officers, directors, employees,
and agents against all expenses with respect to any judgments, fines, and
amounts paid in settlement, or with respect to any threatened, pending, or
completed action, suit, or proceeding to which they were or are parties or are
threatened to be made parties by reason of acting in such capacities, provided
that it is determined, either by a majority vote of a quorum of disinterested
directors of the Company or by the stockholders of the Company or otherwise as
provided in Section 6.4 of Article 6 of the By-Laws, that: (i) they acted in
good faith and in a manner they reasonably believed to be in or not opposed to
the best interests of the Company; (ii) in any action, suit, or proceeding by
or in the right of the Company, they were not, and have not been adjudicated
to have been liable to the Company;
II-1
<PAGE>
and (iii) with respect to any criminal action or proceeding, that they had no
reasonable cause to believe that their conduct was unlawful. Section 6.3 of
Article 6 of the By-Laws provides that to the extent a director, officer,
employee, or agent has been successful on the merits or otherwise in defense
of any such action, suit, or proceeding, he shall be indemnified against
expenses actually and reasonably incurred in connection therewith. At present,
there are no claims, actions, suits, or proceedings pending where
indemnification would be required under these provisions, and the Company does
not know of any threatened claims, actions, suits, or proceedings which may
result in a request for such indemnification.
Under Section 145 of the Delaware Law and Section 6.7 of the By-Laws, the
Company may purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee, or agent of the Company, or who, while
serving in such capacity, is or was at the request of the Company, a director,
officer, employee or agent of another corporation or legal entity or of an
employee benefit plan, against liability asserted against or incurred by such
person in any such capacity whether or not the corporation would have the
power to provide indemnity under Section 145 or the By-Laws. The Company has
purchased a liability policy to indemnify its officers and directors against
loss arising from claims by reason of their legal liability for acts as
officers and directors, subject to limitations and conditions set forth in the
policy.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL (relating to unlawful payment of dividends and unlawful stock
purchase and redemption) or (iv) for any transaction from which the director
derived an improper personal benefit.
Article Ninth of the Second Amended and Restated Certificate of
Incorporation of the Company, a copy of which is filed as Exhibit 3(a),
eliminates personal liability of a director to the Company and its
stockholders for monetary damages for breach of fiduciary as a director to the
maximum extent permitted by Section 102(b)(7) of the DGCL.
The Underwriting Agreement (a form of which appears as Exhibit 1 hereto)
provides for indemnification of the Registrant's directors and officers in
certain circumstances. The indemnification provided for by the Underwriters is
limited to matters arising in connection with this Registration Statement.
Reference is made to paragraph eight of the Underwriting Agreement for
information concerning indemnification undertaken among the Company and the
Underwriters.
The above discussion of the Company's Certificate of Incorporation and By-
Laws and of Section 145 of the DGCL is not intended to be exhaustive and is
respectively qualified in its entirety by such Certificate of Incorporation,
By-Laws and statutes.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since the Company's formation in December 1995, the Company has issued the
following securities that were not registered under the Securities Act of
1933, as amended (the "Securities Act"). The following numbers give effect to
the 6-to-1 stock split effected in the form of a stock dividend on November 7,
1997. No underwriters were engaged in connection with any of the following
transactions, and accordingly, no underwriting discounts or commissions were
paid. The shares of capital stock and other securities issued in the following
transactions were offered and sold in reliance upon the following exemptions:
(i) in the case of the transactions described in (a), below, Section 4(2) of
the Securities Act or Regulation D promulgated thereunder relative to sales by
an issuer not involving a public offering; and (ii) in the case of the
transactions described in (b), below, Section 3(b) of the Securities Act and
Rule 701 promulgated thereunder relative to sales pursuant to certain
compensatory benefits plans.
II-2
<PAGE>
(a) Issuances of Capital Stock
(i) On January 8, 1996, the Company issued 300,000 shares of Common Stock to
Mr. Serrao for a cash purchase price of $500; (ii) pursuant to and in
connection with the Preferred Stock Purchase Agreement, between January 12,
1996 and December 11, 1996, the Company issued to the Purchasers a total of
300,000 shares of Common Stock for a total purchase price of $100,000, 400,000
shares of Series A Convertible Preferred Stock for a total purchase price of
$7,900,000, and 70,000 shares of Series B Redeemable Preferred Stock for a
total purchase price of $7,000,000; (iii) on November 12, 1996, the Company
issued 1,260,000 shares of Common Stock to the stockholders of Park as part of
the consideration (along with subordinated promissory notes in the aggregate
original principal amount of $1,500,000 and cash) paid by the Company in
exchange for all of the outstanding capital stock of Park; (iv) on December
13, 1996, the Company issued 49,200 shares of Common Stock to the sole
stockholder of Les L. Crane, D.D.S., P.C. as part of the consideration (along
with a subordinated promissory note in the original principal amount of
$435,000 and cash) paid by the Company in connection with the purchase of the
allowable assets of Les L. Crane, D.D.S., P.C.; (v) on December 23, 1996, the
Company issued 304,200 shares of Common Stock to the stockholders of Smileage
Dental Care, Inc. as part of the consideration (along with subordinated
promissory notes in the aggregate original principal amount of $247,500 and
cash) paid by the Company in exchange for all of the outstanding capital stock
of Smileage Dental Care, Inc.; (vi) on March 31, 1997, the Company issued
7,944 shares of Common Stock to Lakeside Dental Group as part of the
consideration (along with a subordinated promissory note in the original
principal amount of $225,000 and cash) paid by the Company in connection with
the purchase of the allowable assets of Lakeside Dental Group; (vii) on May
22, 1997, the Company issued 14,118 shares of Common Stock to the sole
stockholder of Soster Dental, Inc. as part of the consideration (along with a
subordinated promissory note in the original principal amount of $200,000 and
cash) paid by the Company in exchange for all of the outstanding capital stock
of Soster Dental, Inc.; (viii) on July 1, 1997, the Company issued 19,290
shares of Common Stock to the stockholders of Northpoint Dental Group, Ltd. as
part of the consideration (along with subordinated promissory notes in the
aggregate original principal amount of $65,000 and cash) paid by the Company
in connection with the purchase of the allowable assets of Northpoint Dental
Group, Ltd. and the performance of other obligations by the selling
stockholders; (ix) on October 1, 1997, the Company issued 83,010 shares of
Common Stock to the stockholders of Apple Park Associates, Inc. and
Orthodontic Care Specialists, Ltd. as part of the consideration (along with
subordinated promissory notes in the aggregate original principal amount of
$900,000 and cash) paid by the Company in connection with the purchase of the
allowable assets of Apple Park Associates, Inc. and Orthodontic Care
Specialists, Ltd.; and (x) on October 1, 1997, the Company issued 56,472
shares of Common Stock to the stockholders of Dental Specialty Management,
Ltd., Orthocare, Ltd., and two 80%-owned subsidiaries of Orthocare, Ltd. as
part of the consideration (along with subordinated promissory notes in the
aggregate original principal amount of $600,000 and cash) paid by the Company
in exchange for all of the outstanding capital stock of those companies.
(b) Grants of Stock Options
(i) As of October 31, 1997, options to purchase 648,420 shares of Common
Stock were outstanding under the Company's 1996 Stock Option Plan, as amended,
of which options to purchase 43,896 shares were then exercisable. None of the
outstanding options had been exercised. All such options were granted between
January 8, 1996 and October 15, 1997 to executive officers and other key
employees of the Company and its subsidiaries in connection with their
employment; (ii) as of October 31, 1997, options to purchase 360,360 shares of
Common Stock were outstanding under the Company's 1996 Time Accelerated
Restricted Stock Option Plan, as amended, none of which were then exercisable.
All such options were granted between January 8, 1996 and August 1, 1997 to
executive officers and other key employees of the Company and its subsidiaries
in connection with their employment; (iii) as of October 31, 1997, options to
purchase 89,586 shares of Common Stock were outstanding under the Company's
Amended and Restated 1996 Affiliate Stock Option Plan, none of which were
exercisable. All such options were granted between November 12, 1996 and
October 1, 1997 to advisors and consultants of the Company and its
subsidiaries; (iv) as of October 31, 1997, options to purchase 19,800 shares
of Common Stock were outstanding under the Company's Amended and Restated 1996
Directors Stock Option Plan, none of which were exercisable. All such options
were granted between February 17, 1997 and August 1, 1997 to directors of the
Company.
II-3
<PAGE>
(c) Other Transactions
On October 1, 1997, the Company issued a subordinated promissory note in the
aggregate original principal amount of $400,000 to the sole stockholder of
Terrance R. Wilkens, D.D.S., SC, Brookfield Dental Center, SC, Waukesha Dental
Center, SC, Hales Corner Dental Center, SC, and West Allis Dental Center, SC
(the "Wilkens Dental Group") as part of the consideration (along with cash)
paid by the Company in connection with the purchase of the allowable assets of
the Wilkens Dental Group. The Company does not believe that the promissory
notes issued in this or the other transactions described in (a), above,
constitute "securities" as defined in Section 2(1) of the Securities Act;
however, in the event the promissory notes are deemed to be securities, these
transactions were exempt from the registration requirements of the Securities
Act pursuant to Section 4(2) or Regulation D thereunder relative to sales by
an issuer not involving a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
* 1 Form of Underwriting Agreement
* 3(a) Second Amended and Restated Certificate of Incorporation of American
Dental Partners, Inc.
3(b) Amended and Restated By-laws of American Dental Partners, Inc.
* 4 Form of Stock Certificate
* 5 Opinion of Baker & Hostetler LLP
10(a) American Dental Partners, Inc. Series A and Series B Preferred Stock
Purchase Agreement dated January 8, 1996, among American Dental
Partners, Inc., Summit Ventures IV, L.P., Summit Investors, III,
L.P., and Gregory A. Serrao, as amended by First Amendment to Series
A and Series B Preferred Stock Purchase Agreement dated February 19,
1996, Second Amendment to Series A and Series B Preferred Stock
Purchase Agreement dated May 1, 1996, and Third Amendment to Series
A and Series B Preferred Stock Purchase Agreement dated November 1,
1996.
10(b) American Dental Partners, Inc. Subordinated Debenture Purchase
Agreement dated January 8, 1996, among American Dental Partners,
Inc., Summit Subordinated Debt Fund, L.P., and Summit Investors III,
L.P., as amended by First Amendment to Subordinated Debenture
Purchase Agreement dated May 1, 1996, and Second Amendment to
Subordinated Debenture Purchase Agreement dated November 1, 1996.
10(c) Registration Rights Agreement dated January 8, 1996, among American
Dental Partners, Inc., Summit Venture IV, L.P., Summit Investors
III, L.P., Gregory A. Serrao, and others, as amended by Amendment to
Registration Rights Agreement dated November 1, 1996.
10(d) Reformation Agreement dated December 23, 1996, among American Dental
Partners, Inc., Summit Ventures IV, L.P., Summit Investors III,
L.P., Summit Investors II, L.P., and Gregory A. Serrao.
10(e) American Dental Partners, Inc. Amended and Restated 1996 Stock
Option Plan.
10(f) American Dental Partners, Inc. 1996 Time Accelerated Stock Option
Plan, as amended by Amendment No. 1
10(g) American Dental Partners, Inc. Amended and Restated 1996 Affiliate
Stock Option Plan.
10(h) American Dental Partners, Inc. Amended and Restated 1996 Directors
Stock Option Plan, as amended by Amendment No. 1
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10(i) Employment and Non-Competition Agreement dated January 8, 1996,
between American Dental Partners, Inc. and Gregory A. Serrao.
10(j) Employment Agreement dated April 22, 1996, between American Dental
Partners, Inc. and Ronald M. Levenson.
10(k) Employment Agreement dated May 31, 1996, between American Dental
Partners, Inc. and George W. Robinson, as amended by Amendment to
Employment Agreement dated August 27, 1997.
10(l) Employment and Noncompetition Agreement dated November 12, 1996,
between PDHC, Ltd. and Gregory T. Swenson, D.D.S.
10(m) Registration Rights Agreement dated November 11, 1996, among
American Dental Partners, Inc. and certain of its stockholders (the
former stockholders of PDHC, Ltd.).
10(n) Registration Rights Agreement dated December 13, 1996, between
American Dental Partners, Inc. and Les L. Crane, D.D.S.
10(o) Registration Rights Agreement dated December 23, 1996, among
American Dental Partners, Inc. and certain of its stockholders (the
former stockholders of Smileage Dental Care, Inc.)
10(p) Registration Rights Agreement dated March 31, 1997, between
American Dental Partners, Inc. and Lakeside Dental Group.
10(q) Registration Rights Agreement dated May 22, 1997, between American
Dental Partners, Inc. and Abel J. Soster, DMD.
**10(r) Service Agreement dated November 12, 1996, between PDHC, Ltd. and
PDG, P.A., as amended by First Amendment to Service Agreement dated
January 1, 1997.
**10(s) Services Agreement dated December 23, 1996, between Smileage Dental
Care, Inc. and Wisconsin Dental Group, S.C., as amended by First
Amendment to Services Agreement dated January 1, 1997.
10(t) Revolving Credit Agreement dated April 24, 1997, between Fleet
National Bank, as Agent, and American Dental Partners, Inc.
10(u) Acquisition and Exchange Agreement dated November 11, 1996, among
American Dental Partners, Inc., PDHC, Ltd., and the Shareholders of
PDHC, Ltd.
10(v) Asset Purchase Agreement dated December 13, 1996, among American
Dental Partners, Inc., Texas Dental Partners, Inc., Les L. Crane,
D.D.S., P.C., and Les L. Crane, D.D.S.
10(w) Agreement and Plan of Merger and Reorganization dated December 23,
1996, among American Dental Partners, Inc., American Dental
Partners of Wisconsin, Inc., Smileage Dental Care, Inc., and the
Shareholders of Smileage Dental Care, Inc.
10(x) Registration Rights Agreement dated July 1, 1997, among American
Dental Partners, Inc. and John M. Werwie, D.D.S., James F. Ruzicka,
D.D.S., and Jon J. Pagenkopf, D.D.S.
10(y) Registration Rights Agreement dated October 1, 1997, among American
Dental Partners, Inc. and Karl H. Biewald, D.D.S., J.E. Cutliffe,
D.D.S., Timothy J. Montgomery, D.D.S., Curtis R. Dunn, D.D.S., and
Christopher S. Hipp, D.D.S.
10(z) Registration Rights Agreement dated October 1, 1997, among American
Dental Partners, Inc. and Karl H. Biewald, D.D.S. and Terri M.
Lawler.
* 10(aa) Asset Purchase Agreement dated October 1, 1997, among American
Dental Partners, Inc., Apple Park Associates, Inc., APAM, Inc., OC
Specialists, Ltd., and the Shareholders of APAM, Inc. and OC
Specialists, Ltd.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
*10(bb) Asset Purchase Agreement dated October 1, 1997 among American Dental
Partners, Inc., American Dental Partners of Wisconsin, Inc.,
Terrance R. Wilkens, D.D.S., Terrance R. Wilkens, D.D.S., S.C.,
Brookfield Dental Center, S.C., Waukesha Dental Center, S.C., Hales
Corners Dental Center, S.C., and West Allis Dental Center, S.C.
*11 Computation of Earnings Per Share
21 Subsidiaries of American Dental Partners, Inc.
*23(a) Consent of Baker & Hostetler LLP (included in Exhibit 5)
*23(b) Consent of KPMG Peat Marwick LLP
*23(c) Consent of Stirtz Bernards Boyden Sturdel & Larter, P.A.
24 Powers of Attorney
27 Financial Data Schedule
- --------
* Filed herewith.
** Certain portions of this exhibit have been omitted pursuant to a request
for confidential treatment.
(B) FINANCIAL STATEMENT SCHEDULES
Not applicable
</TABLE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes as follows:
(1) The undersigned will provide to the underwriters at the closing
specified in the underwriting agreement certificates in such denominations
and registered in such names as required by the underwriters to permit
prompt delivery to each purchaser.
(2) 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 on 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 is declared effective.
(3) 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 the initial bona fide offering thereof.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
in Item 14, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant 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 registrant 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 Act and
will be governed by the final adjudication of such issues.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
TOWN OF WAKEFIELD, COMMONWEALTH OF MASSACHUSETTS, OF THE 31ST DAY OF DECEMBER,
1997.
American Dental Partners, Inc.
/s/ Gregory A. Serrao
By: _________________________________
GREGORY A. SERRAO Chairman,
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENT OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
/s/ Gregory A. Serrao Chairman, President
- ------------------------------------- and Chief Executive December 31,
GREGORY A. SERRAO Officer and 1997
Director (principal
executive officer)
/s/ Ronald M. Levenson Senior Vice
- ------------------------------------- President, Chief December 31,
RONALD M. LEVENSON Financial Officer 1997
and Treasurer
(principal
financial officer)
/s/ Kathryn A. Russell Vice President
- ------------------------------------- Finance (principal December 31,
KATHRYN A. RUSSELL accounting officer) 1997
Dr. Gregory T. Swenson* Director December 31,
- ------------------------------------- 1997
DR. GREGORY T. SWENSON
Martin J. Mannion* Director December 31,
- ------------------------------------- 1997
MARTIN J. MANNION
James T. Kelly* Director December 31,
- ------------------------------------- 1997
JAMES T. KELLY
Derril W. Reeves* Director December 31,
- ------------------------------------- 1997
DERRIL W. REEVES
* The undersigned, Gregory A. Serrao, by signing his name hereto, does hereby
execute this Amendment No. 1 to the Registration on his own behalf
personally and on behalf of each of the above-named directors of the
Registrant pursuant to the Powers of Attorney executed by such directors and
filed with the Securities and Exchange Commission as exhibits to the
Registration Statement.
/s/ Gregory A. Serrao
- -------------------------------------
GREGORY A. SERRAO
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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<C> <S>
*1 Form of Underwriting Agreement
*3(a) Second Amended and Restated Certificate of Incorporation of American
Dental Partners, Inc.
3(b) Amended and Restated By-laws of American Dental Partners, Inc.
*4 Form of Stock Certificate
*5 Opinion of Baker & Hostetler LLP
10(a) American Dental Partners, Inc. Series A and Series B Preferred Stock
Purchase Agreement dated January 8, 1996, among American Dental
Partners, Inc., Summit Ventures IV, L.P., Summit Investors, III,
L.P., and Gregory A. Serrao, as amended by First Amendment to Series
A and Series B Preferred Stock Purchase Agreement dated February 19,
1996, Second Amendment to Series A and Series B Preferred Stock
Purchase Agreement dated May 1, 1996, and Third Amendment to Series
A and Series B Preferred Stock Purchase Agreement dated November 1,
1996.
10(b) American Dental Partners, Inc. Subordinated Debenture Purchase
Agreement dated January 8, 1996, among American Dental Partners,
Inc., Summit Subordinated Debt Fund, L.P., and Summit Investors III,
L.P., as amended by First Amendment to Subordinated Debenture
Purchase Agreement dated May 1, 1996, and Second Amendment to
Subordinated Debenture Purchase Agreement dated November 1, 1996.
10(c) Registration Rights Agreement dated January 8, 1996, among American
Dental Partners, Inc., Summit Venture IV, L.P., Summit Investors
III, L.P., Gregory A. Serrao, and others, as amended by Amendment to
Registration Rights Agreement dated November 1, 1996.
10(d) Reformation Agreement dated December 23, 1996, among American Dental
Partners, Inc., Summit Ventures IV, L.P., Summit Investors III,
L.P., Summit Investors II, L.P., and Gregory A. Serrao.
10(e) American Dental Partners, Inc. Amended and Restated 1996 Stock
Option Plan.
10(f) American Dental Partners, Inc. 1996 Time Accelerated Stock Option
Plan, as amended by Amendment No. 1
10(g) American Dental Partners, Inc. Amended and Restated 1996 Affiliate
Stock Option Plan.
10(h) American Dental Partners, Inc. Amended and Restated 1996 Directors
Stock Option Plan, as amended by Amendment No. 1
10(i) Employment and Non-Competition Agreement dated January 8, 1996,
between American Dental Partners, Inc. and Gregory A. Serrao.
10(j) Employment Agreement dated April 22, 1996, between American Dental
Partners, Inc. and Ronald M. Levenson.
10(k) Employment Agreement dated May 31, 1996, between American Dental
Partners, Inc. and George W. Robinson, as amended by Amendment to
Employment Agreement dated August 27, 1997.
10(l) Employment and Noncompetition Agreement dated November 12, 1996,
between PDHC, Ltd. and Gregory T. Swenson, D.D.S.
10(m) Registration Rights Agreement dated November 11, 1996, among
American Dental Partners, Inc. and certain of its stockholders (the
former stockholders of PDHC, Ltd.).
10(n) Registration Rights Agreement dated December 13, 1996, between
American Dental Partners, Inc. and Les L. Crane, D.D.S.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10(o) Registration Rights Agreement dated December 23, 1996, among
American Dental Partners, Inc. and certain of its stockholders (the
former stockholders of Smileage Dental Care, Inc.)
10(p) Registration Rights Agreement dated March 31, 1997, between
American Dental Partners, Inc. and Lakeside Dental Group.
10(q) Registration Rights Agreement dated May 22, 1997, between American
Dental Partners, Inc. and Abel J. Soster, DMD.
**10(r) Service Agreement dated November 12, 1996, between PDHC, Ltd. and
PDG, P.A., as amended by First Amendment to Service Agreement dated
January 1, 1997.
**10(s) Services Agreement dated December 23, 1996, between Smileage Dental
Care, Inc. and Wisconsin Dental Group, S.C., as amended by First
Amendment to Services Agreement dated January 1, 1997.
10(t) Revolving Credit Agreement dated April 24, 1997, between Fleet
National Bank, as Agent, and American Dental Partners, Inc.
10(u) Acquisition and Exchange Agreement dated November 11, 1996, among
American Dental Partners, Inc., PDHC, Ltd., and the Shareholders of
PDHC, Ltd.
10(v) Asset Purchase Agreement dated December 13, 1996, among American
Dental Partners, Inc., Texas Dental Partners, Inc., Les L. Crane,
D.D.S., P.C., and Les L. Crane, D.D.S.
10(w) Agreement and Plan of Merger and Reorganization dated December 23,
1996, among American Dental Partners, Inc., American Dental
Partners of Wisconsin, Inc., Smileage Dental Care, Inc., and the
Shareholders of Smileage Dental Care, Inc.
10(x) Registration Rights Agreement dated July 1, 1997, among American
Dental Partners, Inc. and John M. Werwie, D.D.S., James F. Ruzicka,
D.D.S., and Jon J. Pagenkopf, D.D.S.
10(y) Registration Rights Agreement dated October 1, 1997, among American
Dental Partners, Inc. and Karl H. Biewald, D.D.S., J.E. Cutliffe,
D.D.S., Timothy J. Montgomery, D.D.S., Curtis R. Dunn, D.D.S., and
Christopher S. Hipp, D.D.S.
10(z) Registration Rights Agreement dated October 1, 1997, among American
Dental Partners, Inc. and Karl H. Biewald, D.D.S. and Terri M.
Lawler.
* 10(aa) Asset Purchase Agreement dated October 1, 1997, among American
Dental Partners, Inc., Apple Park Associates, Inc., APAM, Inc., OC
Specialists, Ltd., and the Shareholders of APAM, Inc. and OC
Specialists, Ltd.
* 10(bb) Asset Purchase Agreement dated October 1, 1997 among American
Dental Partners, Inc., American Dental Partners of Wisconsin, Inc.,
Terrance R. Wilkens, D.D.S., Terrance R. Wilkens, D.D.S., S.C.,
Brookfield Dental Center, S.C., Waukesha Dental Center, S.C., Hales
Corners Dental Center, S.C., and West Allis Dental Center, S.C.
* 11 Computation of Earnings Per Share
21 Subsidiaries of American Dental Partners, Inc.
* 23(a) Consent of Baker & Hostetler LLP (included in Exhibit 5)
* 23(b) Consent of KPMG Peat Marwick LLP
* 23(c) Consent of Stirtz Bernards Boyden Sturdel & Larter, P.A.
24 Powers of Attorney
27 Financial Data Schedule
</TABLE>
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* Filed herewith.
** Certain portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
<PAGE>
EXHIBIT 1
2,300,000 Shares
AMERICAN DENTAL PARTNERS, INC.
Common Stock
($0.01 Par Value)
UNDERWRITING AGREEMENT
----------------------
__________, 1998
BT Alex. Brown Incorporated
BancAmerica Robertson Stephens
Piper Jaffray Inc.
As Representatives of the Several Underwriters
c/o BT Alex. Brown Incorporated
One South Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
American Dental Partners, Inc., a Delaware corporation (the "Company"),
proposes to sell to the several underwriters (the "Underwriters") named in
Schedule I hereto for whom you are acting as representatives (the
"Representatives") an aggregate of 2,000,000 shares of Common Stock, $0.01 par
value, of the Company (the "Common Stock") in the respective amounts set forth
in Schedule I hereto (the "Firm Shares"). The Company also proposes to sell at
the Underwriters' option an aggregate of up to 300,000 additional shares of
Common Stock (the "Option Shares") as set forth below.
As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Underwriting Agreement (this "Agreement") on
behalf of the several Underwriters, and (b) that the several Underwriters are
willing, acting severally and not jointly, to purchase the numbers of Firm
Shares set forth opposite their respective names in Schedule I, plus their pro
rata portion of the Option Shares if you elect to exercise the over-allotment
option in whole or in part
<PAGE>
for the accounts of the several Underwriters. The Firm Shares and the Option
Shares (to the extent the aforementioned option is exercised) are herein
collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company.
---------------------------------------------
The Company represents and warrants to each of the Underwriters as follows:
(a) A registration statement on Form S-1 (File No. 333-39981) with
respect to the Shares has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the rules and regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder and
has been filed with the Commission under the Act. Copies of such
registration statement, including any amendments thereto, the preliminary
prospectuses (meeting the requirements of Rule 430(a) of the Rules and
Regulations) contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been delivered
by the Company to you and, to the extent applicable, were identical to the
electronically transmitted copies thereof filed with the Commission on the
Commission's Electronic Data Gathering, Analysis and Retrieval System
("EDGAR"), except to the extent permitted by Regulation S-T. Such
registration statement, together with any registration statement filed by
the Company pursuant to Rule 462(b) under the Act, herein referred to as
the "Registration Statement," which shall be deemed to include all
information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of
the date of this Agreement. "Prospectus" means (a) the form of prospectus
first filed with the Commission pursuant to Rule 424(b) under the Act, (b)
if no filing pursuant to Rule 424(b) is required and a term sheet in
accordance with Rules 434 and 424(b)(7) is not used, the form of prospectus
included in the Registration Statement at the time of effectiveness or (c)
if a term sheet is used, the form of preliminary prospectus included in the
Registration Statement at the time of effectiveness that is delivered by
the Company to the Underwriters for delivery to purchasers of the Shares,
together with the term sheet or abbreviated term sheet filed with the
Commission in accordance with the provisions of Rule 434 and Rule 424(b)(7)
under the Act. Each preliminary prospectus included in the Registration
Statement prior to the time it becomes effective is herein referred to as a
"Preliminary Prospectus." Any reference herein to the Registration
Statement, any Preliminary Prospectus or the Prospectus shall be deemed to
include any supplements or amendments thereto filed with the Commission
after the date of filing of the Prospectus under Rules 424(b) or 430A, and
prior to the termination of the offering of the Shares by the Underwriters.
Any reference herein to the Registration Statement, any Preliminary
Prospectus, the Prospectus or any
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<PAGE>
amendment or supplement to any of the foregoing, shall be deemed to include
the respective copies thereof filed with the Commission on EDGAR.
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement. Each of the
subsidiaries of the Company as listed in Exhibit 21 to Item 16(a) of the
Registration Statement (collectively, the "Subsidiaries") has been duly
organized and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, with corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement. The Subsidiaries are the only
subsidiaries, direct or indirect, of the Company. The Company and each of
the Subsidiaries are duly qualified to transact business in all
jurisdictions in which the conduct of their business requires such
qualification. The outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and non-assessable and are owned by the Company or another Subsidiary free
and clear of all liens, encumbrances and equities and claims except as
described in the Prospectus; and no options, warrants or other rights to
purchase, agreements or other obligations to issue or other rights to
convert any obligations into shares of capital stock or ownership interests
in the Subsidiaries are outstanding except as described in the Prospectus.
(c) The outstanding shares of Common Stock of the Company have been
duly authorized and validly issued and are fully paid and non-assessable;
the Shares to be issued and sold by the Company have been duly authorized
and when issued and paid for as contemplated herein will be validly issued,
fully paid and non-assessable; and no preemptive rights of stockholders
exist with respect to any of the Shares or the issue and sale thereof.
Neither the filing of the Registration Statement nor the offering 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, except as described in the
Prospectus.
(d) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct in all material respects as of the dates
set forth therein. All of the Shares conform to the description thereof
contained in the Registration Statement. The form of certificates for the
Shares conforms in all material respects to the corporate law of the
jurisdiction of the Company's incorporation.
(e) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Shares
nor instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any
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<PAGE>
amendments or supplements thereto will contain, all statements which are
required to be stated therein by, and will conform to, the requirements of
the Act and the Rules and Regulations. The Registration Statement and any
amendment thereto do not contain, and will not contain, any untrue
statement of a material fact and do not omit, and will not omit, to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus and any amendments and
supplements thereto do not contain, and will not contain, any untrue
statement of material fact and do not omit, and will not omit, to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted
from the Registration Statement or the Prospectus, or any such amendment or
supplement, in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of any Underwriter through the
Representatives, specifically for use in the preparation thereof.
(f) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules as set forth in the
Registration Statement, present fairly the financial position and the
results of operations and cash flows of the Company and the Subsidiaries on
a consolidated basis, at the indicated dates and for the indicated periods.
Such financial statements and related schedules have been prepared in
accordance with generally accepted accounting principles ("GAAP"),
consistently applied throughout the periods involved, except as disclosed
therein, and all adjustments necessary for a fair presentation of results
for such periods have been made. The summary financial data included in
the Registration Statement presents fairly the information shown therein
and such data has been compiled on a basis consistent with the financial
statements presented therein and the books and records of the Company. The
pro forma financial statements and other pro forma financial information
included in the Registration Statement and the Prospectus present fairly
the information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements, have been properly compiled on the pro forma bases described
therein, and, in the opinion of the Company, the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein.
(g) Each of KPMG Peat Marwick LLP and Stirtz Bernards Boyden Surdel &
Larter, P.A., who have certified certain of the financial statements filed
with the Commission as part of the Registration Statement, are independent
public accountants as required by the Act and the Rules and Regulations.
(h) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened or contemplated against the Company or
any of the Subsidiaries before any court or administrative agency or
otherwise which, if determined
-4-
<PAGE>
adversely to the Company or any of its Subsidiaries, would be reasonably
likely to result in a material adverse change in the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and the Subsidiaries taken as a
whole or prevent the consummation of the transactions contemplated hereby,
except as set forth in the Registration Statement.
(i) The Company and the Subsidiaries have good and marketable title to
all of the properties and assets reflected in the financial statements (or
as described in the Registration Statement) hereinabove described, subject
to no lien, mortgage, pledge, charge or encumbrance of any kind except
those reflected in such financial statements (or as described in the
Registration Statement) or which are not material in amount. The Company
and the Subsidiaries occupy their leased properties under valid and binding
leases.
(j) The Company and the Subsidiaries have filed all Federal, state,
local and foreign income tax returns which have been required to be filed
and have paid all taxes indicated by said returns and all assessments
received by them or any of them to the extent that such taxes have become
due and are not being contested in good faith. All material tax liabilities
have been adequately provided for in the financial statements of the
Company.
(k) Since the respective dates as of which information is given in the
Registration Statement, as it may be amended or supplemented, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise),
or prospects of the Company and the Subsidiaries taken as a whole, whether
or not occurring in the ordinary course of business, and there has not been
any material transaction entered into or any material transaction that is
probable of being entered into by the Company or the Subsidiaries, other
than transactions in the ordinary course of business and changes and
transactions described in the Registration Statement, as it may be amended
or supplemented. The Company and the Subsidiaries have no material
contingent obligations which are not disclosed in the Company's financial
statements which are included in the Registration Statement.
(l) Neither the Company nor any of the Subsidiaries is or with the
giving of notice or lapse of time or both, will be, in violation of or in
default under its certificate of incorporation or other organizational
document (each, a "Charter") or by-laws or equivalent documents ("By-Laws")
or under any agreement, lease, contract, indenture or other instrument or
obligation to which it is a party or by which it, or any of its properties,
is bound and which default is of material significance in respect of the
business, management, properties, assets, rights, operations, condition
(financial or otherwise) of the Company and the Subsidiaries taken as a
whole. The execution and delivery of this Agreement and the
-5-
<PAGE>
consummation of the transactions herein contemplated and the fulfillment of
the terms hereof will not conflict with or result in a breach of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust or other agreement or instrument to which the
Company or any Subsidiary is a party, or of the Charter or By-laws of the
Company or any Subsidiary or any order, rule or regulation applicable to
the Company or any Subsidiary of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction.
(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions
herein contemplated (except such additional steps as may be required by the
Commission, the National Association of Securities Dealers, Inc. (the
"NASD") or such additional steps as may be necessary to qualify the Shares
for public offering by the Underwriters under state securities or Blue Sky
laws) has been obtained or made and is in full force and effect.
(n) The Company and the Subsidiaries possess such permits, licenses,
approvals, consents and other authorizations (collectively, "Governmental
Licenses") issued by the appropriate Federal, state, local or foreign
regulatory agencies or bodies necessary to the conduct of their business,
and are in compliance in all material respects with the terms and
conditions of all such Governmental Licenses, except where the failure to
possess or comply with such Governmental Licenses would not, singly or in
the aggregate, have a material adverse effect on the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and the Subsidiaries taken as whole;
neither the Company nor any Subsidiary has received any written notice of
proceedings relating to or is otherwise aware of a revocation or
modification of any Governmental License which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or funding, would have a
material adverse effect on the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects
of the Company and the Subsidiaries taken as whole.
(o) The Company and the Subsidiaries own or possess adequate licenses
or other rights to use the patents, patent rights, inventions, copyrights,
trademarks, service marks, trade names, know-how (including trade secrets
and other unpatented or unpatentable proprietary or confidential
information, formulae, systems or procedures) or other intellectual
property (collectively, "Intellectual Property") described in the
Prospectus as owned or used by them or which is necessary to the conduct of
their business as currently conducted and as proposed to be conducted. To
the knowledge of the Company, none of the Intellectual Property rights
owned or licensed by the Company are unenforceable or invalid. Neither the
Company nor any Subsidiary is aware of any infringement of or conflict with
asserted rights or claims of others with respect to any of
-6-
<PAGE>
the Company's products or Intellectual Property which, if the subject of
any unfavorable decision, ruling or funding, could have a material adverse
effect on the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company
and the Subsidiaries taken as whole. Neither the Company nor any Subsidiary
is aware of any infringement of any of the Intellectual Property rights by
any third party that could have a material adverse effect on the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and the Subsidiaries
taken as whole.
(p) Neither the Company, nor to the Company's knowledge, any of its
affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale of
the Shares.
(q) Neither the Company nor any Subsidiary is an "investment company"
within the meaning of such term under the Investment Company Act of 1940,
as amended, and the rules and regulations of the Commission thereunder (the
"1940 Act").
(r) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with GAAP and to maintain accountability
for assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(s) The Company and each of its Subsidiaries carry, or are covered by,
insurance in such amounts and covering such risks as is adequate for the
conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar industries.
(t) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan
-7-
<PAGE>
for which the Company would have any liability that is intended to be
qualified under Section 401(a) of the Code is so qualified in all material
respects and nothing has occurred, whether by action or by failure to act,
which would cause the loss of such qualification.
(u) Except as would not, singly or in the aggregate, have a material
adverse effect on the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of the
Company and the Subsidiaries taken as whole, (A) neither the Company nor
any Subsidiary is in violation of any Federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common
law or any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent, decree or judgment, relating to
the protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental
Laws"), (B) the Company and the Subsidiaries have all permits,
authorizations and approvals required under any applicable Environmental
Laws and are each in compliance with their requirements, (C) there are no
pending or, to the Company's knowledge, threatened administrative,
regulatory or judicial actions, suits, demands, demand letters, claims,
liens, notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company or any Subsidiary and
(D) there are no events or circumstances of which the Company is aware that
might reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any
Subsidiary relating to any Environmental Laws.
(v) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, An Act Relating to Disclosure of doing Business with Cuba, and the
Company further agrees that if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after
the date the Registration Statement becomes or has become effective with
the Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the
Company's business with Cuba or with any person or affiliate located in
Cuba changes in any material way, the Company will provide the Department
notice of such business or change, as appropriate, in a form acceptable to
the Department.
(w) No contract or document of a character required to be described in
the Registration Statement or the Prospectus or to be filed as an exhibit
to the Registration Statement is not so described or filed as required.
-8-
<PAGE>
2. Purchase, Sale and Delivery of the Firm Shares.
----------------------------------------------
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the
Company agrees to sell to the Underwriters and each Underwriter agrees,
severally and not jointly, to purchase, at a price of $___ per share, the
number of Firm Shares set forth opposite the name of each Underwriter in
Schedule I hereof, subject to adjustments in accordance with Section 9
hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be made by
wire transfer of same-day funds to an account of the Company against
delivery of certificates therefor to the Representatives for the several
accounts of the Underwriters. Such payment and delivery are to be made at
the offices of BT Alex. Brown Incorporated, One South Street, Baltimore,
Maryland, at 10:00 a.m., Baltimore time, on the third business day after
the date of this Agreement or at such other time and date not later than
five business days thereafter as you and the Company shall agree upon, such
time and date being herein referred to as the "Closing Date." (As used
herein, "business day" means a day on which the New York Stock Exchange is
open for trading and on which banks in New York are open for business and
not permitted by law or executive order to be closed.) The certificates
for the Firm Shares will be delivered in such denominations and in such
registrations as the Representatives request in writing not later than the
second full business day prior to the Closing Date, and will be made
available for inspection by the Representatives at least one business day
prior to the Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth,
the Company hereby grants an option to the several Underwriters to purchase
the Option Shares at the price per share as set forth in the first
paragraph of this Section 2. The option granted hereby may be exercised in
whole or in part by giving written notice (i) at any time before the
Closing Date and (ii) only once thereafter within 30 days after the date of
this Agreement, by you, as Representatives of the several Underwriters, to
the Company setting forth the number of Option Shares as to which the
several Underwriters are exercising the option, the names and denominations
in which the Option Shares are to be registered and the time and date at
which such certificates are to be delivered. The time and date at which
certificates for Option Shares are to be delivered shall be determined by
the Representatives but shall not be earlier than three nor later than 10
full business days after the exercise of such option, nor in any event
prior to the Closing Date (such time and date being herein referred to as
the "Option Closing Date"). If the date of exercise of the option is three
or more days before the Closing Date, the notice of exercise shall set the
Closing Date as the Option Closing Date. The number of Option Shares to be
purchased by each Underwriter shall be in the same proportion to the total
number of Option Shares being purchased as the number of Firm Shares being
purchased by such Underwriter bears to the total number of
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<PAGE>
Firm Shares, adjusted by you in such manner as to avoid fractional shares.
The option with respect to the Option Shares granted hereunder may be
exercised only to cover over-allotments in the sale of the Firm Shares by
the Underwriters. You, as Representatives of the several Underwriters, may
cancel such option at any time prior to its expiration by giving written
notice of such cancellation to the Company. To the extent, if any, that the
option is exercised, payment for the Option Shares shall be made on the
Option Closing Date by wire transfer of same-day funds to an account of the
Company against delivery of certificates therefor at the offices of BT
Alex. Brown Incorporated, One South Street, Baltimore, Maryland.
3. Offering by the Underwriters.
----------------------------
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it advisable to
do so. The Firm Shares are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representatives may from
time to time thereafter change the public offering price and other selling
terms. To the extent, if at all, that any Option Shares are purchased pursuant
to Section 2 hereof, the Underwriters will offer them to the public on the
foregoing terms.
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a Master
Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. Covenants of the Company.
------------------------
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (i) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule
430A of the Rules and Regulations is followed, to prepare and timely file
with the Commission under Rule 424(b) of the Rules and Regulations a
Prospectus in a form approved by the Representatives containing information
previously omitted at the time of effectiveness of the Registration
Statement in reliance on Rule 430A of the Rules and Regulations, and (ii)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representatives shall not previously have been
advised and furnished with a copy or to which the Representatives shall
have reasonably objected in writing or which is not in compliance with the
Rules and Regulations. To the extent applicable, the copies of the
Registration Statement (including all exhibits filed therewith), any
Preliminary Prospectus or Prospectus furnished to the Underwriters shall be
identical to the copies thereof electronically filed with the Commission on
EDGAR, except to the extent permitted by Regulation S-T.
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(b) The Company will advise the Representatives promptly (i) when the
Registration Statement or any post-effective amendment thereto shall have
become effective, (ii) of receipt of any comments from the Commission,
(iii) of any request of the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information, and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of
the Prospectus or of the institution of any proceedings for that purpose.
The Company will use its best efforts to prevent the issuance of any such
stop order preventing or suspending the use of the Prospectus and to obtain
as soon as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representatives in attempting
to qualify the Shares for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in
writing and will make such applications, file such documents, and furnish
such information as may be reasonably required for that purpose, provided
the Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction where it
is not now so qualified or required to file such a consent. The Company
will, from time to time, prepare and file such statements, reports, and
other documents, as are or may be required to continue such qualifications
in effect for so long a period as the Representatives may reasonably
request for distribution of the Shares.
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period
when delivery of a Prospectus is required under the Act, as many copies of
the Prospectus in final form, or as thereafter amended or supplemented, as
the Representatives may reasonably request. The Company will deliver to
the Representatives, at or before the Closing Date, four signed copies of
the Registration Statement and all amendments thereto including all
exhibits filed therewith, and will deliver to the Representatives such
number of copies of the Registration Statement (including such number of
copies of the exhibits filed therewith that may reasonably be requested),
and of all amendments thereto, as the Representatives may reasonably
request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934 (the "Exchange Act"),
and the rules and regulations of the Commission thereunder, so as to permit
the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus
is required by law to be delivered by an Underwriter or dealer, any event
shall occur as a result of which, in the judgment of the Company or in the
reasonable opinion of the Underwriters, it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein, in the
light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if it is necessary at any
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time to amend or supplement the Prospectus to comply with any law, the
Company promptly will prepare and file with the Commission an appropriate
amendment to the Registration Statement or supplement to the Prospectus so
that the Prospectus as so amended or supplemented will not, in the light of
the circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with the law.
(f) The Company will make generally available to its security holders,
as soon as it is practicable to do so, but in any event not later than 15
months after the effective date of the Registration Statement, an earning
statement (which need not be audited) in reasonable detail, covering a
period of at least 12 consecutive months beginning after the effective date
of the Registration Statement, which earning statement shall satisfy the
requirements of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and will advise you in writing when such statement has been so
made available.
(g) The Company will, for a period of five years from the Closing
Date, deliver to the Representatives copies of annual reports and copies of
all other documents, reports and information furnished by the Company to
its stockholders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or
the Securities Exchange Act of 1934, as amended. The Company will deliver
to the Representatives similar reports with respect to significant
subsidiaries, as that term is defined in the Rules and Regulations, which
are not consolidated in the Company's financial statements. To the extent
applicable, such reports and documents shall be identical to the copies
thereof electronically filed with the Commission on EDGAR, except to the
extent permitted by Regulation S-T.
(h) The Company will not issue, sell or otherwise dispose of, directly
or indirectly, any shares of Common Stock or other securities convertible
into or exchangeable or exercisable for shares of Common Stock or
derivative of Common Stock (or enter into any agreement for such) for a
period of 180 days after the date of this Agreement otherwise than
hereunder or with the prior written consent of BT Alex. Brown Incorporated
except that the Company may, without such consent, (i) issue shares upon
the exercise of options outstanding on the date of this Agreement issued
pursuant to its 1996 Stock Option Plan, 1996 Affiliate Stock Option Plan or
Amended and Restated 1996 Directors Stock Option Plan, (ii) issue shares
pursuant to its 1997 Employee Stock Purchase Plan, (iii) grant options and
offer to sell shares of Common Stock to its employees, consultants,
advisors and directors pursuant to the plans listed in clauses (i) and
(ii), (iv) issue shares upon the conversion of the Company's Series A
Convertible Preferred Stock, and (v) issue Common Stock in connection with
affiliations or acquisitions provided that the recipient thereof agrees to
execute a lock-up agreement referred to in paragraph (j) below. The
Company will not file a registration statement on Form S-8 under the Act
until 90 days after the date of this Agreement other than a registration
statement covering the shares of Common Stock under the 1997 Employee Stock
Purchase Plan.
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(i) The Company will use its best efforts to list, subject to notice
of issuance, the Shares on the Nasdaq National Market.
(j) The Company has caused each officer and director and each
shareholder of the Company listed on Schedule II attached hereto to furnish
to you, on or prior to the date of this agreement, a letter or letters,
substantially in the form of Annex I attached hereto ("Lockup Agreements").
(k) The Company shall apply the net proceeds of its sale of the Shares
as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Shares and the application of
the proceeds therefrom as may be required in accordance with Rule 463 under
the Act.
(l) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as
would require the Company or any of the Subsidiaries to register as an
investment company under the 1940 Act.
(m) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar for the
Common Stock.
(n) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any securities of the Company.
5. COSTS AND EXPENSES.
------------------
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting
fees of the Company; the fees and disbursements of counsel for the Company; the
cost of printing and delivering to, or as requested by, the Underwriters copies
of the Registration Statement, Preliminary Prospectuses, the Prospectus, this
Agreement, the Underwriters' invitation letter, the listing application, the
Blue Sky survey and any supplements or amendments thereto; the filing fees of
the Commission; the filing fees incident to securing any required review by NASD
Regulation, Inc. (the "NASD") of the terms of the sale of the Shares; the
listing fee of the Nasdaq National Market; and the expenses, including the fees
and disbursements of counsel for the Underwriters, incurred in connection with
the qualification of the Shares under State securities or Blue Sky laws. The
Company shall not, however, be required to pay for any of the Underwriters
expenses (other than those related to qualification under NASD regulations and
State securities or Blue Sky laws) except that, if this Agreement shall not be
consummated because the conditions in Section 6 hereof are not satisfied, or
because this Agreement is terminated by the Representatives pursuant to Section
11 hereof, or by reason of any
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<PAGE>
failure, refusal or inability on the part of the Company to perform any
undertaking or satisfy any condition of this Agreement or to comply with any of
the terms hereof on their part to be performed, unless such failure to satisfy
said condition or to comply with said terms be due to the default or omission of
any Underwriter, then the Company shall reimburse the several Underwriters for
reasonable out-of-pocket expenses, including fees and disbursements of counsel,
reasonably incurred in connection with investigating, marketing and proposing to
market the Shares or in contemplation of performing their obligations hereunder;
but the Company shall not in any event be liable to any of the several
Underwriters for damages on account of loss of anticipated profits from the sale
by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
---------------------------------------------
The several obligations of the Underwriters to purchase the Firm Shares on
the Closing Date and the Option Shares, if any, on the Option Closing Date are
subject to the accuracy, as of the Closing Date or the Option Closing Date, as
the case may be, of the representations and warranties of the Company contained
herein, and to the performance by the Company of its covenants and obligations
hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by
Rule 424 and Rule 430A of the Rules and Regulations shall have been made,
and any request of the Commission for additional information (to be
included in the Registration Statement or otherwise) shall have been
disclosed to the Representatives and complied with to their reasonable
satisfaction. No stop order suspending the effectiveness of the
Registration Statement, as amended from time to time, shall have been
issued and no proceedings for that purpose shall have been taken or, to the
knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or order of any nature by a Federal or state
court of competent jurisdiction shall have been issued as of the Closing
Date which would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Baker & Hostetler
LLP, counsel for the Company, dated the Closing Date or the Option Closing
Date, as the case may be, addressed to the Underwriters to the effect that:
(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of
Delaware, with corporate power and corporate authority to own or lease
its properties and conduct its business as described in the
Registration Statement; each significant Subsidiary, as defined in
Rule 1-02 of Regulation S-X of the Rules and Regulations (a
"Significant Subsidiary") has been duly organized and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with corporate power and corporate
authority
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<PAGE>
to own or lease its properties and conduct its business as described
in the Registration Statement; the Company and each of the Significant
Subsidiaries are duly qualified to transact business in all
jurisdictions in which the conduct of their business requires such
qualification, except where the failure to so qualify would not have a
material adverse effect upon the business of the Company and the
Subsidiaries taken as a whole; and the outstanding shares of capital
stock of each of the Significant Subsidiaries have been duly
authorized and validly issued and are fully paid and non-assessable
and are owned by the Company or a Significant Subsidiary; to such
counsel's knowledge, the outstanding shares of capital stock of each
of the Subsidiaries is owned free and clear of all liens, encumbrances
and equities and claims, except as described in the Prospectus; and,
to such counsel's knowledge, no options, warrants or other rights to
purchase, agreements or other obligations to issue or other rights to
convert any obligations into any shares of capital stock or of
ownership interests in the Subsidiaries are outstanding, except as
described in or contemplated by the Registration Statement or the
Prospectus.
(ii) The Company has authorized and outstanding capital stock as
set forth under the caption "Capitalization" in the Prospectus; the
authorized shares of the Company's Common Stock have been duly
authorized; the outstanding shares of the Company's Common Stock have
been duly authorized and validly issued and are fully paid and non-
assessable; all of the Shares conform to the description thereof
contained under the caption "Description of Capital Stock" in the
Prospectus; the certificates for the Shares, assuming they are in the
form filed with the Commission, conform to the requirements of the
Delaware General Corporation Law; the shares of Common Stock,
including the Option Shares, if any, to be sold by the Company
pursuant to this Agreement have been duly authorized and will be
validly issued, fully paid and non-assessable when issued and paid for
as contemplated by this Agreement; and no preemptive rights of
stockholders exist with respect to any of the Shares or the issue or
sale thereof.
(iii) Except as described in or contemplated by the Registration
Statement or the Prospectus, to the knowledge of such counsel, (A)
there are no outstanding securities of the Company convertible or
exchangeable into or evidencing the right to purchase or subscribe for
any shares of capital stock of the Company and (B) there are no
outstanding or authorized options, warrants or rights of any character
obligating the Company to issue any shares of its capital stock or any
securities convertible into or exchangeable for or evidencing the
right to purchase or subscribe for any shares of such stock; and
except as described in the Prospectus, to the knowledge of such
counsel, no holder of any securities of the Company or any other
person has the right, contractual or otherwise, which has not been
satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of,
any of the Shares or the right to
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<PAGE>
have any Common Shares or other securities of the Company included in
the Registration Statement or the right, as a result of the filing of
the Registration Statement, to require registration under the Act of
any shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the
Act and, to the knowledge of such counsel, no stop order proceedings
with respect thereto have been instituted or are pending or threatened
under the Act.
(v) The Registration Statement, the Prospectus and each
amendment or supplement thereto comply as to form in all material
respects with the requirements of the Act and the applicable rules and
regulations thereunder (except that such counsel need express no
opinion as to the financial statements (historical or pro forma) and
related schedules or other financial data therein).
(vi) The statements under the captions "Business--Government
Regulation," "Description of Capital Stock," and "Shares Eligible for
Future Sale" in the Prospectus, insofar as such statements constitute
a summary of documents referred to therein or matters of law, fairly
present the information called for by the Act and the Rules and
Regulations with respect to such documents and matters of law and
fairly summarize such documents and matters referred to therein.
(vii) Such counsel does not know of any contracts or documents
that are of a character required to be filed as exhibits to the
Registration Statement or described in the Registration Statement or
the Prospectus which are not so filed or described as required; the
description of the Company's form of service agreement under the
caption "Business -- Service Agreement" fairly summarizes such
agreements and is an accurate summary in all material respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of the
Subsidiaries except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will
not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the Charter or By-laws
of the Company, or any agreement known to such counsel to which the
Company or any of the Subsidiaries is a party or by which the Company
or any of the Subsidiaries may be bound.
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<PAGE>
(x) This Agreement has been duly authorized, executed and
delivered by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body is required in connection with the execution
and delivery of this Agreement and the consummation of the
transactions herein contemplated (other than as may be required by the
NASD or as required by State securities and Blue Sky laws as to which
such counsel need express no opinion) except such as have been
obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of the
consummation of the transactions contemplated by this Agreement, and
application of the net proceeds therefrom as described in the
Prospectus, required to register as an investment company under the
1940 Act.
In rendering such opinion, Baker & Hostetler LLP may rely as to
matters governed by the laws of states other than the Delaware General
Corporation Law or Federal laws on local counsel in such jurisdictions,
which opinions shall be addressed to the Underwriters, provided that in
each case Baker & Hostetler LLP shall state that they believe that they and
the Underwriters are justified in relying on such other counsel. In
addition to the matters set forth above, such opinion shall also include a
statement to the effect that nothing has come to the attention of such
counsel which leads them to believe that (i) the Registration Statement, at
the time it became effective under the Act (but after giving effect to any
modifications incorporated therein pursuant to Rule 430A under the Act) and
as of the Closing Date or the Option Closing Date, as the case may be,
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Prospectus, or any
supplement thereto, on the date it was filed pursuant to the Rules and
Regulations and as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements, in the
light of the circumstances under which they are made, not misleading
(except that such counsel need express no view as to financial statements
(historical or pro forma), schedules or other financial or statistical data
therein). With respect to such statement, Baker & Hostetler LLP may state
that their belief is based upon the procedures set forth therein, but is
without independent check and verification.
(c) The Representatives shall have received from Ropes & Gray, counsel
for the Underwriters, an opinion dated the Closing Date or the Option
Closing Date, as the case may be, substantially to the effect specified in
subparagraphs (ii) (as to the Shares), (iv), (v), and (x) of Paragraph (b)
of this Section 6, and that the Company is a duly organized and validly
existing corporation under the laws of the State of Delaware. In rendering
such opinion Ropes & Gray may rely as to all matters governed other than by
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the laws of the Commonwealth of Massachusetts, the Delaware General
Corporation Law or Federal laws on the opinion of counsel referred to in
Paragraph (b) of this Section 6. In addition to the matters set forth
above, such opinion shall also include a statement to the effect that
nothing that has come to the attention of such counsel has caused them to
believe that (i) the Registration Statement, or any amendment thereto, as
of the time it became effective under the Act (but after giving effect to
any modifications incorporated therein pursuant to Rule 430A under the Act)
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Prospectus, or any
supplement thereto, on the date it was filed pursuant to the Rules and
Regulations and as of the Closing Date contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to
make the statements, in the light of the circumstances under which they are
made, not misleading (except that such counsel need express no view as to
financial statements (historical or pro forma), schedules or other
financial data therein). With respect to such statement, Ropes & Gray may
state that their belief is based upon the procedures set forth therein, but
is without independent check and verification.
(d) The Representatives shall have received at or prior to the Closing
Date from Ropes & Gray a memorandum or summary, in form and substance
satisfactory to the Representatives, with respect to the qualification for
offering and sale by the Underwriters of the Shares under the State
securities or Blue Sky laws of such jurisdictions as the Representatives
may reasonably have designated to the Company.
(e) You shall have received, on each of the dates hereof, the Closing
Date and the Option Closing Date, as the case may be, a letter dated the
date hereof, the Closing Date or the Option Closing Date, as the case may
be, in form and substance satisfactory to you, of each of KPMG Peat Marwick
LLP and Stirtz Bernards Boyden Surdel & Larter, P.A., confirming that they
are independent public accountants within the meaning of the Act and the
applicable published Rules and Regulations thereunder and stating that in
their opinion the financial statements and schedules examined by them and
included in the Registration Statement comply in form in all material
respects with the applicable accounting requirements of the Act and the
related published Rules and Regulations; and containing such other
statements and information as is ordinarily included in accountants'
"comfort letters" to Underwriters with respect to the financial statements
and certain financial and statistical information contained in the
Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of
the Chief Executive Officer and the Chief Financial Officer of the Company
to the effect that, as of the Closing Date or the Option Closing Date, as
the case may be, each of them severally represents as follows:
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(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the Registration
Statement has been issued, and, to his knowledge, no proceedings for
such purpose have been taken or are contemplated by the Commission;
(ii) The representations and warranties of the Company contained
in Section 1 hereof are true and correct as of the Closing Date or the
Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
(iv) He has carefully examined the Registration Statement and the
Prospectus and, in his opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration
Statement were true and correct in all material respects, and such
Registration Statement and Prospectus did not omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein not misleading, and since the effective date of the
Registration Statement, no event has occurred which should have been
set forth in a supplement to or an amendment of the Prospectus which
has not been so set forth in such supplement or amendment; and
(v) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been any
material adverse change or any development involving a prospective
material adverse change in or affecting the earnings, business,
management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and the
Subsidiaries taken as a whole, whether or not arising in the ordinary
course of business.
(g) The Company shall have furnished to the Representatives such
further certificates and documents confirming the representations and
warranties, covenants and conditions contained herein and related matters
as the Representatives may reasonably have requested.
(h) The Firm Shares and Option Shares, if any, shall have been
approved for designation upon notice of issuance on the Nasdaq National
Market.
(i) The Lockup Agreements shall be in full force and effect.
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The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects satisfactory to the Representatives and to Ropes & Gray, counsel for
the Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Option Closing Date, as the case
may be.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
--------------------------------------------
The obligations of the Company to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the condition that at the Closing Date or the Option Closing Date, as
the case may be, no stop order suspending the effectiveness of the Registration
Statement shall have been issued and in effect or proceedings therefor initiated
or threatened.
8. INDEMNIFICATION.
---------------
(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 Act, against any losses, claims, damages or liabilities to which such
Underwriter or any such controlling person may become subject under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or (ii) the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; and
will reimburse each Underwriter and each such controlling person upon
demand 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 or liability, action or proceeding
or in responding to a subpoena or governmental inquiry related to the
offering of the Shares, whether or not such Underwriter or controlling
person is a party to any action or proceeding; provided, however, that the
Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement, or omission or alleged omission made
in the Registration Statement, any Preliminary Prospectus, the Prospectus,
or such amendment or supplement, in reliance upon and in
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conformity with written information furnished to the Company by or through
the Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which the Company
may otherwise have.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, each of its directors, each of its officers
who have signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of the 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 Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or (ii) the omission or
the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made; and will reimburse
upon demand any legal or other expenses reasonably incurred by the Company
or any such director, officer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, action
or proceeding; provided, however, that each Underwriter will be liable in
each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission has been made
in the Registration Statement, any Preliminary Prospectus, the Prospectus
or such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such
Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to this Section 8, such person (the "indemnified party")
shall promptly notify the person against whom such indemnity may be sought
(the "indemnifying party") in writing. No indemnification provided for in
Section 8(a) or (b) shall be available to any party who shall fail to give
notice as provided in this Section 8(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related
and was materially prejudiced by the failure to give such notice, but the
failure to give such notice shall not relieve the indemnifying party or
parties from any liability which it or they may have to the indemnified
party for contribution or otherwise than on account of the provisions of
Section 8(a) or (b). In case any such proceeding shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party and shall
pay as incurred the reasonable fees and disbursements of such counsel
related to such proceeding.
-21-
<PAGE>
In any such proceeding, any indemnified party shall have the right to
retain its own counsel at its own expense. Notwithstanding the foregoing,
the indemnifying party shall pay as incurred (or within 30 days of
presentation) the fees and expenses of the counsel retained by the
indemnified party in the event (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such
counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified
party and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them
or (iii) the indemnifying party shall have failed to assume the defense and
employ counsel acceptable to the indemnified party within a reasonable
period of time after notice of commencement of the action. It is understood
that the indemnifying party shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable
fees and expenses of more than one separate firm for all such indemnified
parties. Such firm shall be designated in writing by you in the case of
parties indemnified pursuant to Section 8(a) and by the Company in the case
of parties indemnified pursuant to Section 8(b). The indemnifying party
shall not be liable for any settlement of any proceeding effected without
its written consent but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement or judgment. In addition, the indemnifying party will not,
without the prior written consent of the indemnified party, settle or
compromise or consent to the entry of any judgment in any pending or
threatened claim, action or proceeding of which indemnification may be
sought hereunder (whether or not any indemnified party is an actual or
potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) in
such proportion as is 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. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company on the
one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by
the Company on
-22-
<PAGE>
the one hand and the Underwriters on the other shall be deemed to be in the
same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
(e) The Company and the Underwriters agree that it would not be just
and equitable if contributions pursuant to Section 8(d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to above in Section 8(d).
The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) referred to above in Section 8(d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or
claim. Notwithstanding the provisions of Section 8(d), (i) no Underwriter
shall be required to contribute any amount in excess of the underwriting
discounts and commissions applicable to the Shares purchased by such
Underwriter, and (ii) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in Section 8(d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this
Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process issuing
from such court may be served upon him or it by any other contributing
party and consents to the service of such process and agrees that any other
contributing party may join him or it as an additional defendant in any
such proceeding in which such other contributing party is a party.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person
controlling any
-23-
<PAGE>
Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this
Section 8.
9. Default by Underwriters.
-----------------------
If on the Closing Date or the Option Closing Date, as the case may be, any
Underwriter shall fail to purchase and pay for the portion of the Shares which
such Underwriter has agreed to purchase and pay for on such date (otherwise than
by reason of any default on the part of the Company), you, as Representatives of
the Underwriters, shall use your reasonable efforts to procure within 36 hours
thereafter one or more of the other Underwriters, or any others, to purchase
from the Company such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 36
hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company or you
as the Representatives of the Underwriters will have the right, by written
notice given within the next 36-hour period to the parties to this Agreement, to
terminate this Agreement without liability on the part of the non-defaulting
Underwriters or the Company except to the extent provided in Section 8 hereof.
In the event of a default by any Underwriter or Underwriters, as set forth in
this Section 9, the Closing Date or Option Closing Date, as the case may be, may
be postponed for such period, not exceeding seven days, as you, as
Representatives, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section 9
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. Notices.
-------
All communications hereunder shall be in writing and, except as otherwise
provided herein, will be mailed, delivered, telecopied or telegraphed and
confirmed as follows: if to the
-24-
<PAGE>
Underwriters, to BT Alex. Brown Incorporated, One South Street, Baltimore,
Maryland 21202, Attention: Syndicate, with a copy to BT Alex. Brown
Incorporated, One South Street, Baltimore, Maryland 21202, Attention: General
Counsel and a copy to Ropes & Gray, One International Place, Boston,
Massachusetts 02110, Attention: Keith F. Higgins, Esq.; if to the Company, to
American Dental Partners, Inc., 301 Edgewater Place, Suite 320, Wakefield,
Massachusetts 01880, Attention: Chief Executive Officer, with a copy to Baker &
Hostetler LLP, 65 East State Street, Columbus, Ohio 43215, Attention: Gary A.
Wadman, Esq.
11. Termination.
-----------
This Agreement may be terminated by you by notice to the Company as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change or any development involving a prospective material adverse change
in or affecting the condition, financial or otherwise, of the Company and
its Subsidiaries taken as a whole or the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise)
or prospects of the Company and its Subsidiaries taken as a whole, whether
or not arising in the ordinary course of business, (ii) any outbreak or
escalation of hostilities or declaration of war or national emergency or
other national or international calamity or crisis or change in economic or
political conditions if the effect of such outbreak, escalation,
declaration, emergency, calamity, crisis or change on the financial markets
of the United States would, in your reasonable judgment, make it
impracticable to market the Shares or to enforce contracts for the sale of
the Shares, or (iii) suspension of trading in securities generally on the
New York Stock Exchange or the American Stock Exchange or limitation on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such Exchange, (iv) the enactment, publication, decree
or other promulgation of any statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects or may materially and adversely affect the business or
operations of the Company, (v) declaration of a banking moratorium by
United States or New York State authorities, (vi) any downgrading in the
rating of the Company's debt securities by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g)
under the Exchange Act); (vii) the suspension of trading of the Company's
common stock by the Commission on the Nasdaq National Market or (viii) the
taking of any action by any governmental body or agency in respect of its
monetary or fiscal affairs which in your reasonable opinion has a material
adverse effect on the securities markets in the United States; or
-25-
<PAGE>
(c) as provided in Sections 6 and 9 of this Agreement.
12. Successors.
----------
This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign merely because of such purchase.
13. Information Provided by Underwriters.
------------------------------------
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), legends required by Item 502(d)
of Regulation S-K under the Act and the information under the caption
"Underwriting" in the Prospectus.
14. Miscellaneous.
-------------
The reimbursement, indemnification and contribution agreements contained in
this Agreement and the representations, warranties and covenants in this
Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of
any Underwriter or controlling person thereof, or by or on behalf of the Company
or its directors or officers and (c) delivery of and payment for the Shares
under this Agreement.
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. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Maryland.
-26-
<PAGE>
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms. It is understood that your
acceptance of this letter on behalf of each of the Underwriters is pursuant to
the authority set forth in a Master Agreement among Underwriters, the form of
which shall upon request be submitted to the Company for examination.
Very truly yours,
AMERICAN DENTAL PARTNERS, INC.
By:
---------------------------
Name:
Title:
-27-
<PAGE>
The foregoing Underwriting Agreement is
hereby confirmed and accepted as of the
date first above written.
BT ALEX. BROWN INCORPORATED
BANCAMERICA ROBERTSON STEPHENS
PIPER JAFFRAY INC.
As Representatives of the several
Underwriters listed on Schedule I
----------
By: BT Alex. Brown Incorporated
By:
----------------------------
Name:
Title:
-28-
<PAGE>
Schedule I
----------
Schedule of Underwriters
<TABLE>
<CAPTION>
Number of
Underwriter Firm Shares
to be Purchased
<S> <C>
BT Alex. Brown Incorporated
BancAmerica Robertson Stephens
Piper Jaffray Inc.
---------------
TOTAL 2,000,000
</TABLE>
<PAGE>
Schedule II
-------------
Schedule of Stockholders executing lock-up agreements
<PAGE>
Annex I
---------
Form of lock-up agreement
<PAGE>
EXHIBIT 3(A)
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
AMERICAN DENTAL PARTNERS, INC.
FIRST: The name of this corporation (the "Company") shall be:
AMERICAN DENTAL PARTNERS, INC.
SECOND: Its registered office in the State of Delaware is to be located at
1209 Orange Street, in the City of Wilmington, County of New Castle, 19801, and
its registered agent at such address is THE CORPORATION TRUST COMPANY.
THIRD: The purpose or purposes of the Company shall be:
To engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Company shall have the authority to issue is 26,000,000, consisting of
25,000,000 shares of Common Stock, par value $.01 per share, and 1,000,000
shares of Preferred Stock, par value $.01 per share, of which 400,000 shares
shall be designated as Series A Convertible Preferred Stock and 70,000 shares
shall be designated as Series B Redeemable Preferred Stock.
1. Designation. The series of 400,000 shares of Series A Convertible
-----------
Preferred Stock, par value $.01 per share, shall be designated the "Series A
Preferred Stock", and the series of 70,000 shares of Series B Redeemable
Preferred Stock, par value $.01 per share, shall be designated the "Series B
Preferred Stock." The Series A Preferred Stock and the Series B Preferred Stock
sometimes are referred to hereinafter collectively as the "Preferred Stock" and
shall have the following rights, terms and privileges:
2. Dividends.
---------
(a) Dividends. The holders of the then outstanding Preferred Stock
---------
shall be entitled to receive, out of funds legally available therefore, when, as
and if declared by the Board of Directors, dividends at the cumulative rate of
$1.58 per share of Series A Preferred Stock and $8.00 per share of Series B
Preferred Stock, compounded annually. Such amounts shall be subject to
appropriate adjustment in the event of any stock split, stock dividend or any
other form of recapitalization (collectively a "Recapitalization") occurring
after January 8, 1996. Upon conversion of Series A Preferred Stock into Common
Stock all
<PAGE>
dividends accrued on the Series A Preferred Stock shall be cancelled.
(b) Dividends on Common Stock. No dividend shall be paid on the
-------------------------
Common Stock (other than a dividend payable solely in Common Stock) so long as
any share of Preferred Stock remains outstanding unless the holders of Preferred
Stock shall have consented thereto under Section 9.
3. Liquidation, Dissolution or Winding Up.
--------------------------------------
(a) Treatment at Liquidation, Dissolution or Winding Up. In the event
---------------------------------------------------
of any liquidation, dissolution or winding up of the Company, whether voluntary
or involuntary, before any distribution may be made with respect to the Common
Stock or any other series of capital stock which is junior to the Preferred
Stock, holders of each share of the Preferred Stock shall be entitled to be paid
out of the assets of the Company available for distribution to holders of the
Company's capital stock of all classes, whether such assets are capital,
surplus, or capital earnings, the greater of (i) (x) in the case of the Series A
Preferred Stock, an amount of $19.75 per share (subject to the adjustment in the
event of a Recapitalization occurring after January 8, 1996) and (y) in the case
of the Series B Preferred Stock, an amount of $100 per share of Preferred Stock
(subject to the adjustment in the event of a Recapitalization occurring after
January 8, 1996), plus in each case all accumulated dividends under Section 2(a)
through the date of such liquidation, dissolution or winding up, or (ii) in the
case of the Series A Preferred Stock, such amount per share of Series A
Preferred Stock as would have been payable had each such share been converted
into Common Stock immediately prior to such event of liquidation, dissolution or
winding up pursuant to the provisions of Section 5. The amount payable with
respect to the Series A Preferred Stock and Series B Preferred Stock pursuant to
this Section 3(a) is referred to herein as the "Liquidation Amount."
If the assets of the Company available for distribution to its
shareholders shall be insufficient to pay all the holders of shares of Series A
Preferred Stock and Series B Preferred Stock the full amount of the Liquidation
Amount to which they shall be entitled, the holders of shares of Series A
Preferred Stock and the holders of shares of Series B Preferred Stock shall
share ratably in any distribution of assets in proportion to the amounts which
they would have received with respect to their Series A or Series B Preferred
Stock had all amounts payable on or with respect to said shares been paid in
full.
After the payment of the Liquidation Amount shall have been made in
full to the holders of the Preferred Stock or funds necessary for such payment
shall have been set aside by the Company in trust for the account of holders of
the Preferred Stock so as to be available for such payments, the holders of the
Preferred Stock
-2-
<PAGE>
shall be entitled to no further participation in the distribution of the assets
of the Company, and the remaining assets of the Company legally available for
distribution to its shareholders shall be distributed among the holders of other
classes of securities of the Company in accordance with their respective terms.
(b) Treatment of Reorganizations. Any Reorganization (as such term
----------------------------
is defined in Section 5(g)), shall be regarded as a liquidation, dissolution or
winding up of the affairs of the Company within the meaning of this Section 3;
provided, however, that each holder of the Preferred Stock shall have the right
- -------- -------
to elect the benefits of the provisions of Section 5(g) hereof, if applicable,
in lieu of receiving payment of amounts payable upon liquidation, dissolution or
winding up of the Company pursuant to this Section 3.
(c) Distribution in Cash. The Liquidation
---------------
Amount shall in all events be paid in cash.
4. Voting Power. Except as otherwise expressly provided in
------------
Section 9 hereof, or as required by law, (i) each holder of Series A Preferred
Stock shall be entitled to vote on all matters and shall be entitled to that
number of votes equal to the largest number of whole shares of Common Stock into
which such holder's shares of Series A Preferred Stock could be converted,
pursuant to the provisions of Section 5 hereof, at the record date for the
determination of shareholders entitled to vote on such matter or, if no such
record date is established, at the date such vote is taken or any written
consent of shareholders is solicited, and (ii) holders of Series B Preferred
Stock shall have no voting rights with respect to such stock. Except as
otherwise expressly provided herein or as required by law, the holders of shares
of Series A Preferred Stock and Common Stock shall vote together as a single
class on all matters.
5. Conversion Rights for the Preferred Stock. The holders of the Series A
-----------------------------------------
Preferred Stock shall have the following rights with respect to the conversion
of the Series A Preferred Stock into shares of Common Stock.
(a) General. Subject to and in compliance with the provisions of this
-------
Section 5, any share of the Series A Preferred Stock may, at the option of the
holder, be converted at any time into fully-paid and non-assessable shares of
Common Stock. The number of shares of Common Stock to which a holder of Series
A Preferred Stock shall be entitled upon conversion shall be the product
obtained by multiplying the Applicable Conversion Rate (determined as provided
in Section 5(b)) by the number of shares of Series A Preferred Stock being
converted.
-3-
<PAGE>
(b) Applicable Conversion Rate. The conversion rate in effect at any
--------------------------
time (the "Applicable Conversion Rate") shall be the quotient obtained by
dividing $19.75 by the respective Applicable Conversion Value, calculated as
provided in Section 5(c).
(c) Applicable Conversion Value. The Applicable Conversion Value
---------------------------
shall be $19.75 provided that such amounts shall be adjusted from time to time
in accordance with this Section 5.
(d) Adjustments to Applicable Conversion Value.
------------------------------------------
(i) (A) Upon Sale of Common Stock. If the Company shall, while
-------------------------
there are any shares of Series A Preferred Stock outstanding, issue or sell
shares of its Common Stock without consideration or at a price per share less
than the Applicable Conversion Value in effect immediately prior to such
issuance or sale, then in each such case such Applicable Conversion Values for
the Series A Preferred Stock, upon each such issuance or sale, except as
hereinafter provided, shall be lowered so as to be equal to an amount determined
by multiplying the relevant Applicable Conversion Value by a fraction:
(1) the numerator of which shall be (a) the number of shares of
Common Stock outstanding immediately prior to the issuance of such
additional shares of Common Stock, plus the number of shares of Common
Stock issuable upon exercise of the options described in Section
5(d)(i)(E) which are then outstanding, plus (b) the number of shares
of Common Stock which the net aggregate consideration, if any,
received by the Company for the total number of such additional shares
of Common Stock so issued would purchase at the Applicable Conversion
Value in effect immediately prior to such issuance, and
(2) the denominator of which shall be (a) the number of shares
of Common Stock outstanding immediately prior to the issuance of such
additional shares of Common Stock, plus the number of shares of Common
Stock issuable upon exercise of the options described in Section
5(d)(i)(E) which are then outstanding, plus (b) the number of such
additional shares of Common Stock so issued.
(B) Upon Issuance of Warrants, Options and Rights to Common
-------------------------------------------------------
Stock.
- -----
(1) For the purposes of this Section 5(d)(i), the issuance of
any warrants, options, subscriptions, or purchase rights with respect
to shares of Common Stock and the issuance of any securities
convertible into or exchangeable for shares of Common Stock (or the
issuance of any warrants, options or any rights with respect to
-4-
<PAGE>
such convertible or exchangeable securities) shall be deemed an
issuance of such Common Stock at such time if the Net Consideration
Per Share (as hereinafter determined) which may be received by the
Company for such Common Stock shall be less than the Applicable
Conversion Value at the time of such issuance. Any obligation,
agreement, or undertaking to issue warrants, options, subscriptions,
or purchase rights at any time in the future shall be deemed to be an
issuance at the time such obligation, agreement or undertaking is made
or arises. No adjustment of the Applicable Conversion Value shall be
made under this Section 5(d)(i) upon the issuance of any shares of
Common Stock which are issued pursuant to the exercise of any
conversion or exchange rights in any convertible securities if any
adjustment shall previously have been made or deemed not required
hereunder, upon the issuance of any such warrants, options, or
subscription or purchase rights or upon the issuance of any
convertible securities (or upon the issuance of any warrants, options
or any rights therefor) as above provided.
Should the Net Consideration Per Share of any such warrants, options,
subscriptions, or purchase rights or convertible securities be
decreased from time to time, then, upon the effectiveness of each such
change, the Applicable Conversion Value shall be adjusted to such
Applicable Conversion Value as would have obtained (1) had the
adjustments made upon the issuance of such warrants, options, rights,
or convertible securities been made upon the basis of the decreased
Net Consideration per share of such securities, and (2) had
adjustments made to the Applicable Conversion Value since the date of
issuance of such securities been made to the Applicable Conversion
Value as adjusted pursuant to (1) above. Any adjustment of the
Applicable Conversion Value with respect to this paragraph which
relates to warrants, options, subscriptions, purchase rights or
convertible securities with respect to shares of Common Stock shall be
disregarded if, as, when and to the extent such warrants, options,
subscriptions, purchase rights or convertible securities expire or are
canceled without being exercised or converted, so that the Applicable
Conversion Value effective immediately upon such cancellation or
expiration shall be equal to the Applicable Conversion Value in effect
at the time of the issuance of the expired or canceled warrants,
options, subscriptions, purchase rights or convertible securities with
such additional adjustments as would have been made to that Applicable
Conversion Value had the expired or canceled warrants, options,
subscriptions, purchase rights or convertible securities not been
issued.
-5-
<PAGE>
(2) For purposes of this paragraph, the "Net Consideration Per
Share" which may be received by the Company shall be determined as
follows:
(a) The "Net Consideration Per Share" shall mean the amount
equal to the total amount of consideration, if any, received by
the Company for the issuance of such warrants, options,
subscriptions, or other purchase rights or convertible or
exchangeable securities, plus the minimum amount of
consideration, if any, payable to the Company upon exercise or
conversion thereof, divided by the aggregate number of shares of
Common Stock that would be issued if all such warrants, options,
subscriptions, or other purchase rights or convertible or
exchangeable securities were exercised, exchanged, or converted.
(b) The "Net Consideration Per Share" which may be received
by the Company shall be determined in each instance as of the
date of issuance of warrants, options, subscriptions, or other
purchase rights or convertible or exchangeable securities without
giving effect to any possible future upward price adjustments or
rate adjustments which may be applicable with respect to such
warrants, options, subscriptions, or other purchase rights or
convertible or exchangeable securities.
(C) Stock Dividends. In the event the Company shall make
---------------
or issue a dividend or other distribution payable in Common Stock or securities
of the Company convertible into or otherwise exchangeable for the Common Stock
of the Company, then such Common Stock or other securities issued in payment of
such dividend shall be deemed to have been issued without consideration.
(D) Consideration Other than Cash. For purposes of this
-----------------------------
Section 5(d), if a part or all of the consideration received by the Company in
connection with the issuance of shares of the Common Stock or the issuance of
any of the securities described in this Section 5(d) consists of property other
than cash, such consideration shall be deemed to have a fair market value as is
reasonably determined in good faith by the Board of Directors of the Company.
(E) Exceptions. This Section 5(d)(i) shall not apply under
----------
any of the circumstances which would constitute an Extraordinary Common Stock
Event (as hereinafter defined in Section 5(d)(ii)). Further, the provisions of
this Section 5(d)(i) shall not apply to (i) shares of Common Stock issued upon
conversion of the Series A Preferred Stock, (ii) options (and the shares
issuable upon exercise thereof) to purchase shares of Common Stock
-6-
<PAGE>
(including options outstanding on the date hereof) issued to employees, officers
or consultants of the Company, pursuant to options granted under a stock option
plan approved by the Company's Board of Directors, (iii) shares of Common Stock
issuable prior to May 1, 1996, (iv) shares of Common Stock issuable in
connection with debentures issued pursuant to a certain Subordinated Debenture
Purchase Agreement dated as of January 8, 1996, and (v) shares of Common Stock
issued in connection with an acquisition approved by the Board of Directors of
the Company. The number of shares in this Section (E) shall be proportionately
adjusted to reflect any Recapitalization occurring after January 8, 1996.
(ii) Upon Extraordinary Common Stock Event. Upon the happening of an
-------------------------------------
Extraordinary Common Stock Event (as hereinafter defined), the Applicable
Conversion Value for the Series A Preferred Stock shall, simultaneously with the
happening of such Extraordinary Common Stock Event, be adjusted by multiplying
the then effective Applicable Conversion Value with respect to the Preferred
Stock by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such Extraordinary Common Stock
Event and the denominator of which shall be the number of shares of Common Stock
outstanding immediately after such Extraordinary Common Stock Event, and the
product so obtained shall thereafter be the Applicable Conversion Value. The
Applicable Conversion Values for the Series A Preferred Stock shall be
readjusted in the same manner upon the happening of any successive Extraordinary
Common Stock Event or Events.
"Extraordinary Common Stock Event" shall mean (i) the issue of
additional shares of Common Stock as a dividend or other distribution
on outstanding Common Stock or on any class or series of Preferred
Stock, unless made pro rata to holders of Series A Preferred Stock,
--- ----
(ii) a subdivision of outstanding shares of Common Stock into a
greater number of shares of Common Stock, or (iii) a combination of
outstanding shares of the Common Stock into a smaller number of shares
of Common Stock.
(e) Dividends. In the event the Company shall make or issue, or
---------
shall fix a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution with respect to the Common
Stock payable in (i) securities of the Company other than shares of Common Stock
or (ii) assets, then and in each such event the holders of Series A Preferred
Stock shall receive, at the same time such distribution is made with respect to
Common Stock, the number of securities or such other assets of the Company which
they would have received had their Series A Preferred Stock been converted into
Common Stock immediately prior to the date of such distribution.
-7-
<PAGE>
(f) Capital Reorganization or Reclassification. If the Common Stock
------------------------------------------
issuable upon the conversion of the Series A Preferred Stock shall be changed
into the same or different number of shares of any class or classes of stock,
whether by capital reorganization, reclassification or otherwise (other than a
subdivision or combination of shares or stock dividend provided for elsewhere in
this Section 5 or by a Reorganization), then and in each such event, the holder
of each share of Series A Preferred Stock shall have the right thereafter to
convert such share into the kind and amount of shares of stock and other
securities and property receivable upon such capital reorganization,
reclassification or other change by holders of the number of shares of Common
Stock into which such shares of Series A Preferred Stock might have been
converted immediately prior to such capital reorganization, reclassification or
other change.
(g) Capital Reorganization, Merger or Sale of Assets. If at any time
------------------------------------------------
or from time to time there shall be a capital reorganization of the Common Stock
(other than a subdivision, combination, reclassification or exchange of shares
provided for elsewhere in this Section 5) or a merger or consolidation of the
Company with or into another corporation, or the sale of all or substantially
all of the Company's properties and assets to any other person, (any of which
events is herein referred to as a "Reorganization"), then as a part of such
Reorganization, provision shall be made so that the holders of the Series A
Preferred Stock shall thereafter be entitled to receive upon conversion of the
Series A Preferred Stock, the number of shares of stock or other securities or
property of the Company, or of the successor corporation resulting from such
Reorganization, to which such holder would have been entitled if such holder had
converted its shares of Series A Preferred Stock immediately prior to such
Reorganization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 5 with respect to the rights of
the holders of the Series A Preferred Stock after the Reorganization, to the end
that the provisions of this Section 5 (including adjustment of the Applicable
Conversion Value then in effect and the number of shares issuable upon
conversion of the Series A Preferred Stock) shall be applicable after that event
in as nearly equivalent a manner as may be practicable.
Upon the occurrence of a Reorganization, under circumstances which
make the preceding paragraph applicable, each holder of Series A Preferred Stock
shall have the option of electing treatment for his shares of Series A Preferred
Stock under either this Section 5(g) or Section 3 hereof, notice of which
election shall be submitted in writing to the Company at its principal offices
no later than five (5) business days before the effective date of such event.
-8-
<PAGE>
(h) Certificate as to Adjustments, Notice by the Company. In each
----------------------------------------------------
case of an adjustment or readjustment of the Applicable Conversion Rate, the
Company at its expense will furnish each holder of Series A Preferred Stock with
a certificate, executed by the president and chief financial officer (or in the
absence of a person designated as the chief financial officer, by the treasurer)
showing such adjustment or readjustment, and stating in detail the facts upon
which such adjustment or readjustment is based.
(i) Exercise of Conversion Privilege. To exercise its conversion
--------------------------------
privilege, a holder of Series A Preferred Stock shall surrender the certificate
or certificates representing the shares being converted to the Company at its
principal office, and shall give written notice to the Company at that office
that such holder elects to convert such shares. Such notice shall also state
the name or names (with address or addresses) in which the certificate or
certificates for shares of Common Stock issuable upon such conversion shall be
issued. The certificate or certificates for shares of Series A Preferred Stock
surrendered for conversion shall be accompanied by proper assignment thereof to
the Company in blank. The date when such written notice is received by the
Company, together with the certificate or certificates representing the shares
of Series A Preferred Stock being converted, shall be the "Conversion Date." As
promptly as practicable after the Conversion Date, the Company shall issue and
shall deliver to the holder of the shares of Series A Preferred Stock being
converted, or on its written order, such certificate or certificates as it may
request for the number of whole shares of Common Stock issuable upon the
conversion of such shares of Series A Preferred Stock in accordance with the
provisions of this Section 5, and cash, as provided in Section 5(j), in respect
of any fraction of a share of Common Stock issuable upon such conversion. Such
conversion shall be deemed to have been effected immediately prior to the close
of business on the Conversion Date, and at such time the rights of the holder as
holder of the converted shares of Series A Preferred Stock shall cease and the
person or persons in whose name or names any certificate or certificates for
shares of Common Stock shall be issuable upon such conversion shall be deemed to
have become the holder or holders of record of the shares of Common Stock
represented thereby. The Company shall pay any taxes payable with respect to
the issuance of Common Stock upon conversion of the Series A Preferred Stock,
other than any taxes payable with respect to income by the holders thereof.
(j) Cash in Lieu of Fractional Shares. The Company may, if it so
---------------------------------
elects, issue fractional shares of Common Stock or scrip representing fractional
shares upon the conversion of shares of Series A Preferred Stock. If the
Company does not elect to issue fractional shares, the Company shall pay to the
holder of the shares of Series A Preferred Stock which were converted a cash
adjustment in respect to such fractional shares in an amount equal
-9-
<PAGE>
to the same fraction of the market price per share of the Common Stock (as
reasonably determined in a manner prescribed in good faith by the Board of
Directors) at the close of business on the Conversion Date. The determination
as to whether or not any fractional shares are issuable shall be based upon the
total number of shares of Series A Preferred Stock being converted at any one
time by any holder thereof, not upon each share of Series A Preferred Stock
being converted.
(k) Partial Conversion. In the event some but not all of the shares
------------------
of Series A Preferred Stock represented by a certificate or certificates
surrendered by a holder are converted, the Company shall execute and deliver to
or on the order of the holder, at the expense of the Company, a new certificate
representing the number of shares of Series A Preferred Stock which were not
converted.
(l) Reservation of Common Stock. The Company shall at all times
---------------------------
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of the shares of the
Series A Preferred Stock, such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all outstanding
shares of the Series A Preferred Stock, and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Series A Preferred Stock, the
Company shall take such corporate action as may be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose.
(m) Minimum Adjustment. Any provision of this Section 5 to the
------------------
contrary notwithstanding, no adjustment in the Applicable Conversion Value shall
be made if the amount of such adjustment would be less than 1% of the Applicable
Conversion Value then in effect, but any such amount shall be carried forward
and an adjustment with respect thereto shall be made at the time of and together
with any subsequent adjustment which, together with all amounts so carried
forward, aggregates 1% or more of the Applicable Conversion Value then in
effect.
6. Mandatory Conversion. If at any time the Company shall effect a
--------------------
Qualified Public Offering, then effective upon the closing of the sale of shares
of stock of the Company pursuant to such Qualified Public Offering, all
outstanding shares of Series A Preferred Stock shall automatically convert into
shares of Common Stock on the basis set forth in Section 5. For purposes of
this Section 6, the term "Qualified Public Offering" shall mean a firm
commitment underwritten public offering of shares of Common Stock in which the
aggregate price paid for such shares by the public shall be at least $15,000,000
and the price paid by the public for such shares shall be at least two times the
then Applicable
-10-
<PAGE>
Conversion Value of the Series A Preferred Stock per share. Holders of shares
of Series A Preferred Stock subject to conversion shall deliver to the Company
at its principal office (or such other office or agency as the Company may
designate by notice in writing) during its usual business hours, the certificate
or certificates for the shares of Series A Preferred Stock being converted, and
the Company shall issue and deliver to such holders certificates for the number
of shares of Common Stock to which such holders are entitled. Until such time
as holders of shares of Series A Preferred Stock shall surrender those
certificates therefor as provided above, such certificates shall be deemed to
represent the shares of Common Stock to which the holders shall be entitled upon
the surrender thereof.
7. Redemption. Except to the extent prohibited under applicable law, the
----------
Preferred Stock shall be subject to redemption on the following basis:
(a) If not previously redeemed, all shares of Series B Preferred
Stock shall be redeemed concurrently with consummation of the first sale of
securities by the Company pursuant to a registration statement filed under the
Securities Act of 1933, as amended, or within 90 days thereafter.
(b) All shares of Preferred Stock (including the Series A Preferred
Stock if not previously converted into Common Stock) shall be subject to
redemption at the option of the Company or the holders thereof commencing
January 8, 2002. If the Company so elects in writing to the holders of
Preferred Stock, or if holders of a majority of the shares of Preferred Stock
outstanding on January 8, 2002 give notice to the Company requesting redemption
of their Preferred Stock, the Company shall redeem within 30 days after the
giving of notice of such election, or the receipt of such notice from such
holders, one-third of the shares of Series A Preferred Stock and one-third of
the shares of Series B Preferred Stock then outstanding, and shall redeem an
additional one-third of the shares of each such series on January 8, 2003 and an
additional one-third of the shares of each such series on January 8, 2004. This
redemption right shall be cumulative, so that if the Company does not make such
election or the holders of Preferred Stock do not give such notice in 2002, the
Company or such holders may require redemption of all shares of Preferred Stock
in a subsequent year. All shares of Preferred Stock shall be redeemed at the
original price paid therefore, plus all accumulated dividends under Section
2(a).
8. Reissuance of Preferred Stock. Any share or shares of Series A
-----------------------------
Preferred Stock, Series B Preferred Stock, or other series or classes of
Preferred Stock acquired by the Company by reason of redemption, purchase,
conversion, or otherwise shall again be available for issuance by the Company,
subject to designation as provided in Section 12 of this Article FOURTH.
-11-
<PAGE>
9. Restrictions and Limitations.
----------------------------
(a) Corporate Action. Except as expressly provided herein or as
----------------
required by law, so long as any shares of Series A Preferred Stock remain
outstanding, the Company shall not, and shall not permit any subsidiary (which
shall mean any corporation, association or other business entity which the
Company and/or any of its other subsidiaries directly or indirectly owns at the
time more than fifty percent (50%) of the outstanding voting shares of such
corporation or trust, other than directors' qualifying shares) to, without the
approval by vote or written consent by the holders of at least 51% of the then
outstanding shares of Series A Preferred Stock, voting as a separate class:
(i) authorize or issue, or obligate itself to authorize or
issue, additional shares of Series A Preferred Stock;
(ii) authorize, increase the authorized number of shares of, or
issue, or obligate itself to authorize or issue, any equity security senior to
the Series A Preferred Stock as to liquidation preference, dividend right,
redemption right or voting right;
(iii) amend, restate, modify or alter the certificate of
incorporation or by-laws of the Company in any way which alters or changes the
rights, preferences or privileges of the Series A Preferred Stock so as to
affect such stock adversely.
(b) Corporate Action. Except as expressly provided herein or as
----------------
required by law, so long as any shares of Series B Preferred Stock remain
outstanding, the Company shall not, and shall not permit any subsidiary (which
shall mean any corporation, association or other business entity which the
Company and/or any of its other subsidiaries directly or indirectly owns at the
time more than fifty percent (50%) of the outstanding voting shares of such
corporation or trust, other that directors' qualifying shares) to, without the
approval by vote or written consent by the holders of at least 51% of the then
outstanding shares of Series B Preferred Stock, voting as a separate class:
(i) authorize or issue, or obligate itself to authorize or
issue, additional shares of Series B Preferred Stock;
(ii) authorize, increase the authorized number of shares of, or
issue, or obligate itself to authorize or issue, any equity security senior to
the Series B Preferred Stock as to liquidation preference, dividend right,
redemption right or voting right;
(iii) amend, restate, modify or alter the certificate of
incorporation or by-laws of the Company in any way
-12-
<PAGE>
which alters or changes the rights, preferences or privileges of the Series B
Preferred Stock.
10. No Dilution or Impairment. The Company will not, by amendment of its
-------------------------
certificate of incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of the Preferred Stock set forth herein, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
actions as may be necessary or appropriate in order to protect the rights of the
holders of the Preferred Stock against dilution or other impairment. Without
limiting the generality of the foregoing, the Company (a) will not increase the
par value of any shares of stock receivable on the conversion of the Preferred
Stock above the amount payable therefor on such conversion, (b) will take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of stock on the
conversion of all Preferred Stock from time to time outstanding, or (c) will not
consolidate with or merge into any other person or permit any such person to
consolidate with or merge into the Company (if the Company is not the surviving
person), unless such other person shall expressly assume in writing and will be
bound by all of the terms of the Preferred Stock set forth herein.
11. Notice of Record Date. In the event of
---------------------
(a) any taking by the Company of a record of holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification
or recapitalization of the capital stock of the Company, any merger of the
Company, or any transfer of all or substantially all of the assets of the
Company to any other corporation, or any other entity or person, or
(c) any voluntary or involuntary dissolution, liquidation or winding
up of the Company,
then and in each such event the Company shall mail or cause to be mailed to each
holder of Series B Preferred Stock a notice specifying (i) the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right and a description of such dividend, distribution or right, (ii) the date
on which any such reorganization, reclassification, recapitalization, transfer,
merger, dissolution, liquidation or winding up is expected to become effective
and (iii) the time, if
-13-
<PAGE>
any, that is to be fixed, as to when the holders of record of Common Stock (or
other securities) shall be entitled to exchange their shares of Common Stock (or
other securities) for securities or other property deliverable upon such
reorganization, reclassification, recapitalization, transfer, merger,
dissolution, liquidation or winding up. Such notice shall be mailed at least
ten (10) business days prior to the date specified in such notice on which such
action is to be taken.
12. Undesignated Preferred Stock. The Company may issue one or more
----------------------------
series of shares of Preferred Stock, each of which series may have such voting
powers, full or limited, or no voting powers, such other powers, and such
designations, preferences, and relative participating, optional, or other
special rights, and qualifications, limitations, or restrictions thereof, if
any, as shall be stated and expressed in the resolution or resolutions providing
for the issuance of such shares adopted by the board of directors. The
authority of the board of directors with respect to each series of shares of
Preferred Stock shall include, but not be limited to, determination of the
following:
(a) the number of shares of Preferred Stock of any series issued and
the distinctive designation of the shares of such series of stock, if any;
(b) the dividend rate, if any, on the shares of any series of
Preferred Stock, whether dividends shall be cumulative, and, if so, from which
date or dates, and whether they shall be payable in preference to, or in another
relation to, the dividends payable on any other series of stock;
(c) whether any series of shares of Preferred Stock shall have
conversion or exchange privileges, and, if so, the terms and conditions of such
conversion or exchange, including without limitation provision for adjustment of
the conversion or exchange rate upon the occurrence of such events as the board
of directors shall determine;
(d) whether or not any series of shares of Preferred Stock shall be
redeemable, and, if so, the terms and conditions of such redemption, including
the manner of selecting shares of Preferred Stock for redemption if less than
all shares of stock of a series are to be redeemed, the date or dates upon or
after which they shall be redeemable, and the amount per share payable in case
of redemption, which amount may vary under different conditions and at different
redemption rates;
(e) whether any series of shares of Preferred Stock shall be entitled
to the benefit of a sinking fund to be applied to the purchase or redemption of
the shares of stock, and, if so, the terms and amount of such sinking fund;
-14-
<PAGE>
(f) the rights of any series of shares of Preferred Stock in the
event of any voluntary or involuntary liquidation, dissolution, or winding up of
the Company and whether such rights shall be in preference to, or in another
relation to, the comparable rights of any other class or classes or series of
shares of stock; and
(g) any other relative, participating, optional or other special
rights, qualifications, limitations, or restrictions of any series of shares of
Preferred Stock.
FIFTH: In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware:
A. The board of directors of the Company is expressly authorized to
adopt, amend, or repeal the by-laws of the Company, except as
otherwise provided in the by-laws.
B. Elections of directors need not be by written ballot unless the
by-laws of the Company shall so provide.
C. The books of the Company may be kept at such place within or
without the State of Delaware as the by-laws of the Company may
provide or as may be designated from time to time by the board of
directors of the Company.
SIXTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of section 279 of Title 8 of the
Delaware Code, order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of
-15-
<PAGE>
stockholders, of this corporation, as the case may be, and also on this
corporation.
SEVENTH: The Company hereby elects that it shall be governed by the
provisions of Section 203 of the General Corporation Law of the State of
Delaware.
EIGHTH: The Company reserves the right to amend this Second Amended and
Restated Certificate of Incorporation in any manner permitted by the General
Corporation Law of the State of Delaware, and all rights and powers conferred
herein on stockholders, directors and officers, if any, are subject to this
reserved power. Notwithstanding the foregoing, in addition to any necessary
percentage voting requirements (and notwithstanding that a lesser percentage may
be required) under the General Corporation Law of the State of Delaware, as the
same exists or may hereafter be amended, for the amendment or repeal of any
provision of this Second Amended and Restated Certificate of Incorporation, the
amendment or repeal of any provision of this Second Amended and Restated
Certificate of Incorporation shall require the affirmative vote of the holders
of at least two-thirds of the shares of stock entitled to vote on such proposal
and, if any class of shares is required or entitled to be voted separately as a
class, the affirmative vote of holders of at least two-thirds of the shares of
such class; provided that if two-thirds of the directors then in office
recommend to the stockholders that such proposal be approved, then such proposal
may be approved by the affirmative vote of the holders of at least a majority of
the shares of stock entitled to vote on such proposal and, if any class of
shares is required or entitled to be voted separately as a class, by the
affirmative vote of the holders of at least a majority of the shares of such
class.
NINTH: No director shall be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director
notwithstanding any provision of law imposing such liability; provided, however,
that, to the extent provided by applicable law, this provision shall not
eliminate the liability of a director i) for any breach of a director's duty of
loyalty to the Company or its stockholders, ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, iii) under Section 174 of the General Corporation Law of Delaware, or iv)
for any transaction from which the director derived an improper personal
benefit. No amendment to or repeal of this provision shall apply to or have any
effect on the liability or alleged liability of any director for or with respect
to any acts or omissions of such director occurring prior to such amendment or
repeal.
TENTH: The Company is to have perpetual existence.
-16-
<PAGE>
ELEVENTH: To the extent permitted by law, the Company may purchase or
otherwise acquire shares of stock of any class issued by it for such
consideration and upon such terms and conditions as may be authorized by its
board of directors, in its discretion, from time to time.
TWELFTH: Any director or the entire board of directors of the Company may
be removed, with or without cause. Such removal shall require the affirmative
vote of the holders of at least two-thirds of the shares of stock then entitled
to vote in the election of directors; provided that if two-thirds of the
directors then in office recommend to the stockholders that a director be
removed, then such director may be removed, with or without cause, by the
affirmative vote of the holders of at least a majority of the shares of stock
then entitled to vote in the election of directors.
THIRTEENTH: If at any time the Company has a class of stock registered
pursuant to the provisions of the Securities Exchange Act of 1934, then for so
long as such class of stock is so registered, all actions by the stockholders of
the Company must be taken at an annual or special meeting of the stockholders
and may not be taken by written consent.
-17-
<PAGE>
EXHIBIT 4
[Logo] AMERICAN DENTAL PARTNERS
A Delaware Corporation
Number Shares
ADP
----- ----------
This Certificate is Transferable CUSIP 025353 10 3
in Boston, MA or New York, NY
See Reverse For Certain Definitions and Legends
This Certifies that
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.01 PER
SHARE, OF AMERICAN DENTAL PARTNERS, INC. transferable on the books of the
Corporation by the holder hereof, in person or by duly authorized attorney, upon
surrender of this Certificate properly endorsed or accompanied by a proper
assignment. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
Witness the facsimile signatures of its duly authorized officers.
Dated:
/s/ Gregory A. Serrao /s/ Ronald M. Levenson
President Treasurer
COUNTERSIGNED AND REGISTERED:
BANKBOSTON, N.A.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
AMERICAN DENTAL PARTNERS, 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 of the
Corporation and the qualifications, limitations or restrictions of such
preferences and/or rights. Such request may be made to the Secretary of the
Corporation at its principal office.
The Board of Directors of the Corporation has authority to fix the dividend
rights, dividend rate, conversion rights, voting rights, rights and terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and other rights and terms of one or more series of
Preferred Stock, and also has the authority to fix the number of shares
constituting any series of Preferred Stock.
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:
TEN COM - as tenants in common UNIF GIFT MIN ACT-........ Custodian........
(Cust) (Minor)
TEN ENT - as tenants by the under Uniform Gifts to Minors
entireties
JT TEN - as joint tenants with right Act .........................
of survivorship and not as (State)
tenants in common
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
TAXPAYER IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
---------------------------------------------
Attorney
- -----------------------------------------------------------------------
to transfer the said stock on the books of the within-named Corporation, with
full power of substitution in the premises.
X
------------------
X
NOTICE: ---------------------------------------------------
THE SIGNATURE(S) TO (SIGNATURE)
THIS ASSIGNMENT MUST
CORRESPOND WITH THE
NAME(S) AS WRITTEN
UPON THE FACE OF THE X
CERTIFICATE, IN EVERY ---------------------------------------------------
PARTICULAR, WITHOUT (SIGNATURE)
ALTERATION OR ENLARGE-
MENT, OR ANY CHANGE
WHATEVER. THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE PROGRAM) PURSUANT TO
S.E.C. RULE 17AD-15.
SIGNATURE(S) GUARANTEED BY:
<PAGE>
EXHIBIT 5
BAKER & HOSTETLER LLP
65 East State Street
Suite 2100
Columbus, Ohio 43215
(614) 228-1541 (General Number)
(614) 462-2616 (Telecopy Number)
December 31, 1997
American Dental Partners, Inc.
301 Edgewater Place
Suite 320
Wakefield, Massachusetts 01880
Ladies and Gentlemen:
We are acting as counsel to American Dental Partners, Inc., a Delaware
corporation (the "Company"), in connection with its Registration Statement on
Form S-1 (File No. 333-39981), as amended (the "Registration Statement"), filed
by the Company with the Securities and Exchange Commission under the Securities
Act of 1933, as amended, to register 2,300,000 shares of Common Stock, $0.01 par
value, of the Company (the "Shares").
In connection therewith, we have examined the Company's Seconded Amended
and Restated Certificate of Incorporation, the Company's Amended and Restated
By-laws, the records, as exhibited to us, of the corporate proceedings of the
Company, and such other documents and records as we considered necessary for
purposes of this opinion. In rendering this opinion, we have assumed the
genuineness, without independent investigation, of all signatures on all
documents examined by us, the conformity to original documents of all documents
submitted to us as certified or facsimile copies, and the authenticity of all
such documents.
Based upon the foregoing, we are of the opinion that the Shares have been
duly authorized and, when sold and paid for in the manner contemplated by the
Registration Statement, will have been validly issued and will be fully paid and
nonassessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and the reference to us under the caption "Validity of Common Stock"
in the Prospectus which is part of the Registration Statement.
Very truly yours,
/s/ Baker & Hostetler LLP
BAKER & HOSTETLER LLP
<PAGE>
EXHIBIT 10(AA)
ASSET PURCHASE AGREEMENT
AMONG
AMERICAN DENTAL PARTNERS, INC.,
APPLE PARK ASSOCIATES, INC.,
APAM, INC.,
(formerly known as Apple Park Associates, Inc.),
OC SPECIALISTS, LTD.,
(formerly known as Orthodontic Care Specialists, Ltd.)
AND
THE SHAREHOLDERS OF
APAM, INC. AND OC SPECIALISTS, LTD.
October 1, 1997
<PAGE>
TABLE OF CONTENTS
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Page
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ASSET PURCHASE AGREEMENT................................................... 1
BACKGROUND INFORMATION..................................................... 1
ARTICLE I ASSET PURCHASE AND SALE..................................... 1
(S)1.1 Asset Purchase and Sale....................................... 1
(S)1.2 Excluded Assets............................................... 2
(S)1.3 Liabilities Assumed........................................... 3
(S)1.4 Purchase Price................................................ 3
(S)1.5 Closing....................................................... 4
(S)1.6 Conveyance Documents.......................................... 5
(S)1.7 Possession.................................................... 5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF ADP....................... 6
(S)2.1 Organization and Standing..................................... 6
(S)2.2 Power and Authority........................................... 6
(S)2.3 Capitalization of Each of ADP and American.................... 6
(a) ADP Stock................................................. 6
(b) American Stock............................................ 7
(c) Stock Ownership........................................... 7
(d) No Other Commitment....................................... 7
(e) Compliance with Laws; No Liens............................ 7
(S)2.4 Conflicts; Consents and Approvals............................. 7
(S)2.5 Litigation.................................................... 8
(S)2.6 Brokerage and Finder's Fees................................... 8
(S)2.7 Financial Statements.......................................... 8
(S)2.8 Undisclosed Liabilities....................................... 9
(S)2.9 Taxes......................................................... 9
(S)2.10 Compliance with Law........................................... 10
(S)2.11 Complete Disclosure; Expiration............................... 10
ARTICLE III REPRESENTATIONS AND WARRANTIES OF
THE COMPANIES AND THE SHAREHOLDERS.......................... 11
(S)3.1 Organization and Standing..................................... 11
(S)3.2 Capitalization and Security Holders........................... 12
(a) APA and OCS Stock......................................... 12
(b) Stock Ownership........................................... 12
(c) Due Authorization and Issuance............................ 12
(d) No Other Commitment....................................... 12
(e) Compliance with Laws; Liens............................... 12
(S)3.3 Subsidiaries.................................................. 13
(S)3.4 Business of the Companies..................................... 13
(S)3.5 Power and Authority........................................... 13
(S)3.6 Consents and Approvals........................................ 13
(S)3.7 Financial Statements.......................................... 13
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(S)3.8 Undisclosed Liabilities....................................... 14
(S)3.9 Absence of Certain Changes.................................... 14
(S)3.10 Taxes......................................................... 16
(S)3.11 Compliance with Law........................................... 17
(S)3.12 Proprietary Rights............................................ 19
(S)3.13 Restrictive Documents or Laws................................. 20
(S)3.14 Insurance..................................................... 20
(S)3.15 Bank Accounts, Depositories; Powers of Attorney............... 21
(S)3.16 Title to and Condition of Properties.......................... 21
(S)3.17 Brokers, Finders.............................................. 22
(S)3.18 Legal Proceedings, etc........................................ 22
(S)3.19 ERISA......................................................... 23
(S)3.20 Contracts..................................................... 26
(S)3.21 Accounts Receivable........................................... 28
(S)3.22 No Conflict or Default........................................ 28
(S)3.23 Books of Account; Records..................................... 29
(S)3.24 Compensation.................................................. 29
(S)3.25 Labor Relations............................................... 30
(S)3.26 Suppliers and Third Party Payors.............................. 30
(S)3.27 Medicare and Medicaid......................................... 31
(S)3.28 Investment Intent............................................. 31
(S)3.29 Disciplinary Actions.......................................... 32
(S)3.30 Complete Disclosure........................................... 32
ARTICLE IV COVENANTS OF THE PARTIES.................................... 32
(S)4.1 Mutual Covenants.............................................. 32
(a) General................................................... 32
(b) Governmental Matters...................................... 33
(S)4.2 Covenants of the Companies and the Shareholders............... 33
(a) [Intentionally Omitted]................................... 33
(b) Conduct of Business....................................... 33
(c) Exclusive Rights.......................................... 35
(d) Access to Records and Other Due Diligence................. 35
(e) Disclosures............................................... 35
(f) Employee Retention........................................ 36
(g) Affiliate Indebtedness.................................... 36
(h) Distributions............................................. 36
(i) Shareholders Agreement; Subordination Agreement........... 36
(j) Formation of New PC....................................... 37
(k) Notices of Certain Events................................. 37
(l) Representations and Warranties............................ 38
(m) Noncompetition............................................ 38
(n) Injunctive Relief......................................... 39
(o) Third Party Payor Agreements.............................. 39
(p) Change of APA and OCS Names............................... 39
(S)4.3 Covenants of ADP.............................................. 40
(a) Representations and Warranties............................ 40
(b) Registration Rights Agreement............................. 40
(c) Notices of Certain Events................................. 40
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ARTICLE V CONDITIONS.................................................. 41
(S)5.1 Mutual Conditions............................................. 41
(a) Legal Prohibition......................................... 41
(b) Governmental Approvals.................................... 41
(S)5.2 Conditions to Obligations of the Companies and the
Shareholders................................................... 41
(a) Representations and Warranties............................ 41
(b) Performance of Agreement.................................. 41
(c) Certificate............................................... 41
(d) Opinion of Counsel........................................ 41
(e) Service Agreement......................................... 42
(f) Authority................................................. 42
(g) Material Adverse Change................................... 42
(h) Governmental Consents..................................... 42
(i) Restrictive Agreements.................................... 42
(j) Defaults.................................................. 42
(S)5.3 Conditions to Obligations of ADP.............................. 42
(a) Representations and Warranties............................ 43
(b) Performance of Agreement.................................. 43
(c) Certificate............................................... 43
(d) New PC.................................................... 43
(e) Service Agreement......................................... 43
(f) Authority................................................. 43
(g) Professional Personnel.................................... 43
(h) Financial Statements...................................... 44
(i) Opinion of Counsel........................................ 44
(j) Existing Employment and Deferred
Compensation Agreements................................... 44
(k) Third Party Consents...................................... 44
(l) Restrictive Conditions.................................... 44
(m) Defaults.................................................. 44
(n) Material Adverse Change................................... 44
(o) Books and Records......................................... 44
(p) Compliance with Laws...................................... 44
(q) Related-Party Transactions................................ 45
(r) Acquisition of Orthocare, Ltd............................. 45
(s) 1996 Financial Performance................................ 45
(t) APA and OCS Names......................................... 45
ARTICLE VI TERMINATION AND AMENDMENT................................... 45
(S)6.1 Termination................................................... 45
(a) Termination by the Companies and the
Shareholders.............................................. 45
(b) Termination by ADP........................................ 46
(S)6.2 Amendment..................................................... 46
(S)6.3 Extension; Waiver............................................. 46
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ARTICLE VII INDEMNIFICATION............................................. 46
(S)7.1 Survival of Representations, Warranties
and Agreements................................................ 46
(S)7.2 Indemnification............................................... 47
(S)7.3 Limitations on Indemnification................................ 48
(S)7.4 Procedure for Indemnification with Respect
to Third Party Claims......................................... 49
(S)7.5 Procedure For Indemnification with Respect
to Non-Third Party Claims..................................... 50
(S)7.6 Right of Setoff............................................... 50
(S)7.7 Liability Limitation.......................................... 51
(S)7.8 Indemnification of the Companies and the
Shareholders.................................................. 51
ARTICLE VIII MISCELLANEOUS............................................... 51
(S)8.1 Power of Attorney............................................. 51
(S)8.2 Notices....................................................... 52
(S)8.3 Non-Waiver.................................................... 53
(S)8.4 Genders and Numbers........................................... 53
(S)8.5 Headings...................................................... 53
(S)8.6 Counterparts.................................................. 54
(S)8.7 Entire Agreement.............................................. 54
(S)8.8 No Third Party Beneficiaries.................................. 54
(S)8.9 Governing Law................................................. 54
(S)8.10 Successors; Assignment........................................ 54
(S)8.11 Remedies...................................................... 54
(S)8.12 Expenses...................................................... 54
(S)8.13 Announcements................................................. 54
(S)8.14 Severability.................................................. 55
INDEX OF ADP SCHEDULES..................................................... 56
INDEX OF APA AND OCS SCHEDULES............................................. 57
INDEX OF EXHIBITS.......................................................... 58
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DEFINED TERMS LOCATOR LIST
--------------------------
Term Section
- ---- -------
18-Month Agreement 4.2(j)
Acquisition Proposal 4.2(c)
Additional Documents 7.1(a)
ADP Financial Statements 2.7
ADP Schedules Article II, first paragraph
ADP Shares Background Information
ADP Stock 2.3(a)
Affiliate 3.21
Affiliated Company 4.2(m)
APA and OCS Schedules Article III, first paragraph
APA Receivables 1.1(d)
APA Shares 3.2(a)
Applicable Laws 3.11
Asset Purchase Background Information
Assets 1.1
Assignment of Leases 1.4(d)(ii)
Assumed Liabilities 1.3
Assumption Agreement 1.4(d)(i)
Benefit Arrangements 3.19(e)
Cash 1.1(c)
Cash Consideration Background Information
Closing 1.5
Closing Date 1.5
Companies Background Information
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Damages 7.2(a)
Dr. Biewald 4.2(j)
Employee Plans 3.19
Entity 3.3
Environmental Laws 3.11, last paragraph
Equipment 1.1(a)
Excluded Liabilities 7.2(b)
Financial Statements 3.7(a)
Five-Year Agreement 4.2(j)
Fleet 2.4(a)
Goodwill 1.1(e)
Governmental Programs 3.27
Governmental Receivables 1.2(c)
Governmental Reimbursement Laws 3.27
Incorporated Documents 8.7
Indemnifiable Claims 7.2(b)
Indemnifying Party 7.4(a)
Leases 1.1(g)
Material Adverse Effect 3.9(a)
New PC 4.2(j)
Notes Background Information
OCS Receivables 1.1(d)
OCS Shares 3.2(a)
Parties Background Information
Pension Plans 3.19
Permits 3.11
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<PAGE>
Pre-Closing Period 4.2(b)
Proprietary Rights 3.12
Purchase Price 1.4
Registration Rights Agreement 4.3(b)
Related Party Payables 3.21
Related Party Receivables 3.21
Relevant Laws 2.10
Response Period 7.4(a)
Restricted Period 4.2(m)
Restricted Territory 4.2(m)
Securities 3.28
Securities Act 3.2(e)
Service Agreement 5.3(e)
Shareholders Introduction
Shareholders Agreement 4.2(i)
Software 3.12
Subordination Agreement 4.2(i)
Supplier Agreements 1.1(f)
Supplies 1.1(b)
Tax Returns 3.7(a)
Third-Party Claim 7.4(a)
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<PAGE>
ASSET PURCHASE AGREEMENT
------------------------
This Asset Purchase Agreement (this "Agreement") is made effective October
1, 1997, among American Dental Partners, Inc., a Delaware corporation ("ADP"),
Apple Park Associates, Inc., a Delaware corporation and wholly-owned subsidiary
of ADP ("American"), APAM, Inc., a Minnesota corporation formerly known as Apple
Park Associates, Inc. ("APA"), OC Specialists, Ltd., a Minnesota corporation
formerly known as Orthodontic Care Specialists, Ltd. ("OCS"), and the
shareholders of APA and OCS, as identified on Exhibit A attached to this
Agreement (the "Shareholders").
BACKGROUND INFORMATION
----------------------
A. APA and OCS (the "Companies") desire to sell, and American desires to
purchase, substantially all of the assets of the Companies (the "Asset
Purchase") for total consideration consisting of: (i) cash in the amount of
$5,023,960 (the "Cash Consideration"); (ii) subordinated promissory notes in the
form attached hereto as Exhibit B in the aggregate original principal amount of
$900,000 (the "Notes"); (iii) 13,835 shares of common stock, par value $.01 per
share, of ADP (the "ADP Shares"); and (iv) the assumption by American of the
Assumed Liabilities (defined in (S)1.3, below). The total consideration shall
be allocated between the Companies as provided in (S)1.4, below. ADP, American,
the Companies and the Shareholders (the "Parties") also desire to consummate the
other transactions contemplated by this Agreement.
B. The board of directors of ADP has determined that the Asset Purchase
and the other transactions described in this Agreement are desirable and in the
best interests of its shareholders, and each Shareholder has determined that the
Asset Purchase and the other transactions described in this Agreement are
desirable and in the best interests of the Companies and such Shareholder.
STATEMENT OF AGREEMENT
----------------------
The Parties hereby acknowledge the foregoing Background Information and
agree as follows:
ARTICLE I
ASSET PURCHASE AND SALE
-----------------------
(S)1.1 Asset Purchase and Sale. On the Closing Date, and on the terms and
-----------------------
subject to the conditions described in this Agreement, the Companies shall sell,
assign, transfer, convey, and deliver to American, and American shall, purchase
from the Companies, substantially all of the Companies' respective assets,
<PAGE>
rights, and business operations (the "Assets"), including without limitation the
following:
(a) All furniture, fixtures, and equipment (collectively, the
"Equipment");
(b) All office and dental supplies (collectively, the "Supplies");
(c) All cash and cash equivalents (collectively, the "Cash");
(d) The accounts receivable of APA set forth on Exhibit A to the
Assignment of Cash, Receivables, and Goodwill (the "APA Receivables") and,
in addition, accounts receivable in the amount of $40,000 (which shall not
include Governmental Receivables, as defined in (S)1.2(c), below) (the "OCS
Receivables") and all notes receivable, provided that: (i) the Parties
acknowledge that the OCS Receivables (A) have not been determined according
to generally accepted accounting principles, (B) shall not be subject to
the Service Agreement regardless of whether the services to which the OCS
Receivables relate are rendered before, on, or after October 1, 1997, and
(C) shall be satisfied out of the first $40,000 collected after the Closing
Date regardless of whether the services to which such collections relate
are rendered before, on, or after October 1, 1997; (ii) for purposes of
allocation of the Purchase Price under (S)1.4, below, the OCS Receivables
shall be deemed to have been an asset of, and assigned to American by, OCS;
and (iii) if, during the first 30 days after the Closing, the operation of
the New PC and American pursuant to the Service Agreement requires working
capital in addition to amounts collected upon payment of the APA
Receivables or under (S)1.3(d)(i)(C), above, American shall provide such
additional working capital in the form of a loan to the New PC (which shall
be an advance under the Service Agreement);
(e) Goodwill (the "Goodwill");
(f) All rights under any agreements with equipment vendors or other
suppliers (the "Supplier Agreements");
(g) All rights under all leases of facilities leased, used, or
operated by either or both of the Companies (collectively, the "Leases");
(h) [Intentionally omitted]; and
(i) All rights, titles, and interests in the Proprietary Rights and
the Software (each as defined in (S)3.12, below).
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(S)1.2 Excluded Assets. Notwithstanding any other provision of this
---------------
Agreement to the contrary, the following items shall be excluded from the
Assets:
(a) All patient records of the Companies;
(b) All contracts with patients of OCS for the future provision of
dental or orthodontic services;
(c) Accounts receivable with respect to which assignment is prohibited
under any Governmental Reimbursement Law (as defined in (S)3.27, below)
(such receivables, "Governmental Receivables"); and
(d) Any other assets of APA or OCS which American elects not to
purchase.
(S)1.3 Liabilities Assumed. At the Closing, American shall assume only:
-------------------
(a) working capital liabilities consisting of trade accounts payable and other
short-term liabilities incurred in the ordinary course of the operation of the
Companies' respective businesses; and (b) up to $25,000, in the aggregate, of
indebtedness to certain Shareholders for loans (each in the original principal
amount of $25,000 and dated August 27, 1996, as described on Schedule 3.8) made
to fund improvements to the Companies' Woodbury office (collectively, the
"Assumed Liabilities").
Except as specifically provided in this (S)1.3, neither ADP nor American
shall assume, or in any way be liable or responsible for, any claims,
liabilities, obligations, or debts of either Company or any Shareholder,
including without limitation any liabilities of either Company relating to: (a)
taxes payable, including without limitation income taxes, real estate taxes, or
employment taxes; (b) any pension, profit sharing, or employee benefit plans
covering any of the employees of either Company for any period prior to the
Closing; (c) express or implied warranties; (d) any acts or omissions of either
of the Companies or their respective employees prior to the Closing (including
without limitation any malpractice claims asserted against either Company or any
Shareholder or other tort claims asserted against either Company or any
Shareholder); (e) claims for breach of contract; (f) notes payable to the
Shareholders, each in the original principal amount of $8,000 and dated February
23, 1995, as described on Schedule 3.8; and (g) other claims of any kind
whatsoever, or any other liabilities of either Company or any Shareholder,
direct or contingent.
(S)1.4 Purchase Price. The total purchase price for the Assets (the
--------------
"Purchase Price") shall consist of the Cash Consideration, the Notes, the ADP
Shares, and the assumption of the Assumed Liabilities by American. The Purchase
Price shall be paid to the Companies, at Closing, as follows:
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<PAGE>
(a) American shall pay the Cash Consideration by certified or bank
cashier's check or wire transfer as follows: (i) $4,632,210 to OCS; and
(ii) $391,750 to APA;
(b) ADP shall issue and deliver the Notes as follows: (i) one Note in
the original principal amount of $830,520 to OCS; and (ii) a second Note in
the original principal amount of $69,480 to APA;
(c) ADP shall issue and deliver, or issue to American and cause it to
deliver, the ADP Shares as follows: (i) 12,814 ADP Shares to OCS; and (ii)
1,021 ADP Shares to APA; and;
(d) American shall assume the Assumed Liabilities by executing and
delivering (i) an assumption agreement in the form attached to this
Agreement as Exhibit C (the "Assumption Agreement"), and (ii) an assignment
and assumption agreement for the Leases in the form attached to this
Agreement as Exhibit D (the "Assignment of Leases"), together with separate
assignments of the Leases for recording purposes in form reasonably
satisfactory to ADP and consistent with the Assignment of Leases.
(e) The Companies hereby direct ADP and/or American to issue and
deliver the Notes and the ADP Shares directly to the Shareholders, in the
proportions set forth in Exhibit A, as an accommodation to the Companies
and the Shareholders in light of the fact that each Company will commence
liquidation at or immediately after the Closing.
The Purchase Price shall be allocated among the Assets as agreed upon by
the Companies and ADP at or prior to the Closing in accordance with Section 1060
of the Internal Revenue Code of 1986, as amended, and the applicable regulations
thereunder. The Companies and ADP shall use all reasonable efforts to agree
upon such allocation as soon as practicable. The allocation of the Purchase
Price determined under this (S)1.4 shall be binding on the Parties, shall be
used for all purposes on their respective Federal, state, and local income tax
returns, and shall be supported by them in any audits or other disputes or
litigation involving any such returns.
ADP and each of the Companies shall timely prepare and file all required
tax reports and returns with respect to the allocation of Purchase Price under
this (S)1.4, such as Internal Revenue Service Form 8594 or any equivalent
statement, and shall furnish the other Parties with a copy of any such form or
statement no later than 10 days prior to the required filing date. The
Companies and the Shareholders shall pay, and shall hold ADP and American
harmless from and against, any and all taxes, assessments, and other charges
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<PAGE>
that may be due and payable, or which relate in any way, to the transfer of the
Assets by the Companies to American.
(S)1.5 Closing. The closing of the Asset Purchase (the "Closing") shall
-------
be held at the offices of Fredrikson & Byron, P.A., 1100 International Centre,
900 Second Avenue South, Minneapolis, Minnesota, commencing at 10:00 a.m., local
time, on such date as may be reasonably designated by ADP; provided that: (a)
the date for the Closing (the "Closing Date") shall be not later than five
business days after the satisfaction or waiver of all contingencies set forth in
Article V of this Agreement; and (b) the Closing shall be effective as of 12:01
a.m., local time, on October 1, 1997, unless otherwise agreed by the Companies
and ADP.
(S)1.6 Conveyance Documents. At the Closing, the Companies shall convey,
--------------------
assign, and transfer their respective Assets to American through the execution
and delivery of the following documents:
(a) A bill of sale of the Equipment and Supplies, substantially in the
form attached as Exhibit E to this Agreement;
(b) An assignment of the Cash, Receivables, and Goodwill substantially
in the form attached as Exhibit F to this Agreement;
(c) An assignment of the Supplier Agreements substantially in the form
attached as Exhibit G to this Agreement;
(d) The Assignment of Leases and the separate assignment of each Lease
as contemplated by (S)1.4(d), above;
(e) [Intentionally omitted];
(f) An assignment of the Proprietary Rights and Software substantially
in the form attached as Exhibit I to this Agreement; and
(g) Such other assignment or conveyance documents as may be reasonably
requested by ADP or American.
If consents or approvals of any other parties are required for any
conveyances, assignments, or transfers contemplated by this Agreement, the
Companies and the Shareholders shall cause those consents or approvals to be
obtained prior to the Closing. All costs and expenses related to such consents
or approvals shall be paid by the Companies.
(S)1.7 Possession. American shall be entitled to exclusive possession of
----------
the Assets as of the Closing.
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<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF ADP
-------------------------------------
In order to induce the Companies and the Shareholders to enter into this
Agreement, ADP hereby represents and warrants to the Companies and the
Shareholders that the statements contained in this Article are true, correct and
complete, except as disclosed in the Schedules specifically referred to in this
Article and delivered by ADP to the Companies and the Shareholders on or prior
to the date of this Agreement (collectively, the "ADP Schedules"):
(S)2.1 Organization and Standing. ADP is a corporation duly organized,
-------------------------
validly existing and in good standing under the laws of the State of Delaware.
American is a corporation duly organized, validly existing, and in good standing
under the laws of the State of Delaware. Except as set forth on Schedule 2.1,
each of ADP, American, and ADP's other subsidiaries has full corporate power and
authority to own, lease, use and operate its properties and to conduct its
business as and where now owned, leased, used, operated and conducted and is
duly qualified or licensed as a foreign corporation and is in good standing in
each jurisdiction in which the character or location of the property owned,
leased or operated by it or the nature of the business conducted by it makes
such qualification necessary, except where the failure to be so qualified or
licensed would not have a material adverse effect on ADP and its subsidiaries,
taken as a whole.
(S)2.2 Power and Authority. Each of ADP and American has all requisite
-------------------
corporate power and authority to enter into this Agreement and to perform its
obligations under this Agreement. This Agreement and the transactions
contemplated by this Agreement have been duly and validly authorized by all
necessary corporate action on the part of each of ADP and American. This
Agreement has been duly executed and delivered by each of ADP and American and
constitutes the legal, valid and binding obligation of each of ADP and American,
enforceable against each of ADP and American in accordance with its terms.
(S)2.3 Capitalization of Each of ADP and American. As of the date of this
------------------------------------------
Agreement:
(a) ADP Stock. ADP's authorized capital stock (the "ADP Stock")
---------
consists solely of: (i) 2,500,000 shares of common stock, par value $.01
per share, of which 375,792 are issued and outstanding; (ii) 400,000 Series
A Convertible Preferred Shares, par value $.01 per share, all of which are
issued and outstanding; and (iii) 70,000 Series B Redeemable Preferred
Shares, par value $.01 per share, all of which are issued and outstanding.
Each outstanding share of capital stock of ADP is, and all ADP Shares to be
issued pursuant to this Agreement will be (when issued as contemplated by
this Agreement), duly authorized, validly issued, fully paid and
nonassessable, and
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<PAGE>
have not been and will not be issued in violation of any preemptive or
similar rights.
(b) American Stock. American's authorized capital stock consists
--------------
solely of 100 shares of common stock, par value $.01 per share, all of
which are issued, outstanding and owned by ADP.
(c) Stock Ownership. Set forth in Schedule 2.3 are complete and
---------------
accurate lists of (i) the shareholders of ADP who were initial investors in
ADP and the shares of ADP owned by each of them, and (ii) acquisitions
completed by ADP prior to the date of this Agreement and the shares of ADP
outstanding as a result of each acquisition.
(d) No Other Commitment. Except as set forth in Schedule 2.3, as of
-------------------
the date of this Agreement, there are no outstanding subscriptions,
options, warrants, puts, calls, agreements, understandings, claims or other
commitments or rights of any type relating to the issuance, sale or
transfer by ADP of any shares of ADP Stock, nor are there outstanding any
securities which are convertible into or exchangeable for any ADP Stock and
ADP has no obligation of any kind to issue any additional securities of
ADP, or any predecessor.
(e) Compliance with Laws; No Liens. The issuance of all shares of
------------------------------
ADP Stock has been, and the issuance of the ADP Shares to the Shareholders
as contemplated by this agreement will be (subject to (S)3.28, below), in
full compliance in all material respects, except where non-compliance would
have no adverse effect on ADP, with all applicable federal and state
securities laws and other laws. Except as set forth in Schedule 2.3, ADP
has not agreed to register any securities under the Securities Act and the
rules and regulations thereunder or under any state securities law.
(S)2.4 Conflicts; Consents and Approvals. The execution and delivery of
---------------------------------
this Agreement by ADP and American and the consummation by them of the
transactions contemplated in this Agreement will not:
(a) Violate or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with the giving of notice,
the passage of time or otherwise, would constitute a default) under, or
entitle any third party (with the giving of notice, the passage of time or
otherwise) to terminate, accelerate or call a default under, or result in
the creation of any lien, security interest, charge or encumbrance upon any
of the properties or assets of ADP or American under any of the terms,
conditions or provisions of the certificate of incorporation or bylaws,
each as amended to date, of ADP or American, or any note, bond, mortgage,
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<PAGE>
indenture, deed of trust, license, contract, undertaking, agreement, lease
or other instrument or obligation to which ADP or American is a party and
which is material to ADP and its subsidiaries (including, without
limitation, American), taken as a whole, except that pursuant to ADP's
Revolving Credit Agreement with Fleet National Bank ("Fleet") dated April
24, 1997, Fleet will have a security interest in the Assets after they are
acquired by American;
(b) Violate any order, writ, injunction, decree, statute, rule or
regulation, applicable to ADP or American or its properties or assets; or
(c) Require any action or consent or approval of, or review by, or
registration with any third party, court or governmental body or other
agency, instrumentality or authority, other than such actions taken in
respect of federal and state securities laws as are contemplated by this
Agreement.
(S)2.5 Litigation. There is no suit, claim, action, proceeding or
----------
investigation pending or, to the best knowledge of ADP, threatened against ADP,
American, or any other ADP subsidiary which, individually or in the aggregate,
is reasonably likely to have a material adverse effect on ADP and its
subsidiaries, taken as a whole, or a material adverse effect on the ability of
ADP or American to consummate the transactions contemplated in this Agreement.
Neither ADP, American, nor any ADP subsidiary is subject to any outstanding
order, writ, injunction or decree which, insofar as can be reasonably foreseen,
individually or in the aggregate, would have a material adverse effect on it or
a material adverse effect on the ability of ADP or American to consummate the
transactions contemplated by this Agreement.
(S)2.6 Brokerage and Finder's Fees. Neither ADP nor any of its
---------------------------
subsidiaries (including, without limitation, American), shareholders, directors,
officers or employees has incurred, or will incur on behalf of ADP or American,
any brokerage, finder's or similar fee in connection with the transactions
contemplated by this Agreement.
(S)2.7 Financial Statements. ADP has furnished to the Companies and the
--------------------
Shareholders the following (collectively, the "ADP Financial Statements"): the
balance sheets for ADP as at June 30, 1997, and the related statements of income
and retained earnings and cash flows for the period then ended. The ADP
Financial Statements have been prepared from and are in accordance with the
books and records of ADP and in conformity with generally accepted accounting
principles applied on a consistent basis and fairly present the financial
condition of ADP as of the dates stated and the results of operations of ADP for
the periods then ended in accordance with such practices.
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(S)2.8 Undisclosed Liabilities. Except as disclosed in Schedule 2.8, ADP
-----------------------
does not have any liability or obligation of any nature (whether liquidated,
unliquidated, accrued, absolute, contingent or otherwise and whether due or to
become due) except:
(a) Those set forth in the ADP Financial Statements which have not
been paid or discharged since the date thereof; and
(b) Those incurred in transactions in the ordinary course of ADP's
business since the date of the ADP Financial Statements, including without
limitation the acquisition of dental practices, assets of dental practices,
or other similar transactions unless obligations of ADP with respect to
such acquisitions would be properly included in ADP Financial Statements if
current as of the date of this Agreement, or unless full disclosure of the
terms of any such acquisition is not prohibited by contractual undertakings
by ADP.
(S)2.9 Taxes.
-----
(a) ADP has duly, properly, and timely filed all federal, state,
local and foreign tax returns and tax reports required to be filed by it,
all such returns and reports are true, correct and complete, none of such
returns and reports have been amended, and all taxes, assessments, fees and
other governmental charges due from ADP including without limitation those
arising under such returns and reports, have been fully paid or are fully
accrued as liabilities in the ADP Financial Statements and will be timely
paid. No claim has been made by authorities in any jurisdiction where ADP
did not file tax returns that it is or may be subject to taxation therein.
(b) ADP has delivered to the Companies and the Shareholders copies
of all federal, state, local, and foreign income tax returns filed with
respect to ADP as of the date of this Agreement. Schedule 2.9 sets forth
the dates and results of any and all audits conducted by taxing authorities
within the last five years or otherwise with respect to any tax year for
which assessment is not barred by any applicable statute of limitations. No
waivers of any applicable statute of limitations for the filing of any tax
returns or payment of any taxes or assessments of any deficient or unpaid
taxes are outstanding. Except as set forth in Schedule 2.9, all
deficiencies proposed as a result of any audits have been paid or settled.
There are no pending or, to the best of ADP's knowledge, threatened
federal, state, local or foreign tax audits or assessments of ADP and no
agreement with any federal, state, local or foreign taxing authority that
may affect the subsequent tax liabilities of ADP.
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(c) ADP is not on the date of this Agreement, nor will it be at the
Closing, liable for taxes, assessments, fees or governmental charges for
which it has not made adequate provision.
(S)2.10 Compliance with Law. Except as set forth in Schedule 2.10, ADP has
-------------------
complied and is in compliance in all material respects with all applicable laws,
statutes, orders, rules, regulations, policies and guidelines promulgated, and
all judgments, decisions and orders entered, by any federal, state, local or
foreign court or governmental authority, agency, or instrumentality relating to
ADP, or its business or properties, including without limitation all zoning,
fire, safety, building, asbestos laws, ordinances, regulations and requirements,
Environmental Laws (defined in (S)3.11), Governmental Reimbursement Laws
(defined in (S)3.27), Title VII of the Civil Rights Act of 1964, as amended, the
Fair Labor Standards Act, as amended, the Occupational Safety and Health Act of
1970, as amended, the Americans with Disabilities Act of 1990, all applicable
federal, state and local laws, rules and regulations relating to employment, and
all applicable laws, rules and regulations governing payment of minimum wages
and overtime rates, and the withholding and payment of taxes from compensation
of employees; federal and state antitrust and trade regulation laws applicable
to competition generally or to agreements restricting, allocating or otherwise
affecting geographic or product markets; and all related laws, ordinances,
regulations and requirements (the "Relevant Laws"). Except as set forth in
Schedule 2.10, ADP has not been charged with or given notice of any violation of
any of the Relevant Laws which violation has not been remedied in full. Except
as set forth on Schedule 2.10, (i) ADP has never disposed of, or contracted for
the disposal of, hazardous wastes, hazardous substances, infectious or medical
waste, radioactive waste or sewage sludge, and (ii) no such wastes, substances,
or sludge generated by ADP have finally come to be located on any site which is
or has been (including as a potential or suspect site) included in any published
federal, state, or local "superfund" or other list of hazardous or toxic waste
sites.
(S)2.11 Complete Disclosure; Expiration. No representation or warranty by
-------------------------------
ADP in this Agreement or the ADP Schedules contains, or will contain as of the
Closing, any untrue statement of a material fact or omits, or will omit as of
the Closing, a material fact necessary to make the statements contained herein
or therein not misleading.
The Parties acknowledge that the dental industry and dental practices are
regulated extensively at the state and federal levels. The laws of many states,
including states where ADP operates and anticipates operating, prohibit business
corporations or other non-dental entities (such as ADP) from practicing
dentistry (which in certain states includes managing and operating
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a dental office), splitting professional fees with dentists, owning or
controlling the assets of a group dental practice, employing dentists,
maintaining a dentist's patient records or controlling the content of a
dentist's advertising. The laws of many states also prohibit dentists 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 a dentist to other staff members. These laws and their
interpretation vary from state to state and are enforced by regulatory
authorities with broad discretion. ADP does not intend to control the practice
of dentistry by New PC or other affiliated dental groups or their compliance
with the regulatory requirements directly applicable to dentists or the practice
of dentistry. However, there can be no assurance that any review of ADP's
business relationships, including the relationships of ADP with New PC and other
affiliated dental groups, by courts or other regulatory authorities will not
result in determinations that could adversely affect the operations of ADP, or
that the laws and regulatory environment will not change to restrict ADP's long-
term service agreements, or that enforceability of the provisions thereof will
not be limited. The laws and regulations of certain states in which ADP may
seek to expand may require ADP to change its contractual relationships with
dental practices in a manner that may restrict the ADP's operations in those
states or may prevent ADP from acquiring the assets of or providing
comprehensive services to dental practices in those states.
ADP's obligations with respect to the representations and warranties set
forth in this Article shall expire on the third anniversary of the Closing Date.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE COMPANIES AND THE SHAREHOLDERS
-------------------------------------
In order to induce ADP and American to enter into this Agreement, the
Companies and the Shareholders hereby jointly and severally represent and
warrant to ADP and American that the statements contained in this Article are
true, correct and complete, except as disclosed in the Schedules referred to in
this Article and delivered by the Companies to ADP on or prior to the date of
this Agreement (collectively, the "APA and OCS Schedules"):
(S)3.1 Organization and Standing. Each Company is a corporation duly
-------------------------
organized, validly existing, and in good standing under the laws of the State of
Minnesota with full corporate power and authority to own, lease, use and operate
its properties and to conduct its business as and where now owned, leased, used,
operated and conducted. Each Company is duly qualified to do business in each
jurisdiction listed in Schedule 3.1, is not qualified to do business in any
other jurisdiction, and neither the nature of the
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business conducted by such Company nor the properties it owns, leases or
operates requires it to qualify to do business in any other jurisdiction.
Neither Company has received any written notice or assertion within the last
three years from any governmental official in any jurisdiction to the effect
that it is required to be qualified or authorized to do business in any such
jurisdiction, in which it is not so qualified or has not obtained such
authorization. Neither Company is in default in the performance, observation or
fulfillment of any provision of its articles of incorporation, bylaws, or other
organizational documents, each as amended to date.
(S)3.2 Capitalization and Security Holders.
-----------------------------------
(a) APA and OCS Stock. The authorized capital stock of the
-----------------
Companies consists solely of (i) 25,000 shares of common stock of APA (the
"APA Shares"), of which 1,000 are issued and outstanding, and (ii) 50,000
shares of common stock, par value $.01 per share, of OCS (the "OCS
Shares"), of which 28,484 are issued and outstanding.
(b) Stock Ownership. The Shareholders own beneficially and of
---------------
record all of the outstanding APA Shares and OCS Shares. Exhibit A attached
to this Agreement contains a correct and complete list of the names of the
Shareholders and accurately identifies all of the APA and OCS Shares owned
by the Shareholders, respectively.
(c) Due Authorization and Issuance. Each outstanding APA Share and
------------------------------
OCS Share has been duly authorized and validly issued, is fully paid and
non-assessable, and has not been issued in violation of any preemptive or
similar rights.
(d) No Other Commitment. There are no outstanding subscriptions,
-------------------
options, warrants, puts, calls, agreements, understandings, claims or other
commitments or rights of any type relating to the issuance, sale or
transfer by either Company or any Shareholder of any capital stock or other
securities of APA or OCS, nor are there outstanding any securities which
are convertible into or exchangeable for any shares of capital stock of APA
or OCS, and neither Company has an obligation of any kind to issue any
additional securities.
(e) Compliance with Laws; Liens. The issuance, sale, and transfer of
---------------------------
all of the APA and OCS Shares have been in full compliance with all
applicable federal and state securities laws and other laws. All of the
APA and OCS Shares are free and clear of all liens, security interests,
encumbrances, pledges, charges, claims, voting trusts and restrictions on
transfer of any nature whatsoever, except restrictions on transfer imposed
by or pursuant to federal and state securities laws. Neither Company has
agreed to register any securities under the Securities Act of 1933, as
amended
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(the "Securities Act"), and the rules and regulations thereunder or under
any state securities law.
(S)3.3 Subsidiaries. Neither Company owns any subsidiary corporations,
------------
nor does either Company own, directly or indirectly, any equity or other
ownership interest in any corporation, partnership, joint venture or other
entity or enterprise (hereinafter, simply "entity"). Neither Company is subject
to any obligation or requirement to provide funds to or make any investment (in
the form of a loan, capital contribution or otherwise) in any entity.
(S)3.4 Business of the Companies. APA is and has been engaged in the
-------------------------
business of providing administrative services and staff support to providers of
orthodontic services, including without limitation OCS, and is engaged in no
other business whatsoever except as may be incidental to the foregoing. OCS is
and has been engaged in the business of providing general dentistry and
specialty dental and orthodontic services to its patients and is engaged in no
other business whatsoever except as may be incidental to the foregoing.
(S)3.5 Power and Authority; Capacity. Each Company has all requisite
-----------------------------
corporate power and authority to enter into this Agreement and to perform its
obligations under this Agreement. This Agreement and the transactions
contemplated by this Agreement have been duly and validly authorized by all
necessary corporate action on the part of each Company. Each Shareholder has
full legal capacity, power, and authority to enter into this Agreement and
perform his obligations under this Agreement. This Agreement has been duly
executed and delivered by each Company and each Shareholder and constitutes the
legal, valid and binding obligation of each Company and each Shareholder
enforceable against each of them, respectively, in accordance with its terms.
No other action or proceeding by or in respect of either Company or any
Shareholder is or was necessary to authorize this Agreement or the consummation
of the transactions contemplated by this Agreement.
(S)3.6 Consents and Approvals. Except for the consents described in
----------------------
Schedule 3.6, all of which shall be obtained prior to the Closing, neither the
execution and delivery of this Agreement by either Company or any Shareholder
nor the consummation of the transactions contemplated by this Agreement require
or will require any action, consent, or approval of, or review by, or
registration with, any third party, court or governmental body or other agency,
instrumentality or authority.
(S)3.7 Financial Statements.
--------------------
(a) Each Company shall furnish to ADP the balance sheets and profit
and loss statements for such Company as of December 31, 1996, and a profit
and loss statement prepared on a
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combined basis for both Companies as of August 31, 1997 (collectively, the
"Financial Statements") and the tax returns for such Company for the three
most-recent tax years (collectively, the "Tax Returns"). The Financial
Statements for each Company were prepared from and are in accordance with
the books and records of such Company on a modified cash basis consistent
with such Company's past practices, and the Financial Statements and Tax
Returns for each Company shall fairly present the financial condition of
such Company as of the dates stated and the results of operations of such
Company for the periods then ended in accordance with such practices.
(b) [Intentionally omitted.]
(S)3.8 Undisclosed Liabilities. Except as set forth in Schedule 3.8,
-----------------------
neither Company has any liability or obligation of any nature (whether
liquidated, unliquidated, accrued, absolute, contingent or otherwise and whether
due or to become due) except:
(a) Those set forth in the Financial Statements which have not been
paid or discharged since the date thereof;
(b) Those arising from and after the date of this Agreement under
agreements or other commitments specifically identified in Schedule 3.20;
and
(c) Current liabilities (determined in accordance with generally
accepted accounting principles) incurred since January 1, 1997, in
transactions in the ordinary course of business consistent with past
practices which are properly reflected on its books and are not
inconsistent with the other representations, warranties and agreements of
the Companies and the Shareholders set forth in this Agreement.
(d) Those arising under and as a result of this Agreement.
(S)3.9 Absence of Certain Changes. Except as set forth in Schedule 3.9,
--------------------------
since December 31, 1996, there has not been:
(a) Any material adverse change in or effect on the business,
operations, assets, properties, prospects, rights or condition (financial
or otherwise) of either Company, or the ability of either Company or any
Shareholder to consummate the transactions contemplated by this Agreement,
or, to the best of each Shareholder's knowledge, any occurrence,
circumstance, or combination thereof which reasonably could be expected to
result in any such material adverse change or effect (a "Material Adverse
Effect");
(b) Except as provided in the last paragraph of (S)4.2(b), below, any
declaration, setting aside or payment of any
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distribution or payment (in cash or in kind) by either Company to any
Shareholder or any direct or indirect redemption, purchase or other
acquisition by either Company of any of its capital stock or other
securities or any rights or agreements to purchase or acquire any of its
capital or stock or other securities;
(c) Any increase in amounts payable by either Company to or for the
benefit of, or committed to be paid by either Company to or for the benefit
of, any Shareholder or any director or officer of either Company, or any
consultant, agent or employee of either Company, or any relatives of any
such person, or any increase in any benefits granted under any bonus,
profit-sharing, pension, retirement, deferred compensation, insurance, or
other direct or indirect benefit plan, payment or arrangement made to, with
or for the benefit of any such person, excepting only (i) reimbursement, in
the ordinary course of business consistent with past practices, of out-of-
pocket expenses incurred by employees of either Company directly in
connection with such Company's business, and (ii) compensation or dividend
payments to the Shareholders in amounts consistent with past practices;
(d) Any transaction entered into or carried out by either Company
other than in the ordinary and usual course of its business;
(e) Any borrowing or agreement to borrow funds by either Company, any
incurring by either Company of any other obligation or liability
(contingent or otherwise), except current liabilities incurred in the usual
and ordinary course of business (consistent with past practices), or any
endorsement, assumption or guarantee of payment or performance of any loan
or obligation of any other individual, firm, corporation or other entity by
either Company;
(f) Any material change in either Company's method of doing business
or any change in such Company's accounting principles or practices or its
method of application of such principles or practices;
(g) Any mortgage, pledge, lien, security interest, hypothecation,
charge or other encumbrance imposed or agreed to be imposed on or with
respect to the property or assets of either Company;
(h) Any sale, lease or other disposition of, or any agreement to
sell, lease or otherwise dispose of any of the properties or assets of
either Company, other than in the usual and ordinary course of business
consistent with past practices;
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(i) Any purchase of or any agreement to purchase assets (other than
inventory purchased in the ordinary course of business consistent with past
practices) for an amount in excess of $10,000 for any one purchase made by
either Company or $25,000 for all such purchases made by both Companies
combined or any lease or any agreement to lease, as lessee, any capital
assets with payments over the term thereof to be made by either Company
exceeding an aggregate of $10,000;
(j) Any loan or advance made by either Company to any individual,
firm, corporation or other entity;
(k) Any modification, waiver, change, amendment, release, rescission
or termination of, or accord and satisfaction with respect to, any material
term, condition or provision of any contract, agreement, license or other
instrument to which either Company is a party, other than any satisfaction
by performance in accordance with the terms thereof in the usual and
ordinary course of business;
(l) Any labor dispute or disturbance adversely affecting the business
operations or condition (financial or otherwise) of either Company,
including without limitation the filing of any petition or charge of unfair
labor practice with any governmental or regulatory authority, efforts to
effect a union representation election, actual or threatened employee
strike, work stoppage or slow down; or
(m) Any disciplinary or other similar action, proceeding, or
investigation taken by the Minnesota Board of Dentistry or other
governmental or accrediting board, agency, or authority against or with
respect to either Company, any Shareholder, or any employee or, to the best
of each Shareholder's knowledge without independent investigation,
independent contractor of either Company.
(S)3.10 Taxes.
-----
(a) Each Company has duly, properly, and timely filed all federal,
state, local and foreign tax returns and tax reports required to be filed
by it, all such returns and reports are true, correct and complete, none of
such returns and reports have been amended, and any and all taxes,
assessments, fees and other governmental charges due from either Company,
including without limitation those arising under such returns and reports,
have been fully paid or are fully accrued as liabilities in the Financial
Statements and will be timely paid. No claim has been made by authorities
in any jurisdiction where either Company did not file tax returns that it
is or may be subject to taxation or to reporting therein.
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(b) Each Company has delivered to ADP copies of all federal,
state, local, and foreign income tax returns filed for taxable periods
ended on or after December 31, 1993. Schedule 3.10-1 sets forth the dates
and results of any and all audits conducted by taxing authorities against
either Company or any Shareholder within the last five years or otherwise
with respect to any tax year for which assessment is not barred by any
applicable statute of limitations. No waivers of any applicable statute of
limitations for the filing of any tax returns or payment of any taxes or
assessments of any deficient or unpaid taxes are outstanding. Except as set
forth in Schedule 3.10-1, all deficiencies resulting from any audits have
been paid or settled. There are no pending or, to the best of each
Shareholder's knowledge, threatened federal, state, local or foreign tax
audits or assessments affecting either Company or any Shareholder and no
agreement with any federal, state, local or foreign taxing authority that
may affect the subsequent tax liabilities of either Company.
(c) Neither Company is, on the date of this Agreement, nor will
either of them be as of the Closing, liable for taxes, assessments, fees or
governmental charges for which it has not made adequate provision,
including setting aside a sufficient reserve to cover that potential
liability in full in the Financial Statements.
(d) There exists no tax-sharing agreement or arrangement pursuant
to which either Company is obligated to pay the tax liability of the other
or of any Shareholder or any other person or entity, or to indemnify the
other or any other person or entity with respect to any tax.
(e) Schedule 3.10-2 includes a list of all states, territories
and jurisdictions to which any tax is properly payable by either Company or
in which a tax report must be filed.
(S)3.11 Compliance with Law. Except as set forth in Schedule 3.11-1, each
-------------------
Company has complied and is in compliance in all material respects, except where
non-compliance would have no adverse effect on the business or assets of such
Company, with all applicable laws, statutes, orders, rules, regulations,
policies and guidelines promulgated, and all judgments, decisions and orders
entered, by any federal, state, local or foreign court or governmental
authority, agency, or instrumentality relating to either Company, or its
business or properties, including without limitation all zoning, fire, safety,
building, asbestos laws, ordinances, regulations and requirements, Environmental
Laws (defined below), Governmental Reimbursement Laws (defined in (S)3.27),
Title VII of the Civil Rights Act of 1964, as amended, the Fair Labor Standards
Act, as amended, the Occupational Safety and
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Health Act of 1970, as amended, the Americans with Disabilities Act of 1990, all
applicable federal, state and local laws, rules and regulations relating to
employment, and all applicable laws, rules and regulations governing payment of
minimum wages and overtime rates, and the withholding and payment of taxes from
compensation of employees; all laws, rules, and regulations relating to the
licensing or credentialing of dentists, endodontists, periodontists,
prosthodontists, pediatric dentists, orthodontists, oral surgeons, certified
registered dental assistants, hygienists, and other dental care professionals
involved with the business of either Company; all federal or state laws and
regulations relating to fraud and abuse; and all related laws, ordinances,
regulations and requirements (collectively, the "Applicable Laws"). Except as
set forth in Schedule 3.11-1, neither Company has been charged with or given
notice of any violation of any of the Applicable Laws which violation has not
been remedied in full (without any remaining liability of either Company).
Schedule 3.11-2 includes a list of all franchises, licenses, permits,
consents, authorizations, approvals and certificates necessary for each Company
to carry on its business as presently conducted (collectively, the "Permits"),
each of which currently is owned by such Company (as indicated on
Schedule 3.11-2) and is valid and in full force and effect. Except as set forth
in Schedule 3.11-3, neither Company is in violation of any of the Permits, and
there are no pending or, to the best of each Shareholder's knowledge, threatened
proceedings which could result in the revocation, cancellation or inability of
either Company to renew any Permit.
Except as set forth on Schedule 3.11-3, (i) neither Company has ever
disposed of, or contracted for the disposal of, hazardous wastes, hazardous
substances, infectious or medical waste, radioactive waste or sewage sludge, and
(ii) to the best of each Shareholder's knowledge, no such wastes, substances, or
sludge generated by either Company have finally come to be located on any site
which is or has been (including as a potential or suspect site) included in any
published federal, state, or local "superfund" or other list of hazardous or
toxic waste sites.
For purposes of this Agreement, "Environmental Laws" shall mean all
federal, state, and local environmental laws, statutes, ordinances, and codes
relating to the protection of public health or the environment (including
without limitation any water, land, subsurface, air, fish, wildlife, and other
natural resources) or governing the use, storage, treatment, generation,
transportation, processing, handling, management, production, or disposal of
solid wastes, medical wastes, toxic substances, hazardous wastes, hazardous
substances, petroleum, petroleum-based products, radio-nuclides, or other
radioactive materials and the rules, regulations, policies, guidelines,
interpretations, decisions,
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orders, and directives of federal, state, and local government agencies and
authorities with respect thereto.
(S)3.12 Proprietary Rights. Schedule 3.12-1 sets forth:
------------------
(a) All material names, patents, inventions, trade secrets,
proprietary rights, computer software, trademarks, trade names, service
marks, logos, copyrights and franchises, and all applications therefor,
registrations thereof and licenses, sublicenses or agreements in respect
thereof which either Company owns or has the right to use or to which
either Company is a party; and
(b) All filings, registrations or issuances of any of the
foregoing with or by any federal, state, local or foreign regulatory,
administrative or governmental office or offices (all items in (a) and (b)
of this section being sometimes hereinafter referred to collectively as the
"Proprietary Rights").
Except as set forth in Schedule 3.12-2, APA or OCS (as indicated on
Schedule 3.12-1) is the sole and exclusive owner of all right, title and
interest in and to all Proprietary Rights free and clear of all liens, claims,
charges, equities, rights of use, encumbrances and restrictions whatsoever, and
there is no pending or, to the best of each Shareholder's knowledge, threatened
investigation, proceeding, inquiry or other review by any federal, state, local
or foreign regulatory, administrative or governmental office or offices with
respect to either Company's right, title or interest in any Proprietary Right.
Other than those Proprietary Rights listed in Schedule 3.12-1, no name,
patent, invention, trade secret, patient list, proprietary right, computer
software, trademark, trade name, service mark, logo, copyright, franchise,
license, sublicense, or other such right is necessary for the operation of the
business of either Company in substantially the same manner as such business is
presently conducted. No business of either Company has been or is now being
conducted in contravention of any trademark, copyright or other proprietary
right of any third party.
Except as set forth in Schedule 3.12-3, none of the Proprietary Rights:
(i) has been hypothecated, sold, assigned or licensed by either Company, or any
other person, corporation, firm or other entity; (ii) infringes upon or violate
the rights of any person, firm, corporation, or other entity; (iii) is subject
to challenge, claims of infringement, unfair competition or other claims; or
(iv) to the best of each Shareholder's knowledge, is being infringed upon or
violated by any person, firm, corporation or other entity.
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Except as set forth in Schedule 3.12-4: (A) neither Company has given,
directly or indirectly, any indemnification against patent, trademark or
copyright infringement as to any equipment, materials, products, services or
supplies which either Company uses, licenses or sells; (B) no product, process,
method or operation presently sold, engaged in or employed by either Company
infringes upon any rights owned by any other person, firm, corporation or other
entity; and (C) there is no pending or, to the best of each Shareholder's
knowledge, threatened claim or litigation against either Company contesting the
right of either Company to sell, engage in or employ any such product, process,
method, or operation.
Except as set forth in Schedule 3.12-5, each Company has exclusive rights
to own, use and license others to use the computer software used by it (the
"Software"). Schedule 3.12-1 lists and briefly describes, and the Companies
have provided to ADP true, correct and complete copies of, all material
licenses, agreements, documents and other materials relating to the Software and
to the rights of the Companies therein. Except as set forth in Schedule 3.12-5,
neither Company has licensed or otherwise authorized any other person to use or
make use of all or any part of the Software, nor has either of them granted,
assigned or otherwise conveyed any right in or to the Software.
(S)3.13 Restrictive Documents or Laws. With the exception of the matters
-----------------------------
listed in Schedule 3.13, neither Company and no Shareholder is a party to or
bound under any mortgage, lien, lease, agreement, contract, instrument, law,
order, judgment or decree, or any similar restriction not of general
application, which materially and adversely affects, or reasonably could be
expected to so affect: (a) the condition of either Company (financial or
otherwise) or its assets; (b) the continued operation of either Company's assets
after the Closing on substantially the same basis as such assets are currently
operated; or (c) the consummation of the transactions contemplated by this
Agreement.
(S)3.14 Insurance. Each Company has been and is insured with respect to
---------
its property and the conduct of its business in such amounts and against such
risks as are sufficient for compliance with Applicable Laws and as are adequate
to protect the properties and businesses of such Company in accordance with
normal industry practice. Such insurance is and has been provided by insurers
unaffiliated with the Companies, which insurers are, to the best of each
Shareholder's knowledge, financially sound and reputable. Set forth in
Schedule 3.14 is a true, correct and complete list of all insurance policies and
bonds, if any, in force for which either Company is named as an insured party,
or for which either Company has paid any premiums, and such lists correctly
state the name of the insurer, the name of each insured party, the type and
amount of coverage, deductible amounts, if any, the expiration date and the
premium amount of each such policy or bond. Except as disclosed in
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Schedule 3.14, all such policies or bonds are currently in full force and effect
and no notice of cancellation or termination has been received by either Company
with respect to any such policy or bond. The Companies will continue all such
policies and bonds in full force and effect through the Closing. All premiums
due and payable on such policies and bonds have been paid. Except as disclosed
in Schedule 3.14, neither Company is a co-insurer under any term of any
insurance policy.
(S)3.15 Bank Accounts, Depositories; Powers of Attorney. Set forth in
-----------------------------------------------
Schedule 3.15 is a true, correct and complete list of the names and locations of
all banks or other depositories in which either Company has one or more accounts
or safe deposit boxes, and the names of the persons authorized to draw thereon,
borrow therefrom or have access thereto. Except as set forth in such
Schedule 3.15, no person or entity has a power of attorney from either Company.
(S)3.16 Title to and Condition of Properties. Except as set forth in
------------------------------------
Schedule 3.16-1, each Company has good, valid and marketable title to all of its
assets of every kind, nature and description, tangible or intangible, wherever
located, which constitute all of the property now used in and necessary for the
conduct of its business as presently conducted (including without limitation all
assets shown or reflected on the Financial Statements). Except as set forth in
Schedule 3.16-2, all such assets are owned free and clear of all mortgages,
pledges, liens, security interests, encumbrances and restrictions of any nature
whatsoever, including without limitation: (a) rights or claims of parties in
possession; (b) easements or claims of easements; (c) encroachments, overlaps,
boundary line or water drainage disputes or any other matters; (d) any lien or
right to a lien for services, labor or material furnished; (e) special tax or
other assessments; (f) options to purchase, leases, tenancies, or land
contracts; (g) contracts, covenants, or reservations which restrict the use of
such properties and (h) violations of Environmental Laws and zoning, fire
safety, building, and other laws, ordinances and regulations applicable to such
properties. The current uses of all such assets are in compliance with all
federal, state, local or other governmental building, zoning, health, safety,
platting, subdivision or other law, ordinance or regulation, or any applicable
private restriction, and such uses are legal conforming uses. Except as set
forth in Schedule 3.16-3, no financing statement under the Uniform Commercial
Code or similar law naming either Company as debtor has been filed in any
jurisdiction, and neither Company is a party to or bound under any agreement or
legal obligation authorizing any party to file any such financing statement.
Schedule 3.16-4 contains a complete and accurate legal description of all of the
real property owned or leased by either Company (organized by category).
Neither Company owns or leases any other real property.
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Except as set forth in Schedule 3.16-5, all real property and structures
and all machinery, equipment, and other tangible personal property owned, leased
or used by either Company which are material to the operation of such Company's
business, are suitable for the purpose or purposes for which they are being used
(including full compliance with all Applicable Laws relating to such use), and
are in good condition and repair in all material respects. To the best of each
Shareholder's knowledge, there are no material structural defects in the
exterior walls or the interior bearing walls, the foundation or the roof of any
building or other such structure owned or used by either Company, and the
electrical, plumbing, heating systems, and air conditioning systems of all such
structures are in good operating condition. No hazardous waste or toxic
material is stored upon or in the portion of any real property owned, leased, or
used by either Company (including without limitation any underground storage
tanks), except hazardous or infectious waste or toxic material generated in the
ordinary course of business. Neither Company has received any notice of non-
compliance or violations or threatened non-compliance or violations of any
Environmental Laws relating to any real property owned, leased or used by either
Company. Neither Company (including all of such Company's agents) and no
Shareholder has caused or permitted, and to the best of each Shareholder's
knowledge no other party has caused or permitted, any hazardous waste or toxic
material to be disposed of or discharged or leaked from, or otherwise
contaminate any real property owned, leased or used by either Company. The
utilities servicing the real properties owned or used by either Company are
adequate to permit the continued operation of the business of such Company, and
there are no pending or, to the best of each Shareholder's knowledge, threatened
zoning, condemnation or eminent domain proceedings, building, utility or other
moratoria, or injunctions or court orders which would materially affect such
continued operation.
(S)3.17 Brokers, Finders. The transactions contemplated by this Agreement
----------------
were not submitted to either Company or any Shareholder by any broker or other
person entitled to a commission, finder's fee or like payment thereon, and were
not, with the consent of either Company or any Shareholder, submitted to ADP by
any broker or other person, and none of the actions of either Company or any
Shareholder has given rise to any claim by any person for a commission, finder's
fee or like payment against any of the Parties.
(S)3.18 Legal Proceedings, etc. Except as listed and described in
-----------------------
Schedule 3.18, there are no (and over the last five years there have been no)
claims, proceedings, suits or investigations pending or, to the best of each
Shareholder's knowledge, threatened against or relating to either Company (or
any Shareholder, or any of the employees or, to the best of each Shareholders'
knowledge without independent investigation, independent contractors of either
Company in connection with the business or affairs of either
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Company), by or before any federal, state, local or foreign court or
governmental body, agency, or authority. There are no such claims, proceedings,
suits or investigations pending or, to the best of each Shareholder's knowledge,
threatened for the purpose of enjoining or preventing the consummation of the
Asset Purchase or any other transaction contemplated by this Agreement or
otherwise challenging the validity or propriety of the transactions contemplated
by this Agreement. Except as disclosed in Schedule 3.18, neither Company and no
Shareholder is subject to any judgment, order or decree, or any governmental
restriction applicable to him or it, which has a reasonable probability of
having a Material Adverse Effect, or which may materially adversely affect the
ability of either Company to acquire any property or conduct business as it is
currently being conducted. Except as listed and described in Schedule 3.18, to
the best of each Shareholder's knowledge, there are no facts, circumstances, or
occurrences which may give rise to any claims, proceedings, or suits against
either Company, any Shareholder, or any of the employees or, to the best of each
Shareholder's knowledge without independent investigation, independent
contractors of either Company which could have an adverse effect on either
Company, its business, or its assets.
(S)3.19 ERISA.
-----
(a) Schedule 3.19 identifies each "employee benefit plan," as
defined in Section 3(3) of the Employee Retirement Income Security Act of
1974 ("ERISA") which (i) is subject to any provision of ERISA and (ii) is
or was at any time during the last five years maintained, administered or
contributed to by either Company or any affiliate (as defined below) and
covers any Shareholder, any employee or former employee of either Company
or any affiliate or under which either Company or any affiliate has any
liability. Copies of such plans (and, if applicable, related trust
agreements) and all amendments thereto and written interpretations thereof
have been furnished to ADP together with the three most recent annual
reports (Form 5500) prepared in connection with any such plan. Such plans
are referred to collectively herein as the "Employee Plans." For purposes
of this section, "affiliate" of any person or entity means any other person
or entity which, together with such person or entity, would be treated as a
single employer under Section 414 of the Code or is an "affiliate," whether
or not incorporated, as defined in Section 407(d)(7) of ERISA, of such
person or entity. The only Employee Plans which individually or
collectively would constitute an "employee pension benefit plan" as defined
in Section 3(2) of ERISA (the "Pension Plans") are identified as on
Schedule 3.19.
(b) No Employee Plan constitutes a "multiemployer plan," as
defined in Section 3(37) of ERISA, or a "defined benefit
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plan," as defined in Section 3(35) and subject to Title IV of ERISA, and no
Employee Plan is maintained in connection with any trust described in
Section 501(c)(9) of the Code. No "accumulated funding deficiency," as
defined in Section 412 of the Code, has been incurred with respect to any
Pension Plan, whether or not waived. Full payment has been made of all
amounts which either Company or any affiliate is required to have paid as
contributions to or benefits under any Employee Plan as of the end of the
most recent plan year thereof and there are no unfunded obligations under
any Employee Plan that have not been disclosed to ADP in writing prior to
the Closing. Neither Company and no Shareholder knows of any "reportable
event," within the meaning of Section 4043 of ERISA, and no event described
in Section 4041, 4042, 4062 or 4063 of ERISA has occurred in connection
with any Employee Plan. No condition exists and no event has occurred that
could constitute grounds for termination of any Retirement Plan, and
neither of the Companies or any of their respective affiliates has incurred
any material liability under Title IV of ERISA arising in connection with
the termination of, or complete or partial withdrawal from, any plan
covered or previously covered by Title IV of ERISA. Nothing done or
omitted to be done and no transaction or holding of any asset under or in
connection with any Employee Plan has or will make either Company or any
Shareholder subject to any liability under Title I of ERISA or liable for
any tax pursuant to Section 4975 of the Code. There is no pending or, to
the best of each Shareholder's knowledge, threatened litigation,
arbitration, disputed claim, adjudication, audit, examination or other
proceeding with respect to any Employee Plan or any fiduciary or
administrator thereof in their capacities as such.
(c) Each Employee Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during
the period from its adoption to date, and each trust forming a part thereof
is exempt from tax pursuant to Section 501(a) of the Code. The Companies
have furnished to ADP copies of the most recent Internal Revenue Service
determination letters with respect to each such Employee Plan. Each
Employee Plan has been maintained, from the time of such Plan's inception
up to and including the performance of any or all transactions contemplated
in this Agreement, in material compliance with its terms and the
requirements and fiduciary standards prescribed by any and all statutes,
orders, rules and regulations, including but not limited to ERISA and the
Code, which are applicable to such Employee Plan.
(d) There is no contract, agreement, plan or arrangement covering
any employee or former employee, any Shareholder or former shareholder of
either of the Companies or any of their respective affiliates that,
individually or collectively,
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could give rise to the payment of any amount that would not be deductible
pursuant to the terms of the Code.
(e) Schedule 3.19 identifies each employment, severance or other
similar contract, arrangement or policy and each plan or arrangement
(written or oral) providing for insurance coverage (including any self-
insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits
or for deferred compensation, profit-sharing, bonuses, stock options, stock
appreciation or other forms of incentive compensation or post-retirement
insurance, compensation or benefits which (i) is not an Employee Plan,
(ii) is entered into, maintained or contributed to, as the case may be, by
either of the Companies or any of their respective affiliates, and
(iii) covers any employee or former employee, any Shareholder or former
shareholder of either of the Companies or any of their respective
affiliates. Such contracts, plans and arrangements as are described above,
copies or descriptions of all of which have been furnished previously to
ADP, are referred to collectively herein as the "Benefit Arrangements."
Each Benefit Arrangement has been maintained in substantial compliance with
its terms and with requirements prescribed by any and all statutes, orders,
rules and regulations that are applicable to such Benefit Arrangement.
(f) Except as set forth in Schedule 3.19, there is no liability
in respect of post-retirement health and medical benefits for retired
employees of either of the Companies or any of their respective affiliates,
determined using assumptions that are reasonable in the aggregate, over the
fair market value of any fund, reserve or other assets segregated for the
purpose of satisfying such liability (including for such purposes any fund
established pursuant to Section 401(h) of the Code). Each Company has
reserved its right to amend or terminate any Employee Plan or Benefit
Arrangement providing health or medical benefits in respect of any
Shareholder or other active employee of such Company under the terms of any
such plan and descriptions thereof given to employees. With respect to any
of the Companies' respective Employee Plans which are "group health plans"
under Section 4980B of the Code and Section 607(1) of ERISA, there has been
timely compliance in all material respects with all requirements imposed
thereunder so that each of the Companies and their respective affiliates
have no (and will not incur any) loss, assessment, tax penalty, or other
sanction with respect to any such Plan.
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(g) Except as set forth in Schedule 3.19, there has been no
amendment to, written interpretation or announcement (whether or not
written) by either of the Companies or any of their respective affiliates
relating to, or change in employee participation or coverage under, any
Employee Plan or Benefit Arrangement which would increase the expense of
maintaining such Employee Plan or Benefit Arrangement above the level of
the expense incurred in respect thereof for the plan year ended immediately
prior to the Closing.
(h) Except as set forth in Schedule 3.19, neither Company is a
party or subject to any union contract or any employment contract or
arrangement providing for annual future compensation to any Shareholder or
employee or independent contractor of either Company.
(i) The execution and consummation of the transactions
contemplated by this Agreement will not constitute a triggering event under
any Employee Plan, whether or not legally enforceable, which (either alone
or upon the occurrence of any additional or subsequent event) will or may
result in any payment (of severance pay or otherwise), acceleration,
increase in vesting, or increase in benefits to any current or former
participant, employee or director of either Company that has not been
specifically disclosed on Schedule 3.19 or which is not material to the
financial condition or business of either Company.
(j) Any reference to ERISA or the Code or any section thereof
shall be construed to include all amendments thereto and applicable
regulations and administrative rulings issued thereunder.
(S)3.20 Contracts. Schedule 3.20-1 lists and briefly describes all
---------
contracts, purchase orders, agreements, leases, executory commitments,
arrangements and understandings (written or oral) to which either Company is a
party which (a)(i) involve payments or commitments in excess of $15,000 (in the
aggregate) for any purchase order or $15,000 (in the aggregate) for any other
contract, agreement, lease, commitment, arrangement, or understanding, or
(ii) extend beyond one year (or both), or are otherwise material to the
condition, operations, assets, or business of either Company, unless cancelable
on 60 or fewer days' notice without any liability, penalty or premium, (b) are
with any present or former shareholder, employee, agent or independent
contractor of either Company, or, to the best of each Shareholder's knowledge
without independent investigation, any person related by blood or marriage to
any such person or any person or entity controlling, controlled by or under
common control with any such person not terminable at will, (c) provide for the
future purchase by either Company of any materials, equipment, services or
supplies and continue for a period of more than 12 months (including periods
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covered by any option to renew by either party) or provide for a price
materially in excess of current market prices or is in excess of normal
operating requirements over its remaining term, or (d) involve any of the
following: (i) any borrowings or guarantees; (ii) any contracts containing
covenants purporting to limit the freedom of either Company to compete in any
line of business or provide any of their services in any geographic area;
(iii) any obligation or commitment which limits the freedom of either Company to
sell, lease, license or otherwise provide its services; (iv) any contract or
agreement the performance of which can reasonably be expected to result in a
loss to either Company; or (v) any obligation or commitment providing for
indemnification or responsibility for the obligations or losses of any person.
All of such contracts, agreements, leases, commitments, and other arrangements
and understandings are valid and binding, in full force and effect and
enforceable in accordance with their respective provisions.
Schedule 3.20-2 lists and briefly describes all contracts, agreements,
arrangements and understandings (written or oral) to which either Company is a
party, under which either Company receives revenue, and which (i) involve
payments or commitments to the Companies in excess of $15,000 (in the
aggregate), or (ii) are otherwise material to the condition, operations, assets,
or business of either Company.
Neither Company is in violation of nor in default in respect of nor has
there occurred an event or condition which, with the passage of time or giving
of notice (or both) would constitute a default of any contract, agreement,
lease, commitment, arrangement or understanding of the type described in the
preceding provisions of this section.
The Companies have delivered to ADP a correct and complete copy of the fee
schedule which is currently in effect under each agreement with a third party
payor to which each of the Companies or any of their respective employees or
independent contractors is a party or otherwise provides services, which fee
schedules have been initialed by Dr. Biewald for purposes of identification.
Schedule 3.20-3 contains a correct and complete list of all dentists and
orthodontists employed or otherwise retained by either Company.
Schedule 3.20-4 sets forth an accurate and complete list of the 10 largest
third party payors, in terms of revenue generation for the Companies for the
12-month period ended July 31, 1997, who currently contract with either of the
Companies or any of their respective employees or independent contractors for
the performance of, and reimbursement for, dental services. The Companies have
delivered to ADP an accurate and complete list of all individuals enrolled as
patients with either Company as of July 31, 1997
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pursuant to any such contract, which list has been initialed by the Dr. Biewald
for purposes of identification and the total number of such patients has been
described on Schedule 3.20-4. Not less than five days prior to the Closing, the
Companies shall update Schedule 3.20-4 to show the total number of individuals
enrolled as patients with either Company as of the last day of the calendar
month immediately preceding the Closing.
Except as set forth in Schedule 3.20-5, neither Company has received any
notice from any third party payor, patient, or supplier to the effect that such
third party payor, patient, or supplier will terminate its relationship or
unilaterally modify any terms of that relationship, where applicable, with
either Company as a result of any transaction contemplated by this Agreement or
otherwise.
(S)3.21 Accounts Receivable. As of the Closing Date, all accounts and
-------------------
notes receivable being assigned pursuant to (S)1.1(d), above, are or will be
collectible in full and are or will be valid and subsisting and represent or
will represent sales actually made or services actually provided in the ordinary
and usual course of business of the Companies consistent with past practices.
Schedule 3.21 includes a list of all amounts payable to either Company by
any Affiliate of either Company (the "Related Party Receivables") and all
amounts payable by either Company to any Affiliate of either Company (the
"Related Party Payables") as of August 31, 1997, specifying the payor, payee,
and amount of each Related Party Receivable and Related Party Payable. For
purposes of this Agreement, other than for (S)3.19, above, an "Affiliate" of
either Company shall mean any shareholder, director, officer, or employee of
such Company, any person related by blood or marriage to any such person, or any
person or entity, which, directly or indirectly, controls, is controlled by, or
is under common control with such Company or any such other person or entity.
(S)3.22 No Conflict or Default. Except for the consents described in
----------------------
Schedule 3.22, all of which shall be obtained prior to the Closing (unless
otherwise expressly agreed by ADP in writing), neither the execution and
delivery of this Agreement by the Companies and the Shareholders, nor compliance
by the Companies and the Shareholders with the terms and provisions of this
Agreement, including without limitation the consummation of the transactions
contemplated by this Agreement, will violate in any manner any Applicable Laws
or Permits or conflict with or result in the breach of any term, condition or
provision of the articles of incorporation, by-laws, or other organizational
documents of either Company or of any agreement, deed, contract, undertaking,
mortgage, indenture, writ, order, decree, restriction, legal obligation or
instrument to which either Company or any Shareholder is a party or by which
either Company or any Shareholder, or any of such
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Company's or Shareholder's assets, are or may be bound or affected, or
constitute a default (or an event which, with the giving of notice, the passage
of time, or otherwise, would constitute a default) thereunder, or result in the
creation or imposition of any lien, security interest, charge or encumbrance, or
restriction of any nature whatsoever with respect to any assets of either
Company, or give to others any interest or rights, including rights of
termination, acceleration or cancellation, in or with respect to any of the
assets, contracts or business of either Company.
(S)3.23 Books of Account; Records. Each Company's general ledgers,
-------------------------
corporate record book and other records relating to the material assets,
contracts and outstanding legal obligations of such Company are, in all material
respects, complete and correct, and have been maintained in accordance with good
business practices, and the matters contained therein are appropriate and
accurately reflected in the Financial Statements.
(S)3.24 Compensation. Schedule 3.24 sets forth the total salary, bonus,
------------
other corporate fringe benefits, perquisites, dividends and distributions
allocated to or paid to each Shareholder during or with respect to calendar year
ended December 31, 1996, and any changes to the foregoing which have occurred
subsequent to December 31, 1996. Schedule 3.24 also lists and describes the
current compensation of all employees of each Company (other than the
Shareholders) whose total current salary and bonus exceeds $35,000 annually and
any consultant, advisor, or independent contractor whose compensation exceeds
$5,000 annually. No changes will be made by either Company in the amount or
kind of any compensation being paid or provided to any individual listed in
Schedule 3.24 from the amounts and kinds of compensation described therein prior
to the Closing without ADP's prior written consent, provided that the Companies
may make compensation or dividend payments to the Shareholders in a manner
consistent with prior practices and distributions as specifically permitted by
clause (B) of the last paragraph of (S)4.2(b), below. Except as disclosed in
Schedule 3.24, there are no other forms of compensation paid to any Shareholder
or other employees or independent contractors of either Company (except for
consideration paid to professional advisors in connection with the Asset
Purchase). Except as disclosed in Schedule 3.24, the provisions for wages and
salaries accrued in the Financial Statements are adequate for wages and salaries
and other compensation to each Company's employees, including without limitation
vacation pay, sick pay, accrued compensation to any dentist, and all commissions
and other fees payable to agents, salesmen, independent contractors, and
representatives of each Company. Except as set forth in Schedule 3.24, neither
Company has become obligated, directly or indirectly, to any Shareholder or any
of the other employees or independent contractors of either Company or, to the
best of each Shareholder's knowledge without independent investigation, any
person related to such person by blood or marriage, except for current liability
for such compensation.
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Except as set forth in Schedule 3.24, no Shareholder or any other employees or
independent contractors of either Company or, to the best of each Shareholder's
knowledge without independent investigation, any person related to such person
by blood or marriage holds any position or office with or has any material
financial interest, direct or indirect, in any supplier, customer or account of,
or other outside business which has material transactions with, either Company.
Neither Company has any agreement or understanding with any of the employees,
representatives or independent contractors of such Company which would influence
any such person not to become associated with ADP or American from and after the
Closing or from serving ADP or American after the Closing in a capacity similar
to the capacity presently served. Except as set forth in Schedule 3.24, to the
best of each Shareholder's knowledge, no employee of either Company has a
present intention to leave the employ of such Company or has taken any action
indicative of leaving the employ of such Company.
(S)3.25 Labor Relations. Except as set forth in Schedule 3.25, no
---------------
employees of either Company are represented by any labor union or covered under
any collective bargaining agreement, and there is no unfair labor practice
complaint against either Company pending before the National Labor Relations
Board. There is no labor strike, dispute, slowdown or stoppage, or any union
organizing campaign, actually pending or, to the best of each Shareholder's
knowledge, threatened against or involving either Company. No labor grievance
has been filed with either Company; no arbitration proceeding which has had or
may have such an effect has arisen out of or under a collective bargaining or
other labor agreement and is pending; and no claim therefor has been asserted.
No collective bargaining or other labor agreement is currently being negotiated
by either Company and no union or collective bargaining unit represents either
Company's employees. Neither Company has experienced any work stoppage or other
material labor difficulty during the past five years.
(S)3.26 Suppliers and Third Party Payors. Except as set forth in
--------------------------------
Schedule 3.26, no supplier of products or services to either Company has
indicated that it shall stop, or decrease the rate of, or substantially increase
its fees for, supplying products or services to either Company either prior to,
or following the consummation of, any of the transactions contemplated by this
Agreement. Schedule 3.26 sets forth (a) a list of all third party payors who
have terminated their relationships with either Company since December 31, 1996,
or have notified either Company or any Shareholder since December 31, 1996, that
they intend to terminate their relationships with either Company, and (b) the
gross receipts received from such third party payors for the 12-month period
ending on December 31, 1997. Except as set forth in Schedule 3.26, neither
Company and no Shareholder knows of any loss of a relationship with any third
party payor that alone or in the aggregate comprises more than 1% of calendar
1996 actual revenues
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of either Company as shown in the Financial Statements that has indicated that
it is considering or plans to discontinue using either Company as its provider
of dental services as a result of any of the transactions contemplated by this
Agreement.
(S)3.27 Medicare and Medicaid. Except as set forth in Schedule 3.27,
---------------------
neither Company and no Shareholder, nor any other dentist or other dental care
professional employed or retained by either Company is a provider of dental
services through Medicare, Medicaid, or any other governmental health care
reimbursement program (collectively, the "Governmental Programs"), nor has or
does either Company or any such dentist or other dental care professional
received or expect to receive any reimbursement under any such Governmental
Programs. Neither Company and no Shareholder, nor any employee, to the best of
each Shareholder's knowledge without independent investigation, independent
contractor or other agent of either Company has violated any law, statute, rule,
regulation, or order under or relating to any Governmental Program, including
without limitation those relating to fraud and abuse (the "Governmental
Reimbursement Laws").
(S)3.28 Investment Intent. Each Shareholder is a resident of the State of
-----------------
Minnesota. The Shareholders and the Companies are "accredited investors," as
that term is defined in Regulation D promulgated under the Securities Act. Each
Shareholder (a) by reason of his business and financial experience, and the
business and financial experience of those persons advising him with respect to
his investment in the ADP Shares and the Notes, as the case may be (in any such
case, the "Securities"), has, together with such advisors, such knowledge,
sophistication, and experience in business and financial matters so as to be
able to evaluate the merits and risks of his prospective investment in the
Securities; (b) to his satisfaction, has been provided the opportunity to ask
questions, receive answers, and obtain information from ADP concerning ADP, its
business, and the terms and conditions of the Securities, has had all such
questions answered, and has been supplied all additional information deemed
necessary by him to verify the accuracy of all information provided; (c) is
acquiring the Securities acquired by him for his own account for investment
purposes only and without any view towards resale or other distribution;
(d) except for the representations and warranties of ADP set forth in Article II
of this Agreement, no representations or warranties have been made to him by or
on behalf of ADP in connection with this transaction, and in making his
investment in the Securities, he is relying on the results of his own
independent investigation; (e) understands that an investment in the Securities
is a speculative investment and has determined that he can bear the economic
risks of his investment in the Securities, can afford a complete loss of such
investment, and is not relying upon any representation or warranty made by ADP,
or any officer, director, shareholder, employee, agent, or representative of ADP
regarding the value of the Securities; (f) understands that the issuance of
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the Securities as a result of this Agreement is intended to be exempt from
registration under the Securities Act and applicable state law and that the
Securities are not and will not be registered under the Securities Act, the
Securities Exchange Act of 1934, or any state securities laws, and that there
will be no public market for the Securities; (g) agrees that any certificates
evidencing the ADP Shares shall contain a legend to the effect that such shares
have not been registered under the Securities Act or any state securities laws
and may not be sold without registration as required by the Securities Act and
applicable state securities laws or exemptions therefrom, and in the case of
such an exemption, requiring delivery to ADP of a legal opinion of or
satisfactory to ADP's legal counsel that such exemption is applicable; (h)
agrees that ADP can issue stop transfer instructions to its transfer agent
prohibiting transfer of the ADP Shares except in compliance with the provisions
of the Securities Act, applicable state securities laws, this Agreement, and the
Shareholders Agreement (defined in (S)4.2(i), below); and (i) understands that
the ADP Shares will be subject to additional transfer, voting, and other
restrictions pursuant to the Shareholders Agreement.
(S)3.29 Disciplinary Actions. Except as set forth in Schedule 3.29, during
--------------------
the three year period ending on August 31, 1997, there have been no disciplinary
or other similar actions, proceedings, or investigations taken by the Minnesota
Board of Dentistry or other governmental or accrediting board, agency, or
authority against or with respect to either Company, any Shareholder, or any
employee, or, to the best of each Shareholder's knowledge without independent
investigation, independent contractor of either of the Companies or any of their
respective affiliates.
(S)3.30 Complete Disclosure. No representation or warranty by any
-------------------
Shareholder in this Agreement or the APA and OCS Schedules contains, or will
contain as of the Closing, any untrue statement of a material fact or omits, or
will omit as of the Closing, a material fact necessary to make the statements
contained herein or therein not misleading.
ARTICLE IV
COVENANTS OF THE PARTIES
------------------------
(S)4.1 Mutual Covenants.
----------------
(a) General. Each Party shall use all reasonable efforts to
-------
take all actions and do all things necessary, proper or advisable to
consummate the Asset Purchase and the other transactions contemplated by
this Agreement, including without limitation using all reasonable efforts
to cause the conditions set forth in this Article and Article V for which
such Party is responsible to be satisfied as soon as reasonably practicable
and to prepare, execute, acknowledge or
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verify, deliver, and file such additional documents, and take or cause to
be taken such additional actions, as any other Party may reasonably
request.
(b) Governmental Matters. Each Party shall use all reasonable
--------------------
efforts to take any action that may be necessary, proper or advisable in
connection with any notices to, filings with, and authorizations, consents
and approvals of any court, administrative agency or commission, or other
governmental authority or instrumentality that it may be required to give,
make or obtain.
(S)4.2 Covenants of the Companies and the Shareholders. The Companies and
-----------------------------------------------
the Shareholders hereby jointly and severally agree that:
(a) [Intentionally Omitted].
(b) Conduct of Business. Except as otherwise expressly
-------------------
contemplated by this Agreement, from the date of this Agreement until the
Closing (the "Pre-Closing Period"): (i) neither Company and no Shareholder
shall take or permit to be taken any action or do or permit to be done
anything in the conduct of the business of either Company or otherwise,
that would be contrary to or in breach of any of the provisions of this
Agreement or which would cause any representations and warranties of the
Companies and the Shareholders contained in this Agreement to be or become
untrue in any material respect; (ii) each Company shall conduct its
business in the ordinary course substantially in accordance with past
practices; and (iii) each Company and each Shareholder shall use all
reasonable efforts to preserve each Company's business organization intact,
keep available to American the present services of each Company's employees
and independent contractors, keep available for the New PC the services of
the Providers and the other dentists and dental specialists who are
employees and independent contractors of either Company, and preserve for
American the goodwill of and all agreements with third parties with whom
business relationships exist. Without limiting the generality of the
foregoing, during the Pre-Closing Period, except as otherwise expressly
contemplated by this Agreement or with the prior written consent of ADP,
neither Company and no Shareholder shall:
(i) Adopt or propose any change in the articles of
incorporation, by-laws or other organizational documents of either
Company or permit the transfer of any interest in any APA or OCS
Shares;
(ii) Redeem, repurchase, or otherwise acquire any shares of
capital stock of either Company; issue, deliver, or sell any capital
stock or other securities of
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either Company; or grant any person or entity any right from either
Company or any Shareholder to acquire any interest in any APA or OCS
Shares;
(iii) Merge or consolidate with any other person or entity or
acquire a material amount of assets of any other person or entity;
(iv) Sell, lease, license, pledge, encumber, or otherwise
dispose of any assets or property other than in the ordinary course of
business consistent with past practices;
(v) Incur, create, assume, or otherwise become liable for any
indebtedness other than indebtedness incurred consistent with past
practices (but subject in any event to (S)4.2(g) of this Agreement);
(vi) Enter into or modify any employment, severance,
termination, or similar agreement or arrangement with, or grant any
bonuses, salary increases, severance or termination pay to, any
consultant, employee or independent contractor of either Company;
(vii) Adopt, amend or terminate any employee benefit plan,
except in accordance with (S)3.19, above, or increase, amend, or
terminate any benefits to consultants, employees or independent
contractors of either Company;
(viii) Modify in any material way or terminate any of the
contracts listed (or required to be listed) in Schedule 3.20 except in
the ordinary course of business consistent with past practices;
(ix) Settle any claims, litigation, or actions, whether now
pending or hereafter made or brought, unless such settlement does not
and could not have a Material Adverse Effect;
(x) Engage in any transaction, or enter into any agreement,
contract, lease, or other arrangement or understanding, with any
Affiliate of either Company; or
(xi) Agree or commit to do any of the foregoing.
Notwithstanding the foregoing, during the Pre-Closing Period: (A) the
Companies shall be permitted to repay loans to the Shareholders in the
aggregate amount of not more than $40,000; and (B) each Company may make
distributions to its Shareholders consistent with past practices in a
maximum amount which, when combined with all other distributions to
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its Shareholders, are sufficient for its Shareholders to pay their income
taxes payable as a result of the net S corporation income allocable to the
Shareholders as shareholders of such Company for the current fiscal year.
(c) Exclusive Rights. Neither Company, nor any Shareholder,
----------------
nor any of their respective Affiliates or representatives shall, directly
or indirectly, solicit (including without limitation by way of furnishing
or making available any non-public information concerning the business or
assets of either Company) or engage in negotiations or discussions with,
disclose any of the terms of this Agreement to, accept any offer from,
furnish any information to, or otherwise cooperate, assist or participate
with any person or organization (other than ADP and its representatives)
regarding any Acquisition Proposal (defined below), except that any person
or entity making an Acquisition Proposal may be informed of the
restrictions contained in this sentence. The Companies and Shareholders
shall notify ADP promptly by telephone, and thereafter promptly confirm in
writing, if any such information is requested from, or any Acquisition
Proposal is received by, either Company or any Shareholder. For purposes of
this Agreement, "Acquisition Proposal" shall mean any offer, proposal or
expression of interest received by either Company or any Shareholder prior
to the Closing regarding the acquisition by purchase, merger, lease, or
otherwise of any interest in either Company, any of the business of either
Company, or any material assets, customer relationships or other operations
of either Company.
(d) Access to Records and Other Due Diligence. During the
-----------------------------------------
Pre-Closing Period, the Companies and the Shareholders shall: (i) make or
cause to be made available to ADP and its representatives, attorneys,
accountants and agents, for examination, inspection, and review, the assets
of each Company and all books, contracts, agreements, commitments, records
and documents of every kind relating to such Company's business, and shall
permit ADP and its representatives, attorneys, accountants and agents to
have access to the same at all reasonable times during normal business
hours and upon reasonable notice, including without limitation access to
all tax returns filed and in preparation and all audit and other work
papers and all reports to management and related responses; and (ii) permit
representatives of ADP to interview suppliers, customers, and personnel of
each Company.
(e) Disclosures. After the date of this Agreement, neither
-----------
Company and no Shareholder shall: (i) disclose to any person, association,
firm, corporation or other entity (other
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<PAGE>
than ADP and its representatives, attorneys, accountants, and agents or
those designated in writing by ADP) in any manner, directly or indirectly,
any proprietary information or data relevant to the business of either
Company, whether of a technical or commercial nature, or (ii) use, or
permit or assist, by acquiescence or otherwise, any person, association,
firm, corporation or other entity (other than ADP and its representatives,
attorneys, accountants, and agents or those designated in writing by ADP)
to use, in any manner, directly or indirectly, any such information or
data, excepting only (A) use of such data or information as is at the time
generally known to the public and which did not become generally known
through any breach of any provision of this section by either Company or
any Shareholder, and (B) disclosures of information to employees of either
Company who need to know such information and use of such information by
employees of either Company who need to use such information, in each use
only to the extent necessary for the benefit of either Company or ADP.
(f) Employee Retention. The Companies and the Shareholders
------------------
acknowledge that in ADP's view it is essential to the proposed successful
operation of the business of American that each Company retain
substantially unimpaired its operating organization, including without
limitation retaining its current employees, except for any changes
contemplated by this Agreement. During the Pre-Closing Period, the
Companies and the Shareholders shall endeavor in good faith at all times to
maintain good relations with all employees of each Company.
(g) Affiliate Indebtedness. During the Pre-Closing Period,
----------------------
neither Company and no Shareholder shall cause or permit either Company to
make any advances, loans, or extensions of credit to any Affiliate of such
Company, or otherwise increase the Related Party Receivables, if any, owed
to such Company by any Affiliate of such Company.
(h) Distributions. Except as permitted under clause (B) of the
-------------
last paragraph of (S)4.2(b), during the Pre-Closing Period, neither Company
shall, and no Shareholder shall permit either Company to, declare, set
aside or pay any dividend or distribution (in cash or in kind) to any
Shareholder.
(i) Shareholders Agreement; Subordination Agreement. The
-----------------------------------------------
Shareholders shall execute and deliver to ADP: (i) a Shareholders Agreement
in the form attached as Exhibit J to this Agreement (the "Shareholders
Agreement"); and (ii) a Subordination Agreement in the form attached as
Exhibit K to this Agreement (the "Subordination Agreement"). Such
agreements shall be executed by the Shareholders concurrently with this
Agreement.
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<PAGE>
(j) Formation of New PC. Not later than 10 days prior to the
-------------------
Closing, the Shareholders shall complete the organization of a new
Minnesota professional corporation satisfactory to ADP (the "New PC"),
formed to operate after the Closing all professional dental practices
currently operated by the Companies and having an ownership and
organizational structure satisfactory to ADP. At the Closing: (i) the New
PC shall enter into the Service Agreement with American; and (ii) each
Shareholder (other than Karl H. Biewald, D.D.S. ("Dr. Biewald"), who shall
enter into a five-year employment and noncompetition agreement with
American on terms satisfactory to Dr. Biewald and American) shall (A) enter
into an employment and noncompetition agreement with the New PC in the form
attached as Exhibit B to the Service Agreement (the "Five-Year Agreement"),
except that the Five-Year Agreements entered into by the Shareholders
(other than Dr. Biewald) shall not have the termination provision contained
in clause (b) of (S)10 of the Five-Year Agreement; and (B) exercise all
reasonable efforts from and after the Closing to (1) cause such other
dentists and dental specialists currently employed or retained by the
Companies as may be designated by ADP to enter into a Five-Year Agreement
with the New PC as soon as possible, and (2) cause the other dentists and
dental specialists currently employed or retained by the Companies as may
be designated by ADP to enter into employment and noncompetition agreements
with the New PC in the form attached as Exhibit C to the Service Agreement
(the "18-Month Agreement") as soon as possible.
(k) Notices of Certain Events. The Companies and the
-------------------------
Shareholders shall promptly notify ADP of:
(i) Any notice or other communication from any person or
entity alleging that the consent of such person or entity is or may be
required in connection with any of the transactions contemplated by
this Agreement;
(ii) Any notice or other communication from any governmental
or regulatory agency or authority in connection with the transactions
contemplated by this Agreement;
(iii) Any actions, suits, claims, investigations or
proceedings commenced or, to the knowledge of either Company or any
Shareholder, threatened against, relating to, involving, or otherwise
affecting any Shareholder, either Company, or any of the assets of
either Company which, if in existence on the date of this Agreement
would have been required to have been disclosed by the Shareholders
pursuant to (S)3.18 or which relate to the consummation of any of the
transactions contemplated by this Agreement; and
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<PAGE>
(iv) Any circumstances or events which, if in existence on
the date of this Agreement, would make any representation or warranty
of Companies and the Shareholders incorrect or incomplete in any
material respect.
(l) Representations and Warranties. At the Closing, the Companies
------------------------------
and the Shareholders shall deliver to ADP a certificate, in form and
content reasonably satisfactory to ADP, confirming that the representations
and warranties set forth in Article III of this Agreement are correct and
complete in all material respects. In addition, the Shareholders shall make
such additional representations and warranties as may be reasonably
requested by ADP to confirm the exemptions from registration under the
Securities Act and applicable state securities laws which ADP is relying
upon with respect to issuance of the Securities.
(m) Noncompetition. During the Restricted Period (defined below)
--------------
no Shareholder shall, directly or indirectly (whether individually or as a
shareholder (except as a shareholder owning 1% or less of the outstanding
capital stock of a publicly traded corporation), partner, member, director,
officer, employee, consultant, creditor, or agent of any person,
association, or other entity):
(i) Enter into, engage in, or promote or assist (financially
or otherwise), directly or indirectly, any business which provides
management, consulting or other similar services of the type provided
by any Affiliated Company (defined below) to any practice providing
dental, orthodontic, periodontic, prosthodontic, endodontic, or other
professional dental services, pediatric dentistry, or oral surgery
anywhere in the Restricted Territory (defined below);
(ii) Induce or encourage any employee, officer, director,
agent, supplier, or independent contractor of any Affiliated Company
to terminate its relationship with any such Affiliated Company, or
otherwise interfere or attempt to interfere in any way with any
Affiliated Company's relationships with its employees, officers,
directors, agents, suppliers, independent contractors, or others; or
(iii) Employ or engage any person who, at any time within the
one-year period immediately preceding such employment or engagement,
was an employee, officer, director, or agent of any Affiliated
Company.
Notwithstanding the foregoing, clause (i) of this section shall not be
construed to restrict any Shareholder from
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<PAGE>
practicing dentistry or managing a dental practice in which such
Shareholder spends a substantial portion of his time actively practicing
dentistry, nor shall it prohibit Dr. Biewald from engaging in the
activities specifically permitted by the Stock Purchase Agreement dated the
same date as this agreement and being entered into by ADP and Dr. Biewald,
among others, pursuant to (S)5.3(r), below.
For purposes of this (S)4.2(m), (A) "Affiliated Company" shall mean
ADP and all subsidiaries (including American) or affiliates of ADP other
than Summit Ventures IV, L.P., and its affiliates which are not engaged in
a business similar to that of ADP or its subsidiaries; (B) "Restricted
Period" shall mean the period beginning on the Closing Date and ending on
the later of (i) the fifth anniversary of the Closing Date or (ii) the
second anniversary of the date the Shareholder is no longer employed or
otherwise retained by the New PC (or any successor entity) or any
Affiliated Company and is not receiving any compensation or other
remuneration from the New PC (or any successor entity) or any Affiliated
Company; and (C) "Restricted Territory" shall mean a radius of 25 miles
from any facility or operation leased, owned, managed, or operated by any
Affiliated Company.
(n) Injunctive Relief. The Companies and the Shareholders
-----------------
acknowledge and agree that ADP's and American's remedies at law for any
violation or attempted violation of any of the Companies' or Shareholders'
obligations under this Agreement would be inadequate, and agree that in the
event of any such violation or attempted violation, ADP and American shall
be entitled to a temporary restraining order, temporary and permanent
injunctions, and other equitable relief, without the necessity of posting
any bond or proving any actual damage, in addition to all other rights and
remedies which may be available to ADP and American from time to time.
(o) Third Party Payor Agreements. From and after the Closing, the
----------------------------
Shareholders shall cause the New PC to cooperate in all ways necessary or
reasonably requested by ADP with respect to the assignment from each
Company to the New PC of, and the assumption by the New PC of such
Company's obligations under, such agreements as may be designated by ADP
pursuant to which either Company receives payments for the provision of
dental services, whether in the form of capitation payments, on a fee-for-
service basis, or otherwise, and obtaining the consents of the payors under
those agreements, including without limitation causing the New PC to
execute an assignment and assumption agreement in form and substance
satisfactory to ADP.
(p) Change of APA and OCS Names. On or before the Closing Date,
---------------------------
each Company shall file with the Minnesota
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<PAGE>
Secretary of State articles of amendment to such Company's articles of
incorporation and take such other action as may be necessary to change such
Company's name to a name that is not deceptively similar to "Apple Park
Associates, Inc." or "Orthodontic Care Specialists, Ltd.," such change to
be effective immediately after the Closing, and, if necessary, to consent
to the use by American of the names "Apple Park Associates, Inc." and
"Orthodontic Care Specialists, Ltd." or any similar names.
(S)4.3 Covenants of ADP. ADP agrees that:
----------------
(a) Representations and Warranties. At the Closing, ADP shall
------------------------------
deliver to the Companies and the Shareholders a certificate, in form and
substance reasonably satisfactory to the Companies and the Shareholders,
confirming that the representations and warranties set forth in Article II
of this Agreement are correct and complete in all material respects.
(b) Registration Rights Agreement. At the Closing, ADP shall
-----------------------------
execute and deliver to the Shareholders a Registration Rights Agreement in
the form attached as Exhibit L to this Agreement (the "Registration Rights
Agreement"), provided that the Shareholders execute such agreement
concurrently with ADP.
(c) Notices of Certain Events. ADP shall promptly notify the
-------------------------
Companies and the Shareholders of each of the foregoing which occur during
the Pre-Closing Period:
(i) Any notice or other communication from any person or
entity alleging that the consent of such person or entity is or may be
required in connection with any of the transactions contemplated by
this Agreement;
(ii) Any notice or other communication from any governmental
or regulatory agency or authority in connection with the transactions
contemplated by this Agreement;
(iii) Any actions, suits, claims, investigations or
proceedings commenced or, to the knowledge of ADP, threatened against,
relating to, involving, or otherwise affecting ADP or any of its
assets which, if in existence on the date of this Agreement would have
been required to have been disclosed by ADP pursuant to (S)2.5 or
which relate to the consummation of any of the transactions
contemplated by this Agreement; and
(iv) Any circumstances or events which, if in existence on
the date of this Agreement, would make any representation or warranty
of ADP incorrect or incomplete in any material respect.
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<PAGE>
ARTICLE V
CONDITIONS
----------
(S)5.1 Mutual Conditions. The obligations of the Parties to consummate
-----------------
the Asset Purchase and the other transactions contemplated by this Agreement
shall be subject to the fulfillment of all of the following conditions unless
waived by each of the Companies and ADP:
(a) Legal Prohibition. No temporary restraining order,
-----------------
preliminary or permanent injunction or other order or decree which prevents
the consummation of the Asset Purchase or any of the other transactions
contemplated by this Agreement having been issued and remaining in effect,
and no statute, rule or regulation having been enacted by any state or
federal government or governmental agency, which would prevent the
consummation of the Asset Purchase or the other transactions contemplated
by this Agreement.
(b) Governmental Approvals. Any governmental or other approvals
----------------------
or reviews of this Agreement or the transactions contemplated by this
Agreement required under any applicable laws, statutes, orders, rules,
regulations, policies or guidelines promulgated thereunder shall have been
received.
(S)5.2 Conditions to Obligations of the Companies and the Shareholders.
---------------------------------------------------------------
The obligations of the Companies and the Shareholders to consummate the Asset
Purchase and the other transactions contemplated by this Agreement shall be
subject to the fulfillment of all of the following conditions unless waived by
the Companies and the Shareholders in writing:
(a) Representations and Warranties. The representations and
------------------------------
warranties of ADP and American set forth in Article II of this Agreement
shall be true and correct in all material respects as of the date of this
Agreement and as of the Closing Date as though made at and as of the
Closing.
(b) Performance of Agreement. ADP shall have performed and
------------------------
observed in all material respects all obligations and conditions to be
performed or observed by it under this Agreement at or prior to the
Closing.
(c) Certificate. ADP shall have furnished the Companies and the
-----------
Shareholders with a certificate dated the Closing Date signed by its
president to the effect that the conditions set forth in (S)(S)5.2(a) and
(b) have been satisfied.
(d) Opinion of Counsel. The Companies and the Shareholders shall
------------------
have received the legal opinion, dated the Closing Date, of Baker &
Hostetler LLP, counsel to ADP, in
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<PAGE>
substantially the form attached to this Agreement as Exhibit M.
(e) Service Agreement. American shall have entered into the Service
-----------------
Agreement (as defined in (S)5.3(e), below) with the New PC.
(f) Authority. The Companies and the Shareholders shall have received
---------
evidence reasonably satisfactory to them that this Agreement and the
transactions contemplated by this Agreement have been properly authorized
by ADP and American.
(g) Material Adverse Change. No material adverse change shall have
-----------------------
occurred with respect to ADP's financial condition, operations, prospects,
assets, or business; provided that, for purposes of this (S)5.3(g) and
(S)(S)5.3(i) and 5.3(j), below, "material adverse change" and "material
adverse effect" shall be deemed not to include (i) the ongoing
establishment by ADP of its organizational infrastructure, including
without limitation the hiring of additional executive and administrative
personnel, (ii) ADP or its subsidiaries or affiliates entering into letters
of intent or definitive agreements for other acquisitions or consummating
any such acquisitions, or the termination of any such letters of intent or
definitive agreements, or (iii) any costs or expenses associated with any
of such activities.
(h) Governmental Consents. The Companies and the Shareholders shall
---------------------
have received evidence reasonably satisfactory to them of any governmental
or other consents, approvals, or reviews of the transactions contemplated
by this Agreement required under federal or state law.
(i) Restrictive Agreements. ADP shall be free from any agreements,
----------------------
restrictions, or conditions which in the reasonable opinion of the
Companies and the Shareholders would have a material adverse effect upon
(i) ADP's financial condition, operations, prospects, assets, or business,
or (ii) the ability of ADP to consummate the transactions contemplated by
this Agreement.
(j) Defaults. No material agreement or other document or restrictions
--------
to which ADP is subject being in default at the Closing or being breached
by consummation of the transactions contemplated by this Agreement, which
in either case would, in the reasonable opinion of the Companies and the
Shareholders, have a material adverse effect on ADP's financial condition,
operations, prospects, assets, or business, or on the ability of ADP to
consummate the transactions contemplated by this Agreement.
(S)5.3 Conditions to Obligations of ADP. The obligations of ADP and
--------------------------------
American to consummate the Asset Purchase and the other
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<PAGE>
transactions contemplated by this Agreement shall be subject to the fulfillment
of all of the following conditions unless waived by ADP in writing:
(a) Representations and Warranties. The representations and
------------------------------
warranties of the Companies and the Shareholders set forth in Article III
of this Agreement shall be true and correct in all material respects as of
the date of this Agreement and as of the Closing Date as though made at and
as of the Closing.
(b) Performance of Agreement. The Companies and the Shareholders
------------------------
shall have performed and observed in all material respects all obligations
and conditions to be performed or observed by them, respectively, under
this Agreement at or prior to the Closing.
(c) Certificate. The Companies and the Shareholders shall have
-----------
furnished ADP with a certificate dated the Closing Date signed by each
Company and each Shareholder to the effect that the conditions set forth in
(S)(S)5.3(a) and (b) have been satisfied.
(d) New PC. The New PC shall have been formed with an ownership and
------
organizational structure satisfactory to ADP, as described in
(S)4.2(j)(ii)(A), each Shareholder (other than Dr. Biewald) shall have
entered into a Five-Year Agreement with the New PC as contemplated by
(S)4.2(j), and the Shareholders shall have satisfied their obligations
under (S)4.2(j)(ii)(B) with respect to other Five-Year Agreements and One-
Year Agreements between the New PC and other dentists and specialists.
(e) Service Agreement. The New PC shall have entered into a Service
-----------------
Agreement with American in the form attached as Exhibit N to the Agreement
(the "Service Agreement"); provided that, for purposes of determining the
ownership composition of the New PC under the second sentence of (S)9.16 of
the Service Agreement, if Isaac Liu, D.D.S., purchases or otherwise
acquires common shares of the New PC within six months after the Closing
Date, he shall be treated as having become the holder of such common shares
on the Closing Date.
(f) Authority. ADP shall have received evidence reasonably
---------
satisfactory to it that this Agreement and the transactions contemplated by
this Agreement have been properly authorized by each Company and the New
PC.
(g) Professional Personnel. ADP confirming to its satisfaction that
----------------------
the professional personnel employed or otherwise retained by each Company
support the transactions contemplated by this Agreement.
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<PAGE>
(h) Financial Statements. The Companies shall have delivered to ADP
--------------------
the Financial Statements and the Tax Returns.
(i) Opinion of Counsel. ADP shall have received the legal opinion,
------------------
dated the Closing Date, of Fredrikson & Byron, P.A., counsel to the
Companies and the New PC, in the form attached to this Agreement as
Exhibit O.
(j) Existing Employment and Deferred Compensation Agreements. At or
--------------------------------------------------------
prior to the Closing, each Company shall have terminated all employment
agreements or arrangements (including without limitation all individual
disability and deferred compensation arrangements), and all existing
contractor agreements or arrangements between such Company and its
dentists, dental specialists and independent contractors, without any
remaining liability relating thereto on the part of such Company.
(k) Third Party Consents. ADP shall have received or received
--------------------
satisfactory evidence of all necessary or appropriate third party consents
and approvals relating to this Agreement and the transactions contemplated
by this Agreement, as determined by ADP, including without limitation the
consents described in Schedule 3.6, and ADP shall be satisfied that all
significant contracts of the Companies assigned to American shall remain in
full force and effect after the Closing in accordance with the terms and
conditions of such contracts, subject to any modifications required by this
Agreement.
(l) Restrictive Conditions. Each Company and Shareholder shall be
----------------------
free from any agreements, restrictions or conditions which in the
reasonable opinion of ADP could have a Material Adverse Effect on either
Company.
(m) Defaults. No material agreement or other document or restriction
--------
to which either Company or any Shareholder is subject being in default or
being breached by the transactions contemplated by this Agreement, which in
either case in the reasonable opinion of ADP would have a Material Adverse
Effect on either Company or on the ability of either Company or any
Shareholder to consummate the transactions contemplated by this Agreement.
(n) Material Adverse Change. No Material Adverse Effect shall have
-----------------------
occurred with respect to either Company.
(o) Books and Records. The Companies and the Shareholders shall have
-----------------
delivered to ADP all books and records of the Companies relating to the
Assets.
(p) Compliance with Laws. ADP shall have: (i) received evidence
--------------------
reasonably satisfactory to it that the business of each Company has been,
at all times prior to the Closing, in
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compliance in all material respects with all Applicable Laws relating
directly or indirectly to the provision of dental services (except for non-
compliance arising out of Excluded Liabilities described in (S)7.2(b)(i));
and (ii) confirmed to its satisfaction that the transactions contemplated
by this Agreement will be in compliance with all Applicable Laws.
(q) Related-Party Transactions. ADP shall have confirmed to its
--------------------------
satisfaction that all agreements between each Company and any Affiliate of
such Company or any Shareholder are on arms'-length terms and otherwise
reasonably satisfactory to ADP.
(r) Acquisition of Orthocare, Ltd. At the Closing, ADP, or one or
-----------------------------
more of its subsidiaries, as designated by ADP, shall have acquired all of
the capital stock of Orthocare, Ltd., a Minnesota corporation
("Orthocare"), Orthocare's subsidiaries that are not wholly-owned, and
Dental Specialty Management, Ltd., a Minnesota corporation, on terms and
conditions satisfactory to ADP.
(s) 1996 Financial Performance. ADP confirming to its satisfaction
--------------------------
that the Companies' Adjusted Gross Revenue (as defined in the Service
Agreement) for calendar year 1996 exceeded the Companies' Clinic Expenses
(as defined in the Service Agreement) for calendar year 1996 by not less
than $2,980,000.
(t) APA and OCS Names. At or before the Closing, ADP shall have
-----------------
received evidence reasonably satisfactory to it (including without
limitation copies of any filings made with the Minnesota Secretary of
State) that, effective immediately after the Closing, each Company has
changed its name as provided under 4.2(p), above, and, if necessary,
consented to the use by American of the names "Apple Park Associates, Inc."
and "Orthodontic Care Specialists, Ltd." or any similar names.
ARTICLE VI
TERMINATION AND AMENDMENT
-------------------------
(S)6.1 Termination.
-----------
(a) Termination by the Companies and the Shareholders. This Agreement
-------------------------------------------------
may be terminated and cancelled at any time prior to the Closing by the
Companies and the Shareholders: (i) if (A) any of the representations or
warranties of ADP contained in this Agreement or the ADP Schedules shall
prove to be inaccurate in any material respect, or any obligation or
condition to be performed or observed by ADP or American under this
Agreement has not been performed or observed in any material respect at or
prior to the time specified in this Agreement, and (B) such inaccuracy or
failure shall not have been cured within 15 business days after receipt by
ADP of
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<PAGE>
written notice of such occurrence from the Shareholders; or (ii) if any
permanent injunction or other order of a court or other competent authority
preventing consummation of the Asset Purchase or any other transaction
contemplated by this Agreement shall have become final and non-appealable.
(b) Termination by ADP. This Agreement may be terminated and
------------------
cancelled at any time prior to the Closing by ADP: (i) if (A) any of the
representations or warranties of the Companies and the Shareholders
contained in this Agreement or the APA and OCS Schedules shall prove to be
inaccurate in any material respect, or any obligation or condition to be
performed or observed by either Company or any Shareholder under this
Agreement has not been performed or observed in any material respect at or
prior to the time specified in this Agreement, and (B) such inaccuracy or
failure shall not have been cured within 15 business days after receipt by
the Shareholders of written notice of such occurrence from ADP; (ii) if any
permanent injunction or other order of a court or other competent authority
preventing consummation of the Asset Purchase or any other transaction
contemplated by this Agreement shall have become final and non-appealable;
(iii) in the event a Material Adverse Effect shall have occurred; (iv)
[intentionally omitted]; or (v) if the Closing has not occurred on or
before October 31, 1997; provided that ADP shall have the unilateral right
to extend the Closing Date until any date prior to December 31, 1997 upon
notice from ADP to the Shareholders given prior to October 31, 1997.
Notwithstanding the foregoing, the termination of this Agreement shall not
terminate the Confidentiality Agreement dated November 14, 1996, between
ADP and OCS.
(S)6.2 Amendment. This Agreement may not be amended except by an
---------
instrument in writing signed by all of the Parties.
(S)6.3 Extension; Waiver. At any time prior to the Closing, ADP (with
-----------------
respect to the Companies and the Shareholders) and the Companies and the
Shareholders (with respect to ADP) may, to the extent legally allowed: (i)
extend the time for the performance of any of the obligations or other acts of
any other Party; (ii) waive any inaccuracies in the representations and
warranties contained in this Agreement or in any document delivered pursuant
hereto; or (iii) waive compliance with any of the agreements or conditions
contained in this Agreement. Any agreement on the part of a Party to any such
extension or waiver shall be valid only if set forth in a written instrument
signed by such Party.
ARTICLE VII
INDEMNIFICATION
---------------
(S)7.1 Survival of Representations, Warranties and Agreements.
------------------------------------------------------
(a) Subject to the limitations set forth in (S)7.3, below, and
notwithstanding any investigation conducted at any time by or on behalf of
ADP or American, all representations,
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warranties, covenants and agreements of the Companies and the Shareholders
in this Agreement shall survive the execution, delivery and performance of
this Agreement. All representations and warranties of the Companies and
the Shareholders set forth in this Agreement shall be deemed to have been
made again by the Companies and the Shareholders at and as of the Closing.
(b) As used in this Article, any reference to a representation,
warranty or covenant contained in any section of this Agreement shall
include the Schedule relating to such section.
(S)7.2 Indemnification.
---------------
(a) Subject to the limitations set forth in (S)7.3, below, the
Companies and the Shareholders shall, jointly and severally, indemnify and
hold harmless ADP and American from and against any and all losses,
liabilities, damages, demands, claims, suits, actions, judgments or causes
of action, assessments, costs and expenses, including without limitation
interest, penalties, attorneys' fees, any and all expenses incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in
settlement of any claim or litigation (collectively, "Damages"), asserted
against, resulting to, imposed upon, or incurred or suffered by ADP or
American, directly or indirectly, as a result of or arising from: (i) any
inaccuracy in or breach or nonfulfillment of any of the representations,
warranties, covenants or agreements made by either Companies or any
Shareholder in this Agreement; or (ii) any Excluded Liability (defined
below).
(b) For purposes of this Agreement: (i) the term "Excluded
Liabilities" shall include (A) any and all claims of any current or former
holder of any legal or beneficial ownership interest in or to either
Company which are based upon, relate to, or arise out of any agreements,
transactions, acts, or omissions made or occurring at or prior to the
Closing, excepting only any claims against ADP or American arising out of
the failure of ADP or American to perform its obligations under this
Agreement; (B) any and all claims of any third party or governmental agency
or entity arising out of or related to non-compliance by either Company,
any Shareholder, or any employee, agent, or independent contractor of
either Company with any Applicable Laws prior to the Closing; (C) any and
all claims against either Company which are based upon, related to, or
arise out of non-compliance by OCS with Minnesota laws, rules, or
regulations governing professional corporations; (D) any and all claims
against either Company or any dentist employed by either Company which are
based upon, related to, or arise out of non-compliance by APA, OCS, or any
such dentist with Minnesota laws, rules, or regulations prohibiting the
employment of dentists by non-professional corporations; and (E) any and
all claims against
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OCS or any officer or director of OCS which are based upon, related to, or
arise out of the issuance by OCS of its capital stock in contravention of
the articles of incorporation or bylaws of OCS; and (ii) the term
"Indemnifiable Claims" shall mean the matters with respect to which ADP is
entitled to indemnification under (S)7.2(a).
(c) For purposes of this Article, all Damages shall be computed net of
any insurance coverage which reduces the Damages that would otherwise be
sustained; provided that in all cases the timing of the receipt or
realization of insurance proceeds shall be taken into account in
determining the amount of reduction of Damages.
(d) ADP shall be deemed to have suffered Damages arising out of or
resulting from the matters referred to in (S)7.2(a), above, if the same
shall be suffered by any parent, subsidiary or affiliate of ADP, including,
without limitation, American, after the Closing.
(S)7.3 Limitations on Indemnification. Rights to indemnification under
------------------------------
(S)7.2(a)(i) are subject to the following limitations:
(a) ADP shall not be entitled to indemnification hereunder with
respect to an Indemnifiable Claim arising out of a breach of a
representation or warranty or arising or resulting from an Excluded
Liability as defined in (S)7.2(b)(i)(B) (or, if more than one such
Indemnifiable Claim is asserted, with respect to all such Indemnifiable
Claims) unless, and then only to the extent that, the aggregate amount of
Damages with respect to such Indemnifiable Claim or Claims exceeds $50,000;
provided, however, that such threshold shall not apply to any Indemnifiable
Claim relating to a breach of the representations and warranties set forth
in (S)(S)3.2, 3.3, and 3.5.
(b) The obligation of indemnity with respect to the representations
and warranties set forth in (S)3.10 of this Agreement shall terminate on
the expiration of the respective periods of limitations applicable to
assessment and collection of taxes under laws then applicable to such
taxes, with respect to the representations and warranties as to the absence
of unpaid or undisclosed taxes (including any interest, penalties or
expenses) of the Companies.
(c) The obligation of indemnity with respect to the representations
and warranties set forth in (S)3.19 of this Agreement shall terminate upon
expiration of the respective statutes of limitation applicable to the items
addressed in such section.
(d) The obligation of indemnity with respect to the representations
and warranties contained in (S)(S)3.2, 3.3, 3.5, and 3.11 of this Agreement
shall not expire.
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(e) The obligation of indemnity with respect to the representations
and warranties set forth in Article III of this Agreement other than those
addressed in the immediately preceding subsections (b), (c), and (d) shall
terminate on the third anniversary of the Closing Date.
(f) The foregoing provisions of this (S)7.3 notwithstanding, if, prior
to the termination of any obligation of indemnity, written notice of a
claimed breach or other occurrence or matter giving rise to a claim of
indemnification is given by ADP to any Shareholder, or a suit, action, or
other proceeding based upon a claimed breach is commenced against either
Company or any Shareholder, ADP shall not be precluded from pursuing such
claimed breach, occurrence, other matter, or suit or action, or from
recovering from the Shareholders (whether through the courts or otherwise)
on the claim, suit, action, or proceeding, by reason of the termination
otherwise provided for above.
(S)7.4 Procedure for Indemnification with Respect to Third Party Claims.
----------------------------------------------------------------
(a) If ADP desires to seek indemnification under this Article with
respect to an Indemnifiable Claim resulting from the assertion of liability
by a third party (a "Third-Party Claim"), it shall give notice to the
Companies and the Shareholders (hereinafter each being an "Indemnifying
Party") within a reasonable period of time of ADP's becoming aware of any
such Third-Party Claim, which notice shall set forth such material
information with respect to such Third-Party Claim as is then reasonably
available to ADP. If any Third-Party Claim is asserted against ADP, then,
after ADP notifies the Indemnifying Party of such Third-Party Claim, the
Indemnifying Party shall be entitled, if it or he so elects by written
notice delivered to ADP within a reasonable period of time (not to exceed
10 days in any event) after receiving ADP's notice (the "Response Period"),
to assume the defense of such Third-Party Claim with counsel reasonably
satisfactory to ADP. Notwithstanding the foregoing: (i) ADP shall not
have any obligation to give any notice of any Third-Party Claim unless such
assertion is in writing; and (ii) the rights of ADP to be indemnified in
respect of Indemnifiable Claims resulting from the assertion of any Third-
Party Claim shall not be adversely affected by its failure to give notice
pursuant to the foregoing provisions unless, and, if so, only to the extent
that, the Indemnifying Party is materially prejudiced by such failure; and
(iii) each Party shall cooperate with any other Party in all ways
reasonably requested by such other Party in connection with the defense of
any such Third-Party Claims. With respect to any Third-Party Claim that
results in a claim for indemnification under this Article, the Parties
shall make available to each other all relevant information in their
possession which is material to any such Third-Party Claim.
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<PAGE>
(b) In the event that the Indemnifying Party fails to assume the
defense of ADP against any Third-Party Claim within the Response Period,
ADP shall have the right to defend, compromise or settle such Third-Party
Claim on behalf, for the account, and at the risk of the Indemnifying
Party.
(c) Notwithstanding anything in this (S)7.4 to the contrary, (i) if
there is a reasonable probability that a Third-Party Claim may materially
and adversely affect ADP, its subsidiaries or affiliates, including without
limitation American after the Closing, other than as a result of money
damages or other money payments, then ADP shall have the right, at the cost
and expense of the Indemnifying Party, to defend, compromise or settle such
Third-Party Claim; and (ii) the Indemnifying Party shall not, without ADP's
prior written consent, settle or compromise any Third-Party Claim or
consent to entry of any judgment in respect of any Third-Party Claim unless
such settlement, compromise or consent includes as an unconditional term
the giving by the claimant or the plaintiff to ADP (and its subsidiaries
and affiliates, including, without limitation, American, after the Closing)
a release from all liability in respect of such Third-Party Claim.
(S)7.5 Procedure For Indemnification with Respect to Non-Third Party
-------------------------------------------------------------
Claims. In the event that ADP asserts the existence of an Indemnifiable Claim
- ------
giving rise to Damages other than an Indemnifiable Claim resulting from a Third-
Party Claim, it shall give written notice to the Indemnifying Party specifying
the nature and amount of the Indemnifiable Claim asserted. If the Indemnifying
Party, within 30 days after the receipt of such notice by ADP, has not given
written notice to ADP announcing its or his intention to contest such assertion
by ADP, such assertion shall be deemed accepted and the amount of Indemnifiable
Claim shall be deemed a valid Indemnifiable Claim. In the event, however, that
the Indemnifying Party contests the assertion of an Indemnifiable Claim by
giving such written notice to ADP within such 30-day period, then if the
Parties, acting in good faith, cannot reach agreement with respect to such
Indemnifiable Claim within 15 days after such notice, the contested assertion of
the claim shall be referred to arbitration in Minneapolis, Minnesota, in
accordance with the then-current rules of the American Arbitration Association.
The determination made in accordance with such rules shall be delivered in
writing to the Parties and shall be final and binding and conclusive on the
Parties and the amount of the Indemnifiable Claim, if any, determined to exist
shall be a valid Indemnifiable Claim. Each Party shall pay its own legal,
accounting and other fees in connection with such a contest; provided that if
the contested claim is referred to and ultimately determined by arbitration, the
legal, auditing and other fees of the prevailing Party and the fees and expenses
of any arbitrator shall be borne by the non-prevailing Party.
(S)7.6 Right of Setoff. In addition to its other rights under this
---------------
Agreement, ADP shall have the right to setoff any amounts owing to ADP by the
Shareholders against any amounts owing to the
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Shareholders by ADP (other than amounts owed as compensation for employment).
(S)7.7 Liability Limitation. Notwithstanding the foregoing provisions
--------------------
of this Article VII: (a) the total liability of the Companies and the
Shareholders for Damages with respect to all Indemnifiable Claims shall not
exceed $5,974,960, in the aggregate; and (b) in the event of a breach by a
Shareholder of the covenants set forth in (S)4.2(m), above, the obligation to
indemnify ADP and American for Damages related to such breach shall be limited
to such Shareholder.
(S)7.8 Indemnification of the Companies and the Shareholders. Subject
-----------------------------------------------------
to the limitation contained in the following paragraph, ADP shall indemnify and
hold harmless the Companies and the Shareholders from and against any and all
Damages asserted against, resulting to, imposed upon, or incurred or suffered by
the Companies and the Shareholders, directly or indirectly, as a result of or
arising from any inaccuracy in or breach or nonfulfillment of any of the
representations, warranties, covenants, or agreements made by ADP in this
Agreement.
The representations and warranties of ADP contained in Article II of this
Agreement and the obligations of indemnity of ADP with respect to those
representations and warranties shall terminate on the third anniversary of the
Closing Date; provided that if, prior to termination of any obligation of
indemnity with respect to any such representation or warranty, written notice of
a claimed breach of same is given by the Companies and the Shareholders to ADP,
or a suit, action, or other proceeding based upon the claimed breach is
commenced against ADP, the Companies and the Shareholders shall not be precluded
from pursuing such claimed breach, or from recovering from ADP (whether through
the courts or otherwise) on that claim, by reason of the termination otherwise
provided for above.
ARTICLE VIII
MISCELLANEOUS
-------------
(S)8.1 Power of Attorney. Each Shareholder hereby irrevocably appoints
-----------------
Karl H. Biewald, D.D.S. as such Shareholder's attorney-in-fact and agent (the
"Agent"), and grants to the Agent full power and authority to take any and all
actions, and perform and do any and all things, in such Shareholder's place and
stead, which the Agent may deem necessary or appropriate in connection with this
Agreement or the transactions contemplated by this Agreement, as fully as such
Shareholder might or could do if personally present and acting, including
without limitation executing, acknowledging or verifying, and delivering any
amendments, consents, acknowledgements or other documents relating to this
Agreement or the transactions contemplated by this Agreement, receiving and
giving notices under this Agreement, and taking any and all other
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actions which are permitted or required to be taken by such Shareholder under
this Agreement.
The Agent may conclusively rely on any consent, approval, authorization,
acknowledgement, election, agreement, or other action made or given by
Shareholders who own a majority in interest of the ADP Shares, which action
shall be binding on all Shareholders.
The Agent may resign at any time and may be removed at any time by
Shareholders who own a majority in interest of the ADP Shares. Within 15 days
following any such resignation or removal or upon the incapacity of the Agent,
the Shareholders shall appoint a successor Agent to act pursuant to this
section, which successor shall be such person as may be designated in writing by
Shareholders owning a majority in interest of the ADP Shares, which designation
shall be provided to the other Shareholders and ADP in order to make such
designation effective.
Notwithstanding the preceding paragraphs, if, at any time, no Agent is then
serving pursuant to this section (for any reason), then Shareholders owning a
majority in interest of the ADP Shares shall have full authority to take any and
all actions under this agreement which could be taken by the Agent, which
actions shall be binding on all of the Shareholders.
ADP shall be entitled to rely conclusively on any consent, approval,
authorization, acknowledgement, election, agreement, or other action of the
Agent or Shareholders owning a majority in interest of the ADP Shares. For
purposes of this section, the term "ADP Shares" shall include all ADP Shares, as
previously defined in this Agreement.
(S)8.2 Notices. All notices and other communications under this Agreement
-------
to any Party shall be in writing and shall be deemed given when delivered
personally, telecopied (which is confirmed) to that Party at the telecopy number
for that Party set forth below, mailed by certified mail (return receipt
requested) to that Party at the address for that Party (or at such other address
for such Party as such Party shall have specified in notice to the other
Parties), or delivered to Federal Express, UPS, or any similar express delivery
service for delivery to that Party at that address:
(a) If to ADP:
American Dental Partners, Inc.
301 Edgewater Place, Suite 320
Wakefield, Massachusetts 01880-1249
Attention: Gregory A. Serrao, President
Telecopy No.: (617) 224-4216
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with a copy to:
Baker & Hostetler LLP
65 East State Street
Columbus, Ohio 43215
Attention: Gary A. Wadman, Esq.
Telecopy No.: (614) 462-2616
(b) If to the Companies:
APAM, Inc.
14605 Glazier Ave., #130
Apple Valley, Minnesota 55124
Attention: Karl H. Biewald, D.D.S.
Telecopy No.: (612) 891-8678
OC Specialists, Ltd.
14605 Glazier Ave., #130
Apple Valley, Minnesota 55124
Attention: Karl H. Biewald, D.D.S.
Telecopy No.: (612) 891-8678
with a copy to:
Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, Minnesota 55402-3397
Attention: Neil A. Weikart, Esq.
Telecopy No.: (612) 347-7077
(c) If to a Shareholder, to the Agent at the following address:
Karl H. Biewald, D.D.S.
14605 Glazier Ave., #130
Apple Valley, Minnesota 55124
Telecopy No.: (612) 891-8678
(S)8.3 Non-Waiver. No failure by any Party to insist upon strict
----------
compliance with any term or provision of this Agreement, to exercise any option,
to enforce any right, or to seek any remedy upon any default of any other Party
shall affect, or constitute a waiver of, any other Party's right to insist upon
such strict compliance, exercise that option, enforce that right, or seek that
remedy with respect to that default or any prior, contemporaneous, or subsequent
default. No custom or practice of the Parties at variance with any provision of
this Agreement shall affect or constitute a waiver of, any Party's right to
demand strict compliance with the provisions of this Agreement.
(S)8.4 Genders and Numbers. Where permitted by the context, each pronoun
-------------------
used in this Agreement includes the same pronoun in other genders and numbers,
and each noun used in this Agreement includes the same noun in other numbers.
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(S)8.5 Headings. The headings of the various articles and sections of
--------
this Agreement are not part of the context of this Agreement, are merely labels
to assist in locating such articles and sections, and shall be ignored in
construing this Agreement.
(S)8.6 Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same agreement.
(S)8.7 Entire Agreement. This Agreement (including all exhibits,
----------------
schedules, and other documents referred to in this Agreement (the "Incorporated
Documents"), all of which are hereby incorporated by reference) constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, among the Parties with respect to the subject matter of this
Agreement. All obligations of any Party under any Incorporated Document shall
constitute an obligation of such Party under this Agreement. Any capitalized
terms used in any Incorporated Document which are not otherwise defined therein
shall have the respective meanings given such terms in this Agreement.
(S)8.8 No Third Party Beneficiaries. Nothing contained in this Agreement,
----------------------------
expressed or implied, is intended or shall be construed to confer upon or give
to any person, firm, corporation or legal entity, other than the Parties, any
rights, remedies or other benefits under or by reason of this Agreement.
(S)8.9 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the Commonwealth of Massachusetts without regard
to principles of conflicts of law.
(S)8.10 Successors; Assignment. This Agreement shall be binding upon,
----------------------
inure to the benefit of and be enforceable by and against the Parties and their
respective heirs, personal representatives, successors, and assigns. Neither
this Agreement nor any of the rights, interests or obligations under this
Agreement shall be transferred or assigned by any of the Parties without the
prior written consent of the other Parties.
(S)8.11 Remedies. All rights and remedies of each Party under this
--------
Agreement shall be cumulative and in addition to all other rights and remedies
which may be available to that Party from time to time, whether under any other
agreement, at law, or in equity.
(S)8.12 Expenses. Except as otherwise specifically provided in this
--------
Agreement, each Party shall bear his, her, or its respective legal, accounting,
and other costs and expenses associated with the transactions contemplated by
this Agreement (including without limitation the costs of any brokers and
financial advisors).
(S)8.13 Announcements. This Agreement and the transactions contemplated
-------------
herein shall be confidential and no Party shall
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disclose any information relating to the transactions contemplated by this
Agreement without the prior written consent of the Shareholders and ADP, except
for such disclosures to such professional advisors as may be necessary or
appropriate in order to enter into this Agreement and consummate the
transactions contemplated by this Agreement. Each Party and its representatives
will exercise all reasonable efforts to maintain confidentiality with respect to
such transactions at all times prior to the public announcement, if any, of this
Agreement. The provisions of this section will be subject to each Party's
obligation to comply with applicable requirements of federal or state laws or
any governmental order or regulation.
(S)8.14 Severability. With respect to any provision of this Agreement
------------
finally determined by a court of competent jurisdiction to be unenforceable,
such court shall have jurisdiction to reform such provision so that it is
enforceable to the maximum extent permitted by applicable law, and the Parties
shall abide by such court's determination. In the event that any provision of
this Agreement cannot be reformed, such provision shall be deemed to be severed
from this Agreement, but every other provision of this Agreement shall remain in
full force and effect.
[Signatures on next page.]
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<PAGE>
Each of the undersigned confirms that it or he has read and fully understands
this Agreement, including without limitation the exhibits attached hereto and
the representations and warranties contained in (S)3.28 of this Agreement.
/s/ Karl H. Biewald /s/ J. E. Cutcliffe
- ------------------------------- ---------------------------------------------
KARL H. BIEWALD, D.D.S. J. E. CUTCLIFFE, D.D.S.
/s/ Curtis R. Dunn /s/ Timothy J. Montgomery
- ------------------------------- ---------------------------------------------
CURTIS R. DUNN, D.D.S. TIMOTHY J. MONTGOMERY, D.D.S.
/s/ Christopher S. Hipp
- -------------------------------
CHRISTOPHER S. HIPP, D.D.S.
AMERICAN DENTAL PARTNERS, INC. OC SPECIALISTS, LTD.
By /s/ Gregory A. Serrao By /s/ Karl H. Biewald
------------------------------ -----------------------------------------
Gregory A. Serrao, President Karl H. Biewald, D.D.S,
and Chief Executive Officer President
APPLE PARK ASSOCIATES, INC. APAM, INC.
By /s/ Gregory A. Serrao By /s/ Karl H. Biewald
------------------------------ -----------------------------------------
Gregory A. Serrao, President Karl H. Biewald, D.D.S,
President and Chief
Executive Officer
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EXHIBIT 10 (BB)
ASSET PURCHASE AGREEMENT
AMONG
AMERICAN DENTAL PARTNERS, INC.,
AMERICAN DENTAL PARTNERS OF WISCONSIN, INC.
TERRANCE R. WILKENS, D.D.S.
TERRANCE R. WILKENS, D.D.S., SC
BROOKFIELD DENTAL CENTER, SC
WAUKESHA DENTAL CENTER, SC
HALES CORNERS DENTAL CENTER, SC
AND
WEST ALLIS DENTAL CENTER, SC
Effective October 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ASSET PURCHASE AGREEMENT...................................................... 1
BACKGROUND INFORMATION........................................................ 1
ARTICLE I ASSET PURCHASE AND SALE.......................... 2
(S)1.1 Asset Purchase and Sale.......................................... 2
(S)1.2 Excluded Assets.................................................. 3
(S)1.3 Liabilities Assumed.............................................. 4
(S)1.4 Purchase Price................................................... 4
(S)1.5 Closing.......................................................... 5
(S)1.6 Conveyance Documents............................................. 5
(S)1.7 Possession....................................................... 6
ARTICLE II REPRESENTATIONS AND WARRANTIES OF ADP............ 6
(S)2.1 Organization and Standing........................................ 6
(S)2.2 Power and Authority.............................................. 6
(S)2.3 Capitalization of Each of ADP and American....................... 7
(S)2.4 Conflicts; Consents and Approvals................................ 7
(S)2.5 Litigation....................................................... 8
(S)2.6 Brokerage and Finder's Fees...................................... 8
ARTICLE III REPRESENTATIONS AND WARRANTIES
OF DR. WILKENS AND THE GROUP..................... 8
(S)3.1 Organization and Standing........................................ 8
(S)3.2 Capitalization and Security Holders.............................. 9
(a) Group Stock...................................... 9
(b) Stock Ownership.................................. 9
(c) Due Authorization and Issuance................... 9
(d) No Other Commitment.............................. 9
(S)3.3 Subsidiaries..................................................... 9
(S)3.4 Business of the Group............................................ 9
(S)3.5 Power and Authority.............................................. 9
(S)3.6 Consents and Approvals...........................................10
(S)3.7 Financial Statements.............................................10
(S)3.8 Undisclosed Liabilities..........................................11
</TABLE>
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<TABLE>
<S> <C> <C>
(S)3.9 Absence of Certain Changes.......................................11
(S)3.10 Taxes............................................................13
(S)3.11 Compliance with Law..............................................14
(S)3.12 Proprietary Rights...............................................15
(S)3.13 Restrictive Documents or Laws....................................16
(S)3.14 Insurance........................................................17
(S)3.15 Bank Accounts, Depositories; Powers of Attorney..................17
(S)3.16 Title to and Condition of Properties.............................17
(S)3.17 Brokers, Finders.................................................18
(S)3.18 Legal Proceedings, etc...........................................18
(S)3.19 ERISA............................................................19
(S)3.20 Contracts........................................................22
(S)3.21 Accounts Receivable..............................................23
(S)3.22 No Conflict or Default...........................................24
(S)3.23 Books of Account; Records........................................24
(S)3.24 Compensation.....................................................24
(S)3.25 Labor Relations..................................................25
(S)3.26 Suppliers and Third Party Payors.................................25
(S)3.27 Medicare and Medicaid............................................26
(S)3.28 Investment Intent................................................26
(S)3.29 Disciplinary Actions.............................................26
(S)3.30 Complete Disclosure..............................................27
ARTICLE IV COVENANTS OF THE PARTIES.........................27
(S)4.1 Mutual Covenants.................................................27
(a) General..........................................27
(b) Governmental Matters.............................27
(S)4.2 Covenants of the Group and Dr. Wilkens...........................27
(a) Delivery of Interim Statements...................27
(b) Conduct of Business..............................27
(c) Exclusive Rights.................................29
(d) Access to Records and Other Due Diligence........29
(e) Disclosures......................................30
(f) Employee Retention...............................30
(g) Affiliate Indebtedness...........................30
(h) Distributions....................................31
(i) Subordination Agreement..........................31
(j) Patient Records; Employment Agreement............31
(k) Notices of Certain Events........................31
(l) Representations and Warranties...................32
(m) Noncompetition...................................32
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
(n) Injunctive Relief................................33
(o) Third Party Payor Agreements.....................33
(S)4.3 Covenants of ADP.................................................34
(a) Representations and Warranties...................34
(b) [Intentionally Omitted]..........................34
(c) Notices of Certain Events........................34
ARTICLE V CONDITIONS.......................................34
(S)5.1 Mutual Conditions................................................34
(a) Legal Prohibition................................35
(b) [Intentionally Omitted]..........................35
(c) Governmental Approvals...........................35
(d) Agreements.......................................35
(S)5.2 Conditions to Obligations of the Group and Dr. Wilkens...........35
(a) Representations and Warranties...................35
(b) Performance of Agreement.........................35
(c) Certificate......................................35
(d) Opinion of Counsel...............................35
(e) Authority........................................36
(f) Restrictive Conditions...........................36
(g) Delivery of Purchase Money and Note..............36
(S)5.3 Conditions to Obligations of ADP.................................36
(a) Representations and Warranties...................36
(b) Performance of Agreement.........................36
(c) Certificate......................................36
(d) Brookfield Lease.................................36
(e) Waukesha Lease...................................36
(f) Authority........................................36
(g) Professional Personnel...........................36
(h) Financial Statements.............................37
(i) Opinion of Counsel...............................37
(j) Existing Employment and Deferred Compensation
Agreements.......................................37
(k) Third Party Consents.............................37
(l) Restrictive Conditions...........................37
(m) Defaults.........................................37
(n) Material Adverse Changes.........................37
(o) Books and Records................................37
</TABLE>
-iii-
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
(p) Compliance with Laws........ .................38
(q) Related-Party Transactions..... ..............38
(r) Adjusted EBITDA................... ...........38
(s) Current Ratio........................ ........38
ARTICLE VI TERMINATION AND AMENDMENT........................38
(S)6.1 Termination......................................................38
(a) Termination by the Group and Dr. Wilkens........38
(b) Termination by ADP..............................39
(S)6.2 Amendment........................................................39
(S)6.3 Extension; Waiver................................................39
ARTICLE VII INDEMNIFICATION..................................40
(S)7.1 Survival of Representations, Warranties and Agreements...........40
(S)7.2 Indemnification..................................................40
(S)7.3 Limitations on Indemnification...................................41
(S)7.4 Procedure for Indemnification with Respect to Third Party Claims.42
(S)7.5 Procedure For Indemnification with Respect to Non-Third Party
Claims...........................................................43
(S)7.6 Right of Setoff..................................................44
(S)7.7 Indemnification of the Group and Dr. Wilkens.....................44
ARTICLE VIII MISCELLANEOUS....................................44
(S)8.1 Notices..........................................................44
(S)8.2 Non-Waiver.......................................................45
(S)8.3 Genders and Numbers..............................................46
(S)8.4 Headings.........................................................46
(S)8.5 Counterparts.....................................................46
(S)8.6 Entire Agreement.................................................46
(S)8.7 No Third Party Beneficiaries.....................................46
(S)8.8 Governing Law....................................................46
(S)8.9 Successors; Assignment...........................................46
(S)8.10 Remedies.........................................................46
(S)8.11 Expenses.........................................................46
(S)8.12 Announcements....................................................47
(S)8.13 Severability.....................................................47
INDEX OF GROUP SCHEDULES......................................................49
INDEX OF EXHIBITS.............................................................51
</TABLE>
-iv-
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Acquisition Proposal 4.2(c)
Additional Documents 7.1(a)
Adjusted EBITDA 5.3(r)
ADP Shares 1.8
ADP Schedules Article II, first paragraph
Affiliate 3.22
Affiliated Company 4.2(m)
Applicable Laws 3.11
Asset Purchase Background Information
Assets 1.1
Assumed Liabilities 1.3
Benefit Arrangements 3.19(e)
Brookfield Lease 1.1(g)(i)
Cash 1.1(c)
Closing 1.5
Closing Date 1.5
Consulting Agreement 4.2(p)
Current Ratio 5.3(s)
Damages 7.2(a)
</TABLE>
-v-
<PAGE>
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Effective Date Preamble
Employee Plans 3.19
Employment Agreement 4.2(j)
Environmental Laws 3.11
Equipment 1.1(a)
Excluded Liabilities 7.2(b)
Financial Statements 3.7(a)
Goodwill 1.1(e)
Governmental Programs 3.27
Governmental Receivables 1.2(c)
Governmental Reimbursement Laws 3.27
Group Schedules Article III, first paragraph
Group Stock 3.2
Incorporated Documents 8.6
Indemnifiable Claims 7.2(b)
Indemnifying Party 7.4(a)
Interim Statements 3.7(b)
Leases 1.1(g)
Material Adverse Effect 3.9(a)
1996 Financial Statements 3.7(a)
</TABLE>
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<PAGE>
<TABLE>
<C>
Term Section
- ---- -------
<S> <C>
Note Background Information
Parties Statement of Agreement
Pension Plans 3.19
Permits 3.11
Pre-Closing Period 4.2(b)
Proprietary Rights 3.12
Provider Agreements 1.1(h)
Purchase Money Background Information
Purchase Price 1.4
Receivables 1.1(d)
Related Party Payables 3.21
Related Party Receivable 3.21
Restricted Territory 4.2(m)
Securities Act 3.2(c)
Service Agreement 5.1(b)
Software 3.12
Subordination Agreement 4.2(i)
Supplier Agreements 1.1(f)
Supplies 1.1(b)
Third-Party Claim 7.4(a)
Waukesha Lease 1.1(g)(ii)
</TABLE>
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<PAGE>
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (this "Agreement") is signed this 1st day of
October, 1997 to be effective as of 12:01 a.m. October 1, 1997 (the "Effective
Date"), between American Dental Partners, Inc., a Delaware corporation ("ADP"),
American Dental Partners of Wisconsin, Inc., a Delaware corporation and wholly-
owned subsidiary of ADP ("American"), Terrance R. Wilkens, D.D.S., a Wisconsin
resident ("Dr. Wilkens"), Terrance R. Wilkens, D.D.S., SC, a Wisconsin service
corporation ("Wilkens"), Brookfield Dental Center, SC, a Wisconsin service
corporation ("Brookfield"), Waukesha Dental Center, SC, a Wisconsin service
corporation ("Waukesha"), Hales Corners Dental Center, SC, a Wisconsin service
corporation ("Hales Corners") and West Allis Dental Center, SC, a Wisconsin
service center ("West Allis"). Wilkens, Brookfield, Waukesha, Hales Corners and
West Allis are referred to herein collectively as "the Group."
BACKGROUND INFORMATION
A. Dr. Wilkens, as sole shareholder of each corporation comprising the
Group, desires to sell, and ADP desires to purchase through American,
substantially all of the assets of the Group (the "Asset Purchase") for total
consideration consisting of: (i) cash in the amount of $5,000,000 (the
"Purchase Money"); (ii) a subordinated Promissory Note in the original principal
amount of $400,000, said Note to be substantially in the form of attached
Exhibit H (the "Note"); and (iii) the assumption by American of the Assumed
Liabilities (as defined in (S)1.3, below).
B. The board of directors of ADP has determined that the Asset Purchase
and the other transactions described in this Agreement are desirable and in the
best interests of its shareholders and has duly approved and adopted this
Agreement. Dr. Wilkens, as sole shareholder of each corporation comprising the
Group, has determined that the Asset Purchase and the other transactions
described in this Agreement are desirable and in his best interests and the best
interests of the Group and has approved and adopted this Agreement on behalf of
himself and on behalf of the Group.
STATEMENT OF AGREEMENT
ADP, American, Dr. Wilkens and each member of the Group, and the
Shareholders (collectively, the "Parties") hereby acknowledge the foregoing
Background Information and agree as follows:
<PAGE>
ARTICLE I
ASSET PURCHASE AND SALE
(S)1.1 Asset Purchase and Sale. On the Closing Date and on the terms
-----------------------
and subject to the conditions described in this Agreement, each member of the
Group shall sell, assign, transfer, convey, and deliver to American, and ADP
shall cause American to, and American shall, purchase from each member of the
Group, substantially all of the assets, rights, and business operations of each
member of the Group (the "Assets"), including without limitation the following:
(a) All furniture, fixtures, and equipment, including any tangible
personal property owned by Dr. Wilkens which physically located
within any dental center maintained by any member of the Group;
and (ii) used in the best operations of the Group, whether or not
listed in the financial statements of any member of the Group,
(collectively, the "Equipment");
(b) All office and dental supplies (collectively, the "Supplies");
(c) All cash and cash equivalents (collectively, the "Cash");
(d) All accounts receivable (except Governmental Receivables, as
defined in (S)1.2(c), below) and notes receivable (collectively,
the "Receivables");
(e) Goodwill (the "Goodwill");
(f) All rights under any agreements with customers, equipment vendors
or suppliers (the "Supplier Agreements");
(g) All rights under the following real estate leases:
(i) Lease dated August 30, 1996 between Brookfield as Lessee and
Midway Motor Lodge of Brookfield as Lessor for offices
located at 1025 South Moorland Road, Brookfield, Wisconsin,
(the "Brookfield Lease").
(ii) Lease dated January 1, 1996 between Waukesha as Lessee and
Terrance R. Wilkens as Lessor for offices located at 1717
Paramount Drive, Waukesha, Wisconsin, (the "Waukesha
Lease").
-2-
<PAGE>
(iii) Lease dated March 1, 1993 between Hales Corners as Lessee
and Compcare Health Services Corporation as Lessor for
offices located at 5151 S. 108th Street, Hales Corners,
Wisconsin, (the "Hales Corners Lease").
(iv) Lease dated August 1, 1990 between West Allis as Lessee and
James L. Malone, as Lessee, and Oliver and Patricia Moth,
as Lessors, which Lease was subsequently assigned and
extended for offices located at 8801 West National Avenue,
West Allis, Wisconsin, (the "West Allis Lease").
(h) To the extent assignable under applicable law, all rights under
any agreements with third parties providing payment for dental
services (the "Provider Agreements"); and
(i) All rights, titles, and interests in the Proprietary Rights and
the Software (each as defined in (S)3.12, below).
(j) All patient records of each member of the Group subject to the
rights of each individual patient with respect to his or her
records.
(S)1.2 Excluded Assets. Notwithstanding any other provision of this
---------------
Agreement to the contrary, the following items shall be excluded from the
Assets:
(a) All corporate books and records of each member of the Group,
including without limitation the corporate minute book, stock
ledger, books of account, general ledgers, financial statements,
bank account lists and tax returns and records;
(b) Accounts receivable with respect to which assignment is
prohibited under any Governmental Reimbursement Law (as defined
in (S)3.27, below) (collectively, "Governmental Receivables");
(c) Any other assets of each member of the Group which American
elects not to purchase or is prohibited from purchasing under
applicable law;
(d) The name "Terrance D. Wilkens, D.D.S., S.C.;" and
(e) Personal effects, artwork and other tangible personal property
owned by Dr. Wilkens, located with the centers which is
identified as "Excluded" on the exhibits to the bill of sale
required by (S)1.6(a).
-3-
<PAGE>
(S)1.3 Liabilities Assumed. At the Closing, ADP shall cause American to,
-------------------
and American shall, assume only (a) the obligations of the Group under the
Leases, (b) working capital liabilities of the Group consisting of trade
accounts payable and other short-term liabilities incurred in the ordinary
course of the operation of the Group's business, and (c) notes payable and
capitalized leases of the Group up to a maximum aggregate amount of $525,000
(collectively, the "Assumed Liabilities").
Except as specifically provided in this (S)1.3, neither ADP nor American
shall assume, or in any way be liable or responsible for, any claims,
liabilities, obligations, or debts of the Group, including without limitation
any liabilities of the Group relating to: (a) taxes payable including, without
limitation, income taxes, personal property taxes, real estate taxes (including
those to be paid by the Group under the Leases), or employment taxes, except for
any such taxes accruing and relating to the period from and after the Effective
Date; (b) any pension, profit sharing, or employee benefit plans covering any of
the Group's employees for any period prior to the Effective Date; (c) express or
implied warranties; (d) any acts or omissions of the Group or the Group's
employees prior to the Closing (including without limitation, any malpractice
claims asserted against any member of the Group or Dr. Wilkens or other tort
claims asserted against any member of the Group or Dr. Wilkens); (e) claims for
breach of contract; and (f) other claims of any kind whatsoever, or any other
liabilities of the Group, direct or contingent.
The parties acknowledge that, to the extent listed on Exhibit A of the
Assumption Agreement (as defined below), American shall assume, and pay when
due, the following liabilities of the Group: (a) 1997 accrued but unpaid
personal property tax, (b) 1997 accrued by unpaid real estate taxes required to
be paid under the Leases and (c) 1997 accrued by unpaid sick pay, vacation pay
and holiday pay due to employees of the Group.
(S)1.4 Purchase Price. The total purchase price for the Assets (the
--------------
"Purchase Price") shall consist of the Purchase Money, the Note and the
assumption of the Assumed Liabilities by American. The Purchase Price shall be
paid to Dr. Wilkens and the Group, at Closing, as follows:
(a) American shall pay the Purchase Money by certified or bank
cashier's check or wire transfer;
(b) American shall execute and deliver the Note at the Closing.
(c) American shall assume the Assumed Liabilities by executing and
delivering (i) an assumption agreement in the form attached to
this Agreement as Exhibit A (the "Assumption Agreement"), and
(ii) assignment and assumption agreements for the Leases in the
form attached to this Agreement as Exhibit B (the "Assignment of
Lease").
-4-
<PAGE>
The Purchase Price shall be allocated among the Assets as agreed upon by
Dr. Wilkens and ADP at or prior to the Closing in accordance with Section 1060
of the Internal Revenue Code of 1986, as amended, and the applicable regulations
thereunder. Dr. Wilkens and ADP shall use all reasonable efforts to agree upon
such allocation as soon as practicable. The allocation of the Purchase Price
determined under this (S)1.4 shall be binding on the Parties to this Agreement,
shall be used for all purposes of their respective Federal, state, and local
income tax returns, and shall be supported by them in any audits or other
disputes or litigation involving any such returns.
ADP and Dr. Wilkens shall timely prepare and file all required tax reports
and returns with respect to the allocation of Purchase Price under this (S)1.4,
such as Internal Revenue Service Form 8594 or any equivalent statement, and will
furnish the other Party with a copy of any such form or statement no later than
10 days prior to the required filing date. The Group and Dr. Wilkens shall pay,
and shall hold ADP and American harmless, from and against any and all taxes and
assessments that may be due and payable, or which relate in any way, to the
transfer of the Assets by the Group to American.
(S)1.5 Closing. The closing of the Asset Purchase (the "Closing") shall
-------
be held at such time and place as may be reasonably agreed to by Dr. Wilkens and
ADP, provided that the date for the Closing (the "Closing Date") shall be not
later than five business days after the satisfaction or waiver of all
contingencies set forth in Article V, below, and further provided that if no
agreement is reached between Dr. Wilkens and ADP on the time and place for the
Closing following the satisfaction or waiver of all contingencies set forth in
Article V, below, the Closing shall occur on the fifth business day after the
date of the satisfaction or waiver of all such contingencies at the offices of
ADP in Wakefield, Massachusetts.
(S)1.6 Conveyance Documents. At the Closing, each member of the Group
--------------------
shall execute and deliver to American the following documents to convey, assign,
and transfer the Assets to American:
(a) A bill of sale of the Equipment and Supplies, substantially in
the form attached as Exhibit C to this Agreement. The bill of
sale shall also be executed and delivered by Dr. Wilkens,
individually;
(b) An assignment of the Cash, Receivables, and Goodwill,
substantially in the form attached as Exhibit D to this
Agreement;
(c) An assignment of the Supplier Agreements, substantially in the
form attached as Exhibit E to this Agreement;
(d) An Assignment of Lease for each of the Leases;
-5-
<PAGE>
(e) To the extent any Provider Agreement is legally assignable to
American, an assignment of the Provider Agreements, substantially
in the form attached as Exhibit F to this Agreement;
(f) An assignment of the Proprietary Rights and Software,
substantially in the form attached as Exhibit G to this
Agreement, said assignment shall also be executed and delivered
by Dr. Wilkens, individually; and
(g) Such other assignment or conveyance documents as may be
reasonably requested by ADP or American.
If consents or approvals of any other parties are required for any
conveyances, assignments, or transfers contemplated by this Agreement, Dr.
Wilkens and the Group shall cause those consents or approvals to be obtained
prior to the Closing. All costs, except for the legal fees incurred by ADP and
American, related to such consents or approvals shall be paid by the Group.
(S)1.7 Possession. American shall be entitled to exclusive possession of
----------
the Assets at the Closing.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF ADP
In order to induce Dr. Wilkens and the Group to enter into this Agreement,
ADP hereby represents and warrants to Dr. Wilkens and the Group that the
statements contained in this Article are true, correct and complete, except as
disclosed in the Schedules referred to in this Article and delivered by ADP to
Dr. Wilkens and the Group on or before the date of this Agreement (the "ADP
Schedules"):
(S)2.1 Organization and Standing. Each of ADP and American is a
-------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware with full corporate power and authority to own, lease,
use and operate its properties and to conduct its business as and where now
owned, leased, used, operated and conducted. Each of ADP and American is duly
qualified or licensed as a foreign corporation and in good standing in each
jurisdiction in which the character or location of the property owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to be so qualified or licensed
would not have a material adverse effect on it.
(S)2.2 Power and Authority. Each of ADP and American has all requisite
-------------------
corporate power and authority to enter into this Agreement and to perform its
obligations under this Agreement. This Agreement and the transactions
contemplated by this Agreement have been duly and validly authorized by all
necessary corporate action on the part of each of ADP and American. This
Agreement has been duly executed and delivered by each of ADP and American and
constitutes
-6-
<PAGE>
the legal, valid and binding obligation of each of ADP and American, enforceable
against each of ADP and American in accordance with its terms.
(S)2.3 Capitalization of Each of ADP and American. As of the date of this
------------------------------------------
Agreement:
(a) ADP. ADP's authorized capital stock consists solely of: (i)
---
2,500,000 shares of common stock, par value $.01 per share, of
which 375,792 are issued and outstanding; (ii) 400,000 Series A
Convertible Preferred Shares, par value $.01 per share, all of
which are issued and outstanding; and (iii) 70,000 Series B
Redeemable Preferred Shares, par value $.01 per share, all of
which are issued and outstanding. Each outstanding share of
capital stock of ADP is duly authorized, validly issued, fully
paid and nonassessable, and have not been issued in violation of
any preemptive or similar rights.
(b) American. American's authorized capital stock consists solely of
--------
100 shares of common stock, $.01 par value, all of which are
issued, outstanding and owned by ADP.
(S)2.4 Conflicts; Consents and Approvals. The execution and delivery of
---------------------------------
this Agreement by ADP and American and the consummation of the transactions
contemplated in this Agreement will not:
(a) Violate or conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with the giving
of notice, the passage of time or otherwise, would constitute a
default) under, or entitle any third party (with the giving of
notice, the passage of time or otherwise) to terminate,
accelerate or call a default under, or result in the creation of
any lien, security interest, charge or encumbrance upon any of
the properties or assets of ADP or American under any of the
terms, conditions or provisions of the certificate of
incorporation or bylaws, each as amended to date, of ADP or
American, or any note, bond, mortgage, indenture, deed of trust,
license, contract, undertaking, agreement, lease or other
instrument or obligation to which ADP or American is a party and
which is material to ADP and its subsidiaries (including, without
limitation, American), taken as a whole, except that pursuant to
ADP's Revolving Credit Agreement with Fleet National Bank
("Fleet") dated April 24, 1997, Fleet will have a security
interest in the Assets after they are acquired by American;
(b) Violate any order, writ, injunction, decree, statute, rule or
regulation, applicable to ADP or American or its properties or
assets; or
-7-
<PAGE>
(c) Require any action or consent or approval of, or review by, or
registration with any third party, court or governmental body or
other agency, instrumentality or authority, other than such
actions taken in respect of federal and state securities laws as
are contemplated by this Agreement.
(S)2.5 Litigation. There is no suit, claim, action, proceeding or
----------
investigation pending or, to the best knowledge of ADP, threatened against ADP
or American which, individually or in the aggregate, is reasonably likely to
have a material adverse effect on ADP and its subsidiaries, taken as a whole, or
a material adverse effect on the ability of ADP or American to consummate the
transactions contemplated in this Agreement. Neither ADP nor American is
subject to any outstanding order, writ, injunction or decree which, insofar as
can be reasonably foreseen, individually or in the aggregate, would have a
material adverse effect on it or a material adverse effect on the ability of ADP
or American to consummate the transactions contemplated by this Agreement.
(S)2.6 Brokerage and Finder's Fees. Neither ADP nor any of its
---------------------------
subsidiaries (including, without limitation, American) shareholders, directors,
officers or employees has incurred, or will incur on behalf of ADP or American,
any brokerage, finder's or similar fee in connection with the transactions
contemplated by this Agreement.
The representations and warranties contained in this Article shall survive
the execution, delivery and performance of the Agreement and the Additional
Documents (as defined in (S)7.1(a)) but shall expire automatically on the third
anniversary of the Closing Date.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF DR. WILKENS AND THE GROUP
In order to induce ADP and American to enter into this Agreement, Dr.
Wilkens and the Group hereby represent and warrant to ADP and American that the
statements contained in this Article are true, correct and complete, except as
disclosed in the Schedules referred to in this Article and delivered by Dr.
Wilkens to ADP on or prior to the date of this Agreement (collectively, the
"Group Schedules").
(S)3.1 Organization and Standing. Each member of the Group is a service
-------------------------
corporation duly organized, validly existing, and in good standing under the
laws of the State of Wisconsin with full corporate power and authority to own,
lease, use and operate its properties and to conduct its business as and where
now owned, leased, used, operated and conducted. Each member of the Group is
duly qualified to do business in each jurisdiction listed in Schedule 3.1, is
not qualified to do business in any other jurisdiction, and neither the nature
of the business conducted by each member of the Group nor the properties it
owns, leases or operates requires
-8-
<PAGE>
it to qualify to do business in any other jurisdiction. No member of the Group
has received any written notice or assertion within the last three years from
any governmental official in any jurisdiction to the effect that it is required
to be qualified or authorized to do business in any such jurisdiction, in which
such member is not so qualified or has not obtained such authorization. No
member of the Group is in default in the performance, observation or fulfillment
of any provision of its articles of incorporation, bylaws, or other
organizational documents, each as amended to date.
(S)3.2 Capitalization and Security Holders.
-----------------------------------
(a) Group Stock. The authorized capital stock of each member of the
-----------
Group consists solely of those shares of common stock listed on
Schedule 3.2, of which there are issued and outstanding that
number of shares shown on Schedule 3.2 as outstanding (the "Group
Stock").
(b) Stock Ownership. Dr. Wilkens holds beneficially and of record
---------------
all of the Group Stock.
(c) Due Authorization and Issuance. Each outstanding share of the
------------------------------
Group Stock has been duly authorized and validly issued, is fully
paid and non-assessable (subject, however, to (S)180.0622(2)(b),
Wisconsin Statutes), and has not been issued in violation of any
preemptive or similar rights.
(d) No Other Commitment. There are no outstanding subscriptions,
-------------------
options, warrants, puts, calls, agreements, understandings,
claims or other commitments or rights of any type relating to the
issuance, sale or transfer by Dr. Wilkens or the Group of any
capital stock or other securities of the Group, nor are there
outstanding any securities which are convertible into or
exchangeable for any shares of capital stock of the Group, and no
member of the Group has any obligation of any kind to issue any
additional securities.
(S)3.3 Subsidiaries. No member of the Group owns any subsidiary
------------
corporations, nor does any member of the Group own, directly or indirectly, any
equity or other ownership interest in any corporation, partnership, joint
venture or other entity or enterprise (hereinafter, simply "entity"). No member
of the Group is subject to any obligation or requirement to provide funds to or
make any investment (in the form of a loan, capital contribution or otherwise)
in any entity.
(S)3.4 Business of the Group. The Group is and has been engaged in the
---------------------
business of providing general dentistry and specialty dental services to its
patients and is engaged in no other business whatsoever except as may be
incidental to the foregoing.
(S)3.5 Power and Authority; Capacity. Each member of the Group has all
-----------------------------
requisite corporate power and authority to enter into this Agreement and to
perform its obligations under
-9-
<PAGE>
this Agreement. This Agreement and the transactions contemplated by this
Agreement have been duly and validly authorized by all necessary corporate
action on the part of each member of the Group. Dr. Wilkens has full legal
capacity, power, and authority to enter into this Agreement and perform his
obligations under this Agreement. This Agreement has been duly executed and
delivered by each member of the Group and Dr. Wilkens and constitutes the legal,
valid and binding obligation of each member of the Group and Dr. Wilkens
enforceable against each member of the Group and Dr. Wilkens, respectively, in
accordance with its terms. No other action or proceeding by or in respect of Dr.
Wilkens or any member of the Group is or was necessary to authorize this
Agreement or the consummation of the transactions contemplated by this
Agreement.
(S)3.6 Consents and Approvals. Except for the consents described in
----------------------
Schedule 3.6, all of which shall be obtained prior to the Closing, neither the
execution and delivery of this Agreement by each member of the Group or Dr.
Wilkens nor the consummation of the transactions contemplated by this Agreement
require or will require any action, consent, or approval of, or review by, or
registration with, any third party, court or governmental body or other agency,
instrumentality or authority.
(S)3.7 Financial Statements.
--------------------
(a) Dr. Wilkens shall furnish to ADP the balance sheets for each
member of the Group as of December 31, 1996, December 31, 1995,
and December 31, 1994, and the related statements of income and
retained earnings and cash flows for the calendar year then
ended, including, in each case, the related notes
(collectively, the "Financial Statements"). The Financial
Statements as of and for the calendar year ended December 31,
1996, are sometimes hereinafter referred to separately as the
"1996 Financial Statements." The Financial Statements have been
prepared on a cash basis, consistent with the past practices of
each member of the Group, shall be prepared from and be in
accordance with the books and records of each member of the
Group and shall be initialed for identification by Dr. Wilkens,
and shall fairly present the financial condition of each member
of the Group as of the dates stated therein and the results of
operations of each member of the Group for the periods then
ended in accordance with such practices.
(b) When delivered in accordance with Section 4.2(a) of this
Agreement, the balance sheet of each member of the Group as of
the most recent month-end prior to the Closing, and the related
statements of income and retained earnings and cash flows for
the period beginning on the first day of the current calendar
year for each member of the Group through the most recent
month-end prior to the Closing (collectively, the "Interim
Statements"), shall be prepared in the same manner as the
Financial
-10-
<PAGE>
Statements, and shall fairly present the financial condition of
each member of the Group as of such date and the results of
operations of each member
of the Group for such period then ended in accordance with such
practices.
(S)3.8 Undisclosed Liabilities. Except as set forth in Schedule 3.8, no
-----------------------
member of the Group has any liability or obligation of any nature (whether
liquidated, unliquidated, accrued, absolute, contingent or otherwise and whether
due or to become due) except:
(a) Those set forth in the 1996 Financial Statements which have not
been paid or discharged since the date thereof;
(b) Those arising from and after the date of this Agreement under
agreements or other commitments specifically identified in
Schedule 3.20-1; and
(c) Current liabilities (determined in accordance with generally
accepted accounting principles) incurred since January 1, 1997,
in transactions in the ordinary course of business consistent
with past practices which are properly reflected on the books and
records of each member of the Group, are or will be properly
reflected in the Interim Statements, and are not inconsistent
with the other representations, warranties and agreements of the
Dr. Wilkens and the Group set forth in this Agreement.
(S)3.9 Absence of Certain Changes. Except as set forth in Schedule 3.9,
--------------------------
since December 31, 1996, there has not been:
(a) Any material adverse change in the business, operations, assets,
properties, prospects, rights or condition (financial or
otherwise) of each member of the Group, or, any occurrence,
circumstance, or combination thereof which reasonably could be
expected to result in any such material adverse change (a
"Material Adverse Effect");
(b) Any declaration, setting aside or payment of any distribution or
payment (in cash or in kind) to Dr. Wilkens or any direct or
indirect redemption, purchase or other acquisition by any member
of the Group of any of its capital stock or other securities or
any rights or agreements to purchase or acquire any of its
capital or stock or other securities;
(c) Any increase in amounts payable by any member of the Group to or
for the benefit of, or committed to be paid by any member of the
Group to or for the benefit of Dr. Wilkens, or any other
consultant, agent or employee of any member of the Group, or any
relatives of any such person, or any increase in any benefits
granted under any bonus, profit-sharing, pension, retirement,
deferred compensation, insurance, or other direct or indirect
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<PAGE>
benefit plan, payment or arrangement made to, with or for the
benefit of any such person, excepting only (i) reimbursement, in
the ordinary course of business consistent with past practices,
of out-of-pocket expenses incurred by employees of any member of
the Group directly in connection with the business of the Group,
and (ii) compensation or dividend payments to Dr. Wilkens in
amounts consistent with past practices;
(d) Any transaction entered into or carried out by any member of the
Group other than in the ordinary and usual course of its
business;
(e) Any borrowing or agreement to borrow funds by any member of the
Group, any incurring by any member of the Group of any other
obligation or liability (contingent or otherwise), except current
liabilities incurred in the usual and ordinary course of business
(consistent with past practices), or any endorsement, assumption
or guarantee of payment or performance of any loan or obligation
of any other individual, firm, corporation or other entity by any
member of the Group;
(f) Any material change in the method of doing business of any member
of the Group or any change in its accounting principles or
practices or its method of application of such principles or
practices;
(g) Any mortgage, pledge, lien, security interest, hypothecation,
charge or other encumbrance imposed or agreed to be imposed on or
with respect to the property or assets of any member of the
Group;
(h) Any sale, lease or other disposition of, or any agreement to
sell, lease or otherwise dispose of any of the properties or
assets of any member of the Group, other than in accordance with
the past practices of any member of the Group;
(i) Any purchase of or any agreement to purchase assets (other than
inventory purchased in the ordinary course of business consistent
with past practices) for an amount in excess of $10,000 for any
one purchase or $25,000 for all such purchases made by any member
of the Group or any lease or any agreement to lease, as lessee,
any capital assets with payments over the term thereof to be made
by any member of the Group exceeding an aggregate of $10,000;
(j) Any loan or advance made by any member of the Group to any
individual, firm, corporation or other entity;
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(k) Any modification, waiver, change, amendment, release, rescission
or termination of, or accord and satisfaction with respect to,
any material term, condition or provision of any contract,
agreement, license or other instrument to which any member of the
Group is a party, other than any satisfaction by performance in
accordance with the terms thereof in the usual and ordinary
course of business;
(l) Any labor dispute or disturbance adversely affecting the business
operations or condition (financial or otherwise) of any member of
the Group, including without limitation the filing of any
petition or charge of unfair labor practice with any governmental
or regulatory authority, efforts to effect a union representation
election, actual or threatened employee strike, work stoppage or
slow down; or
(m) Any disciplinary or other similar action, proceeding, or
investigation taken by the Wisconsin Dental Examining Board or
other governmental or accrediting board, agency, or authority
against or with respect to any member of the Group, Dr. Wilkens,
or any employee or Dr. Wilkens' knowledge, independent contractor
of any member of the Group.
(S)3.10 Taxes.
-----
(a) Each member of the Group has duly, properly, and timely filed all
federal, state, local and foreign tax returns and tax reports
required to be filed by it, all such returns and reports are
true, correct and complete, none of such returns and reports have
been amended, and any and all taxes, assessments, fees and other
governmental charges due from any member of the Group, including
without limitation those arising under such returns and reports,
have been fully paid or are fully accrued as liabilities in the
1996 Financial Statements or the Interim Statements and will be
timely paid. No claim has been made by authorities in any
jurisdiction where any member of the Group did not file tax
returns that it is or may be subject to taxation or to reporting
therein.
(b) Each member of the Group has delivered to ADP copies of all
federal, state, local, and foreign income tax returns filed with
respect to each member of the Group for taxable periods ended on
or after December 31, 1993. Schedule 3.10-1 sets forth the dates
and results of any and all audits conducted by taxing authorities
against each member of the Group or Dr. Wilkens within the last
five years or otherwise with respect to any tax year for which
assessment is not barred by any applicable statute of
limitations. No waivers of any applicable statute of limitations
for the filing of any tax returns or payment of any taxes or
assessments of any deficient or unpaid
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<PAGE>
taxes are outstanding. Except as set forth in Schedule 3.10-1,
all deficiencies resulting from any audits have been paid or
settled. There are no pending or threatened federal, state, local
or foreign tax audits or assessments affecting any member of the
Group or Dr. Wilkens and no agreement with any federal, state,
local or foreign taxing authority that may affect the subsequent
tax liabilities of any member of the Group or Dr. Wilkens.
(c) No member of the Group is on the date of this Agreement, nor will
it be as of the Closing, liable for taxes, assessments, fees or
governmental charges for which such member has not made adequate
provision, including setting aside a sufficient reserve to cover
that potential liability in full in its 1996 Financial Statements
or the Interim Statements.
(d) There exists no tax-sharing agreement or arrangement pursuant to
which any member of the Group is obligated to pay the tax
liability of Dr. Wilkens or any other person or entity, or to
indemnify any other person or entity with respect to any tax.
(e) Schedule 3.10-2 includes a list of all states, territories and
jurisdictions to which any tax is properly payable by each member
of the Group or in which a tax report must be filed.
(S)3.11 Compliance with Law. Each member of the Group has complied and is
-------------------
in compliance in all material respects with all applicable laws, statutes,
orders, rules, regulations, policies and guidelines promulgated, and all
judgments, decisions and orders entered, by any federal, state, local or foreign
court or governmental authority, agency, or instrumentality relating to such
member, or its business or properties, including without limitation all zoning,
fire, safety, building, asbestos laws, ordinances, regulations and requirements,
Environmental Laws (defined below), Governmental Reimbursement Laws (defined in
(S)3.27), Title VII of the Civil Rights Act of 1964, as amended, the Fair Labor
Standards Act, as amended, the Occupational Safety and Health Act of 1970, as
amended, the Americans with Disabilities Act of 1990, all applicable federal,
state and local laws, rules and regulations relating to employment, and all
applicable laws, rules and regulations governing payment of minimum wages and
overtime rates, and the withholding and payment of taxes from compensation of
employees; all laws, rules, and regulations relating to the licensing or
credentialing of dentists, endodontists, periodontists, prosthodontists,
pediatric dentists, orthodontists, oral surgeons, certified registered dental
assistants, hygienists, and other dental care professionals involved with the
business of such members of the Group; all federal or state laws and regulations
relating to fraud and abuse; and all related laws, ordinances, regulations and
requirements (collectively, the "Applicable Laws"). Except as set forth in
Schedule 3.11-1, no member of the Group has been charged with or given notice of
any violation of any of the Applicable Laws which violation has not been
remedied in full (without any remaining liability of any member of the Group).
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<PAGE>
Schedule 3.11-2 includes a list of all franchises, licenses, permits,
consents, authorizations, approvals and certificates necessary for each member
of the Group to carry on its business as presently conducted (collectively, the
"Permits"), each of which currently is owned by such member and is valid and in
full force and effect. Except as set forth in Schedule 3.11-3, no member of the
Group is in violation of any of the Permits, and there are no pending or
threatened proceedings which could result in the revocation, cancellation or
inability of any member of the Group to renew any Permit.
Except as set forth on Schedule 3.11-3, (i) no member of the Group has ever
disposed of, or contracted for the disposal of, hazardous wastes, hazardous
substances, infectious or medical waste, radioactive waste or sewage sludge, and
(ii) to the best of Dr. Wilkens' knowledge, no such wastes, substances, or
sludge generated by any member of the Group have finally come to be located on
any site which is or has been (including as a potential or suspect site)
included in any published federal, state, or local "superfund" or other list of
hazardous or toxic waste sites.
For purposes of this Agreement, "Environmental Laws" shall mean all
federal, state, and local environmental laws, statutes, ordinances, and codes
relating to the protection of public health or the environment (including
without limitation any water, land, subsurface, air, fish, wildlife, and other
natural resources) or governing the use, storage, treatment, generation,
transportation, processing, handling, management, production, or disposal of
solid wastes, medical wastes, toxic substances, hazardous wastes, hazardous
substances, petroleum, petroleum-based products, radio-nuclides, or other
radioactive materials and the rules, regulations, policies, guidelines,
interpretations, decisions, orders, and directives of federal, state, and local
government agencies and authorities with respect thereto.
(S)3.12 Proprietary Rights. Schedule 3.12-1 sets forth:
------------------
(a) All material names, patents, inventions, trade secrets, patient
lists, proprietary rights, computer software, trademarks, trade
names, service marks, logos, copyrights and franchises, and all
applications therefor, registrations thereof and licenses,
sublicenses or agreements in respect thereof which any member of
the Group owns or has the right to use or to which such member is
a party; and
(b) All filings, registrations or issuances of any of the foregoing
with or by any federal, state, local or foreign regulatory,
administrative or governmental office or offices (all items in
(a) and (b) of this section being sometimes hereinafter referred
to collectively as the "Proprietary Rights").
By agreement of the parties, the term "Proprietary Rights" does not include
the name, or any rights in the name "Terrance R. Wilkens, D.D.S., S.C."
Except as set forth in Schedule 3.12-2, each member of the Group is the
sole and exclusive owner of all right, title and interest in and to all of its
respective Proprietary Rights free and clear
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<PAGE>
of all liens, claims, charges, equities, rights of use, encumbrances and
restrictions whatsoever, and there is no pending or threatened investigation,
proceeding, inquiry or other review by any federal, state, local or foreign
regulatory, administrative or governmental office or offices with respect to
right, title or interest in any Proprietary Right of any member of the Group.
Other than those Proprietary Rights listed in Schedule 3.12-1, no name,
patent, invention, trade secret, patient list, proprietary right, computer
software, trademark, trade name, service mark, logo, copyright, franchise,
license, sublicense, or other such right is necessary for the operation of the
business of the Group in substantially the same manner as such business is
presently conducted. No business of any member of the Group has been or is now
being conducted in contravention of any trademark, copyright or other
proprietary right of any third party.
Except as set forth in Schedule 3.12-3, none of the Proprietary Rights:
(i) has been hypothecated, sold, assigned or licensed by any member of the
Group, or any other person, corporation, firm or other entity; (ii) infringe
upon or violate the rights of any person, firm, corporation, or other entity;
(iii) are subject to challenge, claims of infringement, unfair competition or
other claims; or (iv) to the best of Dr. Wilkens' knowledge, are being infringed
upon or violated by any person, firm, corporation or other entity.
Except as set forth in Schedule 3.12-4: (A) No member of the Group has
given, directly or indirectly, any indemnification against patent, trademark or
copyright infringement as to any equipment, materials, products, services or
supplies which such member uses, licenses or sells; (B) no product, process,
method or operation presently sold, engaged in or employed by any member of the
Group infringes upon any rights owned by any other person, firm, corporation or
other entity; and (C) there is no pending or threatened claim or litigation
against any member of the Group contesting the right of such member to sell,
engage in or employ any such product, process, method, or operation.
Except as set forth in Schedule 3.12-5, each member of the Group has
exclusive rights to own, use and license others to use the computer software
used by such member (the "Software"). Schedule 3.12-1 lists and briefly
describes, and Dr. Wilkens has provided to ADP true, correct and complete copies
of, all material licenses, agreements, documents and other materials relating to
the Software and to the rights of the Group herein. No member of the Group has
licensed or otherwise authorized any other person to use or make use of all or
any part of the Software, nor has any member of the Group granted, assigned or
otherwise conveyed any right in or to the Software.
(S)3.13 Restrictive Documents or Laws. With the exception of the matters
-----------------------------
listed in Schedule 3.13, no member of the Group nor Dr. Wilkens is a party to or
bound under any mortgage, lien, lease, agreement, contract, instrument, law,
order, judgment or decree, or any similar restriction not of general
application, which materially and adversely affects, or reasonably could be
expected to so affect: (a) the condition of any member of the Group (financial
or
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<PAGE>
otherwise) or its assets; (b) the continued operation of the assets of any
member of the Group after the Closing on substantially the same basis as such
assets are currently operated; or (c) the consummation of the transactions
contemplated by this Agreement.
(S)3.14 Insurance. Each member of the Group has been and is insured with
---------
respect to its property and the conduct of its business in such amounts and
against such risks as are sufficient for compliance with Applicable Laws and as
are adequate to protect the properties and businesses of such member in
accordance with normal industry practice. Such insurance is and has been
provided by insurers unaffiliated with the Group, which insurers are, to the
best of Dr. Wilkens' knowledge, financially sound and reputable. Set forth in
Schedule 3.14 is a true, correct and complete list of all insurance policies and
bonds, if any, in force for which any member of the Group is named as an insured
party, or for which any member of the Group has paid any premiums, and such
lists correctly state the name of the insurer, the name of each insured party,
the type and amount of coverage, deductible amounts, if any, the expiration date
and the premium amount of each such policy or bond. Except as disclosed in
Schedule 3.14, all such policies or bonds are currently in full force and effect
and no notice of cancellation or termination has been received by any member of
the Group with respect to any such policy or bond. Each member of the Group
will continue all such policies and bonds in full force and effect through the
Closing. All premiums due and payable on such policies and bonds have been
paid. Except as disclosed in Schedule 3.14, no member of the Group is a co-
insurer under any term of any insurance policy.
(S)3.15 Bank Accounts, Depositories; Powers of Attorney. Set forth in
-----------------------------------------------
Schedule 3.15 is a true, correct and complete list of the names and locations of
all banks or other depositories in which each member of the Group has accounts
or safe deposit boxes, and the names of the persons authorized to draw thereon,
borrow therefrom or have access thereto. Except as set forth in such Schedule
3.15, no person or entity has a power of attorney from any member of the Group.
(S)3.16 Title to and Condition of Properties. Except as set forth in
------------------------------------
Schedule 3.16-1, each member of the Group has good, valid and marketable title
to all of its assets of every kind, nature and description, tangible or
intangible, wherever located, which constitute all of the property now used in
and necessary for the conduct of its business as presently conducted (including
without limitation all assets shown or reflected on the 1996 Financial
Statements). Except as set forth in Schedule 3.16-2, all such assets are owned
free and clear of all mortgages, pledges, liens, security interests,
encumbrances and restrictions of any nature whatsoever, including without
limitation: (a) rights or claims of parties in possession; (b) easements or
claims of easements; (c) encroachments, overlaps, boundary line or water
drainage disputes or any other matters; (d) any lien or right to a lien for
services, labor or material furnished; (e) special tax or other assessments; (f)
options to purchase, leases, tenancies, or land contracts; (g) contracts,
covenants, or reservations which restrict the use of such properties and (h)
violations of Environmental Laws and zoning, fire safety, building, and other
laws, ordinances and regulations applicable to such properties. The current
uses of all such are in compliance with all federal, state, local or other
governmental building, zoning, health, safety, platting, subdivision or other
law, ordinance or regulation, or any applicable private restriction, and such
uses are legal conforming uses. Except
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as set forth in Schedule 3.16-3, no financing statement under the Uniform
Commercial Code or similar law naming any member of the Group as debtor has been
filed in any jurisdiction, and any member of the Group is a party to or bound
under any agreement or legal obligation authorizing any party to file any such
financing statement. Schedule 3.16-4 contains a complete and accurate legal
description of all of the real property owned or leased by each member of the
Group (organized by category). No member of the Group owns or leases any other
real property.
Except as set forth in Schedule 3.16-5, all real property and structures
and all machinery, equipment, and other tangible personal property owned, leased
or used by each member of the Group which are material to the operation of its
business, are suitable for the purpose or purposes for which they are being used
(including full compliance with all Applicable Laws relating to such use), and
are in good condition and repair. To the best of Dr. Wilkens' knowledge, there
are no material structural defects in the exterior walls or the interior bearing
walls, the foundation or the roof of any building or other such structure owned
or used by any member of the Group, and the electrical, plumbing, heating
systems, and air conditioning systems of all such structures are in good
operating condition. No hazardous waste or toxic material has been disposed of
or discharged on, leaked from, or has otherwise contaminated any real property
owned, leased or used by any member of the Group. No hazardous waste or toxic
material is stored upon or in any real property owned, leased, or used by any
member of the Group (including without limitation any underground storage
tanks). No member of the Group has received any notice of non-compliance or
violations or threatened non-compliance or violations of any Environmental Laws
relating to any real property owned, leased or used by any member of the Group.
Neither any member of the Group nor Dr. Wilkens has caused or permitted, and to
the best of their knowledge no other party has caused or permitted, any
hazardous waste or toxic material to be disposed of or discharged or leaked
from, or otherwise contaminate any real property owned, leased or used by any
member of the Group. To the best of Dr. Wilkens' knowledge, the utilities
servicing the real properties owned or used by each member of the Group are
adequate to permit the continued operation of the business of such member, and
there are no pending or threatened zoning, condemnation or eminent domain
proceedings, building, utility or other moratoria, or injunctions or court
orders which would materially affect such continued operation.
(S)3.17 Brokers, Finders. The transactions contemplated by this Agreement
----------------
were not submitted to either any member of the Group or Dr. Wilkens by any
broker or other person entitled to a commission, finder's fee or like payment
thereon, and were not, with the consent of either any member of the Group or Dr.
Wilkens, submitted to ADP by any broker or other person, and none of the actions
of either any member of the Group or Dr. Wilkens has given rise to any claim by
any person for a commission, finder's fee or like payment against any of the
Parties.
(S)3.18 Legal Proceedings, etc. Except as listed and described in Schedule
-----------------------
3.18, there are no (and over the last five years there have been no) claims,
proceedings, suits or investigations pending or threatened against or relating
to any member of the Group (or Dr. Wilkens, or any of the employees or
independent contractors of any member of the Group in connection with the
business or affairs of such member), by or before any federal, state, local or
foreign court or
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<PAGE>
governmental body, agency, or authority. There are no such claims, proceedings,
suits or investigations pending or threatened for the purpose of enjoining or
preventing the consummation of the Asset Purchase or any other transaction
contemplated by this Agreement or otherwise challenging the validity or
propriety of the transactions contemplated by this Agreement. Except as
disclosed in Schedule 3.18, neither any member of the Group nor Dr. Wilkens is
subject to any judgment, order or decree, or any governmental restriction
applicable to any member of the Group, which has a reasonable probability of
having a Material Adverse Effect, or which may materially adversely affect the
ability of any member of the Group to acquire any property or conduct business
as is currently being conducted. Except as listed and described in Schedule
3.18, to the best of Dr. Wilkens' knowledge, there are no facts, circumstances,
or occurrences which may give rise to any claims, proceedings, or suits against
any member of the Group or Dr. Wilkens or any of the employees or independent
contractors of any member of the Group.
(S)3.19 ERISA.
-----
(a) Schedule 3.19 identifies each "employee benefit plan," as defined
in Section 3(3) of the Employee Retirement Income Security Act of
1974 ("ERISA") which (i) is subject to any provision of ERISA and
(ii) is or was at any time during the last five years maintained,
administered or contributed to by any member of the Group or any
affiliate (as defined below) and covers Dr. Wilkens, any employee
or former employee of any member of the Group or any affiliate or
under which such member or any affiliate has any liability.
Copies of such plans (and, if applicable, related trust
agreements) and all amendments thereto and written
interpretations thereof have been furnished to ADP together with
the three most recent annual reports (Form 5500) prepared in
connection with any such plan. Such plans are referred to
collectively herein as the "Employee Plans." For purposes of this
section, "affiliate" of any person or entity means any other
person or entity which, together with such person or entity,
would be treated as a single employer under Section 414 of the
Code or is an "affiliate," whether or not incorporated, as
defined in Section 407(d)(7) of ERISA of such person or entity.
The only Employee Plans which individually or collectively would
constitute an "employee pension benefit plan" as defined in
Section 3(2) of ERISA (the "Pension Plans") are identified as on
Schedule 3.19.
(b) No Employee Plan constitutes a "multiemployer plan," as defined
in Section 3(37) of ERISA, or a "defined benefit plan," as
defined in Section 3(35) and subject to Title IV of ERISA, and no
Employee Plan is maintained in connection with any trust
described in Section 501(c)(9) of the Code. No "accumulated
funding deficiency," as defined in Section 412 of the Code, has
been incurred with respect to any Pension Plan, whether or not
waived. Full payment has been made of all amounts which any
member of the Group or any affiliate is required to have paid as
contributions to or
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<PAGE>
benefits under any Employee Plan as of the end of the most recent
calendar year thereof and there are no unfunded obligations under
any Employee Plan that have not been disclosed to ADP in writing
prior to the Closing. Neither any member of the Group nor Dr.
Wilkens knows of any "reportable event," within the meaning of
Section 4043 of ERISA, and no event described in Section 4041,
4042, 4062 or 4063 of ERISA has occurred in connection with any
Employee Plan. No condition exists and no event has occurred that
could constitute grounds for termination of any Retirement Plan,
and no member of the Group nor any of its affiliates has incurred
any material liability under Title IV of ERISA arising in
connection with the termination of, or complete or partial
withdrawal from, any plan covered or previously covered by Title
IV of ERISA. Nothing done or omitted to be done and no
transaction or holding of any asset under or in connection with
any Employee Plan has or will make either any member of the Group
or Dr. Wilkens, subject to any liability under Title I of ERISA
or liable for any tax pursuant to Section 4975 of the Code. There
is no pending or threatened litigation, arbitration, disputed
claim, adjudication, audit, examination or other proceeding with
respect to any Employee Plan or any fiduciary or administrator
thereof in their capacities as such.
(c) Each Employee Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so
qualified during the period from its adoption to date, and each
trust forming a part thereof is exempt from tax pursuant to
Section 501(a) of the Code. Dr. Wilkens has furnished to ADP
copies of the most recent Internal Revenue Service determination
letters with respect to each such Employee Plan. Each Employee
Plan has been maintained, from the time of such Plan's inception
up to and including the performance of any or all transactions
contemplated in this Agreement, in compliance with its terms and
the requirements and fiduciary standards prescribed by any and
all statutes, orders, rules and regulations, including but not
limited to ERISA and the Code, which are applicable to such
Employee Plan.
(d) There is no contract, agreement, plan or arrangement covering Dr.
Wilkens, any employee or former employee of any member of the
Group or any affiliate that, individually or collectively, could
give rise to the payment of any amount that would not be
deductible pursuant to the terms of the Code.
(e) Schedule 3.19 identifies each employment, severance or other
similar contract, arrangement or policy and each plan or
arrangement (written or oral) providing for insurance coverage
(including any self-insured
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arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement
benefits or for deferred compensation, profit-sharing, bonuses,
stock options, stock appreciation or other forms of incentive
compensation or post-retirement insurance, compensation or
benefits which (i) is not an Employee Plan, (ii) is entered into,
maintained or contributed to, as the case may be, by any member
of the Group or any of its affiliates, and (iii) covers any
employee or former employee, Dr. Wilkens or any former
shareholder of any member of the Group or any of its affiliates.
Such contracts, plans and arrangements as are described above,
copies or descriptions of all of which have been furnished
previously to ADP, are referred to collectively herein as the
"Benefit Arrangements." Each Benefit Arrangement has been
maintained in substantial compliance with its terms and with
requirements prescribed by any and all statutes, orders, rules
and regulations that are applicable to such Benefit Arrangement.
(f) Except as set forth in Schedule 3.19, there is no liability in
respect of post-retirement health and medical benefits for
retired employees of any member of the Group or any of its
affiliates, determined using assumptions that are reasonable in
the aggregate, over the fair market value of any fund, reserve or
other assets segregated for the purpose of satisfying such
liability (including for such purposes any fund established
pursuant to Section 401(h) of the Code). Each member of the
Group has reserved its right to amend or terminate any Employee
Plan or Benefit Arrangement providing health or medical benefits
in respect of Dr. Wilkens or other active employee of such member
under the terms of any such plan and descriptions thereof given
to employees. With respect to any of the Employee Plans of any
member of the Group which are "group health plans" under Section
4980B of the Code and Section 607(1) of ERISA, there has been
timely compliance in all material respects with all requirements
imposed thereunder so that such member and its affiliates have no
(and will not incur any) loss, assessment, tax penalty, or other
sanction with respect to any such plan.
(g) Except as set forth in Schedule 3.19, there has been no amendment
to, written interpretation or announcement (whether or not
written) by any member of the Group or any of its affiliates
relating to, or change in employee participation or coverage
under, any Employee Plan or Benefit Arrangement which would
increase the expense of maintaining such Employee Plan or Benefit
Arrangement above the level of the expense incurred in respect
thereof for the calendar year ended immediately prior to the
Closing.
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<PAGE>
(h) Except as set forth in Schedule 3.19, no member of the Group is a
party or subject to any union contract or any employment contract
or arrangement providing for annual future compensation to Dr.
Wilkens or any employee or independent contractor of such member.
(i) The execution and consummation of the transactions contemplated
by this Agreement will not constitute a triggering event under
any Employee Plan, whether or not legally enforceable, which
(either alone or upon the occurrence of any additional or
subsequent event) will or may result in any payment (of severance
pay or otherwise), acceleration, increase in vesting, or increase
in benefits to any current or former participant, employee or
director of any member of the Group that has not been
specifically disclosed on Schedule 3.19 or which is not material
to the financial condition or business of such member.
(j) Any reference to ERISA or the Code or any section thereof shall
be construed to include all amendments thereto and applicable
regulations and administrative rulings issued thereunder.
(S)3.20 Contracts. Schedule 3.20-1 lists and briefly describes all
---------
contracts, purchase orders, agreements, leases, executory commitments,
arrangements and understandings (written or oral) to which any member of the
Group is a party (a) which, including all amendments and supplements thereto,
are material to the condition, operations, assets or business of such member,
(b) which (i) involve payments or commitments in excess of $10,000 (in the
aggregate) for any purchase order or $10,000 (in the aggregate) for any other
contract, agreement, lease, commitment, arrangement, or understanding, or (ii)
extend beyond one year (or both), unless cancelable on 60 or fewer days' notice
without any liability, penalty or premium, (c) are with any present or former
shareholder, employee, agent or independent contractor of such member, or any
person related by blood or marriage to any such person or any person or entity
controlling, controlled by or under common control with any such person not
terminable at will, (d) which provide for a discount from the standard fee
schedules of such member, (e) which provide for the future purchase by such
member of any materials, equipment, services or supplies, which continue for a
period of more than 12 months (including periods covered by any option to renew
by either party) or which provide for a price materially in excess of current
market prices or is in excess of normal operating requirements over its
remaining term, or (f) which involve any of the following: (i) any borrowings
or guarantees; (ii) any contracts containing covenants purporting to limit the
freedom of such member to compete in any line of business or provide any of its
services in any geographic area; (iii) any obligation or commitment which limits
the freedom of such member to sell, lease, license or otherwise provide its
services; (iv) any contract or agreement the performance of which can reasonably
be expected to result in a loss to such member; or (v) any obligation or
commitment providing for indemnification or responsibility for the obligations
or losses of any person. All of such contracts, agreements, leases,
commitments, and other arrangements and understandings are valid and binding, in
full force and effect and
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<PAGE>
enforceable in accordance with their respective provisions. No member of the
Group is in violation of or in default in respect of nor has there occurred an
event or condition which, with the passage of time or giving of notice (or both)
would constitute a default of any such contract, agreement, lease, commitment,
arrangement or understanding.
Except as set forth in Schedule 3.20-2, no member of the Group has received
any notice from any third party payor, patient, or supplier to the effect that
such third party payor, patient, or supplier will terminate its relationship or
unilaterally modify any terms of that relationship, where applicable, with such
member as a result of any transaction contemplated by this Agreement or
otherwise.
Attached to Schedule 3.20-3 is a correct and complete copy of the fee
schedule which is currently in effect under each agreement with a third party
payor to which any member of the Group is a party.
Also attached to Schedule 3.20-4 is a correct and complete list of all
dentists employed or retained by each member of the Group.
The various agreements with Blue Cross and Blue Shield United of Wisconsin
listed on Schedule 3.20-5, in the aggregate for the Group as a whole, constitute
the 10 largest third-party payor agreements in terms of revenue generation for
the Group for the last 12 months ended April 30, 1997, for the performance of,
and reimbursement for, dental services for: (i) fees for service insurance; (ii)
PPO plans; and (iii) DHMO Capitated Plans. Additionally, Schedule 3.20-6 shows,
with respect to the Blue Cross and Blue Shield United of Wisconsin Agreements,
the largest employers in terms of revenue generation for the Group for the last
12 months ended June 30, 1997, along with the total percentage of revenue each
employer represents.
(S)3.21 Accounts Receivable. Dr. Wilkens has caused each member of the
-------------------
Group to deliver to ADP a correct and complete list of the accounts receivable
and notes receivable as of March 31, 1997 for each member of the Group. Except
as set forth in Schedule 3.21-1, all accounts and notes receivable of the Group
as of such date, and any accounts and notes receivable arising between such date
and the Closing, are or will be collectible in full, and are or will be valid
and subsisting and represent or will represent sales actually made or services
actually provided in the ordinary and usual course of business of the Group
consistent with past practices.
Since June 30, 1997, there have been no accounts receivable of any member
of the Group converted to notes receivable or otherwise extended, except as
listed in Schedule 3.21-2, and from the date of this Agreement through the
Closing, no accounts receivable of any member of the Group will be converted to
notes receivable, written off or otherwise extended without the prior written
consent of ADP.
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<PAGE>
Schedule 3.21-3 includes a list of all amounts payable to any member of the
Group by any Affiliate of any member of the Group (the "Related Party
Receivables") and all amounts payable by such member to any Affiliate of such
member (the "Related Party Payables") as of June 30, 1997, specifying the payor,
payee, and amount of each Related Party Receivable and Related Party Payable.
For purposes of this Agreement, other than for (S)3.19, above, an "Affiliate" of
such member shall mean any shareholder, employee, representative, independent
contractor or other agent of such member, any person related by blood or
marriage to any such person, or any person or entity, which, directly or
indirectly, controls, is controlled by, or is under common control with such
member or any such other person or entity.
(S)3.22 No Conflict or Default. Except for the consents described in
----------------------
Schedule 3.22, all of which shall be obtained prior to the Closing (unless
otherwise expressly agreed by ADP in writing), neither the execution and
delivery of this Agreement by the Group and Dr. Wilkens, nor compliance by the
Group and Dr. Wilkens with the terms and provisions of this Agreement, including
without limitation the consummation of the transactions contemplated by this
Agreement, will violate in any manner any Applicable Laws or Permits or conflict
with or result in the breach of any term, condition or provision of the articles
of incorporation, by-laws, or other organizational documents of the Group or of
any agreement, deed, contract, undertaking, mortgage, indenture, writ, order,
decree, restriction, legal obligation or instrument to which any member of the
Group or Dr. Wilkens is a party or by which such member or Dr. Wilkens or any of
their respective assets are or may be bound or affected, or constitute a default
(or an event which, with the giving of notice, the passage of time, or
otherwise, would constitute a default) thereunder, or result in the creation or
imposition of any lien, security interest, charge or encumbrance, or restriction
of any nature whatsoever with respect to any assets of such member, or give to
others any interest or rights, including rights of termination, acceleration or
cancellation in or with respect to any of the assets, contracts or business of
such member.
(S)3.23 Books of Account; Records. The general ledgers, corporate record
-------------------------
book and other records relating to the material assets, contracts and
outstanding legal obligations of each member of the Group are, in all material
respects, complete and correct, and have been maintained in accordance with good
business practices, and the matters contained therein are appropriate and
accurately reflected in the 1996 Financial Statements and the Interim
Statements.
(S)3.24 Compensation. Schedule 3.24 sets forth the total salary, bonus,
------------
other corporate fringe benefits, perquisites, dividends and distributions
allocated to or paid to Dr. Wilkens during or with respect to calendar year
ended December 31, 1996, and any changes to the foregoing which have occurred
subsequent to December 31, 1996. Schedule 3.24 also lists and describes the
current compensation of all employees of each member of the Group (other than
Dr. Wilkens) whose total current salary and bonus exceeds $35,000 annually and
any consultant, advisor, or independent contractor whose compensation exceeds
$5,000 annually. No changes will be made by any member of the Group in the
amount or kind of any compensation being paid or provided to any individual
listed in Schedule 3.24 from the amounts and kinds of compensation described
therein prior to the Closing without ADP's prior written consent, provided that
such member may
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<PAGE>
make compensation or dividend payments to Dr. Wilkens in a manner consistent
with prior practices. Except as disclosed in Schedule 3.24, there are no other
forms of compensation paid to Dr. Wilkens or other employees or independent
contractors of any member of the Group. Except as disclosed in Schedule 3.24,
the provisions for wages and salaries accrued in the 1996 Financial Statements
are, and such provisions accrued on the Interim Statements will be, adequate for
wages and salaries and other compensation to its employees, including without
limitation vacation pay, sick pay, accrued compensation to any dentist, and all
commissions and other fees payable to agents, salesmen, independent contractors,
and representatives of each member of the Group. Except as set forth in Schedule
3.24, no member of the Group has become obligated, directly or indirectly, to
Dr. Wilkens or any of the other employees or independent contractors of such
member or any person related to such person by blood or marriage, except for
current liability for such compensation. Except as set forth in Schedule 3.24,
neither Dr. Wilkens nor any other employees or independent contractors of any
member of the Group or any person related to such person by blood or marriage
holds any position or office with or has any material financial interest, direct
or indirect, in any supplier, customer or account of, or other outside business
which has material transactions with, any member of the Group. No member of the
Group has any agreement or understanding with any of the employees,
representatives or independent contractors of any member of the Group which
would influence any such person not to become associated with ADP or American
from and after the Closing or from serving ADP or American after the Closing in
a capacity similar to the capacity presently served. Except as set forth in
Schedule 3.24, to the best knowledge of Dr. Wilkens, no employee of such member
has a present intention to leave the employ of such member or has taken any
action indicative of leaving the employ of any member of the Group.
(S)3.25 Labor Relations. Except as set forth in Schedule 3.25, no
---------------
employees of any member of the Group are represented by any labor union or
covered under any collective bargaining agreement, and there is no unfair labor
practice complaint against any member of the Group pending before the National
Labor Relations Board. There is no labor strike, dispute, slowdown or stoppage,
or any union organizing campaign, actually pending or threatened against or
involving any member of the Group. No labor grievance has been filed with any
member of the Group and no arbitration proceeding, which has had or may have
such an effect has arisen out of or under a collective bargaining or other labor
agreement and is pending and no claim therefor has been asserted. No collective
bargaining or other labor agreement is currently being negotiated by any member
of the Group and no union or collective bargaining unit represents employees of
any member of the Group. No member of the Group has experienced any work
stoppage or other material labor difficulty during the past five years.
(S)3.26 Suppliers and Third Party Payors. Except as set forth in Schedule
--------------------------------
3.26, no supplier of products or services to any member of the Group has
indicated that it shall stop, or decrease the rate of, or substantially increase
its fees for, supplying products or services to such member either prior to, or
following the consummation of, any of the transactions contemplated by this
Agreement. Schedule 3.26 sets forth (a) a list of all third party payors who
have terminated their relationships with any member of the Group since December
31, 1996, or have
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<PAGE>
notified any member of the Group or Dr. Wilkens since December 31, 1996, that
they intend to terminate their relationships with any member of the Group, and
(b) the gross receipts received from such third party payors for the 12-month
period ending on December 31, 1996. Except as set forth in Schedule 3.26,
neither any member of the Group nor Dr. Wilkens knows of any loss of a
relationship with any third party payor that alone or in the aggregate comprises
more than 1% of calendar 1996 actual revenues of any member of the Group as
shown in the 1996 Financial Statements that has indicated that it is considering
or plans to discontinue using any member of the Group as its provider of dental
services as a result of any of the transactions contemplated by this Agreement.
(S)3.27 Medicare and Medicaid. Except as set forth in Schedule 3.27,
---------------------
neither any member of the Group nor Dr. Wilkens, nor any other dentist or other
dental care professional employed or retained by any member of the Group is a
provider of dental services through Medicare, Medicaid, or any other
governmental health care reimbursement program (collectively, the "Governmental
Programs"), nor has or does any member of the Group or any such dentist or other
dental care professional received or expect to receive any reimbursement under
any such Governmental Programs. Neither any member of the Group nor Dr.
Wilkens, nor any employee, to the best of Dr. Wilkens' knowledge, independent
contractor or other agent of any member of the Group has violated any law,
statute, rule, regulation, or order under or relating to any Governmental
Program, including without limitation those relating to fraud and abuse (the
"Governmental Reimbursement Laws").
(S)3.28 Investment Intent. Dr. Wilkens is a resident of the State of
-----------------
Wisconsin. Dr. Wilkens is an "accredited investor," as that term is defined in
Regulation D promulgated under the Securities Act and: (a) by reason of his
business and financial experience, and the business and financial experience of
those persons advising him with respect to his investment in the Note, has,
together with such advisors, such knowledge, sophistication, and experience in
business and financial matters so as to be able to evaluate the merits and risks
of his prospective investment in the Note; (b) to his satisfaction, has been
provided the opportunity to ask questions and receive answers from ADP
concerning the terms and conditions of the Note, has had all such questions
answered, and has been supplied all additional information deemed necessary by
him to verify the accuracy of all information provided; (c) is acquiring the
Note for his own account for investment purposes only and without any view
towards resale or other distribution; (d) except for the representations and
warranties of ADP set forth in Article II of this Agreement, no representations
or warranties have been made to him by or on behalf of ADP in connection with
this transaction, and in making his investment in the Note, he is relying on the
results of his own independent investigation; (e) understands that an investment
in the Note is a speculative investment and has determined that he can bear the
economic risks of his investment in the Note, can afford a complete loss of such
investment, and is not relying upon any representation or warranty made by ADP,
or any officer, director, shareholder, employee, agent, or representative of ADP
regarding the value of the Note; and (f) understands that the issuance of the
Note as a result of this Agreement is intended to be exempt from registration
under the Securities Act and applicable state law and that the Note is not and
will not be registered under the Securities Act, the Securities
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<PAGE>
Exchange Act of 1934, or any state securities laws, and that there will be no
public market for the Note.
(S)3.29 Disciplinary Actions. Except as set forth in Schedule 3.29, during
--------------------
the three year period ending on July 31, 1997, there have been no disciplinary
or other similar actions, proceedings, or investigations taken by the Wisconsin
Dental Examining Board or other governmental or accrediting board, agency, or
authority against or with respect to any member of the Group, Dr. Wilkens, or
any employee, or, to the best of Dr. Wilkens' knowledge, independent contractor,
of any member of the Group or any of its affiliates.
(S)3.30 Complete Disclosure. No representation or warranty by Dr. Wilkens
-------------------
in this Agreement or the Group Schedules contains, or will contain as of the
Closing, any untrue statement of a material fact or omits, or will omit as of
the Closing, a material fact necessary to make the statements contained herein
or therein not misleading.
ARTICLE IV
COVENANTS OF THE PARTIES
(S)4.1 Mutual Covenants.
(a) General. Each Party shall use all reasonable efforts to take
-------
all actions and do all things necessary, proper or advisable
to consummate the Asset Purchase and the other transactions
contemplated by this Agreement, including without limitation
using all reasonable efforts to cause the conditions set forth
in this Article for which such Party is responsible to be
satisfied as soon as reasonably practicable and to prepare,
execute, acknowledge or verify, deliver, and file such
additional documents, and take or cause to be taken such
additional actions, as any other Party may reasonably request.
(b) Governmental Matters. Each Party shall use all reasonable
--------------------
efforts to take any action that may be necessary, proper or
advisable in connection with any notices to, filings with, and
authorizations, consents and approvals of any court,
administrative agency or commission, or other governmental
authority or instrumentality that it may be required to give,
make or obtain.
(S)4.2 Covenants of the Group and Dr. Wilkens. Each member of the Group
--------------------------------------
and Dr. Wilkens jointly and severally agree that:
(a) Delivery of Interim Statements. Dr. Wilkens shall cause the
------------------------------
Interim Statements to be delivered to ADP as soon as
reasonably practicable.
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<PAGE>
(b) Conduct of Business. Except as otherwise expressly contemplated
-------------------
by this Agreement, from the date of this Agreement until the
Closing (the "Pre-Closing Period"): (i) neither any member of
the Group nor Dr. Wilkens shall take or permit to be taken any
action or do or permit to be done anything in the conduct of the
business of any member of the Group, or otherwise, that would be
contrary to or in breach of any of the provisions of this
Agreement or which would cause any of their representations and
warranties contained in this Agreement to be or become untrue in
any material respect; (ii) each member of the Group shall conduct
its business in the ordinary course substantially in accordance
with past practices; and (iii) each member of the Group and Dr.
Wilkens shall use all reasonable efforts to preserve the business
organization of such member intact, keep available to each member
of the Group and ADP the present services of the dentists, dental
specialists and other employees and independent contractors of
each member of the Group, and preserve for ADP and American the
goodwill and all agreements with third parties with whom business
relationships exist. Without limiting the generality of the
foregoing, during the Pre-Closing Period, except as otherwise
expressly contemplated by this Agreement or with the prior
written consent of ADP, no member of the Group shall:
(i) Adopt or propose any change in its articles of
incorporation, by-laws or other organizational documents or
permit the transfer of any interest in any Group Stock;
(ii) Grant any person or entity any right from any member of the
Group or Dr. Wilkens to acquire any interest in any Group
Stock;
(iii) Merge or consolidate with any other person or entity or
acquire a material amount of assets of any other person or
entity;
(iv) Sell, lease, license, pledge, encumber, or otherwise
dispose of any assets or property other than in the
ordinary course of business substantially in accordance
with past practices;
(v) Incur, create, assume, or otherwise become liable for any
indebtedness other than indebtedness incurred substantially
in accordance with past practices (but subject in any event
to (S)4.2(g) of this Agreement);
(vi) Enter into or modify any employment, severance,
termination, or similar agreement or arrangement with, or
grant any bonuses, salary
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<PAGE>
increases, severance or termination pay to, any
consultant, employee or independent contractor of any
member of the Group;
(vii) Adopt, amend or terminate any employee benefit plan,
except in accordance with (S)3.19, above, or increase,
amend, or terminate any benefits to consultants, employees
or independent contractors of any member of the Group;
(viii) Modify in any material way or terminate any of the
contracts listed (or required to be listed) in Schedule
3.20-1 except in the ordinary course of business
consistent with past practices;
(ix) Settle any claims, litigation, or actions, whether now
pending or hereafter made or brought, unless such
settlement does not and could not have a Material Adverse
Effect on any member of the Group;
(x) Engage in any transaction, or enter into any agreement,
contract, lease, or other arrangement or understanding,
with any Affiliate of any member of the Group; or
(xi) Agree or commit to do any of the foregoing.
(c) Exclusive Rights. Neither any member of the Group nor Dr.
----------------
Wilkens, nor any of their respective Affiliates or
representatives shall, directly or indirectly, solicit (including
without limitation by way of furnishing or making available any
non-public information concerning the business, or assets of any
member of the Group) or engage in negotiations or discussions
with, disclose any of the terms of this Agreement to, accept any
offer from, furnish any information to, or otherwise cooperate,
assist or participate with any person or organization (other than
ADP and its representatives) regarding any Acquisition Proposal
(defined below), except that any person or entity making an
Acquisition Proposal may be informed of the restrictions
contained in this sentence. Dr. Wilkens shall notify ADP
promptly by telephone, and thereafter promptly confirm in
writing, if any such information is requested from, or any
Acquisition Proposal is received by, any member of the Group or
himself. For purposes of this Agreement, "Acquisition Proposal"
shall mean any offer, proposal or expression of interest received
by any member of the Group or Dr. Wilkens prior to the Closing
regarding the acquisition by purchase, merger, lease, or
otherwise of any interest in any member of the Group, any of the
business of any member of the Group, or any material assets,
customer relationships or other operations of any member of the
Group.
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<PAGE>
(d) Access to Records and Other Due Diligence. During the Pre-
-----------------------------------------
Closing Period, each member of the Group and Dr. Wilkens shall:
(i) make or cause to be made available to ADP and its
representatives, attorneys, accountants and agents, for
examination, inspection, and review, the assets of each member of
the Group and all books, contracts, agreements, commitments,
records and documents of every kind relating to the business of
each member of the Group or the Group Stock, and shall permit ADP
and its representatives, attorneys, accountants and agents to
have access to the same at all reasonable times during normal
business hours and upon reasonable notice, including without
limitation access to all tax returns filed and in preparation and
all audit and other work papers and all reports to management and
related responses; (ii) permit representatives of ADP to
interview suppliers, customers, and personnel of each member of
the Group; and (iii) permit representatives of ADP to participate
in all aspects of the preparation of the Interim Statements.
(e) Disclosures. After the date of this Agreement, neither any
-----------
member of the Group nor Dr. Wilkens shall: (i) disclose to any
person, association, firm, corporation or other entity (other
than ADP and its representatives, attorneys, accountants, and
agents or those designated in writing by ADP) in any manner,
directly or indirectly, any proprietary information or data
relevant to the business of any member of the Group, whether of a
technical or commercial nature, or (ii) use, or permit or assist,
by acquiescence or otherwise, any person, association, firm,
corporation or other entity (other than ADP and its
representatives, attorneys, accountants, and agents or those
designated in writing by ADP) to use, in any manner, directly or
indirectly, any such information or data, excepting only (A) use
of such data or information as is at the time generally known to
the public and which did not become generally known through any
breach of any provision of this section by any member of the
Group or Dr. Wilkens, and (B) disclosures of information, to
employees of any member of the Group who need to know such
information and use of such information by employees of any
member of the Group who need to use such information, in each use
only to the extent necessary for the benefit of the Group or ADP.
(f) Employee Retention. Each member of the Group and Dr. Wilkens
------------------
acknowledge that in ADP's view it is essential to the proposed
successful operation of the business of American that each member
of the Group retain substantially unimpaired its operating
organization, including without limitation retaining the current
employees of each member of the Group, except for any changes
contemplated by this Agreement. During the Pre-Closing Period,
each member of the Group and Dr. Wilkens shall endeavor
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<PAGE>
in good faith at all times to maintain good relations with all
Group employees.
(g) Affiliate Indebtedness. During the Pre-Closing Period, neither
----------------------
any member of the Group nor Dr. Wilkens shall cause or permit any
member of the Group to make any advances, loans, or extensions of
credit to any Affiliate of any member of the Group, or otherwise
increase the Related Party Receivables, if any, owed to any
member of the Group by any Affiliate of any member of the Group.
(h) Distributions. During the Pre-Closing Period, each member of the
-------------
Group shall not, and Dr. Wilkens shall not permit any member of
the Group to, declare, set aside or pay any dividend or
distribution (in cash or in kind) to Dr. Wilkens. The payment of
performance based compensation to Dr. Wilkens and employees
pursuant to policies in effect at December 31, 1996 are deemed
not to be a distribution prohibited by this paragraph (h).
(i) Subordination Agreement. At the Closing, Dr. Wilkens shall
-----------------------
execute and deliver to ADP a Subordination Agreement in the form
attached as Exhibit J to this Agreement (the "Subordination
Agreement").
(j) Patient Records; Employment Agreement. At the Closing, all of
-------------------------------------
the patient records of each member of the Group shall be
transferred to the American on terms satisfactory to ADP to the
extent permitted. Copies of such records may be retained by each
member of the Group if so desired. In addition, Dr. Wilkens
shall exercise all reasonable efforts to (1) cause such other
dentists and dental specialists currently employed or retained by
any member of the Group as may be designated by ADP to enter into
as of the Closing an Employment Agreement with American; and (2)
cause independent contractors currently under contract to any
member of the Group to enter into as of the Closing
confidentiality agreements with American the terms of which are
reasonably satisfactory to American.
(k) Notices of Certain Events. Dr. Wilkens shall promptly notify ADP
-------------------------
of:
(i) Any notice or other communication from any person or
entity alleging that the consent of such person or entity
is or may be required in connection with any of the
transactions contemplated by this Agreement;
(ii) Any notice or other communication from any governmental or
regulatory agency or authority in connection with the
transactions contemplated by this Agreement;
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<PAGE>
(iii) Any actions, suits, claims, investigations or proceedings
commenced or threatened against, relating to, involving,
or otherwise affecting Dr. Wilkens, any member of the
Group, or any of such member's assets which, if in
existence on the date of this Agreement would have been
required to have been disclosed by Dr. Wilkens pursuant to
(S)3.18 or which relate to the consummation of any of the
transactions contemplated by this Agreement; and
(iv) Any circumstances or events which, if in existence on the
date of this Agreement, would make any representation or
warranty of any member of the Group or of Dr. Wilkens
incorrect or incomplete in any material respect.
(l) Representations and Warranties. At the Closing, Dr. Wilkens
------------------------------
shall deliver to ADP a certificate, in form and content
reasonably satisfactory to ADP, confirming that the
representations and warranties set forth in Article III of this
Agreement are correct and complete in all material respects. In
addition, Dr. Wilkens shall make such additional representations
and warranties as may be reasonably requested by ADP to confirm
the exemptions from registration under the Securities Act and
applicable state securities laws which ADP is relying upon with
respect to issuance of the Note.
(m) Noncompetition. For a period of five (5) years from the
--------------
Effective Date, Dr. Wilkens shall not, directly or indirectly
(whether individually or as a shareholder, partner, member,
director, officer, employee, consultant, creditor, or agent of
any person, association, or other entity):
(i) Enter into, engage in, or promote or assist (financially or
otherwise), directly or indirectly, any business which
provides management, consulting or other similar services of
the type provided by any Affiliated Company (defined below)
to any practice providing dental, orthodontic, periodontic,
prosthodontic, endodontic, or other professional dental
services, pediatric dentistry, or oral surgery anywhere in
the Restricted Territory (defined below);
(ii) Induce or encourage any employee, officer, director, agent,
supplier, or independent contractor of any Affiliated
Company to terminate its relationship with any such
Affiliated Company, or otherwise interfere or attempt to
interfere in any way with any Affiliated Company's
relationships with its employees, officers, directors,
agents, suppliers, independent contractors, or others; or
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<PAGE>
(iii) Employ or engage any person who, at any time within the
one-year period immediately preceding such employment or
engagement, was an employee, officer, director, or agent
of any Affiliated Company.
For purposes of this (S)4.2(m), (A) "Affiliated Company" shall mean
ADP and all subsidiaries (including American) or affiliates of ADP other
than Summit Ventures IV, L.P., and its affiliates which are not engaged in
a business similar to that of ADP or its subsidiaries; and (B) "Restricted
Territory" shall mean a radius of 25 miles from any facility or operation
leased, owned, managed, or operated by any Affiliated Company.
The parties acknowledge that the following activities engaged in by
Wilkens or by Dr. Wilkens shall not constitute a violation of this Section
4.2(m):
(i) risk management;
(ii) peer review;
(iii) benefit plan design and analysis; and
(iv) utilization review.
(n) Injunctive Relief. Dr. Wilkens acknowledges and agrees that ADP
-----------------
and American's remedies at law for any violation or attempted
violation of any of his obligations under this Article would be
inadequate, and agrees that in the event of any such violation or
attempted violation, ADP and American shall be entitled to a
temporary restraining order, temporary and permanent injunctions,
and other equitable relief, without the necessity of posting any
bond or proving any actual damage, in addition to all other
rights and remedies which may be available to ADP and American
from time to time.
(o) Third Party Payor Agreements. From and after the Closing, Dr.
----------------------------
Wilkens shall, and he shall cause the each member of the Group
to, cooperate in all ways reasonably requested by ADP or American
with respect to the assignment from any member of the Group to
American of, and the assumption by American of the obligations of
each member of the Group under, such agreements as may be
designated by ADP pursuant to which any member of the Group
receives payments as a provider of dental services, whether in
the form of capitation payments, on a fee-for-service basis, or
otherwise, and obtaining the consents of the payors under those
agreements, including without limitation causing any member of
the Group to execute an assignment and assumption agreement in
form and substance satisfactory to ADP.
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(p) Consulting Agreement. Dr. Wilkens will enter into, as of the
--------------------
Closing, a Consulting Agreement with American in the form
attached as Exhibit K (the "Consulting Agreement").
(S)4.3 Covenants of ADP. ADP agrees that:
----------------
(a) Representations and Warranties. At the Closing, ADP shall
------------------------------
deliver to Dr. Wilkens a certificate, in form and substance
reasonably satisfactory to Dr. Wilkens, confirming that the
representations and warranties set forth in Article II of this
Agreement are correct and complete in all material respects.
(b) [Intentionally Omitted].
(c) Notices of Certain Events. ADP shall promptly notify Dr. Wilkens
-------------------------
of each of the foregoing which occur during the Pre-Closing
Period:
(i) Any notice or other communication from any person or
entity alleging that the consent of such person or entity
is or may be required in connection with any of the
transactions contemplated by this Agreement;
(ii) Any notice or other communication from any governmental or
regulatory agency or authority in connection with the
transactions contemplated by this Agreement;
(iii) Any actions, suits, claims, investigations or proceedings
commenced or, to the knowledge of ADP, threatened against,
relating to, involving, or otherwise affecting ADP or any
of its assets which, if in existence on the date of this
Agreement would have been required to have been disclosed
by ADP pursuant to (S)2.5 or which relate to the
consummation of any of the transactions contemplated by
this Agreement; and
(iv) Any circumstances or events which, if in existence on the
date of this Agreement, would make any representation or
warranty of ADP incorrect or incomplete in any material
respect.
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<PAGE>
ARTICLE V
CONDITIONS
(S)5.1 Mutual Conditions. The obligations of the Parties to consummate
-----------------
the Asset Purchase and the other transactions contemplated by this Agreement
shall be subject to the fulfillment of all of the following conditions unless
waived by both Dr. Wilkens and ADP:
(a) Legal Prohibition. No temporary restraining order, preliminary
-----------------
or permanent injunction or other order or decree which prevents
the consummation of the Asset Purchase or any of the other
transactions contemplated by this Agreement having been issued
and remaining in effect, and no statute, rule or regulation
having been enacted by any state or federal government or
governmental agency, which would prevent the consummation of the
Asset Purchase or the other transactions contemplated by this
Agreement.
(b) [Intentionally Omitted].
(c) Governmental Approvals. Any governmental or other approvals or
----------------------
reviews of this Agreement or the transactions contemplated by
this Agreement required under any applicable laws, statutes,
orders, rules, regulations, policies or guidelines promulgated
thereunder, or the governance documents of any member of the
Group shall have been received.
(d) Agreements. ADP and Dr. Wilkens shall have executed the
----------
Subordination Agreement. American and Dr. Wilkens shall have
executed the Consulting Agreement.
(S)5.2 Conditions to Obligations of the Group and Dr. Wilkens. The
------------------------------------------------------
obligations of the Group and Dr. Wilkens to consummate the Asset Purchase and
the other transactions contemplated by this Agreement shall be subject to the
fulfillment of all of the following conditions unless waived by Dr. Wilkens in
writing:
(a) Representations and Warranties. The representations and
------------------------------
warranties of ADP and American set forth in Article II of this
Agreement shall be true and correct in all material respects as
of the date of this Agreement and as of the Closing Date as
though made at and as of the Closing.
(b) Performance of Agreement. ADP shall have performed and observed
------------------------
in all material respects all obligations and conditions to be
performed or observed by it under this Agreement at or prior to
the Closing.
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<PAGE>
(c) Certificate. ADP shall have furnished Dr. Wilkens with a
-----------
certificate dated the Closing Date signed by its president to the
effect that the conditions set forth in (S)(S)5.2(a) and (b) have
been satisfied.
(d) Opinion of Counsel. Dr. Wilkens shall have received the legal
------------------
opinion, dated the Closing Date, of Baker & Hostetler LLP,
counsel to ADP, in substantially the form attached to this
Agreement as Exhibit M.
(e) Authority. Dr. Wilkens shall have received evidence reasonably
---------
satisfactory to him that this Agreement and the transactions
contemplated by this Agreement have been properly authorized by
ADP and American.
(f) Restrictive Conditions. No Material Adverse Effect shall have
----------------------
occurred with respect to ADP or American.
(g) Delivery of Purchase Money and Note. ADP and American shall
-----------------------------------
deliver at the Closing to Dr. Wilkens the Purchase Money and the
Note.
(S)5.3 Conditions to Obligations of ADP. The obligations of ADP and
--------------------------------
American to consummate the Asset Purchase and the other transactions
contemplated by this Agreement shall be subject to the fulfillment of all of the
following conditions unless waived by ADP in writing:
(a) Representations and Warranties. The representations and
------------------------------
warranties of each member of the Group and Dr. Wilkens set forth
in Article III of this Agreement shall be true and correct in all
material respects as of the date of this Agreement and as of the
Closing Date as though made at and as of the Closing.
(b) Performance of Agreement. Each member of the Group and Dr.
------------------------
Wilkens shall have performed and observed in all material
respects all obligations and conditions to be performed or
observed by them under this Agreement at or prior to the Closing.
(c) Certificate. Dr. Wilkens shall have furnished ADP with a
-----------
certificate dated the Closing Date signed by him to the effect
that the conditions set forth in (S)(S)5.3(a) and (b) have been
satisfied.
(d) Brookfield Lease. Lessor, under the Brookfield Lease, shall have
----------------
released its security interest in Brookfield's equipment and
inventory.
(e) Waukesha Lease. Dr. Wilkens shall have agreed to such
--------------
modifications to the Waukesha Lease so as to make it acceptable
to ADP and American.
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<PAGE>
(f) Authority. ADP shall have received evidence reasonably
---------
satisfactory to it that this Agreement and the transactions
contemplated by this Agreement have been properly authorized by
each member of the Group.
(g) Professional Personnel. ADP confirming to its satisfaction that
----------------------
the professional personnel employed or otherwise retained by each
member of the Group support the transactions contemplated by this
Agreement.
(h) Financial Statements. Dr. Wilkens shall have delivered to ADP
--------------------
the Financial Statements and the Interim Statements.
(i) Opinion of Counsel. ADP shall have received the legal opinion,
------------------
dated the Closing Date, of E. Joseph Kershek, Esq. counsel to Dr.
Wilkens and the Group, in the form attached to this Agreement as
Exhibit O.
(j) Existing Employment and Deferred Compensation Agreements. At or
--------------------------------------------------------
prior to the Closing, each member of the Group shall have
terminated all employment agreements or arrangements (including
without limitation all individual disability and deferred
compensation arrangements), and all existing contractor
agreements or arrangements between each member of the Group and
its dentists, dental specialists and independent contractors,
without any remaining liability relating thereto on the part of
such member.
(k) Third Party Consents. ADP shall have received or received
--------------------
satisfactory evidence of all necessary or appropriate third party
consents and approvals relating to this Agreement and the
transactions contemplated by this Agreement, including without
limitation the consents described in Schedule 3.6, and ADP shall
be satisfied that all significant contracts of each member of the
Group shall remain in full force and effect after the Closing in
accordance with the terms and conditions of such contracts,
subject to any modifications required by this Agreement.
(l) Restrictive Conditions. Each member of the Group and Dr. Wilkens
----------------------
shall be free from any agreements, restrictions or conditions
which in the reasonable opinion of ADP could have a Material
Adverse Effect on any member of the Group.
(m) Defaults. No material agreement or other document or restriction
--------
to which any member of the Group or Dr. Wilkens is subject being
in default or being breached by the transactions contemplated by
this Agreement, which in either case in the reasonable opinion of
ADP would have a material adverse effect on any member of the
Group on the ability of any member
-37-
<PAGE>
of the Group or Dr. Wilkens to consummate the transactions
contemplated by this Agreement.
(n) Material Adverse Changes. No Material Adverse Effect shall have
------------------------
occurred with respect to any member of the Group.
(o) Books and Records. Each member of the Group and Dr. Wilkens
-----------------
shall have delivered to ADP all books and records of each member
of the Group relating to the Assets.
(p) Compliance with Laws. ADP shall have: (i) received evidence
--------------------
reasonably satisfactory to it that the business of each member of
the Group has been, at all times prior to the Closing, in
compliance in all material respects with all Applicable Laws
relating directly or indirectly to the provision of dental
services; and (ii) confirmed to its satisfaction that the
transactions contemplated by this Agreement will be in compliance
with all Applicable Laws.
(q) Related-Party Transactions. ADP shall have confirmed to its
--------------------------
satisfaction that all agreements between each member of the Group
and any Affiliates of the Group or Dr. Wilkens are on arms'-
length terms and otherwise reasonably satisfactory to ADP.
(r) Adjusted EBITDA. ADP shall have confirmed to its satisfaction
---------------
that the aggregate Adjusted EBITDA (defined below) of the Group
for calendar year 1996 was not less than $900,000. For purposes
of this Agreement, "Adjusted EBITDA "shall mean the consolidated
earnings of the Group before interest, taxes, depreciation and
amortization calculated in accordance with generally accepted
accounting principles.
(s) Current Ratio. ADP shall have confirmed to its satisfaction that
-------------
the aggregate Current Ratio (defined below) of the Group as of
the Closing, as evidenced by the Interim Statements is greater
than 1.0. "Current Ratio" shall mean the consolidated current
assets of the Group divided by the consolidated current
liabilities of the Group, all determined in accordance with
generally accepted accounting practices.
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<PAGE>
ARTICLE VI
TERMINATION AND AMENDMENT
(S)6.1 Termination.
-----------
(a) Termination by the Group and Dr. Wilkens. This Agreement may be
----------------------------------------
terminated and cancelled at any time prior to the Closing by the
Group and Dr. Wilkens: (i) if (A) any of the representations or
warranties of ADP contained in this Agreement or the ADP
Schedules shall prove to be inaccurate in any material respect,
or any obligation or condition to be performed or observed by ADP
or American under this Agreement has not been performed or
observed in any material respect at or prior to the time
specified in this Agreement, and (B) such inaccuracy or failure
shall not have been cured within 15 business days after receipt
by ADP of written notice of such occurrence from the Dr. Wilkens;
or (ii) if any permanent injunction or other order of a court or
other competent authority preventing consummation of the Asset
Purchase or any other transaction contemplated by this Agreement
shall have become final and non-appealable.
(b) Termination by ADP. This Agreement may be terminated and
------------------
cancelled at any time prior to the Closing by ADP: (i) if (A) any
of the representations or warranties of any member of the Group
or Dr. Wilkens contained in this Agreement or the Group Schedules
shall prove to be inaccurate in any material respect, or any
obligation or condition to be performed or observed by any member
of the Group or Dr. Wilkens under this Agreement has not been
performed or observed in any material respect at or prior to the
time specified in this Agreement, and (B) such inaccuracy or
failure shall not have been cured within 15 business days after
receipt by Dr. Wilkens of written notice of such occurrence from
ADP; (ii) if any permanent injunction or other order of a court
or other competent authority preventing consummation of the Asset
Purchase or any other transaction contemplated by this Agreement
shall have become final and non-appealable; (iii) in the event a
Material Adverse Effect shall have occurred with respect to any
member of the Group; (iv) if within 15 business days after ADP's
receipt of the Interim Statements, ADP shall notify Dr. Wilkens
that it does not approve the Interim Statements; or (v) if the
Closing has not occurred on or before September 5, 1997; provided
that ADP shall have the unilateral right to extend the Closing
Date until September 30, 1997 upon notice from ADP to Dr. Wilkens
given prior to September 5, 1997. Notwithstanding the foregoing,
the termination of this Agreement shall not terminate the
Confidentiality Agreement dated May 14, 1997 between the Group
and ADP.
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<PAGE>
(S)6.2 Amendment. This Agreement may not be amended except by an
---------
instrument in writing signed by all of the Parties.
(S)6.3 Extension; Waiver. At any time prior to the Closing, ADP (with
-----------------
respect to the Group and Dr. Wilkens) and Dr. Wilkens (with respect to ADP) may,
to the extent legally allowed: (i) extend the time for the performance of any
of the obligations or other acts of any other Party; (ii) waive any inaccuracies
in the representations and warranties contained in this Agreement or in any
document delivered pursuant hereto; or (iii) waive compliance with any of the
agreements or conditions contained in this Agreement. Any agreement on the part
of a Party to any such extension or waiver shall be valid only if set forth in a
written instrument signed by such Party.
ARTICLE VII
INDEMNIFICATION
(S)7.1 Survival of Representations, Warranties and Agreements.
------------------------------------------------------
(a) Subject to the limitations set forth in (S)7.3, below, and
notwithstanding any investigation conducted at any time by or on
behalf of ADP, all representations, warranties, covenants and
agreements of each member of the Group and Dr. Wilkens in this
Agreement and in any other documents executed or delivered by
each member of the Group and Dr. Wilkens pursuant to this
Agreement or in connection with the transactions contemplated by
this Agreement (the "Additional Documents") shall survive the
execution, delivery and performance of this Agreement and the
Additional Documents. All representations and warranties of each
member of the Group and Dr. Wilkens set forth in this Agreement
and in the Additional Documents shall be deemed to have been made
again by Dr. Wilkens at and as of the Closing.
(b) As used in this Article, any reference to a representation,
warranty or covenant contained in any section of this Agreement
shall include the Schedule relating to such section.
(S)7.2 Indemnification.
---------------
(a) Subject to the limitations set forth in (S)7.3, below, each
member of the Group and Dr. Wilkens shall indemnify and hold
harmless ADP and American from and against any and all losses,
liabilities, damages, demands, claims, suits, actions, judgments
or causes of action, assessments, costs and expenses, including
without limitation interest, penalties, attorneys' fees, any and
all expenses incurred in investigating, preparing or
-40-
<PAGE>
defending against any litigation, commenced or threatened, or any
claim whatsoever, and any and all amounts paid in settlement of
any claim or litigation (collectively, "Damages"), asserted
against, resulting to, imposed upon, or incurred or suffered by
ADP or American, directly or indirectly, as a result of or
arising from: (i) any inaccuracy in or breach or nonfulfillment
of any of the representations, warranties, covenants or
agreements made by any member of the Group or Dr. Wilkens in this
Agreement or the Additional Documents; or (ii) any Excluded
Liability (defined below).
(b) For purposes of this Agreement: (i) the term "Excluded
Liabilities" shall include (A) any and all claims of any current
or former holder of any legal or beneficial ownership interest in
or to any member of the Group which are based upon, relate to, or
arise out of any agreements, transactions, acts, or omissions
made or occurring at or prior to the Closing, excepting only any
claims against ADP arising out of the failure of ADP to perform
its obligations under this Agreement; and (B) any and all claims
of any third party or governmental agency or entity arising out
of or related to non-compliance by any member of the Group with
any Applicable Laws prior to the Closing; and (ii) the term
"Indemnifiable Claims" shall mean the matters with respect to
which ADP is entitled to indemnification under (S)7.2(a).
(c) For purposes of this Article, all Damages shall be computed net
of any insurance coverage which reduces the Damages that would
otherwise be sustained; provided that in all cases the timing of
the receipt or realization of insurance proceeds shall be taken
into account in determining the amount of reduction of Damages.
(d) ADP shall be deemed to have suffered Damages arising out of or
resulting from the matters referred to in (S)7.2(a), above, if
the same shall be suffered by any parent, subsidiary or affiliate
of ADP, including, without limitation, American, after the
Closing.
(S)7.3 Limitations on Indemnification. Rights to indemnification under
------------------------------
(S)7.2(a)(i) are subject to the following limitations:
(a) ADP shall not be entitled to indemnification hereunder with
respect to an Indemnifiable Claim arising out of a breach of a
representation or warranty (or, if more than one such
Indemnifiable Claim is asserted, with respect to all such
Indemnifiable Claims) unless, and then only to the extent that,
the aggregate amount of Damages with respect to such
Indemnifiable Claim or Claims exceeds $25,000; provided, however,
that such threshold shall not
-41-
<PAGE>
apply to any Indemnifiable Claim relating to a breach of the
representations and warranties set forth in (S)(S)3.2, 3.3, 3.5,
and 3.11.
(b) The obligation of indemnity with respect to the representations
and warranties set forth in (S)3.10 of this Agreement shall
terminate on the expiration of the respective periods of
limitations applicable to assessment and collection of taxes
under laws then applicable to such taxes, with respect to the
representations and warranties as to the absence of unpaid or
undisclosed taxes (including any interest, penalties or expenses)
of any member of the Group.
(c) The obligation of indemnity with respect to the representations
and warranties set forth in (S)3.19 of this Agreement shall
terminate upon expiration of the respective statutes of
limitation applicable to the items addressed in such section.
(d) The obligation of indemnity with respect to the representations
and warranties contained in (S)(S)3.2, 3.3, 3.5, and 3.11 of this
Agreement shall not expire.
(e) The obligation of indemnity with respect to the representations
and warranties set forth in Article III of this Agreement other
than those addressed in the immediately preceding subsections
(b), (c), and (d) shall terminate on the third anniversary of the
Closing.
(f) The foregoing provisions of this (S)7.3 notwithstanding, if,
prior to the termination of any obligation of indemnity, written
notice of a claimed breach or other occurrence or matter giving
rise to a claim of indemnification is given by ADP to Dr.
Wilkens, or a suit, action, or other proceeding based upon a
claimed breach is commenced against any member of the Group or
Dr. Wilkens, ADP shall not be precluded from pursuing such
claimed breach, occurrence, other matter, or suit or action, or
from recovering from Dr. Wilkens or any member of the Group
(whether through the courts or otherwise) on the claim, suit,
action, or proceeding, by reason of the termination otherwise
provided for above.
(S)7.4 Procedure for Indemnification with Respect to Third Party Claims.
----------------------------------------------------------------
(a) If ADP desires to seek indemnification under this Article with
respect to an Indemnifiable Claim resulting from the assertion of
liability by a third party (a "Third-Party Claim"), it shall give
notice to any or each member of the Group and Dr. Wilkens
(hereinafter each being an "Indemnifying Party") within a
reasonable period of time of ADP's becoming aware of any such
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<PAGE>
Third-Party Claim, which notice shall set forth such material
information with respect to such Third-Party Claim as is then
reasonably available to ADP. If any Third-Party Claim is
asserted against ADP and ADP notifies the Indemnifying Party of
such Third-Party Claim, the Indemnifying Party shall be entitled,
if it or he so elects by written notice delivered to ADP within a
reasonable period of time (not to exceed 10 days in any event)
after receiving ADP's notice (the "Response Period"), to assume
the defense of such Third-Party Claim with counsel reasonably
satisfactory to ADP. Notwithstanding the foregoing: (i) ADP
shall not have any obligation to give any notice of any Third-
Party Claim unless such assertion is in writing; and (ii) the
rights of ADP to be indemnified in respect of Indemnifiable
Claims resulting from the assertion of any Third-Party Claim
shall not be adversely affected by its failure to give notice
pursuant to the foregoing provisions unless, and, if so, only to
the extent that, the Indemnifying Party is materially prejudiced
by such failure; and (iii) each Party shall cooperate with any
other Party in all ways reasonably requested by such other Party
in connection with the defense of any such Third-Party Claims.
With respect to any Third-Party Claim that results in a claim for
indemnification under this Article, the Parties shall make
available to each other all relevant information in their
possession which is material to any such Third-Party Claim.
(b) In the event that the Indemnifying Party fails to assume the
defense of ADP against any Third-Party Claim within the Response
Period, ADP shall have the right to defend, compromise or settle
such Third-Party Claim on behalf, for the account, and at the
risk of the Indemnifying Party.
(c) Notwithstanding anything in this (S)7.4 to the contrary, (i) if
there is a reasonable probability that a Third-Party Claim may
materially and adversely affect ADP, its subsidiaries or
affiliates, including without limitation American after the
Closing, other than as a result of money damages or other money
payments, then ADP shall have the right, at the cost and expense
of the Indemnifying Party, to defend, compromise or settle such
Third-Party Claim; and (ii) the Indemnifying Party shall not,
without ADP's prior written consent, settle or compromise any
Third-Party Claim or consent to entry of any judgment in respect
of any Third-Party Claim unless such settlement, compromise or
consent includes as an unconditional term the giving by the
claimant or the plaintiff to ADP (and its subsidiaries and
affiliates, including, without limitation, American, after the
Closing) a release from all liability in respect of such Third-
Party Claim.
(S)7.5 Procedure For Indemnification with Respect to Non-Third Party Claims.
--------------------------------------------------------------------
In the event that ADP asserts the existence of an Indemnifiable Claim giving
rise to Damages other than
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<PAGE>
an Indemnifiable Claim resulting from a Third-Party Claim, it shall give written
notice to the Indemnifying Party specifying the nature and amount of the
Indemnifiable Claim asserted. If the Indemnifying Party, within 15 days after
the receipt of such notice by ADP, has not given written notice to ADP
announcing its or his intention to contest such assertion by ADP, such assertion
shall be deemed accepted and the amount of Indemnifiable Claim shall be deemed a
valid Indemnifiable Claim. In the event, however, that the Indemnifying Party
contests the assertion of an Indemnifiable Claim by giving such written notice
to ADP within such 15-day period, then if the Parties, acting in good faith,
cannot reach agreement with respect to such Indemnifiable Claim within 15 days
after such notice, the contested assertion of the claim shall be referred to
arbitration in Milwaukee, Wisconsin, in accordance with the then-current rules
of Resolute System, Inc. if such entity is in good standing and its arbitration
procedures are in effect at the time the Indemnifiable Claim becomes known. If
Resolute System, Inc. is not in good standing or is not resolving arbitration
claims, then the contested assertion of the claim shall be arbitrated pursuant
to the then current procedures of the American Arbitration Association. The
determination made in accordance with such rules shall be delivered in writing
to the Parties and shall be final and binding and conclusive on the Parties and
the amount of the Indemnifiable Claim, if any, determined to exist shall be a
valid Indemnifiable Claim. Each Party shall pay its own legal, accounting and
other fees in connection with such a contest; provided that if the contested
claim is referred to and ultimately determined by arbitration, the legal,
auditing and other fees of the prevailing Party and the fees and expenses of any
arbitrator shall be borne by the non-prevailing Party.
(S)7.6 Right of Setoff. In addition to its other rights under this
---------------
Agreement and the Additional Documents, ADP shall have the right to setoff any
amounts owing to ADP by Dr. Wilkens against any amounts owing to Dr. Wilkens by
ADP.
(S)7.7 Indemnification of the Group and Dr. Wilkens. Subject to the
--------------------------------------------
limitation contained in the following paragraph, ADP shall indemnify and hold
harmless the Group and Dr. Wilkens from and against any and all Damages (as
defined in (S)7.2) asserted against, resulting to, imposed upon, or incurred or
suffered by the Group and Dr. Wilkens, directly or indirectly, as a result of or
arising from any inaccuracy in or breach or nonfulfillment of any of the
representations, warranties, covenants, or agreements made by ADP in this
Agreement.
The representations and warranties of ADP contained in Article II of this
Agreement and the obligations of indemnity of ADP with respect to those
representations and warranties shall terminate on the third anniversary of the
Closing Date (it is understood by the parties that the obligations of idenminity
of ADP with respect to Damages related to covenants or agreements made by ADP in
this Agreement do not terminate on the Third Anniversary of the Closing Date);
provided that if, prior to termination of any obligation of indemnity with
respect to any such representation or warranty, written notice of a claimed
breach of same is given by the Group and Dr. Wilkens to ADP, or a suit, action,
or other proceeding based upon the claimed breach is commenced against ADP, the
Group and Dr. Wilkens shall not be precluded from pursuing such
-44-
<PAGE>
claimed breach, or from recovering from ADP (whether through the courts or
otherwise) on that claim, by reason of the termination otherwise provided for
above.
ARTICLE VIII
MISCELLANEOUS
(S)8.1 Notices. All notices and other communications under this Agreement
-------
to any Party shall be in writing and shall be deemed given when delivered
personally, telecopied (which is confirmed) to that Party at the telecopy number
for that Party set forth below, mailed by certified mail (return receipt
requested) to that Party at the address for that Party (or at such other address
for such Party as such Party shall have specified in notice to the other
Parties), or delivered to Federal Express, UPS, or any similar express delivery
service for delivery to that Party at that address:
(a) If to ADP:
American Dental Partners, Inc.
301 Edgewater Place, Suite 320
Wakefield, Massachusetts 01880-1249
Attention: Gregory A. Serrao, President
Telecopy No.: (617) 224-4216
with a copy to:
Baker & Hostetler LLP
65 East State Street
Columbus, Ohio 43215
Attention: Gary A. Wadman, Esq.
Telecopy No.: (614) 462-2616
(b) If to Dr. Wilkens or to any member of the Group:
Terrance R. Wilkens
W380 S6299 Point Drive
Waukesha, WI 53188
Telecopy No.: (414) 521-1420
-45-
<PAGE>
with a copy to:
E. Joseph Kershek, Esq.
Suite 201 Associated Bank Building
10701 West National Avenue
Milwaukee, Wisconsin 53227
Telecopy No.: (414) 321-6535
(S)8.2 Non-Waiver. No failure by any Party to insist upon strict
----------
compliance with any term or provision of this Agreement, to exercise any option,
to enforce any right, or to seek any remedy upon any default of any other Party
shall affect, or constitute a waiver of, any other Party's right to insist upon
such strict compliance, exercise that option, enforce that right, or seek that
remedy with respect to that default or any prior, contemporaneous, or subsequent
default. No custom or practice of the Parties at variance with any provision of
this Agreement shall affect or constitute a waiver of, any Party's right to
demand strict compliance with the provisions of this Agreement.
(S)8.3 Genders and Numbers. Where permitted by the context, each pronoun
-------------------
used in this Agreement includes the same pronoun in other genders and numbers,
and each noun used in this Agreement includes the same noun in other numbers.
(S)8.4 Headings. The headings of the various articles and sections of
--------
this Agreement are not part of the context of this Agreement, are merely labels
to assist in locating such articles and sections, and shall be ignored in
construing this Agreement.
(S)8.5 Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same agreement.
(S)8.6 Entire Agreement. This Agreement (including all exhibits,
----------------
schedules, and other documents referred to in this Agreement (the "Incorporated
Documents"), all of which are hereby incorporated by reference) constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, among the Parties with respect to the subject matter of this
Agreement, including without limitation the letter agreement dated July 23,
1997. All obligations of any Party under any Incorporated Document shall
constitute an obligation of such Party under this Agreement. Any capitalized
terms used in any Incorporated Document which are not otherwise defined therein
shall have the respective meanings given such terms in this Agreement.
(S)8.7 No Third Party Beneficiaries. Nothing contained in this Agreement,
----------------------------
expressed or implied, is intended or shall be construed to confer upon or give
to any person, firm, corporation or legal entity, other than the Parties, any
rights, remedies or other benefits under or by reason of this Agreement.
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<PAGE>
(S)8.8 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the Commonwealth of Massachusetts without regard
to principles of conflicts of law.
(S)8.9 Successors; Assignment. This Agreement shall be binding upon,
----------------------
inure to the benefit of and be enforceable by and against the Parties and their
respective heirs, personal representatives, successors, and assigns. Neither
this Agreement nor any of the rights, interests or obligations under this
Agreement shall be transferred or assigned by any of the Parties without the
prior written consent of the other Parties.
(S)8.10 Remedies. All rights and remedies of each Party under this
--------
Agreement shall be cumulative and in addition to all other rights and remedies
which may be available to that Party from time to time, whether under any other
agreement, at law, or in equity.
(S)8.11 Expenses. Except as otherwise specifically provided in this
--------
Agreement, each Party shall bear his or its respective legal, accounting, and
other costs and expenses associated with the transactions contemplated by this
Agreement (including without limitation the costs of any brokers and financial
advisors), except that the expenses of Dr. Wilkens incurred at or prior to the
Closing may be paid by the Group at or prior to the Closing.
(S)8.12 Announcements. This Agreement and the transactions contemplated
-------------
herein shall be confidential and no Party shall disclose any information
relating to the transactions contemplated by this Agreement without the prior
written consent of the Shareholders and ADP, except for such disclosures to such
professional advisors as may be necessary or appropriate in order to enter into
this Agreement and consummate the transactions contemplated by this Agreement.
Each Party and its representatives will exercise all reasonable efforts to
maintain confidentiality with respect to such transactions at all times prior to
the public announcement, if any, of this Agreement. The provisions of this
section will be subject to each Party's obligation to comply with applicable
requirements of federal or state laws or any governmental order or regulation.
(S)8.13 Severability. With respect to any provision of this Agreement
------------
finally determined by a court of competent jurisdiction to be unenforceable,
such court shall have jurisdiction to reform such provision so that it is
enforceable to the maximum extent permitted by applicable law, and the Parties
shall abide by such court's determination. In the event that any provision of
this Agreement cannot be reformed, such provision shall be deemed to be severed
from this Agreement, but every other provision of this Agreement shall remain in
full force and effect. Each of the undersigned confirms that it or he has read
and fully understands this Agreement, including without limitation the exhibits
attached hereto and the representations and warranties contained in (S)3.28 of
this Agreement.
-47-
<PAGE>
AMERICAN DENTAL PARTNERS, INC. AMERICAN DENTAL PARTNERS OF
WISCONSIN, INC.
By: /s/ Gregory A. Serrao By: Gregory A. Serrao
------------------------------- -------------------------------
Its: President Its: President
------------------------------- -------------------------------
/s/ Terrance R. Wilkens, D.D.S.
- ----------------------------------- TERRANCE R. WILKENS, D.D.S., SC
Terrance R. Wilkens, D.D.S.
Individually
By: /s/ Terrance R. Wilkens, D.D.S.
----------------------------------
Its: President
---------------------------------
WEST ALLIS DENTAL CENTER, SC BROOKFIELD DENTAL CENTER, SC
By: /s/ Terrance R. Wilkins, D.D.S. By: /s/ Terrance R. Wilkens, D.D.S.
------------------------------- -------------------------------
Its: President Its: President
------------------------------- -------------------------------
WAUKESHA DENTAL CENTER, SC
By: /s/ Terrance R. Wilkens, D.D.S.
---------------------------------
Its: President
---------------------------------
HALES CORNERS DENTAL CENTER, SC
By: /s/ Terrance R. Wilkens, D.D.S.
---------------------------------
Its: President
---------------------------------
-48-
<PAGE>
EXHIBIT 11
AMERICAN DENTAL PARTNERS, INC.
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
----------------- ----------------- ----------------
PRO PRO PRO
FORMA FORMA FORMA
AS AS AS
ACTUAL ADJUSTED ACTUAL ADJUSTED ACTUAL ADJUSTED
1996 1996 1996 1996 1997 1997
------- -------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
PRIMARY
Net earnings (loss)....... $(2,443) $ 538 $(1,514) $ 385 $ 754 $1,468
Less: Dividends on Series
B Redeemable Preferred
Stock................... (96) -- (29) -- (420) --
------- ------ ------- ------ ------ ------
Net earnings (loss)
attributable to common
stockholders............. $(2,539) $ 538 $(1,543) $ 385 $ 334 $1,468
======= ====== ======= ====== ====== ======
Weighted average common
shares outstanding....... 768 834 582 582 2,418 2,418
Add: Options and common
stock issued one year
prior to filing
date(1)................ 1,457 1,689 1,624 1,872 166 241
Add: Assumed conversion of
Series A Convertible
Preferred Stock(2)..... 2,400 2,400 2,400 2,400 2,400 2,400
Add: Shares issued in
connections with initial
public offering(3)....... -- 1,506 -- 1,506 -- 1,506
------- ------ ------- ------ ------ ------
Weighted average common
shares as adjusted....... 4,625 6,429 4,606 6,360 4,984 6,565
======= ====== ======= ====== ====== ======
Net earnings (loss) per
share.................... $ (0.55) $ 0.08 $ (0.33) $ 0.06 $ 0.07 $ 0.22
======= ====== ======= ====== ====== ======
FULLY DILUTED
Net earnings (loss)....... $(2,443) $ 538 $(1,514) $ 385 $ 754 $1,468
Less: Dividends on Series
B Redeemable Preferred
Stock................... (96) -- (29) -- (420) --
------- ------ ------- ------ ------ ------
Net earnings (loss)
attributable to common
stockholders............. $(2,539) $ 538 $(1,543) $ 385 $ 334 $1,468
======= ====== ======= ====== ====== ======
Weighted average common
shares outstanding....... 768 972 582 775 2,459 2,459
Add: Options and common
stock issued one year
prior to filing
date(1)................ 1,457 1,689 1,624 1,872 166 241
Add: Assumed conversion of
Series A Convertible
Preferred Stock(2)..... 2,400 2,400 2,400 2,400 2,400 2,400
Add: Shares issued in
connection with initial
public offering(3)....... -- 1,506 -- 1,506 -- 1,506
------- ------ ------- ------ ------ ------
Weighted average common
shares as adjusted....... 4,625 6,567 4,606 6,553 5,025 6,606
======= ====== ======= ====== ====== ======
Net earnings (loss) per
share.................... $ (0.55) $ 0.08 $ (0.33) $ 0.06 $ 0.07 $ 0.22
======= ====== ======= ====== ====== ======
</TABLE>
- --------
(1) Pursuant to the rules of the SEC all options granted and shares of common
stock issued at prices less than the initial public offering price during
the twelve months preceding the offering date have been included in
primary and fully diluted weighted average shares outstanding for all
periods presented.
(2) In connection with the initial public offering, Series A Convertible
Preferred shares will automatically convert to common stock on a one for
one basis.
(3) In connection with the initial public offering, gives effect to the
issuance of common shares which would have been necessary to pay
$13,700,000 of revolving credit facility indebtedness, redeem $7,706,000
of Series B Redeemable Preferred Stock and pay $1,000,000 of estimated
offering costs.
<PAGE>
EXHIBIT 23(B)
The Board of Directors
American Dental Partners, Inc.:
We consent to the use of our reports on American Dental Partners, Inc. and
subsidiaries dated October 27, 1997, except for note 13 as to which date is
November 7, 1997, PDHC, Ltd. dated March 26, 1997, and The Orthocare Companies
dated December 29, 1997 included herein and to the reference to our firm under
the headings "Selected Historical and Pro Forma Consolidated Financial Data"
and "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
December 31, 1997
<PAGE>
EXHIBIT 23(C)
The Board of Directors
PDHC, Ltd.:
We consent to the use of our reports dated October 16, 1997, included herein
and to the reference to our firm under the heading "Experts" in the
prospectus.
/s/ Stirtz Bernards Boyden Surdel &
Larter, P.A.
Edina, Minnesota
December 31, 1997
