AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1997
REGISTRATION NO. 333-22785
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
APPLE ORTHODONTIX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 8021 74-2795193
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
<TABLE>
<CAPTION>
<S> <C>
MICHAEL W. HARLAN
APPLE ORTHODONTIX, INC. APPLE ORTHODONTIX, INC.
ONE WEST LOOP SOUTH, SUITE 100 ONE WEST LOOP SOUTH, SUITE 100
HOUSTON, TEXAS 77027 HOUSTON, TEXAS 77027
(713) 964-6882 (713) 964-6882
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
OFFICES)
</TABLE>
------------------------
COPIES TO:
RICHARD S. ROTH TED W. PARIS
JACKSON & WALKER, L.L.P. BAKER & BOTTS, L.L.P.
1100 LOUISIANA 3000 ONE SHELL PLAZA
SUITE 4200 910 LOUISIANA
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM
TITLE OF EACH MAXIMUM AGGREGATE AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(1) PRICE(2),(3) FEE(4)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, $.001
par value.......................... -- -- $32,430,000 $9,828
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In accordance with Rule 457(o) under the Securities Act of 1933, as
amended, the number of shares being registered and the proposed maximum
offering price per share are not included in this table.
(2) Includes shares of Common Stock issuable upon exercise of the Underwriters
over-allotment option.
(3) Estimated solely for purposes of calculating the registration fee.
(4) Of this amount, $9,439 has previously been paid.
------------------------
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 SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
******************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
* *
******************************************************************************
SUBJECT TO COMPLETION, DATED APRIL 28, 1997
PROSPECTUS
2,350,000 SHARES
[LOGO -- APPLE ORTHODONTIX, INC.]
CLASS A COMMON STOCK
------------------------
All of the 2,350,000 shares of Class A Common Stock ("Common Stock")
offered hereby are being sold by Apple Orthodontix, Inc. ("Apple"). Prior to
the Offering, there has been no public market for the Common Stock. It is
currently estimated that the initial public offering price will be between
$10.00 and $12.00 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
Common Stock is entitled to one vote per share while the Class B Common Stock is
entitled to three-tenths ( 3/10ths) of a vote per share. The Common Stock has
been approved for listing on the American Stock Exchange under the symbol
"AO," subject to notice of issuance.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 8.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS(1) TO COMPANY(2)
- --------------------------------------------------------------------------------
Per Share................ $ $ $
- --------------------------------------------------------------------------------
Total(3)................. $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $5,500,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 352,500 additional shares of Class A Common Stock, on the same terms and
conditions as set forth above, to cover over-allotments, if any. If such
option is exercised in full, the total Price to the Public, Underwriting
Discounts and Commissions and Proceeds to the Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are being offered severally by the Underwriters,
subject to prior sale, when, as and if accepted by the Underwriters and subject
to conditions, including their right to reject orders, in whole or in part. It
is expected that delivery of the shares will be made at the offices of Bear,
Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167, on or about
, 1997.
------------------------
BEAR, STEARNS & CO. INC. EQUITABLE SECURITIES CORPORATION
The date of this Prospectus is , 1997
<PAGE>
[Map showing locations
of Founding Affiliated Practices]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANS-
ACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON
STOCK OF THE COMPANY, INCLUDING OVER-ALLOTMENT AND OTHER STABILIZING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON THE AMERICAN STOCK EXCHANGE IN ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
CONCURRENTLY WITH THE CLOSING OF THE OFFERING, APPLE WILL ACQUIRE, IN
SEPARATE TRANSACTIONS (THE "ACQUISITIONS"), SUBSTANTIALLY ALL THE TANGIBLE AND
INTANGIBLE ASSETS, AND ASSUME CERTAIN LIABILITIES, OF 31 ORTHODONTIC PRACTICES
(COLLECTIVELY, THE "FOUNDING AFFILIATED PRACTICES") IN EXCHANGE FOR CASH AND
SHARES OF CLASS A COMMON STOCK, PAR VALUE $.001 PER SHARE, OF APPLE ("COMMON
STOCK"). THE NUMBER OF SHARES OF COMMON STOCK TO BE ISSUED IN EACH ACQUISITION
WILL DEPEND ON THE INITIAL PUBLIC OFFERING PRICE OF THE COMMON STOCK.
ACCORDINGLY, THE DISCLOSURES HEREIN RELATING TO THE SHARES OF COMMON STOCK
ISSUED IN CONNECTION WITH THE ACQUISITIONS ARE ESTIMATED, BASED ON AN ASSUMED
INITIAL PUBLIC OFFERING PRICE OF $11.00 PER SHARE (THE MIDPOINT OF THE ESTIMATED
INITIAL PUBLIC OFFERING PRICE RANGE). UNLESS OTHERWISE INDICATED BY THE CONTEXT,
REFERENCES HEREIN TO (I) "APPLE" OR THE "COMPANY" MEAN APPLE ORTHODONTIX,
INC., (II) "AFFILIATED PRACTICES" MEAN THE FOUNDING AFFILIATED PRACTICES AND
ANY ORTHODONTIC PRACTICES WITH WHICH THE COMPANY MAY ENTER INTO SIMILAR
RELATIONSHIPS IN THE FUTURE, (III) "NEW CASE STARTS" MEAN THE NUMBER OF NEW
PATIENTS BEGINNING TREATMENT DURING A PERIOD OF TIME AND (IV) "CASE ACCEPTANCE
RATE" MEAN, FOR ANY SPECIFIED PERIOD OF TIME, THE PERCENTAGE OF POTENTIAL
PATIENTS WHO UNDERGO AN INITIAL EXAMINATION AT AN ORTHODONTIC PRACTICE WHO IN
FACT ELECT TO BEGIN TREATMENT WITH SUCH EXAMINING ORTHODONTIST.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS (I) GIVES EFFECT TO THE ACQUISITIONS, (II) ASSUMES THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND (III) GIVES EFFECT TO A
STOCK SPLIT OF THE OUTSTANDING SHARES OF CLASS B COMMON STOCK, PAR VALUE $.001
PER SHARE ("CLASS B STOCK").
THE COMPANY
Apple was founded in July 1996 to provide practice management services to
orthodontic practices in the United States and Canada. The Company's objective
is to provide a full complement of practice management services designed to
drive internal growth by enhancing the ability of Affiliated Practices to: (i)
deliver quality, affordable orthodontic treatment primarily on a fee-for-service
basis; (ii) stimulate demand in their local markets by increasing consumer
awareness of the benefits, availability and affordability of orthodontic
treatment; and (iii) improve the productivity and profitability of their
practices. The Company will also seek to grow through the acquisition of
additional Affiliated Practices and the development of satellite offices that
complement geographic areas served by existing and future Affiliated Practices.
The Company will earn revenue by providing management, administrative,
development and other services to Affiliated Practices.
The Company has entered into definitive agreements to acquire substantially
all the tangible and intangible assets and assume certain liabilities of, and
provide long-term management services to, the Founding Affiliated Practices. The
Founding Affiliated Practices include 31 orthodontists and 58 offices located in
13 states in the United States and in Calgary, Alberta. The Founding Affiliated
Practices were selected based on a variety of factors, including the competitive
and financial strengths and historical growth of their practices and the
potential for future growth in their markets. Apple also considered the local
and national reputations of the Founding Affiliated Practices within the
orthodontic services industry, their ability to manage multi-location practices
providing high levels of quality care and their desire to grow and improve the
operating efficiency of their respective practices. For the year ended December
31, 1996, the Founding Affiliated Practices had median patient revenues per
practice of approximately $700,000 and average (mean) patient revenues per
practice of approximately $800,000.
The orthodontic services industry is highly fragmented, with over 90% of
the approximately 9,000 orthodontists in the United States operating as sole
practitioners and less than 2% being affiliated with the only existing public
practice management company specializing in orthodontics. The industry currently
generates approximately $3.5 billion in annual gross revenues, which have grown
steadily at an average rate
3
<PAGE>
of 7.5% per year in recent years. Industry data and management's experience
indicate that the need for orthodontics significantly exceeds the current
demand.
The Company's business strategy emphasizes (i) implementing a comprehensive
operating strategy designed to drive internal growth of the Affiliated Practices
and (ii) expanding the Company's network of Affiliated Practices through an
aggressive acquisition program.
The primary elements of the Company's operating strategy are (i)
implementing practice-building and external marketing programs designed to
generate new patient starts through increased referrals from existing and former
patients and the use of multimedia advertising to stimulate demand for treatment
services, (ii) offering more affordable payment plans to patients to broaden the
market for orthodontic services, (iii) increasing the operating efficiency of
the Affiliated Practices by relieving the orthodontists from various
time-consuming administrative responsibilities and realizing economies of scale,
(iv) providing a systems-oriented approach to training and education of clinic
personnel to improve their communications with patients and potential patients
and increase their productivity, (v) developing satellite offices to expand the
geographic markets served by Affiliated Practices and (vi) utilizing customized
management information systems to provide detailed financial and operating data
and related analysis to Affiliated Practices and management. Each of these
elements is intended to drive the internal growth of the Affiliated Practices
while allowing them to maintain high levels of quality care.
The Company has implemented its operating strategy at a prototype practice
owned and, until June 1996, operated by the Company's Chairman and CEO, John G.
Vondrak, D.D.S. This practice has grown substantially since 1989, when Dr.
Vondrak acquired it, to approximately $1.9 million of revenues in 1996, placing
it among the largest sole-practitioner orthodontic practices in the United
States. Among the factors contributing to this growth have been the Company's
practice-building program (consisting of a complete training and operating
program designed to maximize patient satisfaction levels, generate referrals
from existing and former patients and increase case acceptance rates) and
external marketing efforts, including television advertising focusing on
affordable payment programs offered by that practice. The Company believes this
prototype practice has a higher case acceptance rate than the industry average
and a higher than average percentage of new case starts generated from patient
referrals and multimedia advertising. Management believes that the results of
this practice demonstrate the effectiveness of the Company's operating strategy.
In July 1996, Dr. Vondrak delegated the operating responsibilities of this
practice to a newly hired orthodontist who recently completed her education, so
that he could devote his time fully to the formation of the Company. Since this
transfer, the continued application of the Company's operating strategy has
resulted in a comparable number of case starts based on a comparison of the
six-month period ended December 31, 1996 to the corresponding period in the
prior year.
The Company also intends to pursue an aggressive expansion program designed
to strengthen its position in its current markets and expand its network of
Affiliated Practices into markets it does not currently serve. The Company
believes that, due to the highly fragmented nature of the industry, there are
numerous orthodontic practices that are attractive candidates to become
Affiliated Practices. Additionally, the Company plans to focus on candidates who
have strong reputations in their local markets and the desire to implement the
Company's operating strategy. The Company intends to leverage the reputations
and relationships of the orthodontists affiliated with the Founding Affiliated
Practices to identify and develop growth opportunities with candidates to become
future Affiliated Practices. Many of these orthodontists hold, or have
previously held, leadership roles in various state, regional and national
associations or are affiliated with or teach at graduate orthodontic programs at
dental schools. The Company believes the visibility and reputation of these
individuals, combined with the acquisition experience of management, will
provide the Company with certain advantages in identifying, negotiating and
consummating future acquisitions.
4
<PAGE>
THE OFFERING
Common Stock offered by the
Company............................ 2,350,000 shares
Common Stock to be outstanding after
the Offering....................... 4,687,979 shares(1)
Class B Stock to be outstanding after
the Offering....................... 4,106,852 shares
Voting Rights........................ Holders of Common Stock are entitled to
one vote per share and the holders of
Class B Stock are entitled to
three-tenths ( 3/10ths) of a vote per
share. In addition, holders of the Class
B Stock are entitled currently to elect
as a class one member of the Board of
Directors and the holders of the Common
Stock are entitled to elect as a class
all other members of the Board of
Directors. The Common Stock and Class B
Stock possess ordinary voting rights and
vote together as a single class in
respect of other corporate matters. See
"Description of Capital Stock."
Conversion of the Class B Stock...... Each share of Class B Stock will
automatically convert to Common Stock on
a share-for-share basis (i) in the event
of a disposition of such share of Class B
Stock by the holder thereof (excluding
dispositions to such holder's
affiliates), (ii) in the event any person
not affiliated with Apple acquires
beneficial ownership of 15% or more of
the outstanding shares of capital stock
of the Company, (iii) in the event any
person not affiliated with Apple offers
to acquire 15% or more of the outstanding
shares of capital stock of the Company,
(iv) in the event the holder of such
share elects to so convert at any time
after the second anniversary of the date
of this Prospectus, (v) on the fifth
anniversary of the date of this
Prospectus or (vi) in the event the
holders of a majority of the outstanding
shares of Common Stock approve such
conversion. In addition, the Company may
elect to convert any outstanding shares
of Class B Stock into shares of Common
Stock in the event 80% or more of the
outstanding shares of Class B Stock as of
the date of this Prospectus have
previously been converted into shares of
Common Stock.
Use of proceeds...................... To fund the cash portion of the purchase
price for the assets of the Founding
Affiliated Practices, to repay
indebtedness and for general corporate
purposes, which are expected to include
future acquisitions, the development of
satellite offices and future capital
expenditures. See "Use of Proceeds."
Proposed American Stock Exchange
symbol............................... AO
- ------------
(1) Includes 2,337,979 shares of Common Stock to be issued in connection with
the Acquisitions and excludes (i) an aggregate of 236,363 shares of Common
Stock issuable on conversion of $2.6 million in aggregate principal amount
of convertible promissory notes (the "Convertible Notes") issued by Apple
to TriCap Funding I, L.L.C. ("TriCap") in connection with Apple's
organizational financing, which Convertible Notes are convertible into
shares of Common Stock at a conversion price equal to $11.00 per share, (ii)
an aggregate of approximately 760,000 shares of Common Stock issuable upon
exercise of stock options outstanding at a weighted average exercise price
of $10.79 per share under Apple's 1996 Stock Option Plan (the "1996 Stock
Option Plan"), (iii) approximately 240,000 shares reserved
5
<PAGE>
for future issuance under the 1996 Stock Option Plan and (iv) approximately
250,580 shares of Common Stock issuable upon the exercise of a warrant
issued to an affiliate of TriCap, with an exercise price per share equal to
the price to public per share set forth on the cover page of this
Prospectus, which warrant provides that the number of underlying shares will
be determined based upon the initial public offering price per share. The
number of shares to be outstanding on completion of the Offering will
decrease if the initial public offering price is higher, and will increase
if the initial public offering price is lower, than $11.00 per share. For
example, an aggregate of 4,493,148 shares of Common Stock would be
outstanding if that price is $12.00 while an aggregate of 4,921,777 shares
of Common Stock would be outstanding if that price is $10.00. See
"Management -- 1996 Stock Option Plan."
EXCEPT WHERE OTHERWISE SPECIFIED, INDUSTRY INFORMATION USED IN THIS
PROSPECTUS IS DERIVED FROM THE 1995 JOURNAL OF CLINICAL ORTHODONTISTS
ORTHODONTIC PRACTICE STUDY ("1995 JCO STUDY"), A BIENNIAL STUDY, AND RELATES
TO 1994 UNLESS OTHERWISE INDICATED. COMPARABLE INFORMATION FOR 1995 AND 1996 IS
NOT EXPECTED TO BE AVAILABLE UNTIL THE RELEASE OF THE 1997 JCO STUDY IN LATE
1997. THE INFORMATION COMPILED IN THE 1995 JCO STUDY RELATES TO ORTHODONTISTS
WHO HAVE COMPLETED ACCREDITED GRADUATE ORTHODONTIC TRAINING PROGRAMS AND NEITHER
THAT INFORMATION NOR ANY OTHER INDUSTRY INFORMATION SET FORTH IN THIS PROSPECTUS
INCLUDES GENERAL DENTISTS WHO ALSO PERFORM ORTHODONTIC SERVICES.
6
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following selected pro forma financial information assumes Apple has
acquired the assets and assumed certain liabilities of the Founding Affiliated
Practices, executed Service Agreements with the Founding Affiliated Practices in
connection with the Acquisitions and completed the Offering and applied the net
proceeds therefrom as described under "Use of Proceeds." This information is
derived from the unaudited pro forma consolidated financial statements of Apple
and audited financial statements of Apple included elsewhere in this Prospectus.
The unaudited pro forma consolidated financial statements have been
prepared by the Company based on data derived from the historical combined
financial statements of the Founding Affiliated Practices included elsewhere in
this Prospectus and assumptions deemed appropriate by the Company. The unaudited
pro forma financial statements may not be indicative of actual results that
might have been obtained if the transactions had occurred on the dates indicated
or that may be realized in the future. Neither expected benefits and cost
reductions anticipated by the Company nor all costs associated with the
Company's present or future cost structure have been reflected in the pro forma
financial data. The unaudited pro forma consolidated balance sheet as of
December 31, 1996 gives effect to the Acquisitions and the Offering as if those
transactions had occurred on December 31, 1996. The pro forma consolidated
statements of operations for the year ended December 31, 1996 assume the Company
had completed the transactions on January 1, 1996.
YEAR ENDED
DECEMBER 31, 1996
---------------------------
HISTORICAL PRO FORMA(1)
---------- ------------
STATEMENT OF OPERATIONS DATA:
Revenues(2).......................... $ -- $ 18,138
Costs and expenses:
Salaries, wages and benefits..... 627 7,656
Orthodontic supplies............. -- 2,548
Rent............................. 20 1,943
Advertising and marketing........ -- 438
General and administrative
expenses....................... 232 3,912
Depreciation and amortization.... 5 869
Other (income) expenses, net..... -- (31)
---------- ------------
Total costs and expenses......... 884 17,335
---------- ------------
Income (loss) before income taxes.... (884) 803
Provision for income taxes........... -- 305
---------- ------------
Net income (loss).................... $ (884) $ 498
========== ============
Net income per share................. $ .06
============
Shares outstanding(3)................ 7,708,372
============
DECEMBER 31, 1996
---------------------------
HISTORICAL PRO FORMA(1)
---------- ------------
BALANCE SHEET DATA:
Working capital...................... $ (929) $ 11,615
Total assets......................... 1,461 18,236
Long-term debt and capital lease
obligations, net of current
portion............................ -- 412
Stockholders' equity................. (884) 15,126
- ------------
(1) See the Unaudited Pro Forma Combined Financial Statements included
elsewhere in this Prospectus for a discussion of the assumptions made and
adjustments applied in preparation of this information.
(2) Represents estimated management service revenues calculated by applying the
terms of the Service Agreements to the historical operating results of the
individual Founding Affiliated Practices. No assumptions were made
regarding the anticipated payment plans to be implemented by the Founding
Affiliated Practices. See "Business -- Services and
Operations -- Affordable Payment Plans."
(3) Computed on the basis described in Note GG of the Notes to Unaudited Pro
Forma Consolidated Financial Statements.
7
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN EVALUATING THE
COMPANY AND ITS BUSINESS BEFORE PURCHASING ANY OF THE SHARES OF THE COMMON STOCK
OFFERED HEREBY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER FROM THOSE DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS.
ABSENCE OF COMBINED OPERATING HISTORY
The Company was incorporated in July 1996 and has conducted no operations
to date other than in connection with the Offering and the Acquisitions. The
Company has entered into agreements to acquire substantially all the assets and
assume certain liabilities of the Founding Affiliated Practices concurrently
with the closing of the Offering. In connection with the consummation of the
Acquisitions, the Company is entering into agreements to provide management
services ("Service Agreements") to the Founding Affiliated Practices for
initial terms of 20 years (subject to early termination by either party for
"cause," which includes a material default by or bankruptcy of the other
party). The Founding Affiliated Practices have operated as separate independent
entities. There can be no assurance that the process of integrating the
management and administrative functions of the Founding Affiliated Practices
will be successful or that the recently assembled management group will be able
to manage effectively or profitably these operations and successfully implement
the Company's operating or expansion strategies. Failure by the Company to
successfully implement its operating and expansion strategies would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Strategy" and "-- Service
Agreements."
RELIANCE ON AFFILIATED PRACTICES AND ORTHODONTISTS
The Company will receive fees for management services provided to the
Affiliated Practices under the Service Agreements. It will not employ
orthodontists or control the practice of orthodontics by the orthodontists
employed by the Affiliated Practices, and its management services revenue
generally will depend on revenue generated by the Affiliated Practices. In some
cases, the management fees will be based on the costs and expenses the Company
incurs in connection with providing management services. The profitability of
the Affiliated Practices, as well as the performance of the individual
orthodontists employed by the Affiliated Practices, will affect the Company's
profitability. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview" and "Business -- Service Agreements."
The revenue of the Affiliated Practices (and, therefore, the success of the
Company) is dependent on fees generated by the orthodontists employed by the
Affiliated Practices. In connection with the Service Agreements, each
orthodontist affiliated with a Founding Affiliated Practice will enter into an
employment agreement, substantially all of which will have a five-year term,
with the professional corporation or association in which that orthodontist owns
an equity interest (and which is a party to a Service Agreement). A substantial
reduction in the number of orthodontists employed by or associated with the
Affiliated Practices could have a material adverse effect on the financial
performance of the Company. The ability of the Affiliated Practices to replace
existing orthodontists by attracting new orthodontists may be constrained by the
limited number of new orthodontists completing post-graduate orthodontic
programs each year. Failure by the Affiliated Practices to employ a sufficient
number of orthodontists (whether by renewals of existing employment agreements
or otherwise) would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Industry" and
"-- Orthodontist Employment Agreements."
RISKS ASSOCIATED WITH EXPANSION STRATEGY
The success of the Company's expansion strategy will depend on a number of
factors, including the Company's ability to (i) identify attractive and willing
candidates to become Affiliated Practices, (ii) affiliate with acceptable
Affiliated Practices on favorable terms, (iii) adapt the Company's structure to
comply with present or future legal requirements affecting the Company's
arrangements with Affiliated Practices and comply with regulatory and licensing
requirements applicable to orthodontists and facilities
8
<PAGE>
operated and services offered by orthodontists, (iv) obtain suitable financing
to facilitate its expansion program and (v) expand the Company's infrastructure
and management to accommodate expansion. Identifying candidates to become
Affiliated Practices and proposing, negotiating and implementing economically
feasible affiliations with such groups can be a lengthy, complex and costly
process. A shortage of available orthodontists with the skills and experience
sought by the Company would have a material adverse effect on the Company's
expansion opportunities. Furthermore, the Company anticipates facing substantial
competition from other companies to establish affiliations with additional
orthodontic practices. There can be no assurance that the Company's expansion
strategy will be successful, that modifications to the Company's strategy will
not be required, that the Company will be able to effectively manage and enhance
the profitability of additional Affiliated Practices or that the Company will be
able to obtain adequate financing on reasonable terms to support its expansion
program. Furthermore, using shares of Common Stock as consideration for (or in
order to provide financing for) future acquisitions could result in significant
dilution to then-existing stockholders. In addition, future acquisitions
accounted for as purchases may result in substantial annual noncash amortization
charges for intangible assets in the Company's statements of operations. See
" -- Competition," " -- Substantial Dilution and Absence of Dividends,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "Business -- Business Strategy."
NEED FOR ADDITIONAL FINANCING
The Company's expansion strategy will require substantial capital
resources. Capital is needed not only for the acquisition of the assets of
additional Affiliated Practices, but also for the effective integration,
operation and expansion of the Affiliated Practices. In addition, the Affiliated
Practices may from time to time require capital for renovation and expansion and
for the addition of equipment and technology. The Service Agreements provide for
advances by the Company to the Founding Affiliated Practices for working capital
requirements (including any deficits in cash flows of Founding Affiliated
Practices resulting from, among other things, development of satellite offices)
and other purposes. Such loans will generally bear interest at prime plus one
percent and will be repayable over varying periods of time not to exceed five
years. The proceeds from the Offering will not be sufficient to fund the
Company's planned acquisition program in its entirety. The extent to which the
Company will be able or willing to use shares of Common Stock to consummate
acquisitions or provide future financing will depend on its market value from
time to time and, in the case of acquisitions, the willingness of owners of
potential Affiliated Practices to accept Common Stock as full or partial payment
of acquisition consideration. Using shares of Common Stock for these purposes
may result in significant dilution to then-existing stockholders. The Company
will require additional capital from outside financing sources in order to
continue its expansion program. Although the Company currently believes it will
be able to secure additional financing, there can be no assurance that the
Company will be able to obtain additional funds when needed on satisfactory
terms or at all. Any limitation on the Company's ability to obtain additional
financing could have a material adverse effect on the Company's business,
financial condition and results of operations. See " -- Substantial Dilution
and Absence of Dividends" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
PROCEEDS OF OFFERING PAYABLE TO AFFILIATES
In connection with the closing of the Acquisitions, the Company will pay,
out of proceeds from the Offering, approximately $6.4 million in cash to the
owners of the Founding Affiliated Practices, including approximately $455,000 to
Dr. Vondrak for the acquisition of his practice. The Company will also use (i)
approximately $3.0 million of the proceeds from the Offering to repay the entire
principal and interest amounts outstanding under the Convertible Notes, all of
which are held by TriCap, and to reimburse the expenses incurred by TriCap on
behalf of the Company in connection with the Offering and (ii) approximately
$500,000 of such proceeds to pay a financial advisory fee to TriCap Partners,
L.L.C. ("TriCap Partners"), an affiliate of TriCap, pursuant to a consulting
agreement between Apple and TriCap Partners. The Company has used $230,000 of
the funds advanced to it by TriCap to reimburse John G. Vondrak Apple
Orthodontix, Inc., one of the Founding Affiliated Practices ("JGVAOI"), for a
portion of the organizational expenses of Apple incurred by JGVAOI. The Company
intends to reimburse JGVAOI an
9
<PAGE>
additional $70,000 from the proceeds of the Offering to repay the remainder of
such expenses. See "Use of Proceeds" and "Certain Transactions"
GOVERNMENT REGULATION
Various federal and state laws regulate the orthodontic services industry.
Regulatory oversight includes, but is not limited to, considerations of
fee-splitting and corporate practice of orthodontics.
The laws of many states prohibit business corporations such as the Company
from engaging in the practice of orthodontics or employing orthodontists to
practice orthodontics and prohibit orthodontists from splitting fees with
non-orthodontists. The specific restrictions against the corporate practice of
orthodontics, as well as the interpretation of those restrictions by state
regulatory authorities, vary from state to state. The restrictions are generally
designed to prohibit a non-orthodontic entity (such as the Company) from
controlling the professional assets of an orthodontic practice (such as patient
records and payor contracts), employing orthodontists to practice orthodontics
(or, in certain states, employing dental hygienists or orthodontic assistants),
or controlling the content of an orthodontist's advertising or professional
practice. The laws of many states also prohibit orthodontists from sharing
professional fees with non-orthodontic entities. State orthodontic boards do not
generally interpret these prohibitions as preventing a non-orthodontic entity
from owning non-professional assets used by an orthodontist in an orthodontic
practice or providing management services to an orthodontist for a fee provided
certain conditions are met. The Company believes that its operations will not
contravene any restriction on the corporate practice of orthodontics and that
the management fees it intends to charge for its services are consistent with
the laws and regulations of the jurisdictions in which it will operate
concerning fee-splitting. There can be no assurance, however, that a review of
the Company's business relationships by courts or regulatory authorities will
not result in determinations that could prohibit or otherwise adversely affect
the operations of the Company or that the regulatory environment will not
change, requiring the Company to reorganize or restrict its existing or future
operations. The laws regarding fee-splitting and the corporate practice of
orthodontics and their interpretation are enforced by regulatory authorities
with broad discretion. There can be no assurance that the legality of the
Company's business or its relationship with the Affiliated Practices will not be
successfully challenged or that the enforceability of the provisions of any
Service Agreement will not be limited.
EXTENT OF PROTECTION OF PROPRIETARY RIGHTS
Apple relies in part on trademark, service mark, trade dress, trade secret,
unfair competition and copyright laws to protect its intellectual property
rights. There can be no assurance that the actions that have been taken by the
Company will be adequate to protect its intellectual property rights from
misappropriation by others, that the Company's proprietary information will not
become known to competitors, that others will not independently develop
substantially equivalent or better intellectual properties that do not infringe
on the Company's intellectual property rights or that others will not assert
rights in, and ownership of, proprietary rights of the Company. Furthermore, the
Company's rights to its "APPLE ORTHODONTIX" common law service mark may be
limited in market areas where a similar trademark or service mark may already be
in use.
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
Following the completion of the Acquisitions and the Offering (and assuming
the Convertible Notes will be repaid in full with proceeds from the Offering and
will not be converted into shares of Common Stock), Dr. John G. Vondrak, the
Company's Chairman and Chief Executive Officer, the other executive officers and
directors of the Company as a group, and TriCap will beneficially own
approximately 38.6%, 11.3% and 41.0%, respectively, of the outstanding shares of
Class B Stock (or an aggregate of approximately 91.0%) and 4.2%, 7.6% and none,
respectively, of the outstanding shares of Common Stock (or an aggregate of
approximately 11.5%). These persons, if acting in concert, will be able to
exercise significant influence over the Company's affairs, elect the entire
Board of Directors and (subject to Section 203 of the Delaware General
Corporation Law ("DGCL")) control the outcome of any matter submitted to a
vote of stockholders. See "Security Ownership of Certain Beneficial Owners and
Management."
10
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's future performance depends in significant part on the
continued service of its senior management, including John G. Vondrak, D.D.S.
and other key personnel, including LeeAnn Peniche. There can be no assurance
that Dr. Vondrak, the Company's senior management and other key employees will
continue to work for the Company. Loss of services of those employees could have
a material adverse effect on the Company's business, results of operations and
financial condition. The success of the Company's growth strategy will also
depend on the Company's ability to attract and retain additional high quality
personnel. See "Business -- Employees" and "Management."
COMPETITION
The Company anticipates facing substantial competition from other companies
to establish affiliations with additional orthodontic practices. The Company is
aware of one public and two private practice management companies focused on
orthodontics and several companies pursuing similar strategies in other segments
of the health care industry (including dentistry). Certain of these competitors
have greater financial and other resources than the Company (including more
established trading histories for their shares of common stock, which may be
used as currency in making acquisitions). Additional companies with similar
objectives may enter the Company's markets and compete with the Company. In
addition, the business of providing orthodontic services is highly competitive
in each market in which the Company will operate. Each of the Founding
Affiliated Practices faces local competition from other orthodontists, general
dentists and pedodontists (dentists specializing in the care of children's
teeth), some of whom have more established practices. Dentists are not
restricted by law or any governmental authority from providing orthodontic
services. Management believes the increase in recent years in dentists providing
orthodontic services has limited the growth of patient case starts performed by
orthodontists. There can be no assurance that the Company or the Affiliated
Practices will be able to compete effectively with their respective competitors,
that additional competitors will not enter their markets or that additional
competition will not have a material adverse effect on the Company. See
"Business -- Competition."
RISK OF PROVIDING ORTHODONTIC SERVICES; ADEQUACY OF INSURANCE COVERAGE
The Affiliated Practices provide orthodontic services to the public and are
exposed to the risks of professional liability and other claims. Such claims, if
successful, could result in substantial damage awards to the claimants that may
exceed the limits of any applicable insurance coverage. Although the Company
will not control the practice of orthodontics by the Affiliated Practices, it
could be asserted that the Company should be held liable for malpractice of an
orthodontist employed by an Affiliated Practice. Each Affiliated Practice has
undertaken to comply with all applicable regulations and legal requirements, and
the Company maintains liability insurance for itself and it is anticipated that
the Company will be named as an additional insured party on the liability
insurance policies of the Affiliated Practices. The Founding Affiliated
Practices have agreed to maintain comprehensive professional liability
insurance, generally with limits of not less than $1.0 million per claim and
with aggregate policy limits of not less than $3.0 million per orthodontist and,
in the event a Founding Affiliated Practice employs more than one orthodontist,
that Founding Affiliated Practices will maintain such insurance with a separate
limit for claims against that Founding Affiliated Practice in an amount
acceptable to Apple. There can be no assurance, however, that a future claim or
claims will not be successful or, if successful, will not exceed the limits of
available insurance coverage or that such coverage will continue to be available
at acceptable costs. See "Business -- Litigation and Insurance."
LITIGATION WITH ORTHODONTIC CENTERS OF AMERICA
On December 10, 1996, Orthodontic Centers of America, Inc. ("OCA") filed
a complaint in the United States District Court for the Eastern District of
Louisiana against Apple, Dr. Vondrak, John G. Vondrak, P.C. and JGVAOI alleging,
among other things, misappropriation of trade secrets and certain breaches of a
confidentiality agreement executed by Dr. Vondrak, on behalf of John Vondrak,
P.C., in favor of OCA. While Apple is not a party to the confidentiality
agreement, OCA has alleged that Apple should be bound by its terms as a result
of the relationship between Dr. Vondrak and Apple (specifically, OCA has alleged
that Dr. Vondrak and Apple are alter egos and, alternatively, that Dr. Vondrak
was acting as Apple's
11
<PAGE>
agent when he executed the confidentiality agreement). The Company intends to
vigorously defend against the claims made by OCA, which, based on the advice of
legal counsel, the Company believes are without merit.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
The market price of the Common Stock of the Company could be adversely
affected by the sale of substantial amounts of the Common Stock in the public
market following the Offering. The shares being sold in the Offering will be
freely tradable unless acquired by affiliates of the Company.
Concurrently with the closing of the Offering, security holders of the
Founding Affiliated Practices will receive, in the aggregate, 2,337,979 shares
of Common Stock as a portion of the consideration for the assets of their
practices. Certain other stockholders of the Company will hold, in the
aggregate, an additional 4,106,852 shares of Class B Stock. Those shares are not
being offered and sold pursuant to this Prospectus. None of those 6,444,831
shares were acquired in the transactions registered under the Securities Act of
1933, as amended (the "Securities Act"), and, accordingly, such shares may not
be sold except in transactions registered under the Securities Act or pursuant
to an exemption from registration. In addition, the holders of 2,337,979 of
those shares have agreed not to sell any shares of Common Stock owned by them
immediately after the consummation of the Acquisitions for a one-year period
following the Offering, subject to their right to exercise certain registration
rights. After the expiration of such restricted period, all of those shares may
be sold in accordance with Rule 144 under the Securities Act, subject to the
applicable volume limitations, holding period and other requirements of Rule
144. Substantially all of the outstanding shares of Class B Stock will become
eligible for resale pursuant to Rule 144 in October 1997, although such shares
will remain subject to a contractual resale restriction during the 180-day
period described in the following paragraph.
The Company, its directors and executive officers, TriCap and all persons
acquiring shares of Common Stock in connection with the Acquisitions have agreed
not to offer or sell any shares of Common Stock for a period of 180 days (the
"180-Day Lockup Period") following the date of this Prospectus without the
prior written consent of Bear, Stearns & Co. Inc., except that the Company may
issue, subject to certain conditions, Common Stock in connection with
acquisitions and awards under the 1996 Stock Option Plan.
Following completion of the Offering, the Company intends to register the
issuance of an additional 2,000,000 shares of its Common Stock under the
Securities Act subsequent to completion of the Offering for use by the Company
as all or a portion of the consideration to be paid in future acquisitions.
Those shares will generally be freely tradable by nonaffiliates after their
issuance, unless the sale thereof is contractually restricted. 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.
The Company anticipates that, prior to the consummation of the Offering,
the Company will have outstanding under the 1996 Stock Option Plan options to
purchase approximately 760,000 shares of Common Stock. The Company intends to
register the shares issuable upon exercise of options granted under the 1996
Stock Option Plan. See "Management -- 1996 Stock Option Plan" and "Shares
Eligible for Future Sale."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or, if a trading market does develop, that it will continue after the Offering.
The initial public offering price of the Common Stock, which will be determined
through negotiations between the Company and the Underwriters, may not be
indicative of the price at which the Common Stock will trade after the Offering.
The factors considered in making such determination will include the prevailing
market conditions, the financial condition and operating history of the Company
and the Affiliated Practices, their prospects and the prospects for the
orthodontic services industry in general, the management of the Company and the
market price of securities for companies in businesses similar to that of the
Company. The securities markets have, from time to time, experienced significant
price and volume fluctuations that may be unrelated to the operating performance
of particular
12
<PAGE>
companies. These fluctuations often substantially affect the market price of a
company's common stock. The market prices for securities of physician practice
management companies have in the past been, and can in the future be expected to
be, particularly volatile. The market price of the Common Stock may be subject
to volatility from quarter to quarter depending on announcements regarding the
Affiliated Practices and their ability to open new satellite offices,
acquisitions by the Company or its competitors, government relations,
developments or disputes concerning proprietary rights, changes in reimbursement
levels, changes in health care policy in the United States and internationally,
the issuance of stock market analyst reports and recommendations, and economic
and other external factors, as well as operating results of the Company and
fluctuations in the Company's financial results. See "-- Fluctuations in
Operating Results" and "Underwriting."
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 acquisitions and satellite office
openings, seasonal fluctuations in the demand for orthodontic services 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."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
(the "Certificate of Incorporation") and Bylaws and of Delaware law could,
together or separately, discourage potential acquisition proposals, delay or
prevent a change in control of the Company or limit the price that certain
investors might be willing to pay in the future for shares of the Common Stock.
The Certificate of Incorporation provides for "blank check" preferred stock,
which may be issued without stockholder approval, provides for a "staggered"
Board of Directors and provides that stockholders may act only at an annual or
special meeting of stockholders and may not act by written consent. In addition,
certain provisions of the Company's Bylaws restrict the right of the
stockholders to call a special meeting of stockholders, to nominate directors,
to submit proposals to be considered at stockholders' meetings and to adopt
amendments to the Bylaws. The Company also is subject to Section 203 of the
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."
SUBSTANTIAL DILUTION AND ABSENCE OF DIVIDENDS
Purchasers of shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
shares in the amount of $9.33 per share. See "Dilution." In the event the
Company issues additional Common Stock in the future, including shares that may
be issued in connection with future acquisitions, purchasers of Common Stock in
the Offering may experience further dilution in the net tangible book value per
share of Common Stock. The Company has never paid any cash dividends and does
not anticipate paying cash dividends on its Common Stock or Class B Stock in the
foreseeable future. See "Dividend Policy."
13
<PAGE>
THE COMPANY
The Company was incorporated in July 1996 and has conducted no operations
to date other than in connection with the Offering and the Acquisitions. The
Company has entered into agreements to acquire substantially all the assets and
assume certain liabilities of the Founding Affiliated Practices concurrently
with the closing of the Offering. The Company's principal executive offices are
located at One West Loop South, Suite 100, Houston, Texas 77027, and its
telephone number is (713) 964-6882.
USE OF PROCEEDS
The gross proceeds from the sale of the shares of Common Stock offered
hereby are estimated to be approximately $25.9 million (approximately $29.7
million if the Underwriters' over-allotment option is exercised in full). The
net proceeds to the Company from the sale of the shares of Common Stock offered
hereby (after deducting the underwriting discounts and commissions and estimated
Offering expenses (excluding the repayment of the entire principal and interest
amounts outstanding under the Convertible Notes issued to TriCap and the
expenses incurred by TriCap on behalf of the Company in connection with the
Acquisitions and the Offering)) are estimated to be approximately $22.0 million
(approximately $25.6 million if the Underwriters' over-allotment option is
exercised in full).
Of the $22.0 million of net proceeds, the Company intends to use (i)
approximately $6.4 million to pay the cash portion of the consideration for the
Acquisitions, (ii) approximately $2.6 million to repay TriCap amounts
outstanding under the Convertible Notes and approximately $400,000 to reimburse
TriCap for expenses incurred by TriCap on behalf of Apple, and (iii) $500,000 to
pay a financial advisory fee to an affiliate of TriCap. The remaining net
proceeds will be used for general corporate purposes, which are expected to
include future acquisitions, the development of satellite offices and future
capital expenditures. Other than with respect to the Acquisitions, the Company
currently has no agreement or understanding with respect to any future
acquisitions. Pending such uses, the net proceeds will be invested in
short-term, interest bearing, investment grade securities. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
The Convertible Notes were issued in connection with loans made by TriCap
in the aggregate amount of $2.6 million to fund Apple's organizational and other
expenses incurred prior to the completion of the Offering. The Convertible Notes
bear interest at an average rate of 8.5% per annum and are convertible, at the
option of either Apple or TriCap, into shares of Common Stock at a conversion
price of $11.00 per share. Apple does not currently intend to exercise its
conversion rights with respect to the Convertible Notes and, based on a written
representation received from TriCap, does not expect TriCap to exercise its
conversion rights. Assuming the Convertible Notes are not converted, the
indebtedness represented thereby will mature and become due on the closing of
the Offering.
DIVIDEND POLICY
It is the Company's current intention to retain earnings for the
foreseeable future to support operations and finance expansion. The payment of
any future dividends will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's earnings,
financial condition, cash flow from operations, capital requirements, expansion
plans, the income tax laws then in effect, the requirements of Delaware law and
restrictions that may be imposed in the Company's future financing arrangements.
14
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of December 31,
1996 was $(0.60) per share of Common Stock, after giving effect to the
Acquisitions. Pro forma net tangible book value per share is determined by
dividing the pro forma tangible net worth of the Company (pro forma tangible
assets less pro forma total liabilities) by the number of shares of Common Stock
and Class B Stock to be outstanding after giving effect to the Acquistions.
After giving effect to (i) the Acquisitions and (ii) the sale by the Company of
an estimated 2,350,000 shares of Common Stock offered at an assumed price of
$11.00 per share and the application of the estimated net proceeds therefrom as
set forth under "Use of Proceeds," the net pro forma tangible book value of
the Company as of December 31, 1996 would have been $1.67 per share. This
represents an immediate increase in the net tangible book value of $2.27 per
share to existing stockholders and an immediate dilution to new investors
purchasing Common Stock in the Offering of $9.33 per share. The following table
illustrates the per share dilution to new investors purchasing Common Stock in
the Offering:
Assumed initial public offering price
per share(1)......................... $ 11.00
Pro forma net tangible book value per
share as of December 31, 1996
before the Offering................ $ (0.60)
Increase per share attributable to
the Offering....................... 2.27
---------
Pro forma net tangible book value per
share after the Offering........... 1.67
---------
Dilution per share to initial public
offering investors................... $ 9.33
=========
- ------------
The dilution to new investors purchasing shares in the Offering will
increase if the initial public offering price is higher, and will decrease if
the initial public offering price is lower, than $11.00 per share.
The following table sets forth, on a pro forma basis to give effect to the
Acquisitions as of December 31, 1996, the number of shares of Common Stock and
Class B Stock purchased from the Company, the total consideration to the Company
and the average price per share paid to the Company by existing stockholders and
the new investors purchasing shares from the Company in the Offering (before
deducting underwriting discounts and commissions and estimated offering
expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders(2)............. 6,444,831 73.3% $(3,415,000) (15.2)% $(0.53)
New investors........................ 2,350,000 26.7 25,850,000 115.2 11.00
--------- ------- ----------- -------
Total........................... 8,794,831 100.0% $22,435,000 100.0%
========= ======= =========== =======
</TABLE>
- ------------
(1) Before deducting estimated underwriting discount and estimated expenses of
the Offering payable by the Company.
(2) Total consideration paid by existing stockholders represents the combined
stockholders' equity of the Founding Affiliated Practices before the
Offering, adjusted to reflect the payment of $6.4 million in cash as part of
the consideration for the Acquisitions. See "Use of Proceeds" and
"Capitalization."
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<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and the capitalization
of the Company at December 31, 1996 and as adjusted to reflect (i) the
Acquisitions and (ii) the sale of 2,350,000 shares of Common Stock offered
hereby (assuming an offering price of $11.00 per share) and the application of
the estimated net proceeds therefrom. See "Use of Proceeds." This table should
be read in conjunction with the unaudited Pro Forma Financial Statements of the
Company and the related notes thereto included elsewhere in this Prospectus.
AS OF
DECEMBER 31, 1996
-----------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
Short-term debt and capital lease
obligations:
Current portion of long-term
debt and capital lease
obligations.................... $ 515 $ 636
---------- ---------
Total short-term debt and
capital lease obligations...... $ 515 $ 636
========== =========
Long-term debt and capital lease
obligations:
Long-term debt and capital lease
obligations, net of current
portion........................ $-- $ 412
Stockholders' equity (deficit):
Class A Common Stock, $0.001 par
value, 25,000,000 shares
authorized; shares
issued and outstanding as
adjusted(1).................... -- 4
Class B Common Stock, $0.001 par
value, 4,106,852 shares
authorized; 4,106,852 shares
issued and outstanding as
adjusted....................... 4 4
Warrant to purchase
approximately 250,580 shares at
the initial offering price to
the public per share, assuming
a price of $11.00.............. -- 1,700
Additional paid-in capital...... -- 14,306
Retained earnings (deficit)..... (888) (888)
---------- ---------
Total stockholders' equity
(deficit)................ (884) 15,126
---------- ---------
Total capitalization....... $ (884) $15,538
========== =========
- ------------
(1) Excludes (i) an aggregate of 236,363 shares of Common Stock issuable on
conversion of the Convertible Notes (which are expected to be repaid with
proceeds from the Offering), (ii) approximately 760,000 shares of Common
Stock subject to options granted pursuant to the 1996 Stock Option Plan and
(iii) approximately 250,580 shares of Common Stock issuable upon the
exercise of a warrant issued to an affiliate of TriCap, with an exercise
price per share equal to the price to public per share set forth on the
cover page of this Prospectus, which warrant provides that the number of
underlying shares will be determined based upon the initial public offering
price per share. See "Management -- 1996 Stock Option Plan."
16
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following selected pro forma financial information assumes Apple has
acquired the assets and assumed certain liabilities of the Founding Affiliated
Practices, executed Service Agreements with the Founding Affiliated Practices in
connection with the Acquisitions and completed the Offering and applied the net
proceeds therefrom as described under "Use of Proceeds." This information is
derived from the unaudited pro forma consolidated financial statements of Apple
and audited financial statements of Apple included elsewhere in this Prospectus.
The unaudited pro forma consolidated financial statements have been
prepared by the Company based on data derived from the historical combined
financial statements of the Founding Affiliated Practices included elsewhere in
this Prospectus and assumptions deemed appropriate by the Company. The unaudited
pro forma financial statements may not be indicative of actual results that
might have been obtained if the transactions had occurred on the dates indicated
or that may be realized in the future. Neither expected benefits and cost
reductions anticipated by the Company nor all costs associated with the
Company's present or future cost structure have been reflected in the pro forma
financial data. The unaudited pro forma consolidated balance sheet as of
December 31, 1996 gives effect to the Acquisitions and the Offering as if those
transactions had occurred on December 31, 1996. The pro forma consolidated
statements of operations for the year ended December 31, 1996 assume the Company
had completed the transactions on January 1, 1996.
YEAR ENDED
DECEMBER 31, 1996
---------------------------
HISTORICAL PRO FORMA(1)
---------- ------------
STATEMENT OF OPERATIONS DATA:
Revenues(2).......................... $ -- $ 18,138
Costs and expenses:
Salaries, wages and benefits..... 627 7,656
Orthodontic supplies............. -- 2,548
Rent............................. 20 1,943
Advertising and marketing........ -- 438
General and administrative
expenses........................ 232 3,912
Depreciation and amortization.... 5 869
Other (income) expenses, net..... -- (31)
---------- ------------
Total costs and expenses......... 884 17,335
---------- ------------
Income (loss) before income taxes.... (884) 803
Provision for income taxes........... -- 305
---------- ------------
Net income (loss).................... $ (884) $ 498
========== ============
Net income per share................. $ .06
============
Shares outstanding(3)................ 7,708,372
============
DECEMBER 31, 1996
---------------------------
HISTORICAL PRO FORMA(1)
---------- ------------
BALANCE SHEET DATA:
Working capital...................... $ (929) $ 11,615
Total assets......................... 1,461 18,236
Long-term debt and capital lease
obligations, net of current
portion............................ -- 412
Stockholders' equity................. (884) 15,126
- ------------
(1) See the Unaudited Pro Forma Combined Financial Statements included elsewhere
in this Prospectus for a discussion of the assumptions made and adjustments
applied in preparation of this information.
(2) Represents estimated management service revenues calculated by applying the
terms of the Service Agreements to the historical operating results of the
individual Founding Affiliated Practices. No assumptions were made regarding
the anticipated payment plans to be implemented by the Founding Affiliated
Practices. See "Business -- Services and Operations -- Affordable Payment
Plans."
(3) Computed on the basis described in Note GG of the Notes to Unaudited Pro
Forma Consolidated Financial Statements.
17
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN STATEMENTS OF A
FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL
PERFORMANCE OF THE COMPANY. SUCH STATEMENTS ARE ONLY PREDICTIONS AND THE ACTUAL
EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. THE
HISTORICAL RESULTS SET FORTH IN THIS DISCUSSION AND ANALYSIS ARE NOT INDICATIVE
OF TRENDS WITH RESPECT TO ANY ACTUAL OR PROJECTED FUTURE FINANCIAL PERFORMANCE
OF THE COMPANY. THIS DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN
THIS PROSPECTUS.
OVERVIEW
The Company has conducted no significant operations to date but will be
acquiring, in connection with the Acquisitions, tangible and intangible assets
and liabilities of, and entering into Service Agreements with, the Founding
Affiliated Practices. The Company expects that its future growth will come from
(i) implementing a comprehensive operating strategy designed to drive internal
growth of the Affiliated Practices and (ii) entering into Service Agreements
with new Affiliated Practices and developing new orthodontic centers (including
satellite offices) with existing and future Affiliated Practices.
Through its Service Agreements, the Company will be providing a full
complement of practice management services to the Founding Affiliated Practices
in return for management service fees. In general, the Company's management
service revenue will be based upon the revenue generated by the Founding
Affiliated Practices, less amounts retained by the orthodontic entity. In other
cases, the Company's management fee will be based on a percent of revenue
generated by the Founding Affiliated Practices plus the reimbursement of
expenses. In either case, patient revenue is recognized based on the estimated
costs incurred as compared to the total estimated treatment cost, with
approximately 24 percent being recognized at the time of initial treatment due
to the costs incurred at the time of initial treatment. The balance of the
contract revenue is realized pro rata each month over the remaining contract
period. The 24% estimated cost at the initial treatment date is consistent with
industry standards and includes the estimated costs of diagnostic treatment plan
development, initial treatment by orthodontic personnel, orthodontic supplies
and associated administrative services. This revenue computation methodology is
based on the Company's understanding of accepted industry convention. For
Service Agreements with Founding Affiliated Practices in California and Canada,
a percentage of revenue of such Founding Affiliated Practices will be calculated
to determine service fees payable. Outside California and Canada, the amount
retained by the Founding Affiliated Practice will generally be dependent on its
financial performance, based on cash receipts and disbursements provided in the
Service Agreements. Accordingly, orthodontists affiliated with a Founding
Affiliated Practice generally will have a financial incentive to maximize
profits of the Founding Affiliated Practice. For a more complete description of
the Service Agreements, see "Business -- Service Agreements."
The expenses incurred by the Company in fulfilling its obligations under
the Service Agreements are generally of the same nature as the operating costs
and expenses that would have otherwise been incurred by the Founding Affiliated
Practices, including salaries, wages and benefits of practice personnel
(excluding orthodontists and, in some cases, orthodontic assistants and other
professional personnel), orthodontic supplies and office supplies used in
administering their clinic practices, the office (general and administrative)
expenses of the practices and depreciation and amortization of assets acquired
from the Founding Affiliated Practices. In addition to the operating costs and
expenses discussed above, the Company will be incurring personnel and
administrative expenses in connection with establishing and maintaining a
corporate office, which will provide management, administrative, marketing and
development and acquisition services.
In accordance with Staff Accounting Bulletin ("SAB") No. 48, "Transfers
of Nonmonetary Assets by Promoters or Shareholders," published by the
Securities and Exchange Commission (the "Commission"), the acquisition of the
assets and assumption of certain liabilities for all of the Founding Affiliated
Practices pursuant to the Acquisitions are accounted for by the Company at the
transferors' historical cost basis, with the shares of common stock to be issued
in those transactions being valued at the historical cost of the nonmonetary
assets acquired net of liabilities assumed. The cash consideration will be
reflected as a dividend by Apple to the owners of the Founding Affiliated
Practices. SAB No. 48 will not be applicable to
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any acquisitions made by the Company subsequent to the Offering. It is currently
anticipated that the Company's future acquisitions of certain of the assets and
liabilities of Affiliated Practices may result in substantial annual noncash
amortization charges for intangible assets in the Company's statements of
operations.
RESULTS OF OPERATIONS
HISTORICAL
The Company has conducted no significant operations to date and will not
conduct significant operations until the Acquisitions and the Offering are
completed. General and administrative expenses were incurred during the year
ended December 31, 1996 in connection with this Offering. The Company has
incurred and will continue to incur various legal, accounting, travel, personnel
and marketing costs in connection with the Acquisitions and the Offering, $2.6
million of which is being funded through the issuance of Convertible Notes to
TriCap and $0.4 million of which is being funded by other advances from TriCap.
The Convertible Notes are expected to be repaid from the proceeds of the
Offering. See "Use of Proceeds."
PRO FORMA
REVENUES. It is anticipated that substantially all the Company's revenues
will consist of fees under the Service Agreements. The revenues included in the
unaudited pro forma financial statements are calculated by applying the terms of
the Service Agreements to the historical financial results of the Founding
Affiliated Practices for the year ended December 31, 1996, assuming the
Acquisitions had been completed as of January 1, 1996.
OPERATING EXPENSES. The total pro forma operating expenses do not reflect
cost reductions anticipated by the Company or the additional corporate costs
that the Company will incur in the future (which will be material). Furthermore,
the pro forma operating expenses are based on the expenses incurred by Apple for
the period from inception, July 15, 1996, through December 31, 1996. A pro forma
adjustment has been made to reflect the incremental amount in excess of reported
salaries, wages and benefits of the annual salary compensation of the Company's
management excluding acquisitions personnel. No other adjustments were made for
estimated expenses that may have been incurred if the Company was organized on
January 1, 1996. However, the expenses of the Company do reflect pro forma
adjustments to include the costs and expenses of the Founding Affiliated
Practices that will be assumed by Apple.
PROVISION FOR INCOME TAXES. Pro forma income taxes assume that the Company
had operated as a tax-paying entity for the year ended December 31, 1996,
subject to an effective combined tax rate for state and federal income taxes of
38% for the period.
LIQUIDITY AND CAPITAL RESOURCES
If the Acquisitions had occurred on December 31, 1996, the Company would
have had pro forma working capital of $11.6 million at that date. The
approximately $0.4 million of pro forma indebtedness of the Company as of
December 31, 1996 consists primarily of capital lease obligations and debt of
the practices that Apple has agreed to assume.
A part of the Company's business strategy is to encourage Affilated
Practices to offer more affordable payment plans to patients. The Company does
not expect the affordable payment plans to have any significant negative impact
on the working capital or liquidity of the Affiliated Practices. Therefore,
Apple does not anticipate that the offering by the Affiliated Practices of more
affordable payment plans will impair the Company's ability to collect management
service revenues from the Affiliated Practices. See "Business -- Services and
Operations -- Affordable Payment Plans."
The Company anticipates making routine capital expenditures for the
Founding Affiliated Practices during the remainder of 1997 of approximately $2.0
million to fund, among other things, the development of satellite offices. The
average cost of developing a satellite office (which may vary by geographic
market) is estimated to be approximately $250,000, including initial working
capital requirements. The Service Agreements provide for advances by the Company
to the Founding Affiliated Practices for working capital requirements (including
any deficits in cash flows of Founding Affiliated Practices resulting from,
among other things, development of satellite offices) and other purposes. Such
loans will generally bear interest at prime plus one percent and will be
repayable over varying periods of time not to exceed five years. It is
anticipated that the foregoing capital expenditures will be funded from the
Company's cash flow from
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<PAGE>
operations. The Company also expects to make acquisitions of additional
orthodontic practices during 1997 that will involve the use of cash and Common
Stock.
Management believes that the existing cash proceeds of the Offering
combined with its cash flow from operations will be sufficient to fund planned
capital expenditures and ongoing operations of the Company through the end of
1998. The Company is also seeking to establish a revolving bank credit facility
and intends to register two million additional shares of Common Stock which,
when combined with the Company's cash resources, will be used in the Company's
planned acquisition program.
20
<PAGE>
BUSINESS
OVERVIEW
Apple was founded in July 1996 to provide practice management services to
orthodontic practices in the United States and Canada. The Company's objective
is to provide a full complement of practice management services designed to
drive internal growth by enhancing the ability of Affiliated Practices to: (i)
deliver quality, affordable orthodontic treatment primarily on a fee-for-service
basis; (ii) stimulate demand in their local markets by increasing consumer
awareness of the benefits, availability and affordability of orthodontic
treatment; and (iii) improve the productivity and profitability of their
practices. The Company will also seek to grow through the acquisition of
additional Affiliated Practices and the development of satellite offices that
complement existing geographic areas served by existing and future Affiliated
Practices. The Company will earn revenue by providing management,
administrative, development and other services to Affiliated Practices.
The Company has entered into definitive agreements to acquire substantially
all the tangible and intangible assets and assume certain liabilities of, and
provide long-term management services to, the Founding Affiliated Practices. The
aggregate consideration that will be paid by Apple to acquire the Founding
Affiliated Practices consists of (i) approximately $6.4 million in cash and (ii)
2,337,979 shares of Common Stock.
The Founding Affiliated Practices include 31 orthodontists and 58 offices
located in 13 states in the United States and in Calgary, Alberta. The Founding
Affiliated Practices were selected based on a variety of factors, including the
competitive and financial strengths and historical growth of their practices and
the potential for future growth in their markets. Apple also considered the
local and national reputations of the Founding Affiliated Practices within the
orthodontic services industry, their ability to manage multi-location practices
providing high levels of quality care and their desire to grow and improve the
operating efficiency of their respective practices. The Founding Affiliated
Practices were selected by Apple based on its management's extensive experience
with orthodontic practices in the United States and Canada. Of the 31 Founding
Affiliated Practices, nine are corporations (of which the orthodontist is a
stockholder and employee), 16 are professional corporations or professional
associations (of which the orthodontist is a stockholder and employee) and six
are sole proprietorships (owned and operated by the orthodontist). In connection
with the Acquisitions, each Founding Affiliated Practice has agreed to operate
through a professional corporation. For the year ended December 31, 1996, the
Founding Affiliated Practices had revenues ranging from approximately $200,000
to $1.9 million and had average patient revenues of approximately $800,000. See
"-- Summary of Terms of Acquisitions."
INDUSTRY
INDUSTRY OVERVIEW. The orthodontic services industry is highly fragmented,
with over 90% of the approximately 9,000 orthodontists in the United States
operating as sole practitioners and less than 2% being affiliated with the only
existing public practice management company specializing in orthodontics. The
industry currently generates approximately $3.5 billion in annual gross
revenues, which have grown steadily at an average rate of 7.5% per year in
recent years. Based on published industry data, over 70% of orthodontic
treatments are performed on a private pay, fee-for-service basis, 25% of
treatments are covered by traditional forms of dental insurance (generally with
a 50% or greater co-payment by the patient) and the remaining 5% of treatments
involve other payment methods, including managed care networks. Managed care
represents only a small portion of the payor sources due to the elective nature
of most orthodontic treatments. Most orthodontic practices (including all the
Founding Affiliated Practices) do not accept payment by Medicare or Medicaid.
Orthodontic treatments are principally provided by orthodontists who have
completed three years of post-graduate studies following graduation from dental
school. The number of orthodontists in the United States has grown slowly since
1990, which management believes can be attributed to the limited number of
schools offering post-graduate orthodontic programs and the small class size at
each of those schools. In
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addition to orthodontists, a number of dentists provide various orthodontic
services. The industry information set forth in this Prospectus does not include
orthodontic treatments provided by dentists.
The table below summarizes certain information from the 1995 JCO Study
concerning the United States orthodontic services industry for each of the years
presented:
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Number of orthodontists.............. 8,720 8,760 8,856 8,958 9,060
Number of new cases.................. 1,308,000 1,314,000 1,416,690 1,478,070 1,540,200
Average fee per case................. $ 3,050 $ 3,221 $ 3,401 $ 3,447 $ 3,492
</TABLE>
Based on a 1994 study performed by the Department of Orthodontics,
University of Florida College of Dentistry (the "University of Florida Study")
and management's experience, the Company believes the need for orthodontics
significantly exceeds the current demand. The University of Florida Study, which
was funded by a grant from the National Institute of Dental Research and
involved a statistical sample of approximately 3,700 children in Florida,
concluded that only approximately one out of every five children who need
orthodontics receives treatment. The University of Florida Study also indicated
that cost was a barrier to orthodontics. Children in higher socioeconomic groups
received treatment approximately six times more often than children in lower
groups despite no measurable difference in need among the groups. The University
of Florida Study did not address the market potential for adult patients, which
management believes is significant. The Company believes there is significant
opportunity to expand the orthodontic treatment population through improved
public awareness of the benefits, availability and affordability of orthodontic
treatment.
THE TRADITIONAL ORTHODONTIC PRACTICE. The traditional orthodontic practice
typically involves a single orthodontist, practicing at one primary location or
with an average of less than one satellite office, with a small number of
orthodontic assistants and business office personnel and, in some cases, an
orthodontic associate. According to the 1995 JCO Study, the average orthodontist
initiated treatment of 170 new patients in 1994 and maintained approximately 380
active patients. In addition, the 1995 JCO Study reports that only 1.3% of
orthodontists use television advertising to promote their practices. In the
traditional practice, the orthodontist manages all business aspects of the
practice. The use of third-party management services is not typical.
On an individual practice basis, the 1995 JCO Study reported median annual
revenues of $475,000 and median operating income of $191,000 in 1994. The median
overhead as a percentage of revenues was 55%, resulting in a 40% median
operating margin before orthodontist compensation, interest and taxes. Median
down payments were equal to approximately 25% of the total treatment cost.
Median case starts and active treatment cases were 170 and 380 per practice,
respectively, and the median case acceptance rate was 60%. Individual practices
on average generated over one-half of their referrals from dentists and less
than 7% of the practices utilized commercial advertising as a referral source.
Orthodontists believed they had the ability to increase case starts by 30%, yet
the median case starts have not increased significantly since 1981, the first
year of data presented in the study.
THE APPLE ORTHODONTIX APPROACH
The Company believes the traditional orthodontic practice is inefficient
and administratively burdensome to orthodontists, and can be financially
burdensome to patients, who traditionally pay approximately 25% of the total
contract amount as a down payment ($875 when applied to the average fee per case
in 1994, according to the 1995 JCO Study). The Company has developed a
comprehensive operating strategy designed to improve efficiency, increase the
number of new case starts and active cases handled by each orthodontist and
relieve orthodontists associated with Affiliated Practices of time-consuming
administrative responsibilities. As part of its operating strategy, the Company
will assist its Affiliated Practices in developing satellite offices to expand
the scope of the geographic areas they serve. The Company will also assist
Affiliated Practices in developing and implementing payment programs designed to
make orthodontic services more affordable to prospective patients, thereby
making their services available to a larger segment of the population in their
respective markets.
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The Company has implemented its operating strategy at a prototype practice
owned and, until June 1996, operated by the Company's Chairman and CEO, John G.
Vondrak, D.D.S. This practice has grown substantially since 1989, when Dr.
Vondrak acquired it, to approximately $1.9 million of revenues in 1996, placing
it among the largest sole-practitioner orthodontic practices in the United
States. Among the factors contributing to this growth have been the Company's
practice-building program (consisting of a complete training and operating
program emphasizing clear, concise and consistent communications to existing and
prospective patients in order to maximize satisfaction levels, generate
referrals and increase new case acceptance rates) and external marketing
efforts, including television advertising focusing on affordable payment plans
offered by that practice. The Company believes this prototype practice has a
higher case acceptance rate than the industry average.
The Company believes its approach provides unique benefits to orthodontists
who choose to affiliate with it by providing opportunities for the orthodontist
to: (i) drive internal growth by implementing the Company's operating strategy;
(ii) share in the increased profitability resulting from internal growth; (iii)
lower costs through economies of scale; (iv) participate in a cost-effective
national advertising program; (v) focus on patient care; and (vi) enhance
liquidity and diversification.
BUSINESS STRATEGY
The Company's business strategy emphasizes (i) implementing a comprehensive
operating strategy designed to drive internal growth of the Affiliated Practices
and (ii) expanding the Company's network of Affiliated Practices through an
aggressive acquisition program.
OPERATING STRATEGY. The primary elements of the Company's operating
strategy are (i) implementing practice-building and external marketing programs
designed to generate new patient starts through increased referrals from
existing and former patients and the use of multimedia advertising to stimulate
demand for treatment services, (ii) offering more affordable payment plans to
patients to broaden the market for orthodontic services, (iii) increasing the
operating efficiency of the Affiliated Practices by relieving the orthodontists
from various time-consuming administrative responsibilities and realizing
economies of scale, (iv) providing a systems-oriented approach to training and
education of clinic personnel to improve their communications with patients and
potential patients and increase their productivity, (v) developing satellite
offices to expand the geographic markets served by Affiliated Practices and (vi)
utilizing customized management information systems to provide detailed
financial and operating data and related analysis to Affiliated Practices and
management. Each of these elements is intended to drive the internal growth of
the Affiliated Practices while allowing them to maintain high levels of quality
care. However, operating results at each Affiliated Practice will be largely
dependent upon the skills and personality of the orthodontists employed by that
Affiliated Practice.
Management believes that the results of the prototype practice owned by Dr.
Vondrak demonstrate the effectiveness of the Company's operating strategy. In
July 1996, Dr. Vondrak delegated the operating responsibilities of this practice
to a newly hired orthodontist who recently completed her education, so that he
could devote his time fully to the formation of the Company. Since this
transfer, the continued application of the Company's operating strategy has
resulted in a comparable number of case starts based on a comparison of the
six-month period ended December 31, 1996 to the corresponding period in the
prior year.
EXPANSION STRATEGY. The Company intends to pursue an aggressive expansion
strategy designed to strengthen its position in its current markets and expand
its network of Affiliated Practices into markets it does not currently serve.
The Company believes that, due to the highly fragmented nature of the industry,
there are numerous orthodontic practices that are attractive candidates to
become Affiliated Practices. Additionally, the Company plans to focus on
candidates who have strong reputations in their local markets and the desire to
implement the Company's operating strategy. The Company intends to leverage the
reputations and relationships of the orthodontists affiliated with the Founding
Affiliated Practices to identify and develop growth opportunities with
candidates to become future Affiliated Practices. Many of these orthodontists
hold, or have previously held, leadership roles in various state, regional and
national
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associations or are affiliated with or teach at graduate orthodontic programs at
dental schools. The Company believes the visibility and reputation of these
individuals, combined with the acquisition experience of management, will
provide the Company with certain advantages in identifying, negotiating and
consummating future acquisitions.
As consideration for future acquisitions, the Company intends to use
various combinations of its Common Stock, cash and notes. The Company intends to
register two million additional shares of Common Stock under the Securities Act
subsequent to completion of the Offering for use in connection with future
acquisitions. These shares will generally be freely tradeable by non-affiliates
after their issuance, unless the sale thereof is contractually restricted. 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.
SERVICES AND OPERATIONS
The Company will manage all aspects of the Affiliated Practices operations
other than the provision of orthodontic treatment. The Company will employ all
business personnel at the offices of the Affiliated Practices and, where
permitted by applicable law and governmental regulations, also will employ the
orthodontic assistants.
ADMINISTRATIVE. The Company will earn revenue by providing management and
other services to the Affiliated Practices, including staffing, education and
training, billing and collections, cash management, purchasing, inventory
management, payroll processing, employee benefits administration, advertising
production and other marketing support, patient scheduling, financial reporting
and analysis, productivity reporting and analysis, associate recruiting and
support for acquisitions, new site development and other capital requirements.
The Company believes the orthodontists at the Affiliated Practices will benefit
from the administrative and management support provided by Apple and that these
services will substantially reduce the amount of time the orthodontists are
required to spend on administrative matters and will enable them to dedicate
more time to the growth of their professional practices. Management believes
that through economies of scale the Company will be able to provide these
services at a lower cost than could be obtained by each of the Affiliated
Practices individually. In addition, the Company believes that, due to its size
and purchasing power, it will be able to negotiate discounts on, among other
things, orthodontic and office supplies, health and malpractice insurance and
equipment.
PRACTICE-BUILDING PROGRAM. Management believes patient satisfaction
levels, practice productivity and profitability can be substantially enhanced
through a consistent training program emphasizing practice-building techniques.
The Company will implement programs designed to generate growth in case starts
by increasing (i) referrals from existing and former patients and (ii) case
acceptance rates. These programs include a full complement of training,
operating and monitoring techniques emphasizing improvements in communications
with patients and patient satisfaction levels in all facets of operations,
including initial telephone contacts with prospective patients, initial
consultations and case presentations and written or telephonic follow-ups after
office visits. The Company's programs are designed to result in clear, concise
and consistent communications between the patient and the orthodontist and his
or her staff. It is management's belief that these programs will have a positive
effect on the patients' experience and therefore positively impact the number of
patient referrals and case acceptance rates of Affiliated Practices.
EXTERNAL MARKETING. The Company and the Affiliated Practices will utilize
multimedia advertising in local markets to stimulate demand for orthodontic
treatment and promote name recognition for Apple and the Affiliated Practices.
The general public traditionally has had little information about the
availability of orthodontic services or orthodontic fees prior to an initial
consultation with an orthodontist. The advertisements will address the two
primary barriers to receiving orthodontic treatment, availability and
affordability, by focusing on the availability of orthodontic services and the
more affordable payment plans offered by the Affiliated Practices. The
advertisements will also stress the quality of care available at the Affiliated
Practices and the advantage of receiving orthodontic treatment from a
professionally trained
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<PAGE>
orthodontist as opposed to a general dentist, and will promote a toll-free
number for ease of scheduling an appointment with the local Affiliated Practice.
Generally, it is anticipated that an Affiliated Practice will spend an
amount equal to between 5% and 7% of its net revenues for advertising and
marketing, which the Company believes is significantly higher than the industry
average for traditional orthodontic practices. The Company will be responsible
for subcontracting the production of all broadcast advertising, which will be
tailored to meet local requirements. Advertisements will generally be
thirty-second television commercials and will include the names of the
affiliated orthodontists and the Company. The frequency and airing times for
these television ads will be determined by regional media consultants retained
by Apple and the Affiliated Practice in order to optimize penetration to target
market segments.
AFFORDABLE PAYMENT PLANS. Orthodontic services primarily involve private
pay, fee-for-service treatments. As part of its overall marketing strategy for
the Affiliated Practices, the Company intends to encourage the Affiliated
Practices to make orthodontic services available to a larger portion of the
population in their respective markets by offering more affordable payment
plans. Many of the Founding Affiliated Practices have historically received a
down payment equal to 25% of the total cost of services, with the remaining
amount paid equally over the term of treatment. It is contemplated that the
typical payment plan utilized after the Offering would consist of a modest
initial down payment and monthly payments thereafter for the duration of the
treatment period, generally between 26 and 34 months. Those Affiliated Practices
that offer the affordable payment plans will experience an initial decrease in
working capital. However, the Company believes the decrease in working capital
caused by the change in payment plans will be offset by an increase in the
number of patients receiving orthodontic treatment due to the combined effect of
advertising, offering more affordable payment plans and the use of its
practice-building program. The Company believes that offering more affordable
payment plans combined with the use of advertising will result in an increase in
the number of patients inquiring about orthodontic treatment. The Company also
believes that this anticipated increase combined with the use of its internal
marketing programs will result in an increase in the number of patients
receiving orthodontic treatment at the Affiliated Practices.
SATELLITE OFFICES. The Company intends to develop additional satellite
offices (or branch locations) within selected markets served by the Affiliated
Practices. The Company believes that the satellite offices will increase the
geographic area served by the Affiliated Practices, thereby (i) increasing the
potential market, (ii) leveraging the advertising budget of the Affiliated
Practices and (iii) achieving critical mass within its existing markets. It is
anticipated that the satellite offices will generally be located in high
traffic, retail-oriented areas.
Satellite offices developed by the Company will be staffed either on a
part-time basis by an orthodontist from an Affiliated Practice or on a full-time
basis by a newly recruited orthodontist, depending on the potential for
additional patients. The average cost of developing a satellite office (which
may vary by geographic market) is estimated to be approximately $250,000,
including initial working capital requirements. The Company will provide
management services and capital to develop satellite offices. The Company will
be responsible for selecting the site, negotiating the lease, designing the
office layout and furnishing the satellite office. The Company will also assist
the Affiliated Practices in recruiting orthodontists and support staff for those
satellite offices, which will be open full-time.
TRAINING AND EDUCATION. Staff and practice development programs are an
integral part of the Company's operating strategy. The Company believes its
programs will (i) increase the motivation and overall performance of the staff,
(ii) improve the level of patient satisfaction achieved by the Affiliated
Practices and (iii) improve the Company's ability to attract and retain
qualified personnel, which will collectively result in increased referrals from
existing and former patients and increased case acceptance rates for the
Affiliated Practices. The Company will provide each Affiliated Practice with
consulting and educational services. These services include a full training
program covering all non-orthodontic aspects of the practice and specific
training designed for the efficient and effective use of the Company's
management information system.
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Specifically, the Company's training program will provide each member of
the practice, from the receptionist to the orthodontist, with guidelines for
addressing questions and concerns of prospective and existing patients,
techniques for explaining treatment procedures and length of treatment,
parameters for establishing appropriate financial arrangements with each patient
and a systematic approach to monitoring the success of each area of training.
Training will be conducted both at individual clinics and in group sessions and
will include proprietary manuals, tapes and role playing activities.
MANAGEMENT INFORMATION SYSTEMS. The Company believes access to accurate,
relevant and timely financial and operating information is a key element to
providing practice management services to orthodontic practices. The Company
will offer a fully integrated financial reporting, productivity management and
patient management system at each Affiliated Practice. These systems are
designed to increase the productivity of the Affiliated Practices by enabling
the Company and the Affiliated Practices to cost-effectively monitor the
productivity of the Affiliated Practices, identify problem areas and
opportunities for improvement and advise on corrective action in a timely
manner. Productivity measures to be monitored will include case acceptance
rates, treatment times and case starts. In addition, the management information
systems will facilitate optimization of the orthodontists' time through
computerized scheduling and diagnostic and treatment recordkeeping systems. The
Company believes these systems will also improve the productivity of the
Affiliated Practices through benchmarking programs that identify and help
establish the most efficient operational procedures. As of the date of this
Prospectus, 12 of the 31 Founding Affiliated Practices have installed the
Company's management information system. This system will be made available to
the remaining Affiliated Practices following the closing of the Acquisitions.
LOCATIONS
Upon consummation of the Acquisitions, the Company will provide management
services to the following locations:
NUMBER OF
-------------------------
STATE OFFICES ORTHODONTISTS
- ------------------------------------- ------- --------------
Arizona.............................. 6 2
California........................... 10 7
Colorado............................. 10 5
Connecticut.......................... 5 3
Illinois............................. 3 1
New Mexico........................... 2 1
New York............................. 2 1
Nevada............................... 1 1
Montana.............................. 3 1
Pennsylvania......................... 4 2
Texas................................ 8 4
Utah................................. 1 1
Virginia............................. 2 1
Canada............................... 1 1
--
-------
Totals..................... 58 31
======= ==
In some metropolitan areas, the Company has and may seek to affiliate with
more than one Affiliated Practice in order to maximize advertising efficiencies.
SUMMARY OF TERMS OF ACQUISITIONS
The aggregate consideration that will be paid by Apple to acquire the
Founding Affiliated Practices consists of (i) approximately $6.4 million in cash
and (ii) 2,337,979 shares of Common Stock. The Company will also assume certain
indebtedness of the Founding Affiliated Practices of approximately $100,000.
Apple will acquire substantially all the assets necessary to operate the
business of each of the
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<PAGE>
Founding Affiliated Practices, except as limited by applicable restrictions on
the corporate practice of dentistry. See Note 6 to the Notes to Financial
Statements and " -- Government Regulation."
The consideration being paid by Apple for each Founding Affiliated Practice
was determined by arm's-length negotiations between Apple and a representative
of that Founding Affiliated Practice. Apple used the same valuation method to
negotiate the consideration being paid to each of the Founding Affiliated
Practices, including the practice wholly owned by Dr. Vondrak, which method was
based upon the Founding Affiliated Practice's gross revenue, growth potential
and newly acquired satellite offices or equipment.
In connection with the acquisition agreements relating to four of the
Founding Affiliated Practices, the Company agreed to indemnify the owners of
those practices against possible assertions against those owners by federal or
applicable state income tax authorities with respect to certain tax liabilities
arising as a result of the Acquisitions of those practices. Based on appraisals
and other analyses obtained or completed by the Company with respect to those
practices, the Company does not believe that any such indemnification
obligations will be material.
The closing of each Acquisition is subject to customary conditions. These
conditions include, among others, the accuracy on the closing date of the
Acquisitions of the representations and warranties made by the Founding
Affiliated Practices and their stockholders and by the Company; the performance
of each of their respective covenants included in the agreements relating to the
Acquisitions; and the nonexistence of a material adverse change in the results
of operations, financial condition or business of each Founding Affiliated
Practice.
Any Founding Affiliated Practice's acquisition agreement may be terminated,
under certain circumstances, prior to the closing of the Offering: (i) by the
mutual consent of Apple and the Founding Affiliated Practice; (ii) if this
Offering and the acquisition of that Founding Affiliated Practice are not closed
by December 31, 1997; (iii) by the Founding Affiliated Practice or Apple if a
material breach or default is made by the other party in the observance or in
the due and timely performance of any of the covenants, agreements or conditions
contained in the acquisition agreement; or (iv) by Apple if the Founding
Affiliated Practice breaks its continuing obligation to promptly provide Apple
with specified supplemental information.
SERVICE AGREEMENTS
Upon consummation of the Acquisitions, the Company will enter into a
Service Agreement with each Founding Affiliated Practice and its orthodontist
employees under which the Company will become the exclusive manager and
administrator of non-orthodontic services relating to the operation of the
Founding Affiliated Practice. The following is intended to be a brief summary of
the typical form of Service Agreement the Company will enter into with each
Founding Affiliated Practice. The Company expects to enter into similar
agreements with Affiliated Practices in the future. The actual terms of the
various Service Agreements vary from the description below on a case-by-case
basis, depending on negotiations with the individual Founding Affiliated
Practices and the requirements of applicable law and governmental regulations.
The service fees (the "Service Fees") payable to the Company by the
Founding Affiliated Practices under the Service Agreements vary based on the
fair market value, as determined in arm's-length negotiations, for the nature
and amount of services provided. Apple will generally collect all revenue on
behalf of the Affiliated Practices, calculate the Service Fee and remit to the
Affiliated Practice an amount equal to its revenues less the Service Fee. Such
fees are payable monthly and will be calculated pursuant to one of the following
formulas: (i) a percentage of revenues resulting from orthodontist services,
plus expenses and a specified fee, or (ii) revenues relating to orthodontist
services less an amount to be retained by orthodontists based on collections
resulting from orthodontist services subject to certain adjustments. In either
case, patient revenue generated by a Founding Affiliated Practice will be
calculated as the total of (i) 24% of the aggregate contract amounts for new
patient contracts entered into by that Founding Affiliated Practice during that
month and (ii) the aggregate of the monthly contract residuals of that Founding
27
<PAGE>
Affiliated Practice's pre-existing patient contracts (I.E., 76% of each contract
amount prorated on a monthly basis over the treatment period). In addition, with
respect to one of the Founding Affiliated Practices, the service fees are based
on flat fees that are subject to renegotiation on an annual basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
Pursuant to each Service Agreement, the Company will, among other things,
(i) act as the exclusive manager and administrator of non-orthodontist services
relating to the operation of the Founding Affiliated Practice, subject to
matters reserved to the Founding Affiliated Practice, (ii) administer the
billing of patients, insurance companies and other third-party payors and
collect on behalf of the Founding Affiliated Practice the fees for professional
orthodontic and other services and products rendered or sold by the Founding
Affiliated Practice, (iii) provide, as necessary, clerical, accounting, payroll,
legal, bookkeeping and computer services and personnel, information management,
tax return information, printing, postage and duplication services and
transcribing services, (iv) supervise and maintain custody of substantially all
files and records, (v) provide facilities, equipment and furnishings for the
Founding Affiliated Practice, (vi) prepare, in consultation with the Affiliated
Practice, all annual capital and operating budgets, (vii) order and purchase
inventory and supplies as reasonably requested by the Founding Affiliated
Practice and (viii) implement, in consultation with the Founding Affiliated
Practice, advertising programs.
Under each Service Agreement, the applicable Founding Affiliated Practice
retains the responsibility for, among other things, (i) hiring, compensating and
supervising orthodontist employees and other licensed dental professionals, (ii)
ensuring that orthodontists have the required licenses, credentials, approvals
and other certifications appropriate to the performance of their duties and
(iii) complying with federal and state laws, regulations and ethical standards
applicable to the practice of orthodontics. In addition, the Founding Affiliated
Practice will be exclusively in control of all aspects of the practice of
orthodontics and the provision of orthodontic services.
Each Service Agreement is for an initial term of twenty years, with
automatic extensions (unless specified notice is given) of five years. A Service
Agreement may be terminated by either party thereto if the other party (i) files
a petition in bankruptcy or other similar events occur or (ii) defaults in the
performance of a material duty or obligation, which default continues for a
specified term after notice. In addition, the Service Agreement may be
terminated by the Company (i) if the Founding Affiliated Practice or an
orthodontist employee engages in conduct for which the orthodontist employee's
license to practice dentistry is revoked or suspended or is the subject of any
restrictions or limitations by any governmental authority to such an extent that
he, she or it cannot engage in the practice of orthodontics or (ii) upon the
death, disability or retirement of the orthodontist. Each orthodontist that is a
party to a Service Agreement may generally terminate his obligations thereunder
on the fifth anniversary of the date he entered into the Service Agreement.
Certain of the Service Agreements also provide that they may be terminated by
the applicable Founding Affiliated Practice if any governmental authority
imposes retrictions on the ability of any orthodontist employee to practice
orthodontics during the term of the Agreement.
During the term of the Service Agreement and, subject to certain exceptions
and limitations, for a period of two years thereafter, the Founding Affiliated
Practice and each of its orthodontist employees agrees not to compete with the
Company or the other practices for which the Company provides management
services within a specified geographic area. The Founding Affiliated Practice
also agrees not to disclose certain confidential and proprietary information
relating to the Company and the Affiliated Practices.
The Founding Affiliated Practice is responsible for obtaining professional
liability insurance for the employees of the Founding Affiliated Practice (and
which will name the Company as an additional insured), and the Company is
responsible for obtaining general liability and property insurance for the
Founding Affiliated Practice.
Upon termination of a Service Agreement, the Founding Affiliated Practice
has the option to purchase and assume, and the Company has the option to require
the Founding Affiliated Practice to purchase and assume, the assets and
liabilities related to the Founding Affiliated Practice (with the assets being
valued for
28
<PAGE>
those purposes at the fair market value thereof), except in certain
circumstances where the Founding Affiliated Practice or the Company, as
applicable, was in breach of the Service Agreement.
ORTHODONTIST EMPLOYMENT AGREEMENTS
Upon consummation of the Acquisitions, each Founding Affiliated Practice
will be a party to an employment agreement with each orthodontist associated
with its practice (the "Orthodontist Employment Agreements"), including each
orthodontist who will receive cash or Common Stock in the Acquisition of such
Founding Affiliated Practice. Substantially all the Orthodontist Employment
Agreements with orthodontists who will receive cash or Common Stock in the
Acquisitions are for an initial term of five years, and continue thereafter on a
year-to-year basis until terminated under the terms of the agreements.
COMPETITION
The Company anticipates facing substantial competition from other companies
to establish affiliations with additional orthodontic practices. The Company is
aware of one public and two private practice management companies focused on
orthodontics and several companies pursuing similar strategies in other segments
of the health care industry (including dentistry). Certain of these competitors
have greater financial and other resources than the Company (including more
established trading histories for their shares of common stock, which may be
used as currency in making acquisitions). Additional companies with similar
objectives may enter the Company's markets and compete with the Company. In
addition, the business of providing orthodontic services is highly competitive
in each market in which the Company will operate. Each of the Founding
Affiliated Practices faces local competition from other orthodontists, general
dentists and pedodontists (dentists specializing in the care of children's
teeth), some of whom have more established practices. Dentists are not
restricted by law or any other governmental authority from providing orthodontic
services. Management believes the increase in recent years of dentists providing
orthodontic services has limited the growth of patient case starts performed by
orthodontists. There can be no assurance that the Company or the Affiliated
Practices will be able to compete effectively with their respective competitors,
that additional competitors will not enter their markets or that additional
competition will not have a material adverse effect on the Company.
EMPLOYEES
At the date of this Prospectus, the Company employed ten persons and upon
consummation of the Acquisitions, the Company expects that it will have
approximately 284 employees of which approximately 15 will be employed at the
Company's headquarters and approximately 269 will be employed at the locations
of the Founding Affiliated Practices. None of the Company's employees are
represented by collective bargaining agreements. The Company has not experienced
any work stoppages as a result of labor disputes and the Company considers its
employee relations to be good.
LITIGATION AND INSURANCE
The Affiliated Practices provide orthodontic services to the public and are
exposed to the risk of professional liability and other claims. Such claims, if
successful, could result in substantial damage awards to the claimants that may
exceed the limits of any applicable insurance coverage. Although the Company
does not control the practice of orthodontics by the Affiliated Practices, it
could be asserted that the Company should be held liable for malpractice of an
orthodontist employed by an Affiliated Practice. Each Affiliated Practice has
undertaken to comply with all applicable regulations and legal requirements, and
the Company maintains liability insurance for itself and it is anticipated that
the Company will be named as an additional insured party on the liability
insurance policies of the Affiliated Practices. The Founding Affiliated
Practices have agreed to maintain comprehensive professional liability
insurance, generally with limits of not less than $1.0 million per claim and
with aggregate policy limits of not less than $3.0 million per orthodontist and,
in the event a Founding Affiliated Practice employs more than one orthodontist,
the Founding Affiliated Practices will maintain such insurance with a separate
limit for claims against that Founding Affiliated Practice in an amount
acceptable to Apple. There can be no assurance, however, that a
29
<PAGE>
future claim or claims will not be successful or, if successful, will not exceed
the limits of available insurance coverage or that such coverage will continue
to be available at acceptable costs.
On December 10, 1996, OCA filed a complaint in the United States District
Court for the Eastern District of Louisiana against Apple, Dr. Vondrak, John G.
Vondrak, P.C. and JGVAOI, alleging, among other things, misappropriation of
trade secrets and certain breaches of a confidentiality agreement executed by
Dr. Vondrak, on behalf of John Vondrak, P.C., in favor of OCA. While Apple is
not a party to the confidentiality agreement, OCA has alleged that the Company
should be bound by its terms as a result of the relationship between Dr. Vondrak
and Apple (specifically, OCA has alleged that Dr. Vondrak and Apple are alter
egos and, alternatively, that Dr. Vondrak was acting as Apple's agent when he
executed the confidentiality agreement). The Company intends to vigorously
defend against the claims made by OCA, which, based on advice of counsel, the
Company believes are without merit.
The Company is not currently a party to any other claims, suits or
complaints relating to services and products provided by the Company or the
Founding Affiliated Practices, although there can be no assurances that such
claims will not be asserted against the Company in the future. The Company will
become subject to certain pending claims as the result of successor liability in
connection with the Acquisitions; however, it is the opinion of management that
the ultimate resolution of those claims will not have a material adverse effect
on the financial position or operating results of the Company.
The Founding Affiliated Practices have maintained professional liability
insurance coverage on a claims-made basis. Such insurance provides coverage for
claims asserted when the policy is in effect regardless of when the events that
caused the claim occurred. The Company intends to acquire similar coverage after
the closing of the Acquisitions, since the Company, as a result of the
Acquisitions, will in some cases succeed to the liabilities of the Founding
Affiliated Practices. Therefore, claims may be asserted after the Acquisitions
against the Company for events that occurred prior to the Acquisitions.
GOVERNMENT REGULATION
The orthodontic services industry is regulated extensively at both the
state and federal levels. Regulatory oversight includes, but is not limited to,
considerations of fee-splitting, corporate practice of orthodontics and state
insurance regulation.
FEE-SPLITTING; CORPORATE PRACTICE OF ORTHODONTICS
The laws of many states prohibit business corporations such as the Company
from engaging in the practice of orthodontics or employing orthodontists to
practice orthodontics and prohibit orthodontists from splitting fees with
non-orthodontists. The specific restrictions against the corporate practice of
orthodontics, as well as the interpretation of those restrictions by state
regulatory authorities, vary from state to state. The restrictions are generally
designed to prohibit a non-orthodontic entity (such as the Company) from
controlling the professional assets of an orthodontic practice (such as patient
records and payor contracts), employing orthodontists to practice orthodontics
(or, in certain states, employing dental hygienists or orthodontic assistants),
or controlling the content of an orthodontist's advertising or professional
practice. Pursuant to the agreements entered into in connection with the
Acquisitions, Apple will not acquire any professional assets. The Company does
not control the practice of orthodontics or employ orthodontists to practice
orthodontics. Moreover, in states in which it is prohibited, the Company does
not employ orthodontic hygienists or orthodontic assistants. The Company
provides management services to the Affiliated Practices, and believes that the
management fees the Company charges for those services are consistent with the
laws and regulations of the jurisdictions in which it operates. Therefore, the
Company believes it would not be regarded as "owner," "operator" or
"manager" of the Affiliated Practices within the meaning of those terms under
the state orthodontic practice acts and believes that its operations comply with
the above-described laws to which it is subject.
The laws of many states also prohibit orthodontists from sharing
professional fees with non-orthodontic entities. The Company believes that its
operations will not contravene any restriction on the corporate practice of
orthodontics and that the management fees it intends to charge for its services
are
30
<PAGE>
consistent with the laws and regulations of the jurisdictions in which it will
operate concerning fee-splitting. There can be no assurance, however, that a
review of the Company's business relationships by courts or regulatory
authorities will not result in determinations that could prohibit or otherwise
adversely affect the operations of the Company or that the regulatory
environment will not change, requiring the Company to reorganize or restrict its
existing or future operations. The laws regarding fee-splitting and the
corporate practice of orthodontics and their interpretation are enforced by
regulatory authorities with broad discretion. There can be no assurance that the
legality of the Company's business or its relationship with the Affiliated
Practices will not be successfully challenged or that the enforceability of the
provisions of any Service Agreement will not be limited.
State dental boards do not generally interpret these prohibitions as
preventing a non-orthodontic entity from owning non-professional assets used by
an orthodontist in an orthodontic practice or providing management services to
an orthodontist for a fee provided that the following conditions are met: a
licensed dentist has complete control and custody over the professional assets;
the non-orthodontic entity does not employ or control the orthodontists (or, in
some states, orthodontic hygienists or orthodontic assistants); all orthodontic
services are provided by a licensed dentist; licensed dentists have control over
the manner in which orthodontic care is provided and all decisions affecting the
provision of orthodontic care. State laws generally require that the amount of a
management fee be reflective of the fair market value of the services provided
by the management company and in certain states require that any management fee
be a flat fee or cost-plus fee based on the cost of services performed by the
Company. In general, the state orthodontic practice acts do not address or
provide any restrictions concerning the manner in which companies account for
revenues from an orthodontic practice subject to the above-noted restrictions
relating to control over the professional activities of the orthodontic
practice, ownership of the professional assets of an orthodontic practice and
payments for management services. See "Risk Factors -- Government Regulation."
STATE INSURANCE REGULATION
Although the Company does not anticipate entering into managed care
contracts, there are certain regulatory risks associated with the Company's role
in negotiating and administering managed care contracts. The application of
state insurance laws to other than various types of fee for service arrangements
is an unsettled area of law and is subject to interpretation by regulators with
broad discretion. As the Company or the Affiliated Practices contract with
third-party payors, including self-insured plans, for certain non-fee for
service basis arrangements, the Company may become subject to state insurance
laws. Specifically, in some states, state insurance regulators may determine
that the Company or an Affiliated Practice is engaged in the business of
insurance because some of the managed care contracts to which an Affiliated
Practice may become a party may contain capitation features. The Company is
reviewing, and where appropriate modifying, the terms of certain of its
capitation contracts to reduce the likelihood that they could be characterized
as insurance contracts. In the event that the Company or an Affiliated Practice
is determined to be engaged in the business of insurance, it could be required
either to seek licensure as an insurance company or to change the form of the
relationships with third-party payors and, as a result the Company's revenues
may be adversely affected.
HEALTH CARE REFORM PROPOSALS
The United States Congress has considered various types of health care
reform, including comprehensive revisions to the current health care system. It
is uncertain what, if any, legislative proposals will be adopted in the future
or what actions federal or state legislatures or third-party payors may take in
anticipation of or in response to any health care reform proposals or
legislation. Health care reform legislation could have a material adverse effect
on the operations of the Company, and changes in the health care industry, such
as the growth of managed care organizations and provider networks, may result in
lower payment levels for the services of orthodontic practitioners and lower
profitability for Affiliated Practices.
31
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information concerning the Company's
directors, the executive officers and key employees of the Company (ages are as
of March 31, 1997):
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------- --- ---------------------------------------------------
<S> <C> <C>
John G. Vondrak, D.D.S......................... 56 Chairman of the Board and Chief Executive Officer
Robert J. Syverson............................. 47 President and Chief Operating Officer
Michael W. Harlan.............................. 36 Vice President and Chief Financial Officer
H. Steven Walton............................... 39 Vice President of Acquisitions
W. Daniel Cook................................. 41 Chief Administrative Officer and a Director
William W. Sherrill............................ 70 Director
LeeAnn Peniche*................................ 36 Director of Training
Wm. Randol Womack, D.D.S.*..................... 58 Director of Business Development
Charles W. Sommer*............................. 32 Controller
</TABLE>
- ------------
* Key Employee
The executive officers of the Company are elected annually by the Board of
Directors of the Company and serve at the discretion of the Board.
JOHN G. VONDRAK, D.D.S. has been Chairman of the Board of Directors and
Chief Executive Officer of the Company since October 1996 and has served as a
director of the Company since July 1996. Dr. Vondrak has been the President and
sole shareholder of JGVAOI, one of the Founding Affiliated Practices, for more
than the past five years. Dr. Vondrak is a licensed dentist, a graduate of an
American Dental Association accredited orthodontic program and has maintained a
private orthodontic practice for over 24 years. He is a member of the American
Association of Orthodontists and the Southwest Society of Orthodontists and has
served as President of the New Mexico Orthodontic Society (1979).
ROBERT J. SYVERSON has been President of the Company since November 1996
and Chief Operating Officer of the Company since October 1996. From July 1996
through October 1996, Mr. Syverson served as a consultant to the Company on
operational and financial matters. From February 1979 through April 1996, Mr.
Syverson held various executive positions in the finance operations and sales
departments of "A" Company Orthodontics, a manufacturer and supplier of
orthodontic materials. Positions included Vice President of Finance, Vice
President of Operations, Vice President International Sales and most recently,
Executive Vice President Sales. "A" Company Orthodontics was an affiliate of
Johnson & Johnson from April 1982 through June 1994. Prior thereto, Mr. Syverson
held various positions with Coopers & Lybrand as a certified public accountant,
where he was a manager from July 1977 through January 1979.
MICHAEL W. HARLAN has been Vice President and Chief Financial Officer of
the Company since March 1997. From December 1996 to February 1997, Mr. Harlan
served as a consultant to the Company on financial and accounting matters. From
April 1991 through December 1996, Mr. Harlan held various positions in the
finance and acquisition departments of Sanifill, Inc., an international
environmental services company, where he had been the Treasurer since September
1993. While at Sanifill, Inc., Mr. Harlan participated in over 100 acquisitions
and was actively involved in raising in excess of $500 million of public and
private capital. From May 1982 through April 1991, Mr. Harlan held various
positions in the tax and corporate financial consulting services division of
Arthur Andersen LLP, where he had been a manager since July 1986. Mr. Harlan is
a certified public accountant.
H. STEVEN WALTON is Vice President of Acquisitions. Mr. Walton served as
Vice President -- Government Affairs and General Counsel of Sanifill, Inc., an
international environmental services company, from June 1994 to August 1996.
Sanifill was acquired by USA Waste Services, Inc. in August 1996, and Mr. Walton
served as Vice President -- Business Development for USA Waste from August 1996
to March 1997. Before joining Sanifill, Mr. Walton was Senior Vice President and
General Counsel of Catalyst
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Energy Corporation, an independent power company, and Of Counsel to the law firm
Blackwell, Sanders, Matheny, Weary & Lombardi, Kansas City, Missouri.
W. DANIEL COOK has served as a director of the Company since October 1996
and as Chief Administrative Officer since February 1997. From December 1996 to
January 1997 Mr. Cook served as a consultant to the Company on various legal
matters. Prior thereto he was a partner at the law firm of Breard, Raines &
Cook, P.L.L.C. (1996 to 1997) and was associated with the law firm of Page,
Mannio, Peresich, Dickinson & McDermott, P.L.L.C. (1991 to 1995).
WILLIAM W. SHERRILL has served as a director of the Company since October
1996. He is an Executive Professor at the University of Houston College of
Business Administration and is the Director for the University of Houston's Conn
Center for Entrepreneurship & Innovation. Mr. Sherrill was formerly the
principal of William W. Sherrill, Financial Consultants from 1974 to 1981. From
1971 to 1974, Mr. Sherrill served as the President of Associates Corporation of
North America and was a director of Gulf and Western Industries, Inc. Before
joining Associates Corporation, he was appointed by the President of the United
States in 1967, and confirmed by the U.S. Senate, to fill an unexpired term as
Governor of the Federal Reserve Board in Washington D.C. Governor Sherrill was
reappointed by the President, and again confirmed by the Senate, to a full
14-year term on the Board of Governors. Prior to his Federal Reserve
appointment, he was the Director of the Federal Deposit Insurance Corporation,
being appointed by the President, and confirmed by the Senate, to the FDIC's
three-member Board of Directors. Before joining the FDIC, he was President and
Chief Operating Officer of the Homestead Bank, Houston, Texas, from 1963 to
1966. Mr. Sherrill is being appointed to the Company's Board of Directors
pursuant to the provisions of a funding agreement between Apple and TriCap. This
funding agreement will terminate pursuant to its terms upon completion of the
Offering. See "Certain Transactions -- Agreements with TriCap."
LEEANN PENICHE has been Director of Training of the Company since March
1997. From September 1996 to February 1997, Ms. Peniche served as a consultant
to the Company on various practice development matters. In July 1989, Ms.
Peniche founded Peniche & Associates, Inc., a consulting firm specializing in
the development and implementation of practice development techniques for
orthodontic practices throughout North America, where she has served as its
President from inception to the date of this Prospectus. Ms. Peniche has entered
into a three-year employment agreement with the Company. From June 1978 until
July 1989, Ms. Peniche held various positions within several orthodontic
clinics, including dental assistant and office manager. From January 1985 until
September 1991, Ms. Peniche was on the faculty of Paradigm Practice Management
Company, where she specialized in training orthodontists and their staff in
practice development activities. Ms. Peniche is a frequent lecturer with the
American Association of Orthodontics, the Pacific Coast Orthodontic Society and
numerous other private orthodontic societies. Ms. Peniche is a Registered Dental
Assistant, specializing in orthodontics.
WM. RANDOL WOMACK, D.D.S., has been Director of Business Development since
March 1997. From December 1996 to February 1997, Dr. Womack has served as a
consultant to the Company. Prior thereto, Dr. Womack practiced orthodontics
beginning in 1966 in Clovis, New Mexico, with a satellite practice in Tucumari,
New Mexico, and subsequently established a practice in Phoenix, Arizona, where
he has practiced orthodontics since 1972.
CHARLES W. SOMMER has been Controller of the Company since March 1997. From
January 1997 to February 1997, Mr. Sommer served as a consultant to the Company
on various accounting matters. From February 1996 through January 1997, Mr.
Sommer was the Corporate Controller of COREStaff, Inc., a publicly traded,
national provider of temporary services, which has grown through acquisitions
since its inception. From November 1993 through February 1996, Mr. Sommer was
assistant corporate controller of Sanifill, Inc., where he was responsible for
Commission reporting and financial due diligence on acquisitions. From July 1986
through November 1993, Mr. Sommer held various positions in the audit division
of Arthur Andersen LLP, where he had been a manager since July 1990. Mr. Sommer
is a certified public accountant.
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<PAGE>
BOARD OF DIRECTORS
The Board of Directors of the Company currently is composed of three
directors. The Company intends to expand the Board of Directors shortly after
the Offering to add two additional directors, neither of whom will be affiliated
with the Company or its affiliates. The Board of Directors will be divided into
three classes with two directors in each class, with the term of one class
expiring at the annual meeting of stockholders in each year, commencing 1998. At
each annual meeting of stockholders, directors of the class the term of which
then expires will be elected by the holders of the Common Stock to succeed those
directors whose terms are expiring.
On closing of the Offering, there will be three committees of the Board:
Audit, Compensation and Executive. The members of the Audit and Compensation
Committees will not be employees of the Company.
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company will receive a fee of $2,000 for attendance at each Board of
Directors meeting and $1,000 for each committee meeting (unless held on the same
day as a Board of Directors meeting) and an initial grant of nonqualified
options to purchase 12,500 shares of Common Stock. See " -- 1996 Stock Option
Plan." All directors of the Company are reimbursed for out-of-pocket expenses
incurred in attending meetings of the Board of Directors or committees thereof,
and for other expenses incurred in their capacity as directors of the Company.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid by the Company
during the fiscal year 1996 for its Chairman of the Board and Chief Executive
Officer.
ANNUAL
COMPENSATION
NAME SALARY
- ------------------------------------- -------------
John G. Vondrak, D.D.S............... $75,000(1)
- ------------
(1) Dr. Vondrak received no cash bonus or other form of annual compensation
other than salary during 1996.
Apple was incorporated in July 1996 and has not conducted any operations to
date other than in connection with the Offering and the Acquisitions. The
Company anticipates that during 1997 its most highly compensated executive
officers will be Dr. Vondrak and Messrs. Syverson, Harlan, Walton and Cook (the
"Named Executive Officers"), each of whom has entered or will enter into an
employment agreement providing for an annual salary of $180,000, $150,000,
$130,000, $130,000 and $120,000, respectively, and providing that they be
full-time employees of Apple. See " -- Employment Agreements."
In addition to base salary, the Named Executive Officers through their
employment agreements are eligible for bonuses based on earnings performance of
the Company, and Mr. Walton is entitled to receive certain commissions upon the
consummation of future acquisitions.
Apple entered into agreements with Messrs. Syverson, Harlan and Cook
pursuant to which the Company sold to such officers 160,502 shares, 94,295
shares and 210,659 shares of Class B Stock, respectively, at a nominal purchase
price. Each holder of such shares is entitled to all rights of ownership of
Common Stock, including the right to vote and receive dividends, subject to
certain restrictions set forth in a subscription agreement entered into by the
Company and each such holder (each a "Subscription Agreement"). Each
Subscription Agreement provides that, until the restrictions affecting such
shares lapse, the holder may not sell, transfer, pledge or otherwise dispose of
the shares subject to the agreement. Each Subscription Agreement also provides
that, in the event of the termination of the employment of such holder (other
than as a result of termination without cause, death, disability or a change in
control of the Company), the Company shall have the right to repurchase any
shares with respect to which the restrictions imposed by the Subscription
Agreement have not lapsed at the price per share paid by the executive officer.
Each Subscription Agreement further provides that, in the event of a change in
control of the Company
34
<PAGE>
(defined to include, among other events, the acquisition by any person or entity
of 25% or more of the combined voting power of the Company's then outstanding
securities), the executive officer will be entitled to put to the Company all
shares purchased pursuant to such Subscription Agreement that such person then
owns (provided such shares are then subject to resale restrictions under federal
securities laws), and the Company will be required to purchase all such shares,
at a price equal to the fair market value thereof at the time the change in
control occurs.
With respect to Messrs. Syverson and Harlan, the Subscription Agreements
provide that the restrictions will lapse with respect to 50% of each holder's
shares upon consummation of the Offering and that the restrictions on such
holder's remaining shares will lapse on the first anniversary of the
consummation date of the Offering. The Subscription Agreement between Apple and
Mr. Cook provides that the restrictions will lapse immediately upon issuance
with respect to approximately 24% of his shares and that the restrictions on the
remaining shares shall lapse in two equal installments upon consummation of the
Offering and on the first anniversary of the consummation date of the Offering.
In January 1997, the Company granted options to purchase 135,000 shares,
100,000 shares, 90,000 shares, 179,295 shares and 70,000 shares of Common Stock
to Dr. Vondrak, Mr. Syverson, Mr. Harlan, Mr. Walton and Mr. Cook, respectively,
under the Company's 1996 Stock Option Plan, exercisable at the initial public
offering price per share set forth on the cover page of this Prospectus. Such
options will expire in January 2007 and will vest, with respect to all but one
option to acquire 94,295 shares granted to Mr. Walton, as to 25% of the
underlying shares on the date the Offering is consummated and with respect to
the remaining underlying shares on the next three anniversaries of such date in
25% increments. With respect to the option to acquire 94,295 shares granted to
Mr. Walton, such option vests as to 50% of the underlying shares on the date the
Offering is consummated and as to the remaining underlying shares on the first
anniversary of such date. See "-- 1996 Stock Option Plan."
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Dr. Vondrak and
Messrs. Syverson, Harlan, Walton and Cook. The following summary of these
agreements, which will be effective on the closing of the Acquisitions and the
Offering, does not purport to be complete and is qualified by reference to such
agreements, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. Each of these agreements provides
for an annual base salary in an amount not less than the initial specified
amount and entitles the employee to participate in all the Company's
compensation plans (as defined) in which other executive officers of the Company
participate. Each of these agreements also has a continuous three-year term
subject to the right of the Company and the employee to terminate the employee's
employment at any time. If the employee's employment is terminated by the
Company without cause (as defined) or by the employee with good reason (as
defined), the employee will be entitled, during each of the years in the
three-year period beginning on the termination date, to (i) periodic payments
equal to his average annual cash compensation (as defined) from the Company,
including bonuses, if any, during the two years (or such shorter period of
employment) preceding the termination date, and (ii) continued participation in
all the Company's compensation plans (other than the granting of new awards
under the 1996 Stock Option Plan or any other performance-based plan). Except in
the case of a termination for cause, any stock options previously granted to the
employee under the Incentive Plan that have not been exercised and are
outstanding as of the time immediately prior to the date of his termination will
remain outstanding (and continue to become exercisable pursuant to their
respective terms) until exercised or the expiration of their term, whichever is
earlier. If a change of control (as defined) of the Company occurs, the employee
will be entitled to terminate his employment at any time during the 365-day
period following that change of control and receive a lump-sum payment equal to
three times his highest annual base salary under the agreement (plus such
amounts as may be necessary to hold the employee harmless from the consequences
of any resulting excise or other similar purpose tax relating to "parachute
payments" under the Internal Revenue Code of 1986, as amended (the "Code")).
Each employment agreement contains a covenant limiting the employee's right to
compete against the Company for a period of one year following termination of
employment.
35
<PAGE>
Each Founding Affiliated Practice will enter into an employment agreement
with its orthodontist employees. See "Business -- Orthodontist Employment
Agreements."
1996 STOCK OPTION PLAN
In December 1996, the Board of Directors adopted, and the stockholders of
the Company approved, the 1996 Stock Option Plan. The purpose of the 1996 Stock
Option Plan is to provide employees, non-employee directors, advisors and
orthodontists with practice management contracts with the Company or a
subsidiary with additional incentives by increasing their proprietary interest
in the Company. The Company has reserved 1,000,000 shares of Common Stock for
use in connection with the 1996 Stock Option Plan (which includes 760,000 shares
subject to options previously granted). Beginning with the Company's first
fiscal quarter after the closing of this Offering and continuing each fiscal
quarter thereafter, the number of shares available for use in connection with
the 1996 Stock Option Plan will be the greater of 1,000,000 or 12% of the number
of shares of Common Stock outstanding on the last day of the preceding calendar
quarter.
The 1996 Stock Option Plan provides for the grant of incentive stock
options ("ISOs"), as defined in Section 422 of the Code, and nonqualified
stock options (collectively, "Awards"). Following the consummation of the
Offering, the 1996 Stock Option Plan will be administered by the Compensation
Committee of the Board of Directors, which will be comprised of not less than
two members of the Board of Directors (the "Committee"). Prior to the
consummation of the Offering, the 1996 Stock Option Plan had been administered
by the Company's full Board of Directors. The Committee has, subject to the
terms of the 1996 Stock Option Plan, the sole authority to grant Awards under
the 1996 Stock Option Plan, to interpret the 1996 Stock Option Plan and to make
all other determinations necessary or advisable for the administration of the
1996 Stock Option Plan.
All of the Company's employees, non-employee directors, advisors and
orthodontists with practice management contracts with the Company or a
subsidiary are eligible to receive Awards under the 1996 Stock Option Plan, but
only employees of the Company are eligible to receive ISOs. Awards will be
exercisable during the period specified in each option agreement and will
generally be exercisable in installments pursuant to a vesting schedule to be
designated by the Committee. Notwithstanding the provisions of any option
agreement, options will become immediately exercisable in the event of certain
events including certain merger or consolidation transactions and changes in
control of the Company. No option will remain exercisable later than ten years
after the date of grant (or five years from the date of grant in the case of
ISOs granted to holders of more than 10% of Common Stock).
The exercise price for ISOs granted under the 1996 Stock Option Plan may be
no less than the fair market value of the Common Stock on the date of grant (or
110% of the fair market value in the case of ISOs granted to employees owning
more than 10% of the Common Stock). The per share exercise price for
nonqualified options granted under the 1996 Stock Option Plan will be in the
discretion of the Committee, but may not be less than the fair market value of a
share of Common Stock on the date of grant.
There are generally no federal income tax consequences upon the grant of an
option under the 1996 Stock Option Plan. Upon exercise of a nonqualified option,
the optionee generally will recognize ordinary income in the amount equal to the
difference between the fair market value of the option shares at the time of
exercise and the exercise price, and the Company is generally entitled to a
corresponding tax deduction. When an optionee sells shares issued upon the
exercise of a non-qualified stock option, the optionee realizes short-term or
long-term capital gain or loss, depending on the length of the holding period,
but the Company is not entitled to any tax deduction in connection with such
sale.
An optionee will not be subject to federal income taxation upon the
exercise of ISOs granted under the 1996 Stock Option Plan, and the Company will
not be entitled to a federal income tax deduction by reason of such exercise. A
sale of shares of Common Stock acquired upon exercise of an ISO that does not
occur within one year after the date of exercise or within two years after the
date of grant of the option generally will result in the recognition of
long-term capital gain or loss by the optionee in an amount equal to the
difference between the amount realized on the sale and the exercise price, and
the Company is not entitled to any tax deduction in connection therewith. If a
sale of shares of Common Stock acquired upon exercise of an ISO occurs within
one year from the date of exercise of the option or within two years from the
date
36
<PAGE>
of the option grant (a "disqualifying disposition"), the optionee generally
will recognize ordinary income equal to the lesser of (i) the excess of the fair
market value of the shares on the date of exercise of the options over the
exercise price or (ii) the excess of the amount realized on the sale of the
shares over the exercise price. Any amount realized on a disqualifying
disposition in excess of the amount treated as ordinary income will be long-term
or short-term capital gain, depending upon the length of time the shares were
held. The Company generally will be entitled to a tax deduction on a
disqualifying disposition corresponding to the amount of ordinary income
recognized by the optionee.
The Company anticipates that upon the consummation of the Offering it will
have (i) outstanding options to purchase a total of approximately 760,000 shares
of Common Stock under the 1996 Stock Option Plan and (ii) options to purchase
240,000 additional shares available for grant under the 1996 Stock Option Plan.
On the date the Offering closes, each nonemployee director automatically
will be granted nonqualified stock options ("NSOs") to purchase 10,000 shares
of Common Stock. In addition, on the first business day of the month following
the date on which each annual meeting of the Company's stockholders is held
(each an "Annual Director Award Date"), each nonemployee director
automatically will be granted NSOs to purchase 5,000 shares of Common Stock. Any
person who first becomes a nonemployee director after the date the Offering
closes otherwise than by election at an annual meeting of stockholders
automatically will be granted, on the date of his or her election, NSOs to
purchase 10,000 shares of Common Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to December 1996, the Company did not have a Compensation Committee,
and executive compensation has been set by the Company's Board of Directors.
37
<PAGE>
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
The following table provides certain information concerning the issuance of
the outstanding shares of Class B Stock:
<TABLE>
<CAPTION>
DATE OF NUMBER OF AGGREGATE PURCHASE
NAME ISSUANCE SHARES PRICE
- -------------------------------- --------- ----------- -------------------
<S> <C> <C> <C>
John G. Vondrak, D.D.S.......... 10-11-96 1,667,217 $ 4.16
TriCap Funding I, L.L.C......... 10-11-96 1,685,274 $ 4.20
Robert J. Syverson.............. 10-11-96 160,502 $ 0.40
W. Daniel Cook.................. 10-11-96 210,659 $ 0.53
Michael W. Harlan............... 12-9-96 94,295 $ 70.50
</TABLE>
All outstanding shares of Class B Stock are convertible into shares of
Common Stock under certain circumstances. See "Description of Capital
Stock -- Common Stock and Class B Stock." The purchase prices paid for the
foregoing shares of capital stock were the fair market value on the date of
issuance as determined by the Board of Directors. For a description of the
Subscription Agreements relating to the issuances of Class B Stock to Messrs.
Syverson, Cook and Harlan, see "Management -- Executive Compensation."
In connection with the Acquisition of JGVAOI, Dr. Vondrak will receive
approximately 165,442 shares of Common Stock and $455,000, and will enter into a
Service Agreement providing for service fee payments to the Company. See
"Business -- Service Agreements." Additionally, TriCap has incurred $400,000
of expenses in connection with the Acquisitions and the Offering, and has
advanced to the Company $2.6 million to fund transaction costs in exchange for
the reimbursement of such expenses and the repayment of such advances plus
accrued interest (at the prime rate announced by NationsBank of Texas, N.A. plus
.25%) from the proceeds of the Offering. The Company has used $230,000 of the
funds advanced to it by TriCap to reimburse JGVAOI for a portion of the
organizational expenses of Apple incurred by JGVAOI. The Company intends to
reimburse JGVAOI an additional $70,000 from the proceeds of the Offering to
repay the remainder of such expenses. See "Use of Proceeds."
38
<PAGE>
The following table provides certain information concerning the
Acquisitions:
<TABLE>
<CAPTION>
CONSIDERATION TO BE
RECEIVED
------------------------
ASSETS TO BE NUMBER OF CASH
FOUNDING AFFILIATED PRACTICES CONTRIBUTED(1) SHARES(2) DIVIDEND
- ---------------------------------------- -------------- --------- ------------
<S> <C> <C> <C>
California
Robert C. Frantz, D.D.S., P.C...... $ 463 30,390 $ 83,572
Bruce S. Harris, D.D.S., Inc....... (39,966) 63,096 173,515
Budd Rubin, D.D.S., M.S., Inc...... (61,435) 75,055 206,401
John Dell Sauter, D.D.S., M.D.S.,
Inc.............................. (8,127) 56,294 154,808
Michael C. Theurer, D.D.S.......... 599,150 183,944 505,843
Ira S. Wiedman, D.D.S.............. (52,743) 48,582 133,600
Ronald H. Roth and Brian W. Wong,
D.D.S., P.C...................... 89,698 31,192 85,778
Western
Orthodontics Exclusively, Ltd...... 194,833 87,363 240,249
Duncan Y. Brown, P.C............... 412,882 134,442 369,716
Roger L. Bumgarner, D.D.S., P.C.... 218,264 58,851 161,841
Thomas K. Chubb, D.D.S............. 156,732 71,813 197,486
Stanley D. Crawford D.D.S., P.C.... (196,089) 66,419 182,652
Andrew Girardot, D.D.S., P.C....... 94,631 83,464 229,526
James H. Jennings, D.D.S., P.A..... 88,505 37,965 104,405
Philip J. Milanovich, D.D.S.,
M.S.............................. 371,163 80,000 220,000
Bowen D. Miles, D.M.D.............. 126,636 76,364 210,000
Mark J. Mills, D.D.S., P.C......... 241,625 117,219 322,353
Donald D. Schmitz, D.D.S., M.S.,
Ltd.............................. 348,498 74,338 204,430
Darrell G. Smith, D.D.S., P.C...... 165,985 73,582 202,351
Central
Robert Dennington, D.D.S.,
M.S.D............................ 48,156 23,461 64,518
Carlos F. Navarro, D.D.S., M.S.D.,
P.C.............................. 172,961 29,673 81,600
Dr. Charles L. Schnibben, Ltd...... 596,764 105,600 290,400
Thomas A. Tiller, Inc., D.D.S.,
Inc.............................. 132,837 54,326 149,397
John G. Vondrak/Apple Orthodontix,
Inc.............................. 642,284 165,442 454,965
East Coast
Western New York Orthodontic Care,
P.C.............................. (292,863) 71,986 197,962
Philip DePasquale, D.D.S........... 20,645 39,114 107,564
Robert S. Fields, D.M.D., P.C...... 133,166 79,069 217,440
Paul H. Rigali, D.D.S., P.C........ 49,315 106,166 291,957
Carl P. Roy, D.D.S., M.S., P.C..... 297,172 94,284 259,280
Ronald N. Speigal, D.M.D., Inc..... 27,040 39,302 108,082
Jack D. Utley Jr., D.M.D., P.C..... 119,537 79,183 217,752
-------------- --------- ------------
Total......................... $4,698,419 2,337,979 $ 6,429,443
============== ========= ============
</TABLE>
- ------------
(1) Assets to be contributed reflects the historical book value of the assets
of each practice, including their patient receivable balance, net of
prepayments. The nonmonetary assets are reflected at historical cost in
accordance with SAB No. 48. All monetary assets are recorded at fair value,
which is approximated by the historical costs recorded by the practices.
(2) Assumes an initial offering price of $11.00 per share.
AGREEMENTS WITH TRICAP
TriCap Partners, an affiliate of TriCap co-owned by Mr. Sherrill, is the
exclusive financial advisor to Apple pursuant to a consulting agreement with an
initial term extending through the date of consummation of the first public
offering of Common Stock (or a security convertible into or exchangeable for
Common
39
<PAGE>
Stock) by the Company following the Offering. The consulting agreement provides
for, among other things, the payment by Apple to TriCap Partners of (i) $500,000
upon consummation of the Offering and (ii) a warrant to purchase approximately
250,580 shares of Common Stock with an exercise price per share equal to the
price to public per share set forth on the cover page of this Prospectus, which
warrant provides that the number of underlying shares will be determined based
upon the initial public offering price per share. In connection with the
warrant, the Company granted TriCap Partners certain demand and piggyback
registration rights. See "Shares Eligible for Future Sale."
Pursuant to a funding agreement between TriCap and Apple, TriCap has
advanced to Apple approximately $2.6 million to fund transaction costs in
connection with the Acquisitions and the Offering. These advances, which are
evidenced by the Convertible Notes, together with expenses incurred by TriCap on
behalf of the Company estimated at $400,000, will be repaid with proceeds from
the Offering. The funding agreement terminates pursuant to its terms upon
completion of the Offering. See "Use of Proceeds." In connection with this
agreement, Apple granted TriCap and Dr. Vondrak certain piggyback registration
rights. See "Shares Eligible For Future Sale."
COMPANY POLICY
It is anticipated that future transactions with affiliates of the Company
will be minimal, will be approved by a majority of the disinterested members of
the Board of Directors and will be made on terms no less favorable to the
Company than could be obtained from unaffiliated third parties. The Company does
not intend to incur any further indebtedness to, or make any loans to, any of
its executive officers, directors or other affiliates.
40
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows, as of April 1, 1997, information respecting the
then "beneficial owners" (as defined by the Commission) of more than 5% of the
Class B Stock:
SHARES BENEFICIALLY OWNED
-------------------------
PERCENT
NAME NUMBER OF CLASS
- ------------------------------------- ----------- --------
TriCap Funding I, L.L.C. ............ 1,685,274 41.0%
John G. Vondrak, D.D.S. ............. 1,586,966 38.6%
W. Daniel Cook ...................... 210,659 5.1%
The following table shows, immediately after giving effect to the closing
of the Acquisitions and the Offering, the then "beneficial ownership" of the
Common Stock and Class B Stock of (i) TriCap; (ii) each director and person
nominated to become a director on closing of the Offering; (iii) each executive
officer; and (iv) all executive officers and directors of the Company as a
group. The table assumes none of such persons intend to acquire shares in the
Offering.
<TABLE>
<CAPTION>
NUMBER OF SHARES BENEFICIALLY OWNED
AFTER OFFERING(1)
---------------------------------------------------
COMMON PERCENT OF CLASS B PERCENT OF
NAME STOCK CLASS STOCK CLASS
- ------------------------------------- ------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
TriCap Funding I, L.L.C. ............ -- -- 1,685,274 41.0%
One West Loop South, Suite 100
Houston, Texas 77027
John G. Vondrak, D.D.S............... 199,192(2)(3) 4.2% 1,586,966 38.6%
W. Daniel Cook....................... 17,500(3) * 210,659 5.1%
Robert J. Syverson................... 25,000(3) * 160,502 3.9%
Michael W. Harlan.................... 22,500(3) * 94,295 2.3%
H. Steven Walton..................... 68,398(3) 1.4%
William W. Sherrill.................. 253,705(3)(4) 5.1% -- --
All executive officers and directors
as a group
(6 persons)........................ 586,295(3)(4) 11.5% 2,052,422 50.0%
</TABLE>
- ------------
* less than 1%.
(1) Shares shown in the above table do not include shares that could be acquired
upon exercise of currently outstanding stock options which do not vest
within 60 days of April 1, 1997.
(2) Includes 165,442 shares issued in connection with the acquisition of JGVAOI.
(3) Includes shares that may be acquired pursuant to outstanding options within
60 days of April 1, 1997: 33,750 shares in the case of Dr. Vondrak; 17,500
shares in the case of Mr. Cook; 25,000 shares in the case of Mr. Syverson;
22,500 shares in the case of Mr. Harlan; 3,125 shares in the case of Mr.
Sherrill; 68,398 shares in the case of Mr. Walton; and 170,273 shares in the
case of all executive officers and directors as a group.
(4) Includes 250,580 shares that may be acquired pursuant to an outstanding
warrant within 60 days of April 1, 1997 held of record by TriCap Partners,
which Mr. Sherrill co-owns.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 25,000,000 shares of
Class A Common Stock, par value $0.001 per share, 4,106,852 shares of Class B
Common Stock, par value $0.001 per share, and 10,000,000 shares of preferred
stock, par value $0.001 per share (the "Preferred Stock"). At February 28,
1997, 4,106,852 shares of Class B Stock were issued and outstanding and no
shares of Common Stock or preferred stock of the Company were issued and
outstanding. The following summary is qualified in its entirety by reference to
the Certificate of Incorporation, which is included as an exhibit to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK AND CLASS B COMMON STOCK
Upon consummation of the Offering, holders of the Class B Stock will have
the ability to elect as a class one member of the Board of Directors and the
holders of the Common Stock will have the ability to elect as a class all other
members of the Board of Directors. In the event of a change in the number of
directors, holders of Class A Common Stock have the ability to elect at least
80% of the Board of Directors (rounded up to the nearest whole number) elected
by the holders of Common Stock and, subject to the rights of the holders of any
series of preferred stock, the holders of the Class B Common Stock will have the
right to elect the remaining directors. The Common Stock and Class B Stock
possess ordinary voting rights and vote together as a single class in respect of
all other corporate matters, and, in connection therewith, holders of shares of
Common Stock are entitled to one vote per share and holders of shares of Class B
Stock are entitled to three-tenths ( 3/10ths) of a vote per share. The Common
Stock and Class B Stock afford no cumulative voting rights, and the holders of a
majority of the shares voting for the election of directors can elect all the
directors if they choose to do so. The Common Stock and Class B Stock carry no
preemptive rights, are not convertible, redeemable, assessable or entitled to
the benefits of any sinking fund. The holders of Common Stock and Class B Stock
are entitled to dividends in such amounts and at such times as may be declared
by the Board of Directors out of funds legally available therefor. The Company
intends that, after completion of the Offering, all future dividends, if any,
declared on, or distributions with respect to, its shares of Common Stock and
Class B Stock will be paid on a pro rata basis to the holders of such shares.
See "Dividend Policy" for information regarding the Company's dividend policy.
Directors may be removed, with or without cause, by the holders of the
class or classes of stock that elected them. Directors may be removed by the
Board of Directors only for cause. Vacancies in a directorship may be filled by
the vote of the class or classes of shares that had previously filled that
vacancy, or by the remaining directors or director elected by such class or
classes; however, if there are no such directors, the vacancy may be filled by
the other directors.
Each share of Class B Stock will automatically convert to Common Stock on a
share-for-share basis (i) in the event of a disposition of such share of Class B
Stock by the holder thereof (excluding dispositions to such holder's
affiliates), (ii) in the event any person not affiliated with Apple acquires
beneficial ownership of 15% or more of the outstanding shares of capital stock
of the Company, (iii) in the event any person not affiliated with Apple offers
to acquire 15% or more of the outstanding shares of capital stock of the
Company, (iv) in the event the holder of such share elects to so convert at any
time after the second anniversary of the date of this Prospectus, (v) on the
fifth anniversary of the date of this Prospectus or (vi) in the event the
holders of a majority of the outstanding shares of Common Stock approve such
conversion. In addition, the Company may elect to convert any outstanding shares
of Class B Stock into shares of Common Stock in the event 80% or more of the
outstanding shares of Class B Stock as of the date of this Prospectus have
previously been converted into shares of Common Stock.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Certificate of Incorporation and limitations prescribed by law, the Board
of Directors is expressly authorized to adopt resolutions to issue the shares,
to fix the number of shares and to change the number of shares constituting any
series and to provide for or change the voting powers, designations, preferences
and relative, participating, optional or other special
42
<PAGE>
rights, qualifications, limitations or restrictions thereof, including dividend
rights (including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any class or
series of the Preferred Stock, in each case without any further action or vote
by the holders of Common Stock.
Although the Company has no present intention to issue shares of Preferred
Stock, the issuance of shares of Preferred Stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For example, the issuance of a series of Preferred Stock might impede
a business combination by including class voting rights that would enable the
holders to block such a transaction; or such issuance might facilitate a
business combination by including voting rights that would provide a required
percentage vote of the stockholders. In addition, under certain circumstances,
the issuance of Preferred Stock could adversely affect the voting power of the
holders of the Common Stock. Although the Board of Directors is required to make
any determination to issue such stock based on its judgment as to the best
interests of the stockholders of the Company, the Board of Directors could act
in a manner that would discourage an acquisition attempt or other transaction
that some or a majority of the stockholders might believe to be in their best
interests or in which stockholders might receive a premium for their stock over
the then-market price of such stock. The Board of Directors does not at present
intend to seek stockholder approval prior to any issuance of currently
authorized stock, unless otherwise required by law or the rules of any market on
which the Company's securities are traded.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is a Delaware corporation and is subject to Section 203 of the
DGCL. In general, Section 203 prevents an "interested stockholder" (defined
generally as a person owning 15% or more of a corporation's outstanding voting
stock) from engaging in a "business combination" (as defined) with a Delaware
corporation for three years following the time such person became an interested
stockholder unless (i) before such person became an interested stockholder, the
board of directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the business
combination, (ii) upon consummation of the transaction that resulted in the
stockholder's 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 stock held by directors who are also
officers of the corporation and by employee stock plans that do not provide
employees with the rights to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer) or (iii)
following the transaction in which such person became an interested stockholder,
the business combination was approved by the board of directors of the
corporation and authorized at a meeting of stockholders by the affirmative vote
of the holders of two thirds of the outstanding voting stock of the corporation
not owned by the interested stockholder. Under Section 203, the restrictions
described above also do not apply to certain business combinations proposed by
an interested stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an interested stockholder during the previous three years or who
became an interested stockholder with the approval of a majority of the
corporation's directors, if such extraordinary transaction is approved or not
opposed by a majority of the directors who were directors prior to any person's
becoming an interested stockholder during the previous three years or were
recommended for election or elected to succeed such directors by a majority of
such directors.
OTHER MATTERS
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of a director's fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must exercise
an informed business judgment based on all material information reasonably
available to them. Absent the limitations authorized by Delaware law, directors
are accountable to corporations and their stockholders for monetary damages for
conduct constituting gross negligence in the exercise of their duty of care.
Delaware law
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<PAGE>
enables corporations to limit available relief to equitable remedies such as
injunction or rescission. The Certificate of Incorporation limits the liability
of directors of the Company to the Company or its stockholders to the fullest
extent permitted by Delaware law. Specifically, directors of the Company will
not be personally liable for monetary damages for breach of a director's
fiduciary duty as a director, except for liability (i) for any breach of the
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) for unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the DGCL or (iv) for
any transaction from which the director derived an improper personal benefit.
The inclusion of this provision in the Certificate of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from bringing a
lawsuit against directors for breach of their duty of care, even though such an
action, if successful, might otherwise have benefited the Company and its
stockholders. The Company's Bylaws provide indemnification to the Company's
officers and directors and certain other persons with respect to certain
matters, and the Company has entered into agreements with each of its directors
and executive officers providing for indemnification with respect to certain
matters.
The Certificate of Incorporation provides that stockholders may act only at
an annual or special meeting of stockholders and may not act by written consent.
The Certificate of Incorporation and Bylaws provide that special meetings of the
stockholders can be called only by the Chairman of the Board, the President or a
majority of the Board of Directors.
The Certificate of Incorporation provides that the Board of Directors shall
consist of three classes of directors serving for staggered terms. As a result,
it is currently contemplated that approximately one-third of the Company's Board
of Directors will be elected each year. The classified board provision could
prevent a party who acquires control of a majority of the outstanding voting
stock of the Company from obtaining control of the Board of Directors until the
second annual stockholders' meeting following the date the acquiror obtains the
controlling interest. See "Management -- Directors and Executive Officers and
Key Employees."
The Certificate of Incorporation provides that the number of directors
shall be as determined by the Board of Directors from time to time, but shall
not be less than three. It also provides that directors may be removed only for
cause, and then only by the affirmative vote of the holders of at least a
majority of all outstanding voting stock entitled to vote. This provision, in
conjunction with the provisions of the Certificate of Incorporation authorizing
the Board of Directors to fill vacant directorships, will prevent stockholders
from removing incumbent directors without cause and filling the resulting
vacancies with their own nominees.
STOCKHOLDER PROPOSALS
The Company's Bylaws contain provisions (i) requiring that advance notice
be delivered to the Company of any business to be brought by a stockholder
before an annual meeting of stockholders and (ii) establishing certain
procedures to be followed by stockholders in nominating persons for election to
the Board of Directors. Generally, such advance notice provisions provide that
written notice must be given to the Secretary of the Company by a stockholder
(i) in the event of business to be brought by a stockholder before an annual
meeting, not less than 90 days prior to the anniversary date of the immediately
preceding annual meeting of stockholders (with certain exceptions if the date of
the annual meeting is different by more than specified amounts from the
anniversary date), and (ii) in the event of nominations of persons for election
to the Board of Directors by any stockholder, (a) with respect to an election to
be held at the annual meeting of stockholders, not less than 90 days prior to
the anniversary date of the immediately preceding annual meeting of stockholders
(with certain exceptions if the date of the annual meeting is different by more
than specified amounts from the anniversary date), and (b) with respect to an
election to be held at a special meeting of stockholders for the election of
directors, not later than the close of business on the seventh day following the
day on which notice of the date of the special meeting was mailed to
stockholders or public disclosure of the date of the special meeting was made,
whichever first occurs. Such notice must
44
<PAGE>
set forth specific information regarding such stockholder and such business or
director nominee, as described in the Company's Bylaws. The foregoing summary is
qualified in its entirety by reference to the Company's Bylaws, which are
included as an exhibit to the Registration Statement of which this Prospectus is
a part.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Acquisitions and the Offering, the Company will
have outstanding (i) 4,687,979 shares of Common Stock (5,040,479 if the
Underwriters' over-allotment option is exercised in full) of which the 2,350,000
shares sold in the Offering (2,702,500 if the Underwriters' over-allotment
option is exercised in full) will be freely tradeable without restriction or
further registration under the Securities Act, except for those held by
"affiliates" (as defined in the Securities Act) of the Company, which shares
will be subject to the resale limitations of Rule 144 under the Securities Act,
and (ii) 4,106,852 shares of Class B Stock. The remaining 2,337,979 shares of
Common Stock and all of the outstanding shares of Class B Stock are deemed
"restricted securities" under Rule 144 in that they were originally issued and
sold by the Company in private transactions in reliance upon exemptions under
the Securities Act, and may be publicly sold only if registered under the
Securities Act or sold in accordance with an applicable exemption from
registration, such as those provided by Rule 144 promulgated under the
Securities Act as described below.
In general, under Rule 144 as amended effective April 29, 1997, if a
minimum of one year has elapsed since the later of the date of acquisition of
restricted securities from the issuer or from an affiliate of the issuer, the
acquirer or subsequent holder would be entitled to sell within any three-month
period a number of those shares that does not exceed the greater of one percent
of the number of shares of such class of stock then outstanding or the average
weekly trading volume of the shares of such class of 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 issuer. In addition, if a period of at least two years has elapsed since the
later of the date of acquisition of restricted securities from the issuer or
from any affiliate of the issuer, and the acquirer or subsequent holder thereof
is deemed not to have been an affiliate of the issuer of such restricted
securities at any time during the 90 days preceding a sale, such person would be
entitled to sell such restricted securities under Rule 144(k) without regard to
the requirements described above. Rule 144 does not require the same person to
have held the securities for the applicable periods. The foregoing summary of
Rule 144 is not intended to be a complete description thereof. The Commission
has proposed certain amendments to Rule 144 that would, among other things,
eliminate the manner of sale requirements and revise the notice provisions of
that rule. The SEC has also solicited comments on other possible changes to Rule
144, including possible revisions to the one- and two-year holding periods and
the volume limitations referred to above.
As of February 28, 1997, options to purchase an aggregate of approximately
760,000 shares of Common Stock were outstanding under the Company's 1996 Stock
Option Plan. See " Management -- 1996 Stock Option Plan." In general, pursuant
to Rule 701 under the Securities Act, any employee, officer or director of, or
consultant to, the Company who purchased his or her shares pursuant to a written
compensatory plan or contract is entitled to rely on the resale provisions of
Rule 701, which permit non-affiliates to sell such shares without compliance
with the public information, holding period, volume limitation or notice
provisions of Rule 144, and permit affiliates to sell such shares without
compliance with the holding period provisions of Rule 144, in each case
commencing 90 days after the date of this Prospectus. A total of 170,273 shares
of Common Stock will be eligible for resale pursuant to Rule 701 (upon exercise
of options) 90 days following the date of this Prospectus (although the holders
of those shares have agreed not to offer or sell any of those shares during the
180-Day Lockup Period). In addition, the Company intends to file a registration
statement covering the 829,727 additional shares issuable upon exercise of stock
options that may be granted in the future under the 1996 Stock Option Plan, in
which case such shares of Common Stock generally will be freely tradable by
non-affiliates in the public market without restriction under the Securities
Act.
The Company, its executive officers and directors, TriCap and the persons
acquiring shares of Common Stock in connection with the Acquisitions have agreed
not to offer, sell, contract to sell, grant any option or other right for the
sale of, or otherwise dispose of any shares of Common Stock or any securities,
indebtedness or other rights exercisable for or convertible or exchangeable into
Common Stock owned or
46
<PAGE>
acquired in the future in any manner prior to the expiration of 180 days after
the date of this Prospectus without the prior written consent of Bear, Stearns &
Co. Inc., except that the Company may issue, subject to certain conditions,
Common Stock in connection with acquisitions and may grant Awards (or Common
Stock upon exercise of Awards) under the 1996 Stock Option Plan. In addition,
the holders of the shares of Common Stock acquired in connection with the
Acquisitions have agreed with the Company that they generally will not sell,
transfer or otherwise dispose of any of their shares for one year following the
closing of the Offering. Substantially all the outstanding shares of Class B
Stock will become eligible for resale pursuant to Rule 144 in October 1997.
In connection with the Acquisitions, the Company will enter into a
registration rights agreement with former stockholders of the Founding
Affiliated Practices (the "Registration Rights Agreement"), which will provide
certain registration rights with respect to the Common Stock issued to such
stockholders in the Acquisitions. The Registration Rights Agreement will provide
the holders of Common Stock subject to the agreement with the right in the event
the Company proposes to register under the Securities Act any Common Stock for
its own account or for the account of others at any time through November 2001,
subject to certain exceptions, to require the Company to include shares owned by
them in the registration. In addition, pursuant to separate registration rights
agreements with TriCap, Dr. Vondrak and TriCap Partners, TriCap, Dr. Vondrak and
TriCap Partners have the right, in the event the Company proposes to register
under the Securities Act any Common Stock for its own account or for the account
of others at any time through November 2001, subject to certain exceptions, to
require the Company to include shares owned by them in the registration.
Furthermore, the registration rights agreement to which TriCap Partners is a
party provides for a single demand registration right pursuant to which Apple
will file a registration statement under the Securities Act to register the sale
of the shares issuable to TriCap Partners on exercise of the warrant described
under "Certain Transactions -- Agreements with TriCap." The demand request may
be made at any time before May 31, 2002, subject to certain conditions and
limitations.
In the case of each registration rights agreement described above, the
Company is generally required to pay the costs associated with such an offering
other than underwriting discounts and commissions and transfer taxes
attributable to the shares sold on behalf of the selling stockholders. Each
registration rights agreement provides that the number of shares of Common Stock
that must be registered on behalf of the selling stockholders is subject to
limitation if the managing underwriter determines that market conditions require
a limitation. Under each agreement, the Company will indemnify the selling
stockholders thereunder, and such stockholders will indemnify the Company,
against certain liabilities in respect of any registration statement or offering
covered by the registration rights agreement.
Prior to the Offering, there has been no established public market for the
Common Stock. No prediction can be made of the effect, if any, that sales of
shares under Rule 144, or otherwise, or the availability of shares for sale will
have on the market price of the Common Stock prevailing from time to time after
the Offering. The Company is unable to estimate the number of shares that may be
sold in the public market under Rule 144, or otherwise, because such amount will
depend on the trading volume in, and market price for, the Common Stock and
other factors. Nevertheless, sales of substantial amounts of shares in the
public market, or the perception that such sales could occur, could adversely
affect the market price of the Common Stock of the Company. See
"Underwriting."
The Company intends to register 2,000,000 shares of Common Stock under the
Securities Act during the second quarter of 1997 for use in connection with
future acquisitions. These shares generally will be freely tradable after their
issuance by persons not affiliated with the Company 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.
47
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Company, Bear, Stearns & Co. Inc. and Equitable Securities Corporation as the
Representatives of the Underwriters, each of the Underwriters named below has
severally agreed to purchase from the Company, and the Company has agreed to
sell to the Underwriters, the respective number of shares of Common Stock set
forth opposite its name below.
NUMBER OF
UNDERWRITERS SHARES
- ---------------------------------------- -----------
Bear, Stearns & Co. Inc. ...............
Equitable Securities Corporation........
-----------
Total......................... 2,350,000
===========
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to approval of
certain legal matters by counsel and to certain other conditions precedent. If
any of the shares of Common Stock are purchased by the Underwriters pursuant to
the Underwriting Agreement, all such shares of Common Stock (other than shares
of Common Stock covered by the over-allotment option described below) must be so
purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the public offering price set forth on the cover page of this
Prospectus, and at such price less a concession not in excess of $ per share
of Common Stock to certain other dealers who are members of the National
Association of Securities Dealers, Inc. The Underwriters may allow, and such
dealers may reallow, concessions not in excess of $ per share to certain
other dealers. After the public offering, the offering price and other selling
terms may be changed by the Underwriters. The Company's Common Stock will be
quoted on the Nasdaq National Market.
The Underwriters have been granted a 30-day over-allotment option to
purchase up to 352,500 additional shares of Common Stock of the Company
exercisable at the public offering price less the underwriting discount. If the
Underwriters exercise such over-allotment option, then each of the Underwriters
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage thereof as the number of shares of Common
Stock to be purchased by it as shown in the above table bears to the
shares of Common Stock offered hereby. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of the shares of
Common Stock offered hereby.
The officers and directors of the Company and certain holders of the Common
Stock have agreed not to offer, sell, transfer, assign or otherwise dispose of,
any shares of Common Stock owned by them for a period of 180 days after the date
of the final Prospectus relating to the Offering, without the prior written
consent of Bear, Stearns & Co. Inc.
The Company has agreed that it will not issue, sell or grant options to
purchase or otherwise dispose of any shares of its Common Stock or securities
convertible into or exchangeable for its Common Stock, except, subject to
certain conditions, with respect to acquisitions or pursuant to the 1996 Stock
Option Plan, for a period of 180 days after the date of the final prospectus
relating to the Offering without the prior written consent of Bear, Stearns &
Co. Inc.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters and controlling persons, if any, against certain civil liabilities,
including liabilities under the Securities Act, or will contribute to payments
that the Underwriters or any such controlling persons may be required to make in
respect thereof.
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The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales in excess of five percent of the
number of shares of Common Stock offered hereby to accounts over which they
exercise discretionary authority.
Prior to the Offering, there was no public market for the Common Stock of
the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiations between the Company and the
Representatives. The factors considered in making such determination will
include the prevailing market conditions, the financial condition and operating
history of the Company and the Affiliated Practices, their prospects and the
prospects for the orthodontic services industry in general, the management of
the Company and the market price of securities for companies in businesses
similar to that of the Company. There can be no assurance, however, that an
active or orderly trading market will develop for the Common Stock or that the
Common Stock will trade in the public market subsequent to the Offering at or
above the initial offering price.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain, or otherwise affect the price of the
Common Stock, including over-allotment and other stabilizing transactions, in
accordance with Rule 104 of Regulation M promulgated by the Commission. Such
transactions may be discontinued at any time.
In connection with the Offering, certain Underwriters and selling group
members, if any, may engage in passive market making transactions in the Common
Stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M
promulgated by the Commission. Passive market making consists of displaying bids
on the Nasdaq National Market limited by the prices of independent market makers
and effecting purchases limited by such prices and in response to order flow.
Rule 103 limits the amount of net purchases that each passive market maker can
make and the displayed size of the bid. Passive market making may stabilize the
market price of the Common Stock at a level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Jackson & Walker, L.L.P., Houston, Texas. Certain legal
matters in connection with the sale of the Common Stock offered hereby will be
passed upon for the Underwriters by Baker & Botts, L.L.P., Houston, Texas.
EXPERTS
The financial statements of Apple Orthodontix, Inc. as of December 31, 1996
and for the period from inception, July 15, 1996, through December 31, 1996
included in this Prospectus and appearing elsewhere in the Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, which is
included herein in reliance upon the authority of said firm as experts in giving
said report.
49
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all exhibits, schedules and amendments relating thereto, the
"Registration Statement") with respect to the Common Stock offered hereby.
This Prospectus, filed as part of the Registration Statement, does not contain
all the information contained in the Registration Statement, certain portions of
which have been omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement including
the exhibits and schedules thereto. Statements contained in this Prospectus as
to the contents of any contract or other document filed as an exhibit to the
Registration Statement accurately describe the material provisions of such
document and are qualified in their entirety by reference to such exhibits for
complete statements of their provisions. All of these documents may be inspected
without charge at the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the
following regional offices of the Commission: Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies can also be obtained from the Commission
at prescribed rates. The Commission maintains a Web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
AUDITED FINANCIAL STATEMENTS OF APPLE ORTHODONTIX, INC
Report of Independent Public Accountants ............................ F-2
Balance Sheet -- December 31, 1996 .................................. F-3
Statement of Operations For the Period From Inception, July 15, 1996
Through December 31, 1996 .......................................... F-4
Statement of Changes in Stockholders' Equity (Deficit) For the
Period From Inception, July 15, 1996 Through December 31, 1996 ..... F-5
Statement of Cash Flows For the Period From Inception, July 15, 1996
Through December 31, 1996 .......................................... F-6
Notes to Financial Statements ....................................... F-7
UNAUDITED PRO FORMA FINANCIAL STATEMENTS ................................. F-12
Unaudited Pro Forma Consolidated Balance Sheet December 31, 1996 .... F-13
Unaudited Pro Forma Consolidated Statement of Operations For the Year
Ended December 31, 1996 ............................................ F-14
Notes to Unaudited Pro Forma Consolidated Financial Statements ...... F-15
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Apple Orthodontix, Inc.:
We have audited the accompanying balance sheet of Apple Orthodontix, Inc.,
a Delaware corporation, as of December 31, 1996, and the related statements of
operations, changes in stockholders' equity (deficit) and cash flows for the
period from inception, July 15, 1996, through December 31, 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 Apple Orthodontix, Inc., as
of December 31, 1996, and the results of its operations and its cash flows for
the period from inception, July 15, 1996, through December 31, 1996, in
conformity with generally accepted accounting principles.
Houston, Texas
February 28, 1997
(except with respect to the stock split
discussed in Note 2, as to
which the date is April 24, 1997)
F-2
<PAGE>
APPLE ORTHODONTIX, INC.
BALANCE SHEET -- DECEMBER 31, 1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 21,254
Deferred issuance costs ................................... 1,395,350
-----------
Total current assets ................................. 1,416,604
ORGANIZATION COSTS, net of accumulated amortization of $4,510 .. 44,687
-----------
Total assets ......................................... $ 1,461,291
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable .......................................... $ 1,439,565
Accrued bonuses ........................................... 325,000
Other accrued liabilities ................................. 35,000
Amounts due to a founding affiliated practice ............. 30,444
Amounts due to venture capital investors .................. 515,000
-----------
Total current liabilities ............................ 2,345,009
STOCKHOLDERS' EQUITY (DEFICIT):
Class A Common Stock, $.001 par value, no shares
authorized, issued and outstanding ................... --
Class B Common Stock, $.001 par value, 4,106,852
shares authorized, issued and outstanding ............ 4,107
Retained deficit .......................................... (887,825)
-----------
Total stockholders' equity (deficit) ................. (883,718)
-----------
Total liabilities and stockholders' equity
(deficit) ........................................... $ 1,461,291
===========
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE>
APPLE ORTHODONTIX, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION, JULY 15, 1996
THROUGH DECEMBER 31, 1996
REVENUES .................................................. $ --
COSTS AND EXPENSES:
Salaries and benefits ................................ 627,476
Rent ................................................. 19,676
Amortization of organization costs ................... 4,510
General and administrative ........................... 232,232
-----------
Total costs and expenses ........................ 883,894
PROVISION FOR INCOME TAXES ................................ --
-----------
NET LOSS .................................................. $ (883,894)
===========
NET LOSS PER SHARE ........................................ $ (0.21)
===========
NUMBER OF SHARES USED IN CALCULATING
NET LOSS PER SHARE ........................................ 4,121,852
===========
The accompanying notes are an integral part of this financial statement.
F-4
<PAGE>
APPLE ORTHODONTIX, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION, JULY 15, 1996
THROUGH DECEMBER 31, 1996
TOTAL
COMMON STOCK STOCKHOLDERS'
--------------------- RETAINED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
--------- --------- --------- ---------
BALANCE, July 15, 1996 ...... -- $ -- $ -- $ --
Issuance of stock ...... 4,106,852 4,107 (3,931) 176
Net loss ............... -- -- (883,894) (883,894)
--------- --------- --------- ---------
BALANCE, December 31, 1996 .. 4,106,852 $ 4,107 $(887,825) $(883,718)
========= ========= ========= =========
The accompanying notes are an integral part of this financial statement.
F-5
<PAGE>
APPLE ORTHODONTIX, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION, JULY 15, 1996
THROUGH DECEMBER 31, 1996
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss .................................................... $(883,894)
Amortization of organization costs .......................... 4,510
Increase in accounts payable and accrued liabilities not
related to issuance costs ................................... 404,215
---------
Net cash provided by operating activities .............. (475,169)
---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Cash paid for organization costs ............................ (49,197)
Advances from a related party ............................... 515,000
Advances from a founding practice ........................... 283,744
Repayment of advances from a founding practice .............. (253,300)
Proceeds from issuance of common stock ...................... 176
---------
Net cash used in financing activities .................. 496,423
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................ $ 21,254
=========
The accompanying notes are an integral part of this financial statement.
F-6
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Apple Orthodontix, Inc. (Apple or the Company), was established as a
Delaware corporation on
July 15, 1996, for the purpose of creating an orthodontic practice management
company which will own the assets of and provide management services to
orthodontic practices (see Note 6). The Company's operations to date have
consisted primarily of seeking affiliations with orthodontists, negotiating to
acquire the assets of those professionals' practices and negotiating agreements
to provide management services to those practices (Acquisitions). Apple plans to
complete an initial public offering of its Class A common stock and
simultaneously exchange cash and shares of its Class A common stock for selected
assets and liabilities associated with 31 orthodontic practices (the Founding
Affiliated Practices). The completion of the Acquisitions, public offering and
entry by Apple into service agreements with the owners of the orthodontic
practices will mark the beginning of Apple's operations. The financial
statements have been prepared on the basis that the proposed transactions will
occur although no assurance can be made that the proposed transaction will be
completed. For further discussion of the various risks associated with Apple's
operations and the proposed transaction, including the absence of a combined
operating history, reliance on Affiliated Practices and orthodontists, the need
for additional financing, government regulation, dependence on key personnel,
competition, and other risks, please refer to the discussion of risk factors in
the Company's registration statement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DEFERRED ISSUANCE COSTS
Substantially all costs incurred to date have been in conjunction with the
Acquisitions and the anticipated initial public offering (Offering) of the
Company's Class A common stock. All costs incurred in connection with those
efforts, excluding certain ongoing costs of the Company, have been capitalized
and will be charged against the proceeds of the initial public offering upon its
successful completion.
ORGANIZATION COSTS
Organization costs incurred in the formation of the Company are amortized
on a straight-line basis over a five-year period.
STOCKHOLDERS' EQUITY (DEFICIT)
On October 11, 1996, 3,884,155 shares of Class B common stock were issued
at a total price of $9.68. Management believes that the consideration received
for those shares represented the fair value of the shares at that date. On
December 9, 1996, 222,697 additional shares were issued in exchange for $166 of
consideration. Management believes that the consideration received for those
shares represented the fair value of the shares at that date. The shares issued
through December 31, 1996 have been restated to reflect the effect of a
4,013-for-one stock split approved on April 24, 1997. The Class B common stock
will be entitled to a three-tenths ( 3/10ths) of a vote per share. The Class B
common stock automatically converts to one vote per share in the event of the
disposition of the stock by the stockholder (excluding dispositions to the
holder's affiliates), any person offers to or acquires 15% or more of the
outstanding capital stock of the Company, any person acquires beneficial
ownership of 15% or more of the outstanding shares of capital stock of the
Company, the stockholder elects to convert at any time after the second
anniversary of the effective date of this Offering, the holders of that number
of shares of Class A common stock and Class B common stock, voting together as a
single class, with a majority of the outstanding voting power approve
conversion, or on the fifth anniversary of the effective date of the Offering.
In the event that 80 percent or more of the currently outstanding shares of
Class B common stock have been converted into shares of Class A common stock,
the Company may elect to convert the remaining outstanding shares of Class B
common shares into shares of Class A common stock. The Class A common stock to
be issued to the Founding Affiliated Practices and in the Offering will be
entitled to one vote per share.
F-7
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Approximately 465,456 of the issued and outstanding shares are subject to
subscription agreements that include a provision that in the event of a change
in control of the Company, the executive officers holding the subject shares
will be entitled to put to the Company all shares purchased pursuant to such
subscription agreements that such person then owns, and the Company will be
required to purchase all such shares, at a price equal to the fair market value
thereof at the time the change in control occurs.
The shares used in calculating net loss per share include all shares of
capital stock outstanding as of February 28, 1997 and the additional shares that
would be outstanding if all options that were issued prior to the Offering were
exercised and the proceeds used to repurchase shares at an assumed offering
price of $11 per share.
STOCK OPTION PLAN
In December 1996 the board of directors of the Company adopted the 1996
Stock Option Plan (Plan). Employees, non-employee directors and advisors are
eligible to receive awards under the Plan; only employees of the Company are
eligible to receive incentive stock options. The aggregate number of options to
purchase shares of common stock that may granted under the Plan is the greater
of 1,000,000 or 12% of the number of shares of Class A common stock outstanding
on the last day of the preceding calendar quarter. As of December 31, 1996, no
options had been granted under the Plan. The Company anticipates that upon or
shortly after the consummation of its Offering that it will grant options to
purchase approximately 760,000 shares of common stock under the Plan. All of
these options will be at the Offering price except for 20,000 options that were
granted in January 1997 at $3.00 per option, which equaled the fair value of the
common stock of the Company at that date. The Company will account for options
issued to employees and non-employee directors under the Plan in accordance with
APB Opinion No. 25, and accordingly no compensation cost will be recognized. The
Company will provide the pro forma disclosure of net earnings per share in the
notes to the financial statements as if the fair value-based method of
accounting had been applied to awards as required by Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation."
INCOME TAXES
As reflected in the accompanying statement of operations, the Company
incurred a loss from operations during the period from inception, July 15, 1996,
through December 31, 1996. Due to the limited operations of the Company since
its inception and the pending Offering, a valuation allowance has been recorded
to fully reserve for the deferred tax benefits generated by these net operating
losses. There is no significant difference in the tax and book bases of the
Company's assets or liabilities that would give rise to deferred tax balances.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
3. FINANCING PROVIDED BY VENTURE CAPITAL INVESTORS:
On November 14, 1996, the Company entered into an agreement with TriCap
Funding I, L.L.C. (TriCap), whereby TriCap agreed to provide $3,000,000 to
finance costs related to the Offering. As of December 31, 1996, the Company had
borrowed $515,000 under this agreement. The $3,000,000, to the extent expended,
will be repaid out of proceeds from the Offering, including interest at a rate
of prime plus .25 percent. The Company also entered into an agreement on such
date with TriCap Partners, L.L.C. (TriCap Partners) that extends through the
date of the consummation of the first public offering of Common
F-8
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock (or a security convertible or exchangeable for Common Stock) by the
Company following the Offering. This agreement provides for (a) the payment by
Apple to TriCap Partners of approximately $500,000 upon consummation of the
Offering and (b) the issuance to TriCap Partners of a warrant with a value of
$1,700,000 to purchase approximately 250,580 shares of Common Stock, assuming an
exercise price per share of $11, to be adjusted based on the actual initial
offering price to public per share. The fair value of the warrant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions: (i) expected dividend yield -- 0.0%; (ii) expected stock
price volatility -- 67.5%; (iii) risk-free interest -- 6.2%; and (iv) expected
life of the warrant -- 5 years.
4. RELATED PARTY:
The practice of a founding stockholder of the Company, John G. Vondrak,
D.D.S., has paid for certain costs and expenses on behalf of the Company. Such
payments, net of reimbursement in conjunction with the financing, have been
reflected as amounts due to a Founding Affiliated Practice in the accompanying
balance sheet and will be repaid with proceeds from the planned Offering.
5. LITIGATION:
On December 10, 1996, Orthodontic Centers of America (OCA) filed a
complaint against Apple, Dr. Vondrak and his practice, alleging misappropriation
of trade secrets and breach of a confidentiality agreement executed by Dr.
Vondrak with OCA. The Company plans to vigorously defend itself in this matter
and does not believe that the results of these proceedings will have a material
adverse effect on the Company's operating results or financial position.
6. PLANNED ACQUISITIONS OF FOUNDING AFFILIATED PRACTICES:
Apple plans to complete, through a series of mergers and asset transfers,
the acquisition of certain assets and assumption of certain liabilities of the
Founding Affiliated Practices (the Acquisitions) concurrently with an initial
public offering of shares of its Class A common stock. The Founding Affiliated
Practices will receive Class A common stock and cash as consideration in the
Acquisitions. In connection with the Acquisitions, the selling orthodontists
will create new professional corporations, professional associations or other
entities (collectively, the New PCs) that will enter into 20-year service
agreements with Apple. Additionally, those orthodontists will enter into
employment and noncompete agreements with the New PCs.
The Company will not employ orthodontists or control the practice of
orthodontics by the orthodontists employed by the New PCs. As Apple will not be
acquiring the future patient revenues earned by the New PCs, the Acquisitions
are not deemed to be business combinations. In accordance with the Securities
and Exchange Commission's Staff Accounting Bulletin (SAB) No. 48, "Transfers of
Nonmonetary Assets by Promoters or Shareholders," the transferred nonmonetary
assets and assumed liabilities will be accounted for at the historical cost
basis of the Founding Affiliated Practices. Each of the Founding Affiliated
Practices is a promoter of the Offering. Any monetary assets included in the
Acquisitions will be recorded at fair value. The resulting value of the net
assets acquired by Apple will be recorded as the value of the stock
consideration tendered. Cash consideration paid to selling orthodontists in
conjunction with the Acquisitions will be reflected as a dividend paid by Apple.
The selling orthodontists will generally retain the long-term debt
obligations of their respective practices. Capital lease obligations will be
assumed by the Company. In certain cases, Apple has agreed to refinance debt
retained by the selling orthodontists.
F-9
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The combined detail of the Founding Affiliated Practices' assets to be
transferred and liabilities to be assumed is as follows:
COMBINED PRESENTATION OF ASSETS TO BE TRANSFERRED AND LIABILITIES ASSUMED FROM
THE
FOUNDING AFFILIATED PRACTICES AS OF DECEMBER 31, 1996
Cash and cash equivalents ....................................... $ 1,177,000
Patient receivables, net of allowances and patient prepayments .. 866,000
Prepaid expenses and other current assets ....................... 137,000
Property, equipment and improvements, net ....................... 2,087,000
Intangible and other long-term assets, net ...................... 431,000
-----------
Assets transferred .............................................. 4,698,000
Accounts payable and accrued liabilities ........................ (1,627,000)
Current portion of capital lease obligations .................... (121,000)
Long-term portion of capital lease obligations .................. (312,000)
-----------
Assets transferred, net of liabilities assumed .................. $ 2,638,000
===========
The management service revenues that will be earned by Apple subsequent to
the Acquisitions and execution of the service agreements are based on various
arrangements. In general, the resulting fee will be substantially based on the
patient revenues and cash collections of the New PCs and the operating expenses
assumed by Apple. Apple's standard form of service agreement (the Standard
Contract) will be applied to all practices operating in locations where it is
not prohibited by law or governmental regulation. In those instances where the
standard contract may not be permitted, an alternative form of agreement (the
Alternative Contract) will be used.
COMBINED OPERATING DATA OF THE FOUNDING AFFILIATED PRACTICES FOR THE
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PATIENT REVENUES CASH COLLECTIONS OPERATING EXPENSES
---------------- ---------------- ------------------
<S> <C> <C> <C>
Practices participating under the
Standard Contract.................. $ 19,699,000 $ 19,886,000 $ 12,035,000
Practices participating under the
Alternative Contract............... 5,358,000 5,519,000 2,935,000
---------------- ---------------- ------------------
Totals for Founding Affiliated
Practices.......................... $ 25,057,000 $ 25,405,000 $ 14,970,000
================ ================ ==================
</TABLE>
Patient revenues are derived from orthodontic care provided to patients
under contract terms agreed to by the patient or other responsible parties. The
contracts vary by practice and by patient, and service often extends over an
eighteen month to six-year period. Revenue is recognized based on the estimated
costs incurred as compared to the total estimated treatment cost, with
approximately 24 percent being recognized at the time of initial treatment which
is related to the costs incurred at the time of initial treatment. The balance
of the contract revenue is realized pro rata each month over the remaining
contract period. The 24 percent estimated cost at the initial treatment date is
consistent with industry standards and includes the estimated costs of
diagnosis, treatment plan development, initial treatment by orthodontic
personnel, orthodontic supplies and associated administrative services.
The difference in the timing of the recognition of patient revenues and
cash collections results in (i) unbilled receivables in instances where
recognition of revenues precedes the patient's payment plan and (ii) patient
prepayments when payments are made on a more accelerated basis than revenues are
earned. The following table presents the combined uncollected patient
receivables unbilled patient receivables and patient prepayments of the Founding
Affiliated Practices. These amounts are not receivables of the Company, but the
net position of these receivables will be acquired as part of the Acquisitions
and in future periods each New PC will provide the Company with a security
interest in the receivables of the New PC.
F-10
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED PATIENT RECEIVABLES, NET, OF THE FOUNDING AFFILIATED PRACTICES AS OF
DECEMBER 31, 1996
Patient receivables, net of allowances of $631,000 ............. $ 918,000
Unbilled patient receivables, net of allowances of $70,000 ..... 3,361,000
Patient prepayments ............................................ (3,413,000)
-----------
Patient receivables net of allowances and prepayments ..... $ 866,000
===========
Subsequent to the Acquisitions, the operating expenses of the Founding
Affiliated Practices will be the responsibility of Apple. The Company will have
discretion to control the level of those expenses in conjunction with providing
the related services to the New PCs. The combined historical expenses of the
Founding Affiliated Practices for the year ended December 31, 1996 that will be
assumed by the Company in the future were:
COMBINED DETAIL OF THE FOUNDING AFFILIATED PRACTICES' EXPENSES FOR THE YEAR
ENDED DECEMBER 31, 1996
Salaries, wages and benefits of employees, excluding
the orthodontists ........................................ $ 6,381,000
Orthodontic supplies .......................................... 2,548,000
Rent .......................................................... 1,923,000
Advertising and marketing ..................................... 438,000
General and administrative expenses ........................... 3,680,000
-----------
Total operating expenses ................................. 14,970,000
Depreciation and amortization on acquired assets .............. 864,000
-----------
Total expenses to be assumed ............................. $15,834,000
===========
The combined historical financial information of the Founding Affiliated
Practices presented herein is not related to the financial position or results
of operations of Apple. This information is presented solely for the purpose of
providing disclosures to potential investors regarding the group of entities
with which Apple will be contracting to provide future services due to the
significant relationships between Apple and the Founding Affiliated Practices.
The Founding Affiliated Practices' financial information is presented on a
combined basis to assist in an understanding of their relationship to the pro
forma financial statements included elsewhere in the Company's registration
statement and due to the fact that their service agreements with the Company
will be signed contingent on the single common event of the completion of the
Offering. The Founding Affiliated Practices were not operated under common
control or management during the fiscal year ended December 31, 1996.
F-11
<PAGE>
APPLE ORTHODONTIX, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements include
the unaudited pro forma consolidated balance sheet of Apple Orthodontix, Inc.
(Apple or the Company) as of December 31, 1996 and the unaudited pro forma
consolidated statement of operations of the Company for the year ended December
31, 1996.
The unaudited pro forma consolidated financial statements have been
prepared as if (a) the acquisitions by Apple, which include the acquisition of
certain assets and assumption of certain liabilities associated with 31
orthodontic practices (the Founding Affiliated Practices) for consideration
consisting of a combination of cash and shares of Class A common stock of the
Company, and the execution of agreements to provide management services to the
Founding Affiliated Practices (collectively, the Acquisitions) and (b) the
initial public offering of the Company's common stock (the Offering), had been
completed. The accompanying unaudited pro forma consolidated balance sheet as of
December 31, 1996 gives effect to the Acquisitions and Offering as if such
transactions had occurred on December 31, 1996. The accompanying unaudited pro
forma consolidated statement of operations for the year ended December 31, 1996
assumes the Company had completed the transactions on January 1, 1996.
The Company will not employ orthodontists or control the practice of
orthodontics by the orthodontists. As Apple will not be acquiring the future
patient revenues earned by the Founding Affiliated Practices, the Acquisitions
are not deemed to be business combinations. In accordance with the Securities
and Exchange Commission's Staff Accounting Bulletin No. 48, "Transfers of
Nonmonetary Assets by Promoters or Shareholders," the Acquisitions will be
accounted for at the historical cost basis with the shares of Class A common
stock to be issued in those transactions being valued at the historical cost of
the nonmonetary assets acquired net of liabilities assumed. The cash
consideration will be reflected as a dividend by Apple to the owners of the
Founding Affiliated Practices.
The unaudited pro forma consolidated financial statements have been
prepared by the Company based on the audited historical financial statements of
Apple included elsewhere in this Prospectus, including the audited combined
financial information of the Founding Affiliated Practices included in the notes
to those financial statements, and assumptions deemed appropriate by the
Company. These unaudited pro forma consolidated financial statements may not be
indicative of actual results that might have been obtained if the transactions
had occurred on the dates indicated or which may be realized in the future.
Neither expected benefits and cost reductions anticipated by the Company nor all
costs associated with the Company's present or future cost structure except for
certain costs of the existing management team have been reflected in the
accompanying unaudited pro forma consolidated financial statements. The
unaudited pro forma consolidated statement of operations includes the financial
results of Apple for the period from inception, July 15, 1996, through December
31, 1996. Additionally, certain of the Founding Affiliated Practices made
acquisitions or experienced departures of owner orthodontists or employee
orthodontists during the year ended December 31, 1996; the Company does not
consider the net effect of these changes to be significant for the purposes of
these unaudited pro forma consolidated financial statements.
F-12
<PAGE>
APPLE ORTHODONTIX, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
APPLE ADJUSTMENTS PRO FORMA
------ ------------ ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 21 $ 18,541 (B) $ 13,310
(6,429)(C)
1,177 (C)
Receivables from orthodontic
practices..................... -- 866 (C) 866
Deferred issuance costs and
other current assets.......... 1,395 3,605 (A) 137
(5,000)(B)
137 (C)
------ ------------ ----------
Total current assets....... 1,416 12,897 14,313
PROPERTY AND EQUIPMENT, net.......... -- 2,087 (C) 2,500
413 (D)
OTHER NONCURRENT ASSETS, net......... 45 431 (C) 1,423
947 (E)
------ ------------ ----------
Total assets............... $1,461 $ 16,775 $ 18,236
====== ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities................... $1,830 $ 3,605 (A) $ 2,062
(5,000)(B)
1,627 (C)
Current portion of long-term
liabilities................... 515 121 (C) 636
------ ------------ ----------
Total current
liabilities............. 2,345 353 2,698
LONG-TERM LIABILITIES................ -- 312 (C) 412
100 (E)
------ ------------ ----------
Total liabilities.......... 2,345 765 3,110
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock.................... 4 2 (B) 8
2 (C)
Additional paid-in capital...... -- 16,839 (B) 14,306
(3,793)(C)
413 (D)
847 (E)
Warrants........................ -- 1,700 (B) 1,700
Retained deficit................ (888) -- (888)
------ ------------ ----------
Total stockholders' equity
(deficit)............... (884) 16,010 15,126
------ ------------ ----------
Total liabilities and
stockholders' equity
(deficit)............... $1,461 $ 16,775 $ 18,236
====== ============ ==========
See accompanying notes to unaudited pro forma consolidated financial statements.
F-13
<PAGE>
APPLE ORTHODONTIX, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
APPLE ADJUSTMENTS PRO FORMA
------ ------------ ----------
REVENUES:
Management service revenues..... $ -- $ 18,138 (AA) $ 18,138
------ ------------ ----------
COSTS AND EXPENSES:
Salaries, wages and benefits.... 627 6,381 (BB) 7,656
648 (FF)
Orthodontic supplies............ -- 2,548 (BB) 2,548
Rent............................ 20 1,923 (BB) 1,943
Advertising and marketing....... -- 438 (BB) 438
General and administrative
expenses...................... 232 3,680 (BB) 3,912
Depreciation and amortization... 5 864 (BB) 869
Other (income) expense, net..... -- 47 (CC) (31)
(78)(DD)
------ ------------ ----------
Total costs and expenses... 884 16,451 17,335
------ ------------ ----------
INCOME (LOSS) BEFORE INCOME TAXES.... (884) 1,687 803
PROVISION FOR INCOME TAXES........... -- 305 (EE) 305
------ ------------ ----------
NET INCOME (LOSS).................... $ (884) $ 1,382 $ 498
====== ============ ==========
NET INCOME (LOSS) PER SHARE.......... $ .06
==========
NUMBER OF SHARES USED IN NET INCOME
PER SHARE CALCULATION.............. 7,708,372(GG)
==========
See accompanying notes to unaudited pro forma consolidated financial statements.
F-14
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS
The accompanying unaudited pro forma consolidated balance sheet as of
December 31, 1996 gives effect to the Acquisitions and the Offering as if those
transactions had occurred on December 31, 1996. The unaudited pro forma
consolidated balance sheet does not represent the historical or future financial
position of Apple.
(A) Reflects the accrual of estimated offering costs to be incurred
subsequent to December 31, 1996, in conjunction with the Offering to a total of
$5,000.
(B) Reflects the issuance of 2,350,000 shares of Class A common stock by
the Company in the Offering at an assumed initial public offering price of
$11.00 per share, net of underwriters' commissions of $1,809 and the
reclassification of deferred issuance costs of $5,000 and the payment of a cash
fee to an affiliate of TriCap at closing of $500 in total against the Offering
proceeds. An affiliate of TriCap will also receive warrants to purchase shares
at the initial offering price with a total value of $1,700. The resulting net
proceeds of $16,941 are reflected as Class A common stock, par value of $.001
per share, totaling $2, with the remaining amount recorded as additional paid-in
capital of $16,839.
(C) Reflects completion of the Acquisitions, which will involve (1) the
issuance of 2,337,979 shares of Class A Common Stock based on the assumed
initial public offering price of $11.00 per share and (2) the declaration of a
$6,429 dividend, taken together, as consideration in the Acquisitions for net
assets with a historical net book value as of December 31, 1996 of $2,638
consisting of certain assets and certain liabilities of the Founding Affiliated
Practices.
The assets transferred and liabilities assumed from the Founding Affiliated
Practices reflected herein are as follows:
Cash and cash equivalents .......................................... $ 1,177
Patient receivables, net of allowances and patient prepayments ..... 866
Prepaid expenses and other current assets .......................... 137
Property, equipment and improvements, net .......................... 2,087
Intangible and other long-term assets, net ......................... 431
Accounts payable and accrued liabilities ........................... (1,627)
Current portion of capital lease obligations ....................... (121)
Long-term portion of capital lease obligations ..................... (312)
Cash dividend ...................................................... (6,429)
-------
Stockholders' deficit ......................................... $(3,791)
=======
Net assets acquired does not include certain long-term debt of the Founding
Affiliated Practices which will be assumed by the owner orthodontists at or
prior to the Acquisitions.
This transaction would produce a pro forma deferred tax asset of
approximately $250 which has been fully reserved in these pro forma statements
as the realizability of such asset cannot be determined.
(D) Represents property, equipment and improvements separately owned by a
selling orthodontist at December 31, 1996 related to new offices opening in 1997
that will also be acquired as an additional part of the Acquisitions in note
(C).
(E) Reflects the estimated amount of financing Apple will provide to the
selling orthodontists to refinance debt which was outstanding and recorded by
the Founding Affiliated Practices as of December 31, 1996 resulting in notes
receivable from the selling orthodontists of $947 offset by approximately $100
of debt which Apple has agreed to assume in conjunction with the Acquisitions.
F-15
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS ADJUSTMENTS
The accompanying unaudited pro forma consolidated statement of operations
for the year ended December 31, 1996 assumes the Company had completed the
Acquisitions and the Offering on January 1, 1996. The pro forma adjustments are
based on the historical financial results of the Founding Affiliated Practices.
This statement does not represent the historical or future results of operations
of the Company.
(AA) Represents estimated management service revenues of Apple calculated
in accordance with the management service agreements anticipated to be entered
into with the Founding Affiliated Practices, as applied to the historical
operating results of the individual Founding Affiliated Practices for the year
ended December 31, 1996.
The management service fees earned by the Company will be in accordance
with two general types of service agreements -- the standard form of the service
agreement (Standard Contract) and the alternative form of the service agreement
(the Alternative Contract). The determination of which agreement will be used
for a practice depends on the laws relating to the corporate practice of
dentistry and fee splitting in the state or states in which that practice
operates. The Standard Contract calls for a calculation of the monthly service
fee based on the total revenues earned by the New PCs, which is defined by the
agreement to represent 24% of the total contract value in the initial month of a
patient's treatment with the remainder of the contract balance earned evenly
over the balance of the contract term. From total revenues, the orthodontists
retain a set percentage of the New PC's cash collections. There are adjustments
to the service fee designed to both provide incentives for the orthodontists to
provide efficient patient treatment and to increase the number of patients
treated, as well as to ensure that the orthodontists retain a minimum amount for
payment of their compensation from their respective New PCs on a monthly basis.
The Alternative Contract is currently offered in California. It is a cost plus
fee arrangement, whereby the service fee includes the reimbursement of defined
expenses incurred by Apple in the course of providing services to the New PC
plus a percentage of revenues.
The pro forma management service fee for practices that have agreed to the
Standard Contract is based on the accrual basis revenues of the Founding
Affiliated Practices ($19,699) less an amount based on the cash collections of
the practices ($6,547) appropriately adjusted for various provisions of the
service fee agreement (taken together, a net increase of $1,327). The resulting
pro forma management service fee for the year ended December 31, 1996 is
$14,479.
The pro forma management service fee for practices that have agreed to the
Alternative Contract represents a percentage of revenues ($724) and
reimbursement of the operating expenses of those practices ($2,935). The total
pro forma management service revenues would have been:
Practices participating under the Standard Contract .............. $14,479
Practices participating under the Alternative Contract ........... 3,659
-------
Total pro forma management service revenues ................. $18,138
=======
Apple will be managed on a regional basis. The following information on the
pro forma management service fee is provided on a regional basis as supplemental
information.
PRO FORMA
HISTORICAL MANAGEMENT
PATIENT SERVICE
REGION REVENUES FEES
- ------------------------------------- ----------- -----------
California........................... $ 5,358 $ 3,659
Western.............................. 10,709 7,640
East Coast........................... 5,392 4,094
Central.............................. 3,598 2,745
----------- -----------
$25,057 $18,138
=========== ===========
F-16
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The revenues and cash collections used to calculate the pro forma
management service revenues have not been adjusted for the pro forma effect of
acquisitions and dispositions made by the Founding Affiliated Practices during
the year ended December 31, 1996. Management does not believe that such
adjustments would have a material impact on the calculation of these pro forma
calculations.
(BB) Represents an adjustment to reflect certain historical costs of the
Founding Affiliated Practices that will be incurred by the Company in order to
fulfill the Company's obligations under the service agreements with the Founding
Affiliated Practices.
(CC) Reflects interest expense attributable to capital lease obligations
expected to be assumed by Apple in connection with the Acquisitions.
(DD) Reflects interest income on the notes receivable from orthodontists
related to the refinancing of their long term obligations at a rate of prime
plus one percent less increased interest expense related to debt of the
practices' that the Company has agreed to assume.
(EE) Reflects federal and state income taxes the Company would have
incurred on pro forma income before taxes at an assumed income tax rate of 38
percent.
(FF)__Represents the total annual management salaries, excluding
acquisition personnel, of the existing management team less the salary expense
reflected in the Company's historical results for the period from inception
through December 31, 1996 to reflect the assumption that the management team
would have been in place as of January 1, 1996.
(GG) The number of shares used in the pro forma net income per share
calculation are determined as follows:
Apple outstanding shares before the Acquisitions and Offering ... 4,106,852
Shares to be issued for the Acquisitions ........................ 2,337,979
Shares to be issued in the Offering ............................. 2,350,000
Net shares that would be outstanding if outstanding options
were exercised and the proceeds were used to repurchase
shares at the assumed initial public offering price ........... 14,545
Less -- Shares not required for the Acquisitions and other
uses of proceeds ($12,111/$11.00) ............................. (1,101,005)
----------
Total ...................................................... 7,708,372
==========
F-17
<PAGE>
================================================================================
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
OF ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary ........................................................ 3
Risk Factors .............................................................. 8
The Company ............................................................... 14
Use of Proceeds ........................................................... 14
Dividend Policy ........................................................... 14
Dilution .................................................................. 15
Capitalization ............................................................ 16
Selected Financial Data ................................................... 17
Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................... 18
Business .................................................................. 21
Management ................................................................ 32
Certain Transactions ...................................................... 38
Security Ownership of Certain Beneficial Owners and Management ............ 41
Description of Capital Stock .............................................. 42
Shares Eligible for Future Sale ........................................... 46
Underwriting .............................................................. 48
Legal Matters ............................................................. 49
Experts ................................................................... 49
Additional Information .................................................... 50
Index to Financial Statements ............................................. F-1
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
2,350,000 SHARES
[LOGO APPLE ORTHODONTIX]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
BEAR, STEARNS & CO. INC.
EQUITABLE SECURITIES CORPORATION
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be paid by the Company
(other than underwriting compensation expected to be incurred) in connection
with the offering described in this Registration Statement. All amounts are
estimates, except the SEC Registration Fee, the NASD Filing Fee and the Nasdaq
National Market Listing Fee.
SEC Registration Fee ......................................... $ 9,828
NASD Filing Fee .............................................. 3,615
American Stock Exchange Listing Fee .......................... 42,500
Blue Sky Fees and Expenses ................................... 10,000
Printing Costs ............................................... 200,000
Legal Fees and Expenses ...................................... 1,450,000
Accounting Fees and Expenses ................................. 3,300,000
Transfer Agent and Registrar Fees and Expenses ............... 5,000
Premiums for D&O Insurance ................................... 125,000
Miscellaneous ................................................ 354,057
----------
Total .............................................. $5,500,000
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
DELAWARE GENERAL CORPORATION LAW
Section 145(a) of the General Corporation Law of the State of Delaware (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, administrative 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 attorney's
fees), judgements, fines and amounts 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. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which 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 reasonable cause to believe that his conduct was unlawful.
Section 145(b) of the DGCL states 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 or suit by or in the right of the
corporation to procure a judgment in its favor 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 or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorney's fees)
actually and reasonably incurred by him 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 of 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 Court of
Chancery or the 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
II-1
<PAGE>
person is fairly and reasonably entitled to indemnity for such expenses which
the Court of Chancery or such other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a director,
officer, employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorney's
fees) actually and reasonably incurred by him in connection therewith.
Section 145(d) of the DGCL states that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made
by the corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances because he has met the applicable standard of conduct set
forth in subsections (a) and (b). Such determination shall be made (1) by the
board of directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (2) if such a quorum is
not obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized in Section 145. Such
expenses (including attorneys' fees) incurred by other employees and agents may
be so paid upon such terms and conditions, if any, as the board of directors
deems appropriate.
Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who 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 any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Section 145.
Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent, and shall inure to the
benefit of the heirs, executors and administrators of such a person.
CERTIFICATE OF INCORPORATION
The Restated Certificate of Incorporation of the Company provides that a
director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the 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 DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. If the DGCL is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Company, in addition to the limitation on
personal liability described above, shall be limited to the fullest extent
permitted by the amended DGCL. Further, any repeal or modification of such
provision of the Restated Certificate of Incorporation by the stockholders of
the Company shall be prospective only, and shall not
II-2
<PAGE>
adversely affect any limitation on the personal liability of a director of the
Company existing at the time of such repeal or modification.
BYLAWS
The Bylaws of the Company provide that the Company will indemnify and hold
harmless any director or officer of the Company to the fullest extent permitted
by applicable law, as in effect as of the date of the adoption of the Bylaws or
to such greater extent as applicable law may thereafter permit, from and against
all losses, liabilities, claims, damages, judgments, penalties, fines, amounts
paid in settlement and expenses (including attorneys' fees) whatsoever arising
out of any event or occurrence related to the fact that such person is or was a
director or officer of the Company and further provide that the Company may, but
is not required to, indemnify and hold harmless any employee or agent of the
Company or a director, officer, employee or agent of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise who
is or was serving in such capacity at the written request of the Company;
provided, however, that the Company is only required to indemnify persons
serving as directors, officers, employees or agents of the Company for the
expenses incurred in a proceeding if such person is a party to and is
successful, on the merits or otherwise, in such proceeding, or if unsuccessful
in the proceeding, but successful as to a matter in such proceeding, the
expenses attributable to such matter and provided further that the Company may,
but is not required to, indemnify such persons who are serving as a director,
officer, employee or agent of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise at the written request of the
Company for the expenses incurred in a proceeding if such person is a party to
and is successful, on the merits or otherwise, in such proceeding. The Bylaws
further provide that, in the event of any threatened, or pending action, suit or
proceeding in which any of the persons referred to above is a party or is
involved and that may give rise to a right of indemnification under the Bylaws,
following written request by such person, the Company will promptly pay to such
person amounts to cover expenses reasonably incurred by such person in such
proceeding in advance of its final disposition upon the receipt by the Company
of (i) a written undertaking executed by or on behalf of such person providing
that such person will repay the advance if it is ultimately determined that such
person is not entitled to be indemnified by the Company as provided in the
Bylaws and (ii) satisfactory evidence as to the amount of such expenses.
UNDERWRITING AGREEMENT
The Underwriting Agreement provides for the indemnification of the
directors and officers of the Company in certain circumstances.
TRICAP PARTNERS, L.L.C. AGREEMENT
The financial advisory consulting agreement provides for the
indemnification of the directors and officers of the Company in certain
circumstances.
INSURANCE
The Company intends to maintain liability insurance for the benefit of its
directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to securities of the Company issued or
sold within the past three years which were not registered under the Securities
Act:
On October 11, 1996, the Company issued 420, 415.5, 52.5, 40, 10, 10, 10, 5
and 5 shares of Common Stock to TriCap Funding I, L.L.C., John G. Vondrak,
D.D.S., W. Daniel Cook, Robert J. Syverson, Roxanne Robertson, Wm. Randol
Womack, D.D.S., Duncan Y. Brown, D.D.S., Wanda Rose and Stephen DeOrlow,
Trustee, respectively, the founders of the Company, for $0.01 per share. On
December 9, 1996, the Company issued 23.5, 24.5, 5 and 2.5 shares of Common
Stock to Michael W. Harlan, LeeAnn Peniche, Orthodontic Investors of Texas II,
Inc. and Allan Benson, respectively, for $3.00 per share. Such issuances were
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof as transactions not involving any public offering.
II-3
<PAGE>
In March 1997, each outstanding share of Common Stock was reclassified into
4,012.5569 shares of Class B Stock (the "Stock Split"). The Stock Split was
exempt from the registration requirements of the Securities Act as it did not
involve a "sale," as defined in Section 2(3) of the Securities Act.
Simultaneously with the completion of this Offering, the Company will issue
2,337,979 shares of Common Stock in connection with the acquisition of the
Founding Affiliated Practices. Such issuances will be exempt for the
registration requirements of Section 4(2) thereof as transactions not involving
any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
1.1* -- Form of Underwriting Agreement
2.1+ -- Form of Agreement and Plan of Reorganization
2.2+ -- Form of Uniform Provisions relating to Agreement and Plan of Reorganization
3.1 -- Restated Certificate of Incorporation
3.2 -- Bylaws
4.1* -- Form of certificate evidencing ownership of Common Stock of Apple Orthodontix, Inc.
4.2 -- Form of Registration Rights Agreement
4.3 -- Registration Rights Agreement among Apple Orthodontix, Inc., John G. Vondrak, D.D.S. and
TriCap Funding I, L.L.C.
4.4 -- Registration Rights Agreement between TriCap Partners, L.L.C. and Apple Orthodontix, Inc.
5.1* -- Opinion of Jackson & Walker, L.L.P.
10.1 -- Apple Orthodontix, Inc., 1996 Stock Option Plan
10.2+ -- Employment Agreement between Apple Orthodontix, Inc. and John G. Vondrak, D.D.S.
10.3+ -- Employment Agreement between Apple Orthodontix, Inc. and Robert J. Syverson
10.4+ -- Employment Agreement between Apple Orthodontix, Inc. and Michael W. Harlan
10.5+ -- Employment Agreement between Apple Orthodontix, Inc. and W. Daniel Cook
10.6+ -- Form of California Service Agreement
10.7+ -- Employment Agreement of H. Steven Walton
10.8 -- Form of Service Agreement
23.1 -- Consent of Arthur Andersen LLP
23.2* -- Consent of Jackson & Walker, L.L.P. (contained in Exhibit 5.1)
24.1+ -- Power of Attorney (contained on the signature page of this Registration Statement)
</TABLE>
- ------------
* To be filed by amendment.
+ Previously filed.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
(1) To 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.
II-4
<PAGE>
(2) Insofar as indemnification for liabilities arising under the
Securities Act 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 Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payments 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 Securities Act and will be governed by the final
adjudication of such issue.
(3) That, for the purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(4) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
APPLE ORTHODONTIX, INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
HOUSTON, STATE OF TEXAS, ON APRIL 28, 1997.
APPLE ORTHODONTIX, INC.
By: /s/ JOHN G. VONDRAK, D.D.S.
JOHN G. VONDRAK, D.D.S.
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AND ON APRIL 28, 1997.
SIGNATURES TITLE
- --------------------------------------- ---------------------------------------
/s/ JOHN G. VONDRAK, D.D.S. Chairman of the Board and Chief
JOHN G. VONDRAK, D.D.S. Executive Officer (Principal Executive
Officer)
/s/ MICHAEL W. HARLAN* Vice President and Chief Financial
MICHAEL W. HARLAN Officer (Principal Financial and
Accounting Officer)
/s/ W. DANIEL COOK* Director
W. DANIEL COOK
/s/ WILLIAM W. SHERRILL* Director
WILLIAM W. SHERRILL
*By /s/ MICHAEL W. HARLAN
MICHAEL W. HARLAN,
INDIVIDUALLY AND AS
ATTORNEY-IN-FACT
II-6
RESTATED CERTIFICATE OF INCORPORATION
OF
APPLE ORTHODONTIX, INC.
Apple Orthodontix, Inc. (the "Corporation"), a corporation organized
and existing under and by virtue of the General Corporation Law of the State of
Delaware (the "DGCL"), hereby adopts this Restated Certificate of Incorporation,
which accurately restates and integrates the provisions of the existing
Certificate of Incorporation of the Corporation and all amendments thereto that
are in effect on the date hereof (the "Certificate of Incorporation") and
further amends the provisions of the Certificate of Incorporation as described
below, and does hereby further certify that:
1. The name of the Corporation is Apple Orthodontix, Inc. The
original certificate of incorporation of the Corporation was filed with the
Secretary of State of the State of Delaware on July 15, 1996.
2. The Board of Directors of the Corporation duly adopted a
resolution proposing and declaring advisable the amendments to the Certificate
of Incorporation as described herein, and the holders of a majority of the
Corporation's outstanding capital stock have duly adopted such amendments, all
in accordance with the provisions of Sections 228, 242 and 245 of the DGCL.
3. This Restated Certificate of Incorporation is being filed
pursuant to Sections 242 and 245 of the Delaware General Corporation Law in
order to restate the Certificate of Incorporation of the Corporation as amended
to date, and also to amend further the Certificate of Incorporation to (i)
increase the authorized capital stock of the Corporation, (ii) authorize the
issuance of preferred stock, Class A Common Stock and Class B Common Stock,
(iii) reclassify each issued and outstanding share of Common Stock of the
Corporation into 4,012.556913 shares of Class B Common Stock and (iv) provide
for the classification of the Board of Directors of the Corporation.
4. At the effective time of this Restated Certificate of
Incorporation each share of Common Stock, par value $0.01 per share, authorized
immediately prior to this amendment shall be reclassified into 4,012.556913
fully paid and non-assessable shares of Class B Common Stock, par value $0.001
per share, so that each share of Common Stock, par value $0.01 per share,
authorized immediately prior to this Restated Certificate of Incorporation shall
be automatically converted and reclassified without further action into
4,012.556913 shares of Class B Common Stock, par value $0.001 per share. No
scrip or certificates for fractional shares of Common Stock will be issued by
reason of this amendment.
5. The Certificate of Incorporation is hereby restated and further
amended to read in its entirety as follows:
RESTATED CERTIFICATE OF INCORPORATION
FIRST: The name of the Corporation is Apple Orthodontix, Inc.
<PAGE>
SECOND: The address of the registered office of the Corporation in
the State of Delaware is 1050 S. State Street, in the City of Dover, County of
Kent. The name of its registered agent at such address is CorpAmerica, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful
business, act or activity for which corporations may be organized under the DGCL
or any successor statute.
FOURTH: The aggregate number of shares of capital stock which the
Corporation shall have authority to issue is Thirty-nine Million One Hundred Six
Thousand Eight Hundred and Fifty-Two (39,106,852), divided into Twenty-five
Million (25,000,000) shares of Class A Common Stock, par value $0.001 per share
("Class A Common Stock"), 4,106,852 shares of Class B Common Stock, par value
$0.001 per share ("Class B Common Stock" and, together with the Class A Common
Stock, "Common Stock"), and Ten Million (10,000,000) shares of preferred stock,
par value $0.001 per share ("Preferred Stock"). Shares of any class of capital
stock of the Corporation may be issued for such consideration and for such
corporate purposes as the Board of Directors of the Corporation (the "Board of
Directors") may from time to time determine. No stockholder shall, by reason of
the holding of shares of any class or series of capital stock of the
Corporation, have a preemptive or preferential right to acquire or subscribe for
any shares or securities of any class, whether now or hereafter authorized,
which may at any time be issued, sold or offered for sale by the Corporation,
unless specifically provided for in a Directors' Resolution with respect to a
series of Preferred Stock. Cumulative voting of shares of any class or series of
capital stock having voting rights is prohibited unless specifically provided
for in a Directors' Resolution (as defined below) with respect to a series of
Preferred Stock.
A statement of the powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, in respect of each class of stock of the
Corporation is as follows:
PREFERRED STOCK
The Preferred Stock may be divided into and issued from time to time
in one or more series as may be fixed and determined by the Board of Directors.
The relative rights and preferences of the Preferred Stock of each series shall
be such as shall be stated in any resolution or resolutions adopted by the Board
of Directors setting forth the designation of the series and fixing and
determining the relative rights and preferences thereof, any such resolution or
resolutions being herein called a "Directors' Resolution." The Board of
Directors is hereby authorized to fix and determine the powers, designations,
preferences, and relative, participating, optional or other rights (including,
without limitation, voting powers, full or limited, preferential rights to
receive dividends or assets upon liquidation, rights of conversion or exchange
into Common Stock, Preferred Stock of any series or other securities, any right
of the Corporation to exchange or convert shares into Common Stock, Preferred
Stock of any series or other securities, or redemption provisions or sinking
fund provisions) as between series and as between the Preferred Stock or any
series thereof and the Common Stock, and the qualifications, limitations or
restrictions thereof, if any, all as shall be stated in a Directors' Resolution,
and
2
<PAGE>
the shares of Preferred Stock or any series thereof may have full or limited
voting powers, or be without voting powers, all as shall be stated in a
Directors' Resolution.
COMMON STOCK
Class A Common Stock and Class B Common Stock shall be identical in all
respects and shall have equal powers, rights and privileges, except as otherwise
expressly provided herein. The relative powers, preferences, rights,
qualifications, limitations and restrictions of the shares of each of the
classes of Common Stock are as follows:
(a) CASH OR PROPERTY DIVIDENDS. Subject to the rights and
preferences of the Preferred Stock as set forth in any resolution or
resolutions of the Board of Directors providing for the issuance of such
stock pursuant to this Article Fourth, and except as otherwise provided
for herein, the holders of Class A Common Stock and Class B Common Stock
shall be entitled to receive ratably (on the basis of one share of Class A
Common Stock being treated equally as one share of Class B Stock) cash or
property dividends as may from time to time be declared by the Board out
of funds legally available therefore.
(b) STOCK DIVIDENDS. If at any time a dividend is to be paid in
shares of Class B Common Stock or shares of Class A Common Stock (a "stock
dividend"), such stock dividend may be declared and paid only as follows:
Class A Common Stock may be paid only to holders of Class A Common Stock
and Class B Common Stock may be paid only to holders of Class B Common
Stock, and whenever a stock dividend is paid, the same rate or ratio of
shares shall be paid in respect of each outstanding share of Class A
Common Stock or Class B Common Stock.
(c) STOCK SUBDIVISIONS AND COMBINATIONS. The Corporation shall not
subdivide, reclassify or combine stock of any class of Common Stock
without at the same time making a proportionate subdivision or combination
of the other class.
(d) VOTING. Voting power shall be divided between classes of stock as
follows:
(1) With respect to the election of directors, holders of
Class B Common Stock and holders of any series of Preferred Stock
(to the extent that holders of Preferred Stock are entitled to vote
in accordance with this Article Fourth and not otherwise required by
law to vote as a separate class) voting together shall be entitled
to elect that number of directors which constitutes 20% of the
authorized number of members of the Board of Directors and, if such
20% is not a whole number, then the holders of Class B Common Stock
and holders of any series of Preferred Stock (to the extent they are
entitled to vote thereon) voting together shall be entitled to elect
the nearest lower whole number of directors that is closest to 20%
of such membership. Holders of Class A Common Stock shall be
entitled to elect the remaining directors.
3
<PAGE>
(2) Holders of Class B Common Stock and holders of any series
of Preferred Stock (to the extent they are entitled to vote thereon)
shall be entitled to vote together on the removal, with cause, of
any director elected by the holders of Class B Common Stock and
holders of any series of Preferred Stock (to the extent they are
entitled to vote thereon). Holders of Class A Common Stock shall be
entitled to vote on the removal, with cause, of any director elected
by the holders of Class A Common Stock.
(3) Except as specified herein, the holders of the Class A
Common Stock and the holders of the Class B Common Stock shall be
entitled to vote as separate classes only when required by law to do
so or as provided herein.
(4) Any vacancy in the office of a director created by the
death, resignation or removal of a director elected by the holders
of Class B Common Stock and holders of any series of Preferred Stock
(to the extent they are entitled to vote thereon) may be filled by a
vote of holders of Class B Common Stock and holders of any series of
Preferred Stock (to the extent they are entitled to vote thereon)
voting together. Any vacancy in the office of a director created by
the death, resignation or removal of a director elected by the
holders of Class A Common Stock may be filled by a vote of holders
of Class A Common Stock. Notwithstanding anything in this Section
(d) to the contrary, any vacancy in the office of a director may be
filled by the vote of the majority of the directors (or director)
elected by the same class or classes of stock that elected that
director whose death, resignation or removal created the vacancy, if
any. Any director elected by some or all of the directors or by the
stockholders to fill a vacancy shall serve until the annual meeting
at which such director's term expires and until his or her successor
has been elected and has qualified unless removed and replaced
pursuant to this subsection (d)(4). The Board of Directors may
increase the number of directors and any newly-created directorship
so created may be filled by the Board of Directors, provided that
the Board of Directors may be so enlarged by the Board only to the
extent that 20%, or, if such 20% is not a whole number, then the
nearest lower whole number of directors that is closest to 20%, of
such membership of the enlarged Board consists of directors elected
by the holders of Class B Common Stock and the holders of any series
of Preferred Stock (to the extent they are entitled to vote thereon)
or by the vote of the majority of the directors (or director)
elected by the holders of Class B Common Stock and the holders of
any series of Preferred Stock (to the extent they are entitled to
vote thereon).
(5) Holders of Class A Common Stock and Class B Common Stock
shall in all matters, other than the election of directors and as
not otherwise specified in this Section (d), vote together, with
each share of Class A Common Stock having one vote and each share of
Class B Common Stock having threetenths (3/10ths) of one vote.
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(6) Notwithstanding anything in this Section (d) to the
contrary, the holders of Class A Common Stock shall have exclusive
voting power (except for voting powers, if any, of any series of
Preferred Stock) on all matters at any time when no Class B Common
Stock is issued and outstanding, and the holders of Class B Common
Stock shall have exclusive voting power (except for voting powers,
if any, of any series of Preferred Stock) on all matters at any time
when no Class A Common Stock is issued and outstanding.
(e) CONVERSION. Each share of Class B Common Stock will
automatically convert into Class A Common Stock on a share for share basis
(a) in the event of a disposition after the date of the Corporation's
initial public offering of such share of Class B Common Stock by the
holder thereof to any person who is not an affiliate of such holder, (b)
in the event any person not affiliated with the Corporation acquires
beneficial ownership (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) of 15% or more of
the outstanding shares of capital stock of the Corporation, (c) in the
event any person not affiliated with the Corporation offers to acquire
beneficial ownership of 15% or more of the outstanding shares of capital
stock of the corporation, (d) in the event the holder of Class B Common
Stock elects to convert it into Class A Common Stock at any time after the
second anniversary of the consummation of the Corporation's initial public
offering of Class A Common Stock (the "Public Offering"), (e) on the fifth
anniversary of the date of the consummation of the Public Offering, or (f)
in the event the holders of a majority of the outstanding shares of Class
A Common Stock entitled to vote approve such conversion. Additionally, the
Corporation may elect to convert any outstanding shares of Class B Common
Stock into shares of Class A Common Stock on a share for share basis in
the event less than 821,370 shares of Class B Common Stock are then
outstanding Upon the occurrence of any such conversion, any holder of
Class B Common Stock may surrender such holder's certificate or
certificates representing the Class B Common Stock so converted, duly
endorsed, at the office of the Corporation or any transfer agent for the
Class B Common Stock, together with a written notice to the Corporation at
such office that such holder elects to exchange such certificate or
certificates for a certificate or certificates representing Class A Common
Stock. Promptly thereafter, the Corporation shall issue and deliver to
such holder, or such holder's nominee or nominees, a certificate or
certificates representing the number of shares of Class A Common Stock to
which such holder shall be entitled as aforesaid. Such conversion shall be
deemed to have been made at the close of business at the date of such
event and the person or persons entitled to receive the Class A Common
Stock issuable on such conversion shall be treated for all purposes as the
record holder or holders of such Class A Common Stock as of the close of
business on that date.
FIFTH: (a) DIRECTORS. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors. In
addition to the authority and powers conferred upon the Board of Directors by
the DGCL or by the other provisions of this Restated Certificate of
Incorporation (this "Certificate of Incorporation"), the Board of Directors is
hereby authorized and empowered to exercise all such powers and do all such acts
and things
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as may be exercised or done by the Corporation, subject to the provisions of the
DGCL, this Certificate of Incorporation and any Bylaws adopted by the
stockholders of the Corporation; PROVIDED, HOWEVER, that no Bylaws hereafter
adopted by the stockholders of the Corporation, or any amendments thereto, shall
invalidate any prior act of the Board of Directors that would have been valid if
such Bylaws or amendment had not been adopted.
(b) NUMBER, ELECTION AND TERMS OF DIRECTORS. The number of directors
which shall constitute the whole Board of Directors shall be fixed from time to
time by a majority of the directors then in office, subject to an increase in
the number of directors by reason of any provisions contained in or established
pursuant to Article FOURTH, but in any event shall not be less than three. The
directors, other than those who may be elected by the holders of any series of
Preferred Stock, shall be divided into three classes, Class I, Class II and
Class III. Each director shall serve for a term ending on the third annual
meeting following the annual meeting at which such director was elected;
PROVIDED, HOWEVER, that the directors first elected to Class I shall serve for a
term expiring at the annual meeting next following the end of the calendar year
1997, the directors first elected to Class II shall serve for a term expiring at
the annual meeting next following the end of the calendar year 1998, and the
directors first elected to Class III shall serve for a term expiring at the
annual meeting next following the end of the calendar year 1999. Each director
shall hold office until the annual meeting at which such director's term expires
and, the foregoing notwithstanding, shall serve until his successor shall have
been duly elected and qualified or until his earlier death, resignation or
removal.
At each annual election, the directors chosen to succeed those whose
terms then expire shall be of the same class as the directors they succeed,
unless, by reason of any intervening changes in the authorized number of
directors, the Board of Directors shall have designated one or more
directorships whose term then expires as directorships of another class in order
more nearly to achieve equality of number of directors among the classes.
In the event of any change in the authorized number of directors,
each director then continuing to serve as such shall nevertheless continue as a
director of the class of which he is a member until the expiration of his
current term, or his prior death, resignation or removal. The Board of Directors
shall specify the class to which a newly created directorship shall be
allocated.
Election of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
(c) REMOVAL OF DIRECTORS. No director of the Corporation shall be
removed from office as a director by vote or other action of the stockholders or
otherwise except for cause, and then only by the affirmative vote of the holders
of at least a majority of the voting power of all outstanding shares of capital
stock of the Corporation generally entitled to vote in the election of such
director, voting together as a single class. Except as may otherwise be provided
by law, cause for removal of a director shall be deemed to exist only if: (i)
the director whose removal is proposed has been convicted, or where a director
is granted immunity to testify where another has been convicted, of a felony by
a court of competent jurisdiction and such conviction is no longer subject to
direct appeal; (ii) such director has been found by the
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affirmative vote of a majority of the entire Board of Directors at any regular
or special meeting of the Board of Directors called for that purpose or by a
court of competent jurisdiction to have been grossly negligent or guilty of
misconduct in the performance of his duties to the Corporation in a matter of
substantial importance to the Corporation; or (iii) such director has been
adjudicated by a court of competent jurisdiction to be mentally incompetent,
which mental incompetency directly affects his ability as a director of the
Corporation.
(d) VACANCIES. Except as provided in Article FOURTH hereof, newly
created directorships resulting from any increase in the number of directors and
any vacancies on the Board of Directors resulting from death, resignation,
removal or other cause shall be filled by the affirmative vote of a majority of
the remaining directors then in office, even though less than a quorum of the
Board of Directors. Any director elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified or until
his earlier death, resignation or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
SIXTH: From and after the first date as of which the Corporation has
a class or series of capital stock registered under the Exchange Act, any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at an annual or special meeting of stockholders of the Corporation and
may not be effected by any consent in writing by such stockholders. Except as
otherwise required by law, or as may be prescribed in a Directors' Resolution,
special meetings of stockholders of the Corporation may be called only by the
Chairman of the Board of Directors or by the President of the Corporation or by
the Board of Directors pursuant to a resolution approved by the affirmative vote
of a majority of the entire Board of Directors.
SEVENTH: No director of the Corporation shall be personally liable
to the Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director; PROVIDED, HOWEVER, that the foregoing provisions
shall not eliminate or limit the liability of a director (i) for any breach of
such 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, as the same
exists or as such provision may hereafter be amended, supplemented or replaced,
or (iv) for any transactions from which such director derived an improper
personal benefit. If the DGCL is amended after the filing of this Certificate of
Incorporation to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation, in addition to the limitation on personal liability provided
herein, shall be limited to the fullest extent permitted by such law, as so
amended. Any repeal or modification of this Article SEVENTH by the stockholders
of the Corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Corporation existing
at the time of such repeal or modification.
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EIGHTH: In furtherance of, and not in limitation of, the powers
conferred by statute, the Board of Directors is expressly authorized to adopt,
amend or repeal the Bylaws of the Corporation, or adopt new Bylaws, without any
action on the part of the stockholders, except as may be otherwise provided by
applicable law or the Bylaws of the Corporation.
NINTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
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 the Corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for the Corporation under
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 the Corporation
under 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 the Corporation, as the case may be, to be summoned in such
manner as the said court directs. If the 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 the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of the
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
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
IN WITNESS WHEREOF, the Corporation has caused this certificate to
be executed this 24th day of April, 1997.
APPLE ORTHODONTIX, INC.
By:/s/John G. Vondrak, D.D.S.
John G. Vondrak, D.D.S.
Chairman and Chief Executive Officer
8
BYLAWS
OF
APPLE ORTHODONTIX, INC.
Adopted and Effective
October 10, 1996
<PAGE>
TABLE OF CONTENTS
ARTICLE I OFFICES........................................................ 1
Section 1. Registered Office......................................... 1
Section 2. Other Offices............................................. 1
ARTICLE II MEETINGS OF STOCKHOLDERS....................................... 1
Section 1. Place of Meetings......................................... 1
Section 2. Annual Meetings........................................... 1
Section 3. Special Meetings.......................................... 1
Section 4. Quorum.................................................... 2
Section 5. Adjournments.............................................. 2
Section 6. Voting.................................................... 2
Section 7. List of Stockholders Entitled to Vote..................... 2
Section 8. Record Date............................................... 3
Section 9. Conduct of Meetings by Presiding Person................... 3
Section 10. Nomination of Directors.................................. 4
Section 11. Stockholder Proposals Regarding Amendments to
Certificate of Incorporation............................. 5
ARTICLE III DIRECTORS..................................................... 6
Section 1. Number and Election of Directors.......................... 6
Section 2. Vacancies................................................. 6
Section 3. Duties and Powers......................................... 7
Section 4. Meetings.................................................. 7
Section 5. Quorum.................................................... 7
Section 7. Meetings by Conference Telephone.......................... 7
Section 8. Committees................................................ 8
Section 9. Compensation.............................................. 8
Section 10. Interested Directors..................................... 8
Section 11. Removal.................................................. 9
ARTICLE IV OFFICERS........................................................ 10
Section 1. General................................................... 10
Section 2. Election.................................................. 10
Section 3. Chairman of the Board of Directors........................ 10
Section 4. Vice Chairman of the Board of Directors................... 10
Section 5. President................................................. 11
Section 6. Vice Presidents........................................... 11
Section 7. Secretary................................................. 11
Section 8. Controller................................................ 12
Section 9. Treasurer................................................. 12
Section 10. Assistant Secretaries.................................... 12
Section 11. Assistant Treasurers..................................... 12
Section 12. Other Officers........................................... 12
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ARTICLE V STOCK.......................................................... 13
Section 1. Form of Certificates...................................... 13
Section 2. Signatures................................................ 13
Section 3. Lost Certificates......................................... 13
Section 4. Transfers................................................. 13
ARTICLE VI NOTICES......................................................... 13
Section 1. Notices................................................... 13
ARTICLE VII AMENDMENT OF BYLAWS............................................ 14
Section 1. Vote Requirements......................................... 14
Section 2. Stockholder Proposals..................................... 14
ARTICLE VIII GENERAL PROVISIONS............................................ 15
Section 1. Indemnification of Directors, Officers and Employees...... 15
Section 2. Dividends................................................. 15
Section 3. Disbursements............................................. 16
Section 4. Fiscal Year............................................... 16
Section 5. Corporate Seal............................................ 16
Section 6. Definition of Beneficial Owner............................ 16
<PAGE>
BYLAWS
OF
APPLE ORTHODONTIX, INC.
(hereinafter the "Corporation")
ARTICLE I
OFFICES
Section 1. REGISTERED OFFICE. The registered office of the Corporation
shall be located at 1050 S. State Street, City of Dover, State of Delaware
19901.
Section 2. OTHER OFFICES. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of the stockholders for the
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware, as may be designated from
time to time by the Board of Directors and stated in the notice of the meeting
or in a duly executed waiver of notice thereof.
Section 2. ANNUAL MEETINGS. The annual meeting of stockholders shall be
held on such date and at such time as may be designated from time to time by the
Board of Directors and stated in the notice of the meeting, at which meeting the
stockholders shall elect by a plurality vote a number of directors equal to the
number of directors whose term expires at the time of such meeting and transact
such other business as may properly be brought before the meeting. Written
notice of the annual meeting stating the place, date and hour of the meeting
shall be given to each stockholder entitled to vote at such meeting not less
than ten nor more than sixty days before the date of the meeting. If mailed,
such notice shall be deemed to be given when deposited in the mail, postage
prepaid, directed to the stockholder at his address as it appears on the records
of the Corporation.
Section 3. SPECIAL MEETINGS. Special meetings of stockholders, for any
purpose or purposes, may be called only by the person or persons specified in
the Corporation's Certificate of Incorporation, as the same may be amended or
restated from time to time (the "Certificate of Incorporation"). Written notice
of a special meeting stating the place, date and hour of the meeting and the
purpose or purposes for which the meeting is being called shall be given to each
stockholder entitled to vote at such meeting not less than ten nor more than
sixty days before
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the meeting. If mailed, such notice shall be deemed to be given when deposited
in the mail, postage prepaid, directed to the stockholder at his address as it
appears on the records of the Corporation.
Section 4. QUORUM. Except as otherwise provided by law or by the
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall be necessary and sufficient to constitute a quorum
at all meetings of the stockholders for the transaction of business. If,
however, such quorum shall not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted that might have been
transacted at the meeting as originally noticed. If the adjournment is for more
than thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder entitled to vote at the meeting.
Section 5. ADJOURNMENTS. Any meeting of stockholders may be adjourned from
time to time to reconvene at the same or some other place, and notice need not
be given of any such adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting, the Corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjournment
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
Section 6. VOTING. Unless otherwise required by law, the Certificate of
Incorporation or these bylaws, any question brought before any meeting of
stockholders shall be decided by the vote of the holders of a majority of the
voting power of the stock represented and entitled to vote thereat. Such votes
may be cast in person or by proxy but no proxy shall be voted or acted upon
after three years from its date, unless such proxy provides for a longer period.
The presiding person at a meeting of stockholders, in his or her discretion, may
require that any votes cast at such meeting shall be cast by written ballot.
Section 7. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder of the Corporation who is
present. The stock ledger of the Corporation shall be the only evidence as to
who are the stockholders of the Corporation.
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Section 8. RECORD DATE. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which in the
case of a meeting, shall not be less than the minimum nor more than the maximum
number of days prior to the scheduled date of such meeting permitted under the
laws of the State of Delaware or the rules of any exchange on which shares of
capital stock of the Company are listed for trading and which, in the case of
any other action, shall be not more than the maximum number of days prior to any
such action permitted by the laws of the State of Delaware. If no such record
date is fixed by the Board of Directors, the record date shall be that
prescribed by the laws of the State of Delaware. A determination of stockholders
of record entitled to notice of or to vote at a meeting of stockholders shall
apply to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
Section 9. CONDUCT OF MEETINGS BY PRESIDING PERSON. All determinations of
the presiding person at each meeting of stockholders shall be conclusive unless
a matter is determined otherwise upon motion duly adopted by the affirmative
vote of the holders of at least 80% of the voting power of the shares of capital
stock of the Corporation entitled to vote in the election of directors held by
stockholders present in person or represented by proxy at such meeting.
Accordingly, in any meeting of stockholders or part thereof, the presiding
person shall have the sole power to determine appropriate rules or to dispense
with theretofore prevailing rules. Without limiting the foregoing, the following
rules shall apply:
(a) The presiding person may ask or require that anyone not a bona
fide stockholder or proxy leave the meeting.
(b) A resolution or motion shall be considered for a vote only if
proposed by a stockholder or duly authorized proxy, and seconded by an
individual, who is a stockholder or a duly authorized proxy, other than
the individual who proposed the resolution or motion, subject to
compliance with any other requirements concerning such a proposed
resolution or motion contained in these bylaws. The presiding person may
propose any motion for a vote. The order of business at all meetings of
stockholders shall be determined by the presiding person.
(c) The presiding person may impose any reasonable limits with
respect to participation in the meeting by stockholders, including, but
not limited to, limits on the amount of time at the meeting taken up by
the remarks or questions of any stockholder, limits on the numbers of
questions per stockholder, and limits as to the subject matter and timing
of questions and remarks by stockholders.
(d) Before any meeting of stockholders, the Board of Directors shall
appoint any persons other than nominees for office to act as inspectors of
election
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at the meeting or its adjournment. If no inspectors of election are so
appointed or if such inspectors shall fail to act, the presiding person
shall appoint inspector(s) of election at the meeting of stockholders. If
any person appointed as inspector fails to appear or fails or refuses to
act, the presiding person shall appoint a person to fill such vacancy.
The duties of these inspectors shall be as follows:
(i) Determine the number of shares outstanding and the voting power
of each, the shares represented at the meeting, the existence of a quorum,
and the authenticity, validity and effect of proxies;
(ii) Receive votes or ballots;
(iii) Hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(iv) Count and tabulate all votes;
(v) Report to the Board of Directors the results based on the
information assembled by the inspectors; and
(vi) Do any other acts that may be proper to conduct the election or
vote.
Notwithstanding the foregoing, the final certification of the results of any
election or other matter acted upon at a meeting of stockholders shall be made
by the Board of Directors.
Section 10. NOMINATION OF DIRECTORS. Nominations for the election of
directors may be made by the Board of Directors or by any stockholder (a
"Nominator") entitled to vote in the election of directors. Such nominations,
other than those made by the Board of Directors, shall be made in writing
pursuant to timely notice delivered to or mailed and received by the Secretary
of the Corporation as set forth in this Section 10. To be timely in connection
with an annual meeting of stockholders, a Nominator's notice, setting forth the
name and address of the person to be nominated, shall be delivered to or mailed
and received at the principal executive offices of the Corporation not less than
ninety days nor more than 180 days prior to the earlier of the date of the
meeting or the corresponding date on which the immediately preceding year's
annual meeting of stockholders was held. To be timely in connection with any
election of a director at a special meeting of the stockholders, a Nominator's
notice, setting forth the name and address of the person to be nominated, shall
be delivered to or mailed and received at the principal executive offices of the
Corporation not less than forty days nor more than sixty days prior to the date
of such meeting; provided, however, that in the event that less than fifty days'
notice or prior public disclosure of the date of the special meeting of the
stockholders is given or made to the stockholders, the Nominator's notice to be
timely must be so received not later than the close of business on the seventh
day following the day on which such notice of date of the meeting was mailed or
such public disclosure was made. At such time, the Nominator shall
4
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also submit written evidence, reasonably satisfactory to the Secretary of the
Corporation, that the Nominator is a stockholder of the Corporation and shall
identify in writing (i) the name and address of the Nominator, (ii) the number
of shares of each class of capital stock of the Corporation of which the
Nominator is the beneficial owner, (iii) the name and address of each of the
persons with whom the Nominator is acting in concert and (iv) the number of
shares of capital stock of which each such person with whom the Nominator is
acting in concert is the beneficial owner pursuant to which the nomination or
nominations are to be made. At such time, the Nominator shall also submit in
writing (i) the information with respect to each such proposed nominee that
would be required to be provided in a proxy statement prepared in accordance
with Regulation 14A under the Securities Exchange Act of 1934, as amended, and
(ii) a notarized affidavit executed by each such proposed nominee to the effect
that, if elected as a member of the Board of Directors, he will serve and that
he is eligible for election as a member of the Board of Directors. Within thirty
days (or such shorter time period that may exist prior to the date of the
meeting) after the Nominator has submitted the aforesaid items to the Secretary
of the Corporation, the Secretary of the Corporation shall determine whether the
evidence of the Nominator's status as a stockholder submitted by the Nominator
is reasonably satisfactory and shall notify the Nominator in writing of his
determination. If the Secretary of the Corporation finds that such evidence is
not reasonably satisfactory, or if the Nominator fails to submit the requisite
information in the form or within the time indicated, such nomination shall be
ineffective for the election at the meeting at which such person is proposed to
be nominated. The presiding person at each meeting of stockholders shall, if the
facts warrant, determine and declare to the meeting that a nomination was not
made in accordance with the procedures prescribed by these bylaws, and if he
should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded. The requirements of this Section 10 shall be in
addition to any other requirements imposed by these bylaws, by the Certificate
of Incorporation or by law.
Section 11. STOCKHOLDER PROPOSALS REGARDING AMENDMENTS TO CERTIFICATE OF
INCORPORATION. No proposal by a stockholder to amend or supplement the
Certificate of Incorporation of the Corporation shall be voted upon at a meeting
of stockholders unless such stockholder shall have delivered or mailed in a
timely manner (as set forth in this Section 11) and in writing to the Secretary
of the Corporation (i) notice of such proposal and the text of such amendment or
supplement, (ii) evidence, reasonably satisfactory to the Secretary of the
Corporation, of such stockholder's status as such and of the number of shares of
each class of the capital stock of the Corporation of which such stockholder is
the beneficial owner, (iii) a list of the names of other beneficial owners of
shares of the capital stock of the Corporation, if any, with whom such
stockholder is acting in concert and of the number of shares of each class of
the capital stock of the Corporation beneficially owned by each such beneficial
owner, and (iv) an opinion of counsel, which counsel and the form and substance
of which opinion shall be reasonably satisfactory the Board of Directors of the
Corporation, to the effect that the Certificate of Incorporation of the
Corporation, as proposed to be so amended or supplemented, would not be in
conflict with the laws of the State of Delaware. To be timely in connection with
an annual meeting of stockholders, a stockholder's notice and other aforesaid
items shall be delivered to or mailed and received at the principal executive
offices of the Corporation not less than ninety nor more than 180 days prior to
the date on which the immediately preceding year's annual meeting of
stockholders was held. To be timely in connection with the voting on any
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such proposal at a special meeting of the stockholders, a stockholder's notice
and other aforesaid items shall be delivered to or mailed and received at the
principal executive offices of the Corporation not less than forty days nor more
than sixty days prior to the date of such meeting; provided, however, that in
the event that less than fifty days' notice or prior public disclosure of the
date of the special meeting of the stockholders is given or made to the
stockholders, such stockholder's notice and other aforesaid items to be timely
must be so received not later than the close of business on the seventh day
following the day on which such notice of date of the meeting was mailed or such
public disclosure was made. Within thirty days (or such shorter time period that
may exist prior to the date of the meeting) after such stockholder shall have
delivered the aforesaid items to the Secretary of the Corporation, the Secretary
and the Board of Directors of the Corporation shall respectively determine
whether the items to be ruled upon by them are reasonably satisfactory and shall
notify such stockholder in writing of its determination. If such stockholder
fails to submit a required item in the form or within the time indicated, or if
the Secretary of the Corporation determines that the items to be ruled upon by
it are not reasonably satisfactory, then such proposal by such stockholder may
not be voted upon by the stockholders of the Corporation at such meeting of
stockholders. The presiding person at each meeting of stockholders shall, if the
facts warrant, determine and declare to the meeting that a proposal made
pursuant to this Section 11 was not made in accordance with the procedure
prescribed by these bylaws, and if he should so determine, he shall so declare
to the meeting and the defective proposal shall be disregarded.
ARTICLE III
DIRECTORS
Section 1. NUMBER AND ELECTION OF DIRECTORS. The business and affairs of
the Corporation shall be managed by a Board of Directors. The initial number of
directors on the Board of Directors at the time of the adoption of these bylaws
shall be three. The number of directors constituting the entire Board of
Directors shall be not less than two nor more than twelve and shall be fixed
from time to time by vote of a majority of the entire Board of Directors;
provided, however, that the number of directors shall not be reduced so as to
shorten the term of any incumbent director and that the number of directors
constituting the entire Board of Directors shall be three until otherwise fixed
by a majority of the entire Board of Directors. Except as otherwise provided in
this Article III, directors shall be elected by a plurality of the votes cast at
annual meetings of the stockholders, and, except as otherwise provided in this
Article III, each director so elected shall hold office until the next annual
meeting and until his or her successor is duly elected and qualified or until
his or her earlier resignation or removal. Any director may resign at any time
upon notice to the Corporation. A director need not be a stockholder, a citizen
of the United States or a resident of the State of Delaware.
Section 2. VACANCIES. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director, and the directors so chosen shall hold office until the
annual meeting at which such director's term expires and until their successors
are duly elected and qualified or until their earlier resignation or removal. If
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there are no directors in office, then an election of directors may be held in
the manner provided by statute.
Section 3. DUTIES AND POWERS. The business of the Corporation shall be
managed by or under the direction of the Board of Directors, which may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation or by these bylaws
directed or required to be exercised or done by the stockholders.
Section 4. MEETINGS. Meetings of the Board of Directors shall be held at
such time as the Board of Directors shall fix. Meetings shall be held at such
place within or without the State of Delaware as may be fixed by the Board of
Directors. No call shall be required for regular meetings for which the time and
place have been fixed. Special meetings may be called by or at the direction of
the Chairman of the Board, if any, the President or a majority of the directors
then in office. No notice shall be required for regular meetings for which the
time and place have been fixed. Written, oral or any other mode of notice of the
time and place shall be given for special meetings at least twenty-four hours
before the meeting. Notice need not be given to any director or to any member of
a committee of directors who submits a written waiver of notice signed by him or
her before or after the time stated therein. Attendance of any such person at a
meeting shall constitute a waiver of notice of such meeting, except when he or
she attends a meeting for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the directors need be specified in
any written waiver of notice.
Section 5. QUORUM. Except as may be otherwise specifically provided by
law, the Certificate of Incorporation or these bylaws, at all meetings of the
Board of Directors, a majority of the entire Board of Directors shall constitute
a quorum for the transaction of business, and the act of a majority of the
directors present at any meeting at which a quorum is present shall be the act
of the Board of Directors. If a quorum shall not be present at any meeting of
the Board of Directors, the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present.
Section 6. ACTIONS BY WRITTEN CONSENT. Unless otherwise provided by the
Certificate of Incorporation or these bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, in one document or in
counterparts, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors or committee.
Section 7. MEETINGS BY CONFERENCE TELEPHONE. Unless otherwise provided by
the Certificate of Incorporation or these bylaws, members of the Board of
Directors or any committee may participate in a meeting of the Board of
Directors or such committee by means of a conference telephone or similar
communication equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
Section 7 shall constitute presence in person at such meeting.
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Section 8. COMMITTEES. The Board of Directors may, by resolution passed by
a majority of the entire Board of Directors, designate one or more committees,
each committee to consist of one or more of the directors of the Corporation.
The Board of Directors may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of any such committee. In the absence or disqualification of a member of
a committee, and in the absence of a designation by the Board of Directors of an
alternate member to replace the absent or disqualified member, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in place of any absent or
disqualified member. Any committee, to the extent allowed by law and provided in
the resolution establishing such committee, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the Corporation. Each committee shall keep regular minutes and
report to the Board of Directors when required. Unless the Board of Directors
otherwise provides, each committee designated by the Board of Directors may
make, alter and repeal rules for the conduct of its business. In the absence of
such rules, each committee shall conduct its business in the same manner as the
Board of Directors conducts its business pursuant to these bylaws.
Section 9. COMPENSATION. The Board of Directors may from time to time by
resolution authorize the payment of fees or other compensation to the Directors
for services as such to the Corporation including, but not limited to, a fixed
sum and expenses for attendance at each regular or special meeting of the Board
of Directors or any committee thereof; provided that nothing contained herein
shall be construed to preclude any director from serving the Corporation in any
other capacity and receiving compensation therefor.
Section 10. INTERESTED DIRECTORS. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other entity
in which one or more of its directors or officers are directors or officers, or
have a financial interest, shall be void or voidable solely for this reason, or
solely because the director or officer is present at or participates in the
meeting of the Board of Directors or committee thereof that authorizes the
contract or transaction, or solely because his, her or their votes are counted
for such purpose if (a) the material facts as to his, her or their relationship
or interest as to the contract or transaction are disclosed or are known to the
Board of Directors or committee, and the Board of Directors or committee in good
faith authorizes the contract or transaction by the affirmative vote of a
majority of the disinterested directors, even though the disinterested directors
be less than a quorum, (b) the material facts as to his, her or their
relationship or interest as to the contract or transaction are disclosed or are
known to the stockholders entitled to vote thereon and the contract or
transaction is specifically approved in good faith by vote of the stockholders
or (c) the contract or transaction is fair as to the Corporation as of the time
it is authorized, approved or ratified by the Board of Directors, a committee
thereof or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or a
committee that authorizes the contract or transaction.
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Section 11. REMOVAL. No director of the Corporation shall be removed from
his office as a director except in the manner provided in the Certificate of
Incorporation. No proposal by a stockholder to remove a director of the
Corporation shall be voted upon at a meeting of the stockholders unless such
stockholder shall have delivered or mailed in a timely manner (as set forth in
this Section 11) and in writing to the Secretary of the Corporation (i) notice
of such proposal, (ii) a statement of the grounds, if any, on which such
director is proposed to be removed, (iii) evidence, reasonably satisfactory to
the Secretary of the Corporation, of such stockholder's status as such and of
the number of shares of each class of the capital stock of the Corporation of
which such stockholder is the beneficial owner, (iv) a list of the names and
addresses of other beneficial owners of shares of the capital stock of the
Corporation, if any, with whom such stockholder is acting in concert, and of the
number of shares of each class of the capital stock of the Corporation
beneficially owned by each such beneficial owner, and (v) an opinion of counsel,
which counsel and the form and substance of which opinion shall be reasonably
satisfactory to the Board of Directors of the Corporation (excluding the
director proposed to be removed), to the effect that, if adopted at a duly
called special or annual meeting of the stockholders of the Corporation by the
required vote as set forth in the Certificate of Incorporation, such removal
would not be in conflict with the laws of the State of Delaware, the Certificate
of Incorporation or these bylaws. To be timely in connection with an annual
meeting of stockholders, a stockholder's notice and other aforesaid items shall
be delivered to or mailed and received at the principal executive offices of the
Corporation not less than ninety nor more than 180 days prior to the earlier of
the date of the meeting or the corresponding date on which the immediately
preceding year's annual meeting of stockholders was held. To be timely in
connection with the removal of any director at a special meeting of the
stockholders, a stockholder's notice and other aforesaid items shall be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than forty days nor more than sixty days prior to the date
of such meeting; provided, however, that in the event that less than fifty days'
notice or prior public disclosure of the date of the special meeting of
stockholders is given or made to the stockholders, the stockholder's notice and
other aforesaid items to be timely must be so received not later than the close
of business on the seventh day following the day on which such notice of date of
the meeting was mailed or such public disclosure was made. Within thirty days
(or such shorter period that may exist prior to the date of the meeting) after
such stockholder shall have delivered the aforesaid items to the Secretary of
the Corporation, the Secretary and the Board of Directors of the Corporation
shall respectively determine whether the items to be ruled upon by them are
reasonably satisfactory and shall notify such stockholder in writing of their
respective determinations. If such stockholder fails to submit a required item
in the form or within the time indicated, or if the Secretary or the Board of
Directors of the Corporation determines that the items to be ruled upon by them
are not reasonably satisfactory, then such proposal by such stockholder may not
be voted upon by the stockholders of the Corporation at such meeting of
stockholders. The presiding person at each meeting of stockholders shall, if the
facts warrant, determine and declare to the meeting that a proposal to remove a
director of the Corporation was not made in accordance with the procedures
prescribed by these bylaws, and if he should so determine, he shall so declare
to the meeting and the defective proposal shall be disregarded. Notwithstanding
the foregoing, the presiding person may, in his sole discretion, waive
compliance with any of the requirements of this Section 11. The requirements of
this Section 11 shall be in addition to any other requirements imposed by these
bylaws, by the Certificate of Incorporation or by law.
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ARTICLE IV
OFFICERS
Section 1. GENERAL. The officers of the Corporation shall be chosen by the
Board of Directors and shall be a President and a Secretary. The Board of
Directors, in its discretion, may also choose a Chairman of the Board of
Directors and a Vice Chairman of the Board of Directors (each of whom must be a
director), a Treasurer and one or more Vice Presidents, Assistant Secretaries,
Assistant Treasurers and other officers. Any number of offices may be held by
the same person, unless otherwise prohibited by law, the Certificate of
Incorporation or these bylaws. The officers of the Corporation need not be
stockholders of the Corporation or, except in the case of the Chairman or Vice
Chairman of the Board of Directors, directors of the Corporation.
Section 2. ELECTION. The Board of Directors at its first meeting held
after each annual meeting of stockholders shall elect the officers of the
Corporation, who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors; and all officers of the Corporation shall hold office until
their successors are chosen and qualified or until their earlier resignation or
removal. Any officer elected by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled by the Board
of Directors. The salaries of all officers of the Corporation shall be fixed by
the Board of Directors and may be altered from time to time except as otherwise
provided by contract.
Section 3. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board
of Directors, if there be one, shall preside at all meetings of the stockholders
and of the Board of Directors. Except where by law the signature of the
President is required, the Chairman of the Board of Directors shall possess the
same power as the President to sign all contracts, certificates and other
instruments of the Corporation. During the absence or disability of the
President, the Chairman of the Board of Directors shall exercise all the powers
and discharge all the duties of the President. The Chairman of the Board of
Directors shall also perform such other duties and may exercise such other
powers as from time to time may be assigned to him or her by these bylaws or by
the Board of Directors.
Section 4. VICE CHAIRMAN OF THE BOARD OF DIRECTORS. The Vice Chairman of
the Board of Directors, if there be one, shall, in the absence of the Chairman
of the Board of Directors or if the Chairman of the Board of Directors shall be
unable or refuses to act or is absent, preside at all meetings of the
stockholders and of the Board of Directors and shall possess all of the powers
and discharge all of the duties of the Chairman of the Board of Directors. The
Vice Chairman of the Board of Directors shall possess the same power as the
Chairman of the Board of Directors to sign all contracts, certificates and other
instruments of the Corporation. The Vice Chairman of the Board of Directors
shall also perform such other duties and may exercise such other powers as from
time to time may be assigned to him or her by these bylaws or by the Board of
Directors.
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Section 5. PRESIDENT. The President shall, subject to the control of the
Board of Directors, have general supervision of the business of the Corporation
and shall see that all orders and resolutions of the Board of Directors are
carried into effect. He or she shall be the Chief Executive Officer of the
Corporation and shall execute all bonds, mortgages, contracts and other
instruments of the Corporation requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except that the other officers of the Corporation may sign and
execute documents when so authorized by these bylaws, the Board of Directors or
the President. In the absence or disability of the Chairman of the Board of
Directors and the Vice Chairman of the Board of Directors, or if there be none,
the President shall preside at all meetings of the stockholders and (if the
President is a director) the Board of Directors. The President shall also
perform such other duties and may exercise such other powers as from time to
time may be assigned to him or her by these bylaws or by the Board of Directors.
Section 6. VICE PRESIDENTS. At the request of the President or in his or
her absence or in the event of his or her inability or refusal to act (and if
there be no Chairman of the Board of Directors and Vice Chairman of the Board of
Directors or if the Chairman of the Board of Directors and the Vice Chairman of
the Board of Directors shall be unable or refuse to act or are absent), the Vice
President or the Vice Presidents, if there be more than one, shall perform the
duties of the President, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the President. Each Vice President shall
perform such other duties and have such other powers as the Board of Directors
from time to time may prescribe. If there be no Chairman of the Board of
Directors or Vice Chairman of the Board of Directors or Vice President, the
Board of Directors shall designate the officer of the Corporation who, in the
absence of the President or in the event of the inability or refusal of the
President to act, shall perform the duties of the President, and when so acting,
shall have all the powers of and be subject to all the restrictions upon the
President.
Section 7. SECRETARY. The Secretary shall attend all meetings of the Board
of Directors and all meetings of stockholders and record all the proceedings
thereat in a book or books to be kept for that purpose; the Secretary shall also
perform like duties for the standing committees when required. The Secretary
shall give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or President, under whose
supervision he or she shall be. If the Secretary shall be unable or shall refuse
to cause to be given notice of all meetings of the stockholders and special
meetings of the Board of Directors, and if there be no Assistant Secretary, then
either the Board of Directors or the President may choose another officer to
cause such notice to be given. The Secretary shall have custody of the seal of
the Corporation and the Secretary or an Assistant Secretary, if there be one,
shall have authority to affix the same to any instrument requiring it and when
so affixed, it may be attested by the signature of the Secretary or by the
signature of any such Assistant Secretary. The Board of Directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest the affixing by his or her signature. The Secretary shall see that all
books, reports, statements, certificates and other documents and records
required by law to be kept or filed are properly kept or filed, as the case may
be.
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Section 8. CONTROLLER. The Controller, if there be one, shall be the
principal officer in charge of the accounts of the Corporation and shall perform
such duties as from time to time may be assigned to him by the Board of
Directors.
Section 9. TREASURER. The Treasurer, if there be one, shall have the
custody of the corporate funds and securities and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Corporation and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by the Board
of Directors. The Treasurer shall disburse the funds of the Corporation as may
be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meeting, or when the Board of Directors so requires, an account of
all his or her transactions as Treasurer and of the financial condition of the
Corporation. If required by the Board of Directors, the Treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his or her office and for the restoration to the Corporation, in case
of his or her death, resignation, retirement or removal from office, of all
books, papers, vouchers, money and other property of whatever kind in his or her
possession or under his or her control belonging to the Corporation.
Section 10. ASSISTANT SECRETARIES. Except as may be otherwise provided in
these bylaws, Assistant Secretaries, if there be any, shall perform such duties
and have such powers as from time to time may be assigned to them by the Board
of Directors, the President, any Vice President, if there be one, or the
Secretary, and in the absence of the Secretary or in the event of his or her
disability or refusal to act, shall perform the duties of the Secretary, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Secretary.
Section 11. ASSISTANT TREASURERS. Assistant Treasurers, if there be any,
shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President or
the Treasurer, and in the absence of the Treasurer or in the event of his or her
disability or refusal to act, shall perform the duties of the Treasurer, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Treasurer. If required by the Board of Directors, an
Assistant Treasurer shall give the Corporation a bond in such sum and with such
surety or sureties as shall be satisfactory to the Board of Directors for the
faithful performance of the duties of his or her office and for the restoration
of the Corporation, in case of his or her death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his or her possession or under his or her control belonging to
the Corporation.
Section 12. OTHER OFFICERS. Such other officers as the Board of Directors
may appoint shall perform such duties and have such powers as from time to time
may be assigned to them by the Board of Directors. The Board of Directors may
delegate to any other officer of the Corporation the power to choose such other
officers and to prescribe their respective duties and powers.
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ARTICLE V
STOCK
Section 1. FORM OF CERTIFICATES. Every holder of stock in the Corporation
shall be entitled to have a certificate signed in the name of the Corporation
(a) by the Chairman of the Board of Directors or Vice Chairman of the Board of
Directors or by the President or a Vice President and (b) by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary of the
Corporation, certifying the number of shares owned by such holder.
Section 2. SIGNATURES. Where a certificate is countersigned by (a) a
transfer agent other than the Corporation or its designated employees or (b) a
registrar other than the Corporation or its designated employees, any other
signature on the certificate may be a facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the Corporation
with the same effect as if he or she were such officer, transfer agent or
registrar at the date of issue.
Section 3. LOST CERTIFICATES. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate, the
Board of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his or her legal representative, to advertise the same in such
manner as the Board of Directors shall require and/or to give the Corporation a
bond or other indemnity deemed satisfactory by the Board of Directors in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
Section 4. TRANSFERS. Stock of the Corporation shall be transferable in
the manner prescribed by law and in these bylaws. Transfers of stock shall be
made on the books of the Corporation only by the person named in the certificate
or by his or her attorney lawfully constituted in writing and upon the surrender
of the certificate therefor, which shall be cancelled before a new certificate
shall be issued.
ARTICLE VI
NOTICES
Section 1. NOTICES. Whenever written notice is required by law, the
Certificate of Incorporation or these bylaws to be given to any director, member
of a committee or stockholder, such notice may be given by mail, addressed to
such director, member of a committee or stockholder, at his or her address as it
appears on the records of the Corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Written notice may also be given personally
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or by facsimile transmission, telegram, telex or cable and such notice shall be
deemed given at the time when the same shall be sent.
Section 2. WAIVERS OF NOTICE. Whenever any notice is required by law, the
Certificate of Incorporation or these bylaws to be given to any director, member
of a committee or stockholder, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent to notice.
ARTICLE VII
AMENDMENT OF BYLAWS
Section 1. VOTE REQUIREMENTS. These bylaws may only be altered, amended or
repealed in the manner provided in the Certificate of Incorporation.
Section 2. STOCKHOLDER PROPOSALS. No proposal by a stockholder made
pursuant to this Article VII may be voted upon at a meeting of stockholders
unless such stockholder shall have delivered or mailed in a timely manner (as
set forth in this Section 2) and in writing to the Secretary of the Corporation
(i) notice of such proposal and the text of the proposed alteration, amendment
or repeal, (ii) evidence reasonably satisfactory to the Secretary of the
Corporation, of such stockholder's status as such and of the number of shares of
each class of capital stock of the Corporation of which such stockholder is the
beneficial owner, (iii) a list of the names and addresses of other beneficial
owners of shares of the capital stock of the Corporation, if any, with whom such
stockholder is acting in concert, and the number of shares of each class of
capital stock of the Corporation beneficially owned by each such beneficial
owner and (iv) an opinion of counsel, which counsel and the form and substance
of which opinion shall be reasonably satisfactory to the Board of Directors of
the Corporation, to the effect that the bylaws resulting from the adoption of
such proposal would not be in conflict with the Certificate of Incorporation or
the laws of the State of Delaware. To be timely in connection with an annual
meeting of stockholders, a stockholder's notice and other aforesaid items shall
be delivered to or mailed and received at the principal executive offices of the
Corporation not less than ninety nor more than 180 days prior to the earlier of
the date of the meeting or the corresponding date on which the immediately
preceding year's annual meeting of stockholders was held. To be timely in
connection with the voting on any such proposal at a special meeting of the
stockholders, a stockholder's notice and other aforesaid items shall be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than forty days nor more than sixty days prior to the date
of such meeting; provided, however, that in the event that less than fifty days'
notice or prior public disclosure of the date of the special meeting of the
stockholders is given or made to the stockholders, such stockholder's notice and
other aforesaid items to be timely must be so received not later than the close
of business on the seventh day following the day on which such notice of date of
the meeting was mailed or such public disclosure was made. Within thirty days
(or such shorter period that may exist prior to the date of the meeting) after
such stockholder shall have submitted the aforesaid items, the Secretary and the
Board of Directors of the Corporation shall respectively determine whether the
items to be ruled upon by them are reasonably satisfactory and shall notify such
stockholder in writing of
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their respective determinations. If such stockholder fails to submit a required
item in the form or within the time indicated, or if the Secretary or the Board
of Directors of the Corporation determines that the items to be ruled upon by
them are not reasonably satisfactory, then such proposal by such stockholder may
not be voted upon by the stockholders of the Corporation at such meeting of
stockholders. The presiding person at each meeting of stockholders shall, if the
facts warrant, determine and declare to the meeting that a proposal made
pursuant to this Article VII was not made in accordance with the procedure
prescribed by these bylaws, and if he should so determine, he shall so declare
to the meeting and the defective proposal shall be disregarded. The requirements
of this Section 2 shall be in addition to any other requirements imposed by
these bylaws, by the Certificate of Incorporation or the law.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES. The
Corporation may indemnify (and advance expenses to) 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, administrative or
investigative (and whether or not 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 company, partnership, joint
venture, trust or other enterprise or is or was serving as a fiduciary of any
employee benefit plan, fund or program sponsored by the Corporation or such
other company, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding, to the extent and under the circumstances permitted
by the General Corporation Law of the State of Delaware, as amended from time to
time. The foregoing rights shall not be deemed exclusive of any other rights to
which those seeking indemnification or advancement of expenses may be entitled
under any bylaw, agreement, vote of stockholders or the Board of Directors or
otherwise, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 2. DIVIDENDS. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, and may be
paid in cash, in property or in shares of the capital stock of the Corporation.
Before payment of any dividend, there may be set aside out of any funds of the
Corporation available for dividends such sum or sums as the Board of Directors
from time to time, in its absolute discretion, deems proper as a reserve or
reserves to meet contingencies, or for any proper purpose, and the Board of
Directors may modify or abolish any such reserve.
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Section 3. DISBURSEMENTS. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 4. FISCAL YEAR. The fiscal year of the Corporation shall end on
December 31 of each year, unless otherwise fixed by resolution of the Board of
Directors.
Section 5. CORPORATE SEAL. The corporate seal shall have inscribed thereon
the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware." The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced.
Section 6. DEFINITION OF BENEFICIAL OWNER. "Beneficial owner" as used in
these bylaws means of the following:
(a) a person who individually or with any of his affiliates or associates
beneficially owns (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) any capital stock of the Company, directly or
indirectly;
(b) a person who individually or with any of his affiliates or associates
has either of the following rights:
(i) to acquire capital stock of the Corporation, whether such right
is exercisable immediately or only after the passage of time, pursuant to
any agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise,
(ii) to vote capital stock of the Corporation pursuant to any
agreement, arrangement or understanding; or
(c) a person who has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing capital stock of the Company
with any other person who beneficially owns or whose affiliates beneficially own
(within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as
amended), directly or indirectly, such shares of capital stock.
16
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered
into as of ____________, 1997, by and among Apple Orthodontix, Inc., a Delaware
corporation ("Apple"), and each person listed on the signature pages hereto
under the caption "Stockholders" (each a "Stockholder" and, collectively, the
"Stockholders").
WHEREAS, pursuant to various acquisition agreements entered into with
Apple (collectively, the "Acquisition Agreements"), each of the Stockholders has
received on the date hereof shares of common stock, par value $.01 per share, of
Apple ("Common Stock"); and
WHEREAS, in order to induce the Stockholders to enter into their
respective Acquisition Agreements, Apple has agreed to provide registration
rights on the terms set forth in this Agreement for the benefit of the
Stockholders;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements set forth herein, the parties hereto agree as follows:
1 . DEFINITIONS. The following capitalized terms shall have the meanings
assigned to them in this SECTION 1 or in the parts of this Agreement referred to
below:
CODE: the Internal Revenue Code of 1986, as amended, and any successor
thereto.
COMMISSION: the Securities and Exchange Commission, and any successor
thereto.
EXCHANGE ACT: the Securities Exchange Act of 1934, as amended, and any
successor thereto, and the rules and regulations thereunder.
EXEMPT OFFERING: as defined in SECTION 2.
REGISTRABLE COMMON: shares of Common Stock that were issued to the
Stockholders pursuant to the Acquisition Agreements, and any additional shares
of Common Stock issued or distributed in respect of any other shares of
Registrable Common by way of a stock dividend or distribution or stock split or
in connection with a combination of shares, recapitalization, reorganization,
merger, consolidation or otherwise. For purposes of this Agreement, shares of
Registrable Common will cease to be Registrable Common when and to the extent
that (i) a registration statement covering such shares has been declared
effective under the Securities Act and such shares have been disposed of
pursuant to such effective registration statement, (ii) such shares are sold
pursuant to Rule 144 or (iii) such shares have been otherwise transferred to a
person or entity that is not a Stockholder, other than pursuant to SECTION 11
hereof.
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REGISTRATION NOTICE: as defined in SECTION 2.
RULE 144: Securities Act Rule 144 (or any similar or successor provision
under the Securities Act).
SECURITIES ACT: the Securities Act of 1933, as amended, and any successor
thereto, and the rules and regulations thereunder.
SELLING STOCKHOLDER: as defined in SECTION 11.
2. PIGGYBACK REGISTRATION RIGHTS. At any time before November 14, 2001, whenever
Apple proposes to register any Common Stock for its own account, or for the
account of any other person holding registration rights, under the Securities
Act for a public offering for cash, other than a registration relating to the
offering or issuance of shares in connection with (i) employee compensation or
benefit plans or (ii) one or more acquisition transactions under a registration
statement on either Form S-1 or Form S-4 under the Securities Act (or a
successor to either Form S-1 or Form S-4) (any such offering or issuance being
an "Exempt Offering"), Apple will give each Stockholder written notice of its
intent to do so (a "Registration Notice") at least 20 days prior to the filing
of the related registration statement with the Commission. Such notice shall
specify the approximate date on which Apple proposes to file such registration
statement and shall contain a statement that the Stockholders are entitled to
participate in such offering and shall set forth the number of shares of
Registrable Common (as hereinafter defined) that represents the best estimate of
the lead managing underwriter (or if not known or applicable, Apple) that will
be available for sale by the holders of Registrable Common in the proposed
offering. If Apple shall have delivered a Registration Notice, each Stockholder
shall be entitled to participate on the same terms and conditions as Apple in
the public offering to which such Registration Notice relates and to offer and
sell shares of Registrable Common therein only to the extent provided in this
SECTION 2. Each Stockholder desiring to participate in such offering shall
notify Apple no later than ten days following receipt of the Registration Notice
of the aggregate number of shares of Registrable Common that such Stockholder
then desires to sell in the offering. Each Stockholder desiring to participate
in such public offering may include shares of Registrable Common in the
registration statement relating to the offering to the extent that the inclusion
of such shares shall not reduce the number of shares of Common Stock to be
offered and sold by Apple to be included therein. If the lead managing
underwriter selected by Apple for a public offering (or, if the offering is not
underwritten, a financial advisor to Apple) determines that marketing factors
require a limitation on the number of shares of Registrable Common to be offered
and sold in such offering, there shall be included in the offering only that
number of shares of Registrable Common, if any, that such lead managing
underwriter or financial advisor, as the case may be, reasonably and in good
faith believes will not jeopardize the success of the offering, PROVIDED that if
the lead managing underwriter or financial advisor, as the case may be,
determines that marketing factors require a limitation on the number of shares
of Registrable Common to be offered and sold as aforesaid and so notifies Apple
in writing, the number of shares of Registrable Common to be offered and sold by
holders desiring to participate in the offering, shall be allocated among such
holders on a pro rata basis based on their holdings of
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Registrable Common. Apple shall have the right at any time to reduce the number
of shares requested by any Stockholder to be included in such registration to
the extent that Apple reasonably concludes that inclusion of such shares is
likely to jeopardize the non-recognition status under the Code of any
acquisition transaction consummated pursuant to any of the Acquisition
Agreements; PROVIDED that any determination to exclude shares from any such
registration pursuant to this provision shall be based on written advice of tax
counsel to Apple or its independent accountants.
3. REGISTRATION PROCEDURES. In connection with registrations under SECTION 2
hereof, and subject to the terms and conditions contained therein, Apple shall
(a) use its best efforts to prepare and file with the Commission as soon as
reasonably practicable, a registration statement with respect to the Registrable
Common and use its best efforts to cause such registration to promptly become
and remain effective for a period of at least 120 days (or such shorter period
during which holders shall have sold all Registrable Common which they requested
to be registered); PROVIDED, HOWEVER, that such 120-day period shall be extended
for a period equal to the period that a Stockholder agrees to refrain from
selling any securities included in such registration in accordance with SECTION
7 hereof; (b) prepare and file with the Commission such amendments (including
post-effective amendments) to such registration statement and supplements to the
related prospectus to appropriately reflect the plan of distribution of the
securities registered thereunder until the completion of the distribution
contemplated by such registration statement or for so long thereafter as a
dealer is required by law to deliver a prospectus in connection with the offer
and sale of the shares of Registrable Common covered by such registration
statement and/or as shall be necessary so that neither such registration
statement nor the related prospectus shall contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and so that such
registration statement and the related prospectus will otherwise comply with
applicable legal requirements; (c) provide to any Stockholder requesting to
include shares of Registrable Common in such registration statement and a single
counsel for all holders of Registrable Common requesting to include shares of
Registrable Common in such registration statement, which counsel shall be
selected by the holders of a majority of shares of Registrable Common requested
to be included in such registration statement and shall be reasonably
satisfactory to Apple, an opportunity to review and provide comments with
respect to such registration statement (and any post-effective amendment
thereto) prior to such registration statement (or post-effective amendment)
becoming effective; (d) use its best efforts to register and qualify the
Registrable Common covered by such registration statement under applicable
securities or "Blue Sky" laws of such jurisdictions as the holders shall
reasonably request for the distribution of the Registrable Common; (e) take such
other actions as are reasonable and necessary to comply with the requirements of
the Securities Act; (f) furnish such number of prospectuses (including
preliminary prospectuses) and documents incident thereto as a Stockholder from
time to time may reasonably request; (g) provide to any Stockholder requesting
to include Registrable Common in such registration statement and any managing
underwriter participating in any distribution thereof, and to any attorney,
accountant or other agent retained by such Stockholder or managing underwriter,
reasonable access to appropriate officers and directors of Apple to ask
questions and to obtain information reasonably requested by any such
Stockholder, managing underwriter, attorney,
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accountant or other agent in connection with such registration statement or any
amendment thereto; PROVIDED, HOWEVER, that (i) in connection with any such
access or request, any such requesting persons shall cooperate to the extent
reasonably practicable to minimize any disruption to the operation by Apple of
its business and (ii) any records, information or documents shall be kept
confidential by such requesting persons, unless (A) such records, information or
documents are in the public domain or otherwise publicly available or (B)
disclosure of such records, information or documents is required by court or
administrative order or by applicable law (including, without limitation, the
Securities Act); (h) notify each Stockholder and the managing underwriters
participating in the distribution pursuant to such registration statement
promptly (i) when Apple is informed that such registration statement or any
post-effective amendment to such registration statement becomes effective, (ii)
of any request by the Commission for an amendment or any supplement to such
registration statement or any related prospectus, (iii) of the issuance by the
Commission of any stop order suspending the effectiveness of such registration
statement or of any order preventing or suspending the use of any related
prospectus or the initiation or threat of any proceeding for that purpose, (iv)
of the suspension of the qualification of any shares of Registrable Common
included in such registration statement for sale in any jurisdiction or the
initiation or threat of a proceeding for that purpose, (v) of any determination
by Apple that any event has occurred which makes untrue any statement of a
material fact made in such registration statement or any related prospectus or
which requires the making of a change in such registration statement or any
related prospectus in order that the same will not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading and (vi) of
the completion of the distribution contemplated by such registration statement
if it relates to an offering by Apple; (i) in the event of the issuance of any
stop order suspending the effectiveness of such registration statement or of any
order suspending or preventing the use of any related prospectus or suspending
the qualification of any shares of Registrable Common included in such
registration statement for sale in any jurisdiction, use its best efforts to
obtain its withdrawal; (j) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, but not later than fifteen
months after the effective date of such registration statement, an earnings
statement covering the period of at least twelve months beginning with the first
full fiscal quarter after the effective date of such registration statement,
which earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act (including Rule 158); (k) if requested by the lead managing
underwriter or a Stockholder, promptly incorporate in a prospectus supplement or
post-effective amendment such information as is requested by such person
pertaining to the terms of the sale of Registerable Common and make all required
filings of the prospectus supplement or post-effective amendment promptly after
notification of the matters to be included therein; (l) use reasonable diligence
to cause all shares of Registrable Common included in such registration
statement to be listed on any securities exchange (including, for this purpose,
the Nasdaq National Market) on which the Common Stock is then listed at the
initiation of Apple; (m) use reasonable diligence to obtain an opinion from
legal counsel (which may include the General Counsel of Apple) in customary form
and covering such matters of the type customarily covered by opinions as the
underwriters, if any, may reasonably request; (n) provide a transfer agent and
registrar for all such Registrable Common not later than the effective date of
such registration statement; (o) enter into such
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customary agreements (including an underwriting agreement in customary form) as
the underwriters, if any, may reasonably request in order to expedite or
facilitate the disposition of such shares of Registrable Common; and (p) use
reasonable diligence to obtain a "comfort letter" from Apple's independent
public accountants, dated the effective date of the registration statement and
the effective date of a prospectus supplement or post-effective amendment to the
registration statement, in customary form and covering such matters of the type
customarily covered by comfort letters as the underwriters, if any, may
reasonably request. As used in this SECTION 3 and elsewhere herein, the term
"underwriters" does not include any Stockholder.
4. UNDERWRITING AGREEMENT. In connection with each registration pursuant to
SECTION 2 covering an underwritten registered public offering, Apple and each
participating Stockholder agree to enter into a written agreement with the
managing underwriter in such form and containing such provisions as are
customary in the securities business for such an arrangement between such
underwriter and companies of Apple's size and investment stature, including
provisions for indemnification by Apple and each Selling Stockholder as more
fully described in SECTION 11 hereof.
5. AVAILABILITY OF RULE 144. Notwithstanding anything contained herein to the
contrary, (including SECTION 2 hereof), Apple shall not be obligated to register
shares of Registrable Common held by any Stockholder when the resale provisions
of Rule 144(k) are available to such Stockholder or such Stockholder is
otherwise entitled to sell the shares of Registrable Common held by him or her
in a brokerage transaction without registration under the Securities Act and
without limitation as to volume or manner of sale or both.
6. RULE 144 REPORTING. With a view to making available the benefits of certain
rules and regulations of the Commission which may permit the sale of the shares
of Registrable Common held by the Stockholders to the public without
registration, Apple agrees to:
(a) make and keep public information available (as those terms are
understood and defined in Rule 144) at all times from and after 90 days
following the effective date of the registration statement;
(b) use its best efforts to file with the Commission in a timely manner
all reports and other documents required of Apple under the Securities Act and
the Exchange Act at any time that it is subject to such reporting requirements;
and
(c) so long as a Stockholder owns any shares of Registrable Common,
furnish to the Stockholder forthwith upon request a written statement by Apple
as to its compliance with the reporting requirements of Rule 144, the Securities
Act and the Exchange Act (at any time that it is subject to such reporting
requirements), a copy of the most recent annual or quarterly report of Apple,
and such other reports and documents filed in accordance with such reporting
requirements as a Stockholder may reasonably request in availing itself of any
rule or regulation of the Commission allowing a Stockholder to sell any such
securities without registration; and
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(d) if required by the transfer agent and registrar for the Common Stock,
use reasonable diligence to obtain an opinion from legal counsel (which may
include the General Counsel of Apple) addressed to such transfer agent and
registrar, with respect to any sale of shares of Registerable Common pursuant to
Rule 144 (or, at the option of Apple, pay the reasonable fees and expenses of
legal counsel retained by a Stockholder to provide such an opinion).
7. MARKET STANDOFF. In consideration of the granting to Stockholders of the
registration rights pursuant to this Agreement, each Stockholder agrees that,
for so long as such Stockholder holds shares of Registrable Common, except as
permitted by SECTION 2 hereof, such Stockholder will not sell, transfer or
otherwise dispose of, including without limitation through put or short sale
arrangements, shares of Common Stock in the ten days prior to the effectiveness
of any registration (other than relating to an Exempt Offering) of Common Stock
for sale to the public and for up to 90 days following the effectiveness of such
registration.
8. REGISTRATION EXPENSES. All expenses incurred in connection with any
registration, qualification and compliance under this Agreement (including,
without limitation, all registration, filing, qualification, legal, printing and
accounting fees) shall be borne by Apple. All underwriting commissions and
discounts applicable to shares of Registrable Common included in the
registrations under this Agreement shall be borne by the holders of the
securities so registered pro rata on the basis of the number of shares so
registered. Subject to the foregoing, all expenses incident to Apple's
performance of or compliance with this Agreement, including, without limitation,
all filing fees, fees and expenses of compliance with securities or Blue Sky
laws (including, without limitation, fees and disbursements of counsel in
connection with Blue Sky qualifications of the Registrable Common), printing
expenses, messenger and delivery expenses, internal expenses (including, without
limitation, all salaries and expenses of Apple's officers and employees
performing legal or accounting duties), the fees and expenses applicable to
shares of Registrable Common included in connection with the listing of the
securities to be registered on each securities exchange (including, for this
purpose, the Nasdaq National Market) on which similar securities issued by Apple
are then listed at the initiation of Apple, registrar and transfer agents' fees
and fees and disbursements of counsel for Apple and its independent certified
public accountants, securities act liability insurance of Apple and its officers
and directors (if Apple elects to obtain such insurance), the fees and expenses
of any special experts retained by Apple in connection with such registration
and fees and expenses of other persons retained by Apple and incurred in
connection with each registration hereunder (but not including, without
limitation, any underwriting fees, discounts or commissions attributable to the
sale of Registrable Common, fees and expenses of counsel and any other special
experts retained by the holders of Registrable Common in connection with a
registration required hereunder, and transfer taxes, if any), will be borne by
Apple.
9. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No holder of Registrable Common
may participate in any underwritten registration hereunder unless such holder
(a) agrees to sell such holder's securities on the basis provided in any
underwriting arrangements approved by the persons entitled hereunder to approve
such arrangements and (b) completes and executes all
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questionnaires, powers of attorney, custody agreements, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements.
10. TRANSFER OF REGISTRATION RIGHTS; ADDITIONAL GRANTS OF REGISTRATION RIGHTS.
The registration rights provided to the holders of Registrable Common under
SECTION 2 hereof may not be transferred to any other person or entity, except to
another Stockholder or pursuant to the laws of descent and distribution;
PROVIDED that such transferees are bound by and subject to the terms and
conditions contained herein. The Company may, without the prior consent of the
Stockholders, extend the registration rights provided for in this Agreement to
additional persons or entities who become holders of Common Stock subsequent to
the date of this Agreement by entering into one or more addenda to this
Agreement with any such stockholders, and, upon execution of any such addenda,
any stockholder that is a party thereto shall thereafter be a "Stockholder" for
purposes of this Agreement and any shares of Common Stock referred to therein as
such shall be shares of "Registrable Common" for purposes of this Agreement.
Nothing herein shall limit the ability of Apple to grant to any person or entity
any registration or similar rights in the future with respect to Common Stock or
other securities of Apple (whether pursuant to the foregoing provision or
otherwise).
11. INDEMNIFICATION AND CONTRIBUTION.
(a) INDEMNIFICATION BY THE COMPANY. To the extent permitted by law,
Apple agrees to indemnify and hold harmless each Stockholder who sells shares of
Registrable Common in a registered offering pursuant to either SECTION 2 hereof
(a "Selling Stockholder"), from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable legal expenses) arising out of or
based upon any violation by Apple of any securities laws or any untrue statement
or alleged untrue statement of a material fact contained in any registration
statement or prospectus relating to the Registrable Common or in any amendment
or supplement thereto or in any related preliminary prospectus, or arising out
of or based upon any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, except insofar as such losses, claims, damages, liabilities or
expenses arise out of, or are based upon, any such untrue statement or omission
or allegation thereof based upon information furnished in writing to Apple by
such Selling Stockholder or on such Selling Stockholder's behalf expressly for
use therein. In connection with an underwritten offering of shares of
Registrable Common, Apple will indemnify any underwriters of the Registrable
Common, their partners, officers and directors and each person who controls such
underwriters (within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act) on substantially the same basis as that of the
indemnification of the Selling Stockholders provided in this SECTION 11(A).
Notwithstanding the foregoing, Apple's indemnification obligations with respect
to any preliminary prospectus shall not inure to the benefit of any Selling
Stockholder or underwriter with respect to any loss, claim, damage, liability
(or actions in respect thereof) or expense arising out of or based on any untrue
statement or alleged untrue statement or omission or alleged omission to state a
material fact in such preliminary prospectus, in any case where (i) a copy of
the prospectus used to confirm sales of shares of Registrable Common was not
sent or given to the person asserting such loss, claim,
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damage or liability at or prior to the written confirmation of the sale to such
person and (ii) such untrue statement or alleged untrue statement or omission or
alleged omission was corrected in such prospectus.
(b) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Promptly after receipt
by a Selling Stockholder of notice of any claim or the commencement of any
action or proceeding brought or asserted against such Selling Stockholder in
respect of which indemnity may be sought from Apple, such Selling Stockholder
shall notify Apple in writing of the claim or the commencement of that action or
proceeding; PROVIDED, HOWEVER, that the failure to so notify Apple shall not
relieve Apple from any liability that it may have to the Selling Stockholder
otherwise than pursuant to the indemnification provisions of this Agreement. If
any such claim or action or proceeding shall be brought against a Selling
Stockholder and such Selling Stockholder shall have duly notified Apple thereof,
Apple shall have the right to assume the defense thereof, including the
employment of counsel. Such Selling Stockholder shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall be at the expense of such
Selling Stockholder unless (i) Apple has agreed to pay such fees and expenses or
(ii) the named parties to any such action or proceeding include both such
Selling Stockholder and Apple, and such Selling Stockholder shall have been
advised by counsel that there may be one or more legal defenses available to
such Selling Stockholder which are different from or additional to those
available to Apple, in which case, if such Selling Stockholder notifies Apple in
writing that it elects to employ separate counsel at the expense of Apple, Apple
shall not have the right to assume the defense of such action or proceeding on
behalf of such Selling Stockholder; it being understood, however, that Apple
shall not, in connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one separate firm of attorneys (together with
appropriate local counsel) at any time for all Selling Stockholders. Apple shall
not be liable for any settlement of any such action or proceeding effected
without Apple's written consent. No indemnifying party pursuant to this Section
11 will consent to entry of any judgment or enter into any settlement that does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in respect
to such claim or litigation.
(c) INDEMNIFICATION BY HOLDERS OF REGISTRABLE COMMON. In connection
with any registration in which a Selling Stockholder is participating, such
Selling Stockholder will furnish to Apple in writing such information and
affidavits as Apple reasonably requests for use in connection with any related
registration statement or prospectus. To the extent permitted by law, each
Selling Stockholder, severally, and not jointly or jointly and severally, agrees
to indemnify and hold harmless Apple, its directors and officers who sign the
registration statement relating to shares of Registrable Common offered by such
Selling Stockholder and each person, if any, who controls Apple within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act to the same extent as the foregoing indemnity from Apple to such Selling
Stockholder, but only with respect to information concerning such Selling
Stockholder furnished in writing by such Selling Stockholder or on such Selling
Stockholder's
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behalf expressly for use in any registration statement or prospectus relating to
shares of Registrable Common offered by such Selling Stockholder, or any
amendment or supplement thereto, or any related preliminary prospectus. In case
any action or proceeding shall be brought against Apple or its directors or
officers, or any such controlling person, in respect of which indemnity may be
sought against such Selling Stockholder, such Selling Stockholder shall have the
rights and duties given to Apple, and Apple or its directors or officers or such
controlling persons shall have the rights and duties given to such Selling
Stockholder, by the preceding paragraph. Each Selling Stockholder also agrees to
indemnify and hold harmless any underwriters of the Registrable Common, their
partners, officers and directors and each person who controls such underwriters
(within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act) on substantially the same basis as that of the indemnification
of Apple provided in this SECTION 11(C). Notwithstanding anything to the
contrary herein, in no event shall the amount paid or payable by any Selling
Stockholder under this SECTION 11(C) exceed the amount of proceeds received by
such Selling Stockholder from the offering of the Registrable Common.
(d) CONTRIBUTION. If the indemnification provided for in this
SECTION 11 is unavailable to any indemnified party in respect of any losses,
claims, damages, liabilities or expenses referred to herein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and expenses in such proportion as
is appropriate to reflect the relative fault of the indemnifying party and the
indemnified parties in connection with the actions that resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of such indemnifying party and
indemnified parties shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact
relates to information supplied by such indemnified party or indemnified parties
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such action. Apple and the Selling
Stockholders agree that it would not be just and equitable if contribution
pursuant to this SECTION 11(D) were determined by pro rata allocation or by any
other method of allocation that does not take account of the equitable
considerations referred to in this SECTION 11(D). No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. If indemnification is available under this SECTION
11, the indemnifying parties shall indemnify each indemnified party to the full
extent provided in SECTIONS 11(A) and (C) without regard to the relative fault
of said indemnifying party or indemnified party or any other equitable
consideration provided for in this SECTION 11(D)
12. MISCELLANEOUS.
(a) AMENDMENTS AND WAIVERS. Except as otherwise provided herein, the
provisions of this Agreement may not be amended, modified or supplemented, and
waivers or consents to
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departures from the provisions hereof may not be given, unless Apple has
obtained the written consent of holders of at least 51% of the shares of
Registrable Common then outstanding.
(b) NOTICES. All notices and other communications provided for or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if delivered personally or sent by telex or telecopy, or registered or
certified mail (return receipt requested), postage prepaid, or courier to the
parties at the following addresses (or at such other address for any party as
shall be specified by like notice), PROVIDED that notices of a change of address
shall be effective only upon receipt thereof. Notices sent by mail shall be
effective when answered back, notices sent by telecopier shall be effective when
receipt is acknowledged, and notices sent by courier guaranteeing next day
delivery shall be effective on the next business day after timely delivery by
the courier. Notices shall be sent to the following addresses:
(i) if to a Stockholder, at the most current address given by such
Stockholder to Apple in a writing making specific reference to this
Agreement;
(ii) if to Apple, at the following address:
Apple Orthodontix, Inc.
One West Loop South
Suite 100
Houston, Texas 77027
Attn: Robert J. Syverson
Telecopy: (713) 964-6883
with copies to: Jackson & Walker, L.L.P.
1100 Louisiana, Suite 4200
Houston, Texas 77002
Attn: Richard S. Roth, Esq.
Telecopy: (713) 752-4221
(c) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon the heirs, executors, administrators, successors and assigns
of each of the parties.
(d) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(e) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(f) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS
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APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN
THAT STATE.
(g) SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby, it being intended that all the rights and privileges of the
Stockholders shall be enforceable to the fullest extent permitted by law.
(h) ENTIRE AGREEMENT; TERMINATION. This Agreement is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein. This Agreement supersedes all
prior agreements and understandings between the parties with respect to such
subject matter. This Agreement, except the provisions of SECTION 11 (which shall
survive until the expiration of the applicable statutes of limitations) and this
SECTION 12, shall terminate and be of no further force or effect on November 14,
2001.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
APPLE:
APPLE ORTHODONTIX, INC.
By:
Robert J. Syverson
President
STOCKHOLDERS:
[Name]
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REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered
into as of April 23, 1997, by and among Apple Orthodontix, Inc., a Delaware
corporation ("Apple"), and John G. Vondrak, D.D.S. and TriCap Funding I, L.L.C.
(each a "Stockholder" and, collectively, the "Stockholders").
WHEREAS, Apple desires to provide the Stockholders with an opportunity to
achieve liquidity in their respective investments in Apple by granting the
Holders the right to participate in certain future public offerings of capital
stock of Apple; and
WHEREAS, Apple and the Stockholders entered into that certain registration
rights agreement dated November 14, 1996, which agreement shall be amended and
restated by the following;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements set forth herein, the parties hereto agree as follows:
1 . DEFINITIONS. The following capitalized terms shall have the meanings
assigned to them in this SECTION 1 or in the parts of this Agreement referred to
below:
CODE: the Internal Revenue Code of 1986, as amended, and any successor
thereto.
COMMISSION: the Securities and Exchange Commission, and any successor
thereto.
EXCHANGE ACT: the Securities Exchange Act of 1934, as amended, and any
successor thereto, and the rules and regulations thereunder.
EXEMPT OFFERING: as defined in SECTION 2.
REGISTRABLE COMMON: shares of common stock par value $0.01 per share
("Common Stock") set forth opposite each Stockholder's name on Exhibit A hereto,
and any additional shares of Common Stock issued or distributed in respect of
any other shares of Registrable Common by way of a stock dividend or
distribution or stock split or in connection with a combination of shares,
recapitalization, reorganization, merger, consolidation or otherwise. For
purposes of this Agreement, shares of Registrable Common will cease to be
Registrable Common when and to the extent that (i) a registration statement
covering such shares has been declared effective under the Securities Act and
such shares have been disposed of pursuant to such effective registration
statement, (ii) such shares are sold pursuant to Rule 144 or (iii) such shares
have been otherwise transferred to a person or entity that is not a Stockholder,
other than pursuant to SECTION 10 hereof.
REGISTRATION NOTICE: as defined in SECTION 2.
<PAGE>
RULE 144: Securities Act Rule 144 (or any similar or successor provision
under the Securities Act).
SECURITIES ACT: the Securities Act of 1933, as amended, and any successor
thereto, and the rules and regulations thereunder.
SELLING STOCKHOLDER: as defined in SECTION 11.
2. PIGGYBACK REGISTRATION RIGHTS. At any time before November 14, 2001, whenever
Apple proposes to register any Common Stock for its own account, or for the
account of any other person holding registration rights, under the Securities
Act for a public offering for cash, other than a registration relating to the
offering or issuance of shares in connection with (i) employee compensation or
benefit plans or (ii) one or more acquisition transactions under a Registration
Statement on either Form S-1 or Form S-4 under the Securities Act (or a
successor to either Form S-1 or Form S-4) (any such offering or issuance being
an "Exempt Offering"), Apple will give each Stockholder written notice of its
intent to do so (a "Registration Notice") at least 20 days prior to the filing
of the related registration statement with the Commission. Such notice shall
specify the approximate date on which Apple proposes to file such registration
statement and shall contain a statement that the Stockholders are entitled to
participate in such offering and shall set forth the number of shares of
Registrable Common (as hereinafter defined) that represents the best estimate of
the lead managing underwriter (or if not known or applicable, Apple) that will
be available for sale by the holders of Registrable Common in the proposed
offering. If Apple shall have delivered a Registration Notice, each Stockholder
shall be entitled to participate on the same terms and conditions as Apple in
the public offering to which such Registration Notice relates and to offer and
sell shares of Registrable Common therein only to the extent provided in this
SECTION 2. Each Stockholder desiring to participate in such offering shall
notify Apple no later than ten days following receipt of the Registration Notice
of the aggregate number of shares of Registrable Common that such Stockholder
then desires to sell in the offering. Each Stockholder desiring to participate
in such public offering may include shares of Registrable Common in the
registration statement relating to the offering to the extent that the inclusion
of such shares shall not reduce the number of shares of Common Stock to be
offered and sold by Apple to be included therein. If the lead managing
underwriter selected by Apple for a public offering (or, if the offering is not
underwritten, a financial advisor to Apple) determines that marketing factors
require a limitation on the number of shares of Registrable Common to be offered
and sold in such offering, there shall be included in the offering only that
number of shares of Registrable Common, if any, that such lead managing
underwriter or financial advisor, as the case may be, reasonably and in good
faith believes will not jeopardize the success of the offering, PROVIDED that if
the lead managing underwriter or financial advisor, as the case may be,
determines that marketing factors require a limitation on the number of shares
of Registrable Common to be offered and sold as aforesaid and so notifies Apple
in writing, the number of shares of Registrable Common to be offered and sold by
holders desiring to participate in the offering, shall be allocated among such
holders on a pro rata basis based on their holdings of Registrable Common. Apple
shall have the right at any time to reduce the number of shares requested by any
Stockholder to be included in such registration to the extent that Apple
reasonably concludes that inclusion of such shares is likely to jeopardize the
non-recognition status under the Code of any acquisition transaction consummated
pursuant to any
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of the acquisition agreements entered into by Apple and one of its founding
orthodontic practices; PROVIDED that any determination to exclude shares from
any such registration pursuant to this provision shall be based on advice of tax
counsel to Apple or its independent accountants.
3. REGISTRATION PROCEDURES. In connection with registrations under SECTION 2
hereof, and subject to the terms and conditions contained therein, Apple shall
(a) use its best efforts to prepare and file with the Commission as soon as
reasonably practicable, a registration statement with respect to the Registrable
Common and use its best efforts to cause such registration to promptly become
and remain effective for a period of at least 120 days (or such shorter period
during which holders shall have sold all Registrable Common which they requested
to be registered); PROVIDED, HOWEVER, that such 120-day period shall be extended
for a period equal to the period that a Stockholder agrees to refrain from
selling any securities included in such registration in accordance with SECTION
7 hereof; (b) prepare and file with the Commission such amendments (including
post-effective amendments) to such registration statement and supplements to the
related prospectus to appropriately reflect the plan of distribution of the
securities registered thereunder until the completion of the distribution
contemplated by such registration statement or for so long thereafter as a
dealer is required by law to deliver a prospectus in connection with the offer
and sale of the shares of Registrable Common covered by such registration
statement and/or as shall be necessary so that neither such registration
statement nor the related prospectus shall contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and so that such
registration statement and the related prospectus will otherwise comply with
applicable legal requirements; (c) provide to any Stockholder requesting to
include shares of Registrable Common in such registration statement and a single
counsel for all holders of Registrable Common requesting to include shares of
Registrable Common in such registration statement, which counsel shall be
selected by the holders of a majority of shares of Registrable Common requested
to be included in such registration statement and shall be reasonably
satisfactory to Apple, an opportunity to review and provide comments with
respect to such registration statement (and any post-effective amendment
thereto) prior to such registration statement (or post-effective amendment)
becoming effective; (d) use its best efforts to register and qualify the
Registrable Common covered by such registration statement under applicable
securities or "Blue Sky" laws of such jurisdictions as the holders shall
reasonably request for the distribution of the Registrable Common; (e) take such
other actions as are reasonable and necessary to comply with the requirements of
the Securities Act; (f) furnish such number of prospectuses (including
preliminary prospectuses) and documents incident thereto as a Stockholder from
time to time may reasonably request; (g) provide to any Stockholder requesting
to include Registrable Common in such registration statement and any managing
underwriter participating in any distribution thereof, and to any attorney,
accountant or other agent retained by such Stockholder or managing underwriter,
reasonable access to appropriate officers and directors of Apple to ask
questions and to obtain information reasonably requested by any such
Stockholder, managing underwriter, attorney, accountant or other agent in
connection with such registration statement or any amendment thereto; PROVIDED,
HOWEVER, that (i) in connection with any such access or request, any such
requesting persons shall cooperate to the extent reasonably practicable to
minimize any disruption to the operation by Apple of its business and (ii) any
records, information or documents shall be kept confidential by such requesting
persons, unless (A) such records, information or documents are in the public
domain or otherwise publicly
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<PAGE>
available or (B) disclosure of such records, information or documents is
required by court or administrative order or by applicable law (including,
without limitation, the Securities Act); (h) notify each Stockholder and the
managing underwriters participating in the distribution pursuant to such
registration statement promptly (i) when Apple is informed that such
registration statement or any post-effective amendment to such registration
statement becomes effective, (ii) of any request by the Commission for an
amendment or any supplement to such registration statement or any related
prospectus, (iii) of the issuance by the Commission of any stop order suspending
the effectiveness of such registration statement or of any order preventing or
suspending the use of any related prospectus or the initiation or threat of any
proceeding for that purpose, (iv) of the suspension of the qualification of any
shares of Registrable Common included in such registration statement for sale in
any jurisdiction or the initiation or threat of a proceeding for that purpose,
(v) of any determination by Apple that any event has occurred which makes untrue
any statement of a material fact made in such registration statement or any
related prospectus or which requires the making of a change in such registration
statement or any related prospectus in order that the same will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading and
(vi) of the completion of the distribution contemplated by such registration
statement if it relates to an offering by Apple; (i) in the event of the
issuance of any stop order suspending the effectiveness of such registration
statement or of any order suspending or preventing the use of any related
prospectus or suspending the qualification of any shares of Registrable Common
included in such registration statement for sale in any jurisdiction, use its
best efforts to obtain its withdrawal; (j) otherwise use its best efforts to
comply with all applicable rules and regulations of the Commission, and make
available to its security holders, as soon as reasonably practicable, but not
later than fifteen months after the effective date of such registration
statement, an earnings statement covering the period of at least twelve months
beginning with the first full fiscal quarter after the effective date of such
registration statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act; (k) use reasonable diligence to cause all
shares of Registrable Common included in such registration statement to be
listed on any securities exchange (including, for this purpose, the Nasdaq
National Market) on which the Common Stock is then listed at the initiation of
Apple; (l) use reasonable diligence to obtain an opinion from legal counsel
(which may include the General Counsel of Apple) in customary form and covering
such matters of the type customarily covered by opinions as the underwriters, if
any, may reasonably request; (m) provide a transfer agent and registrar for all
such Registrable Common not later than the effective date of such registration
statement; (n) enter into such customary agreements (including an underwriting
agreement in customary form) as the underwriters, if any, may reasonably request
in order to expedite or facilitate the disposition of such shares of Registrable
Common; and (o) use reasonable diligence to obtain a "comfort letter" from
Apple's independent public accountants in customary form and covering such
matters of the type customarily covered by comfort letters as the underwriters,
if any, may reasonably request. As used in this SECTION 3 and elsewhere herein,
the term "underwriters" does not include any Stockholder.
4. UNDERWRITING AGREEMENT. In connection with each registration pursuant to
SECTION 2 covering an underwritten registered public offering, Apple and each
participating Stockholder agree to enter into a written agreement with the
managing underwriter in such form and containing such provisions as are
customary in the securities business for such an arrangement
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between such underwriter and companies of Apple's size and investment stature,
including provisions for indemnification by Apple and each Selling Stockholder
as more fully described in SECTION 11 hereof.
5. AVAILABILITY OF RULE 144. Notwithstanding anything contained herein to the
contrary, (including SECTION 2 hereof), Apple shall not be obligated to register
shares of Registrable Common held by any Stockholder when the resale provisions
of Rule 144(k) are available to such Stockholder or such Stockholder is
otherwise entitled to sell the shares of Registrable Common held by him or her
in a brokerage transaction without registration under the Securities Act and
without limitation as to volume or manner of sale or both.
6. RULE 144 REPORTING. With a view to making available the benefits of certain
rules and regulations of the Commission which may permit the sale of the shares
of Registrable Common held by the Stockholders to the public without
registration, Apple agrees to:
(a) make and keep public information available (as those terms are
understood and defined in Rule 144) at all times from and after 90 days
following the effective date of the registration statement;
(b) use its best efforts to file with the Commission in a timely manner
all reports and other documents required of Apple under the Securities Act and
the Exchange Act at any time that it is subject to such reporting requirements;
and
(c) so long as a Stockholder owns any shares of Registrable Common,
furnish to the Stockholder forthwith upon request a written statement by Apple
as to its compliance with the reporting requirements of Rule 144, the Securities
Act and the Exchange Act (at any time that it is subject to such reporting
requirements), a copy of the most recent annual or quarterly report of Apple,
and such other reports and documents filed in accordance with such reporting
requirements as a Stockholder may reasonably request in availing itself of any
rule or regulation of the Commission allowing a Stockholder to sell any such
securities without registration; and
(d) if required by the transfer agent and registrar for the Common Stock,
use reasonable diligence to obtain an opinion from legal counsel (which may
include the General Counsel of Apple) addressed to such transfer agent and
registrar, with respect to any sale of shares of Registerable Common pursuant to
Rule 144 (or, at the option of Apple, pay the reasonable fees and expenses of
legal counsel retained by a Stockholder to provide such an opinion).
7. MARKET STANDOFF. In consideration of the granting to Stockholders of the
registration rights pursuant to this Agreement, each Stockholder agrees that,
for so long as such Stockholder holds shares of Registrable Common, except as
permitted by SECTION 2 hereof, such Stockholder will not sell, transfer or
otherwise dispose of, including without limitation through put or short sale
arrangements, shares of Common Stock in the ten days prior to the effectiveness
of any registration (other than relating to an Exempt Offering) of Common Stock
for sale to the public and for up to 90 days following the effectiveness of such
registration.
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8. REGISTRATION EXPENSES. All expenses incurred in connection with any
registration, qualification and compliance under this Agreement (including,
without limitation, all registration, filing, qualification, legal, printing and
accounting fees) shall be borne by Apple. All underwriting commissions and
discounts applicable to shares of Registrable Common included in the
registrations under this Agreement shall be borne by the holders of the
securities so registered pro rata on the basis of the number of shares so
registered. Subject to the foregoing, all expenses incident to Apple's
performance of or compliance with this Agreement, including, without limitation,
all filing fees, fees and expenses of compliance with securities or Blue Sky
laws (including, without limitation, fees and disbursements of counsel in
connection with Blue Sky qualifications of the Registrable Common), printing
expenses, messenger and delivery expenses, internal expenses (including, without
limitation, all salaries and expenses of Apple's officers and employees
performing legal or accounting duties), the fees and expenses applicable to
shares of Registrable Common included in connection with the listing of the
securities to be registered on each securities exchange (including, for this
purpose, the Nasdaq National Market) on which similar securities issued by Apple
are then listed at the initiation of Apple, registrar and transfer agents' fees
and fees and disbursements of counsel for Apple and its independent certified
public accountants, securities act liability insurance of Apple and its officers
and directors (if Apple elects to obtain such insurance), the fees and expenses
of any special experts retained by Apple in connection with such registration
and fees and expenses of other persons retained by Apple and incurred in
connection with each registration hereunder (but not including, without
limitation, any underwriting fees, discounts or commissions attributable to the
sale of Registrable Common, fees and expenses of counsel and any other special
experts retained by the holders of Registrable Common in connection with a
registration required hereunder, and transfer taxes, if any), will be borne by
Apple.
9. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No holder of Registrable Common
may participate in any underwritten registration hereunder unless such holder
(a) agrees to sell such holder's securities on the basis provided in any
underwriting arrangements approved by the persons entitled hereunder to approve
such arrangements and (b) completes and executes all questionnaires, powers of
attorney, custody agreements, indemnities, underwriting agreements and other
documents reasonably required under the terms of such underwriting arrangements.
10. TRANSFER OF REGISTRATION RIGHTS; ADDITIONAL GRANTS OF REGISTRATION RIGHTS.
The registration rights provided to the holders of Registrable Common under
SECTION 2 hereof may not be transferred to any other person or entity, except to
another Stockholder or pursuant to the laws of descent and distribution;
PROVIDED that such transferees are bound by and subject to the terms and
conditions contained herein. The Company may, without the prior consent of the
Stockholders, extend the registration rights provided for in this Agreement to
additional persons or entities who become holders of Common Stock subsequent to
the date of this Agreement by entering into one or more addenda to this
Agreement with any such stockholders, and, upon execution of any such addenda,
any stockholder that is a party thereto shall thereafter be a "Stockholder" for
purposes of this Agreement and any shares of Common Stock referred to therein as
such shall be shares of "Registrable Common" for purposes of this Agreement.
Nothing herein shall limit the ability of Apple to grant to any person or entity
any registration or similar rights in the future with respect to Common Stock or
other securities of Apple (whether pursuant to the foregoing provision or
otherwise).
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11. INDEMNIFICATION AND CONTRIBUTION.
(a) INDEMNIFICATION BY THE COMPANY. To the extent permitted by law,
Apple agrees to indemnify and hold harmless each Stockholder who sells shares of
Registrable Common in a registered offering pursuant to SECTION 2 hereof (a
"Selling Stockholder"), from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable legal expenses) arising out of or
based upon any untrue statement or alleged untrue statement of a material fact
contained in any registration statement or prospectus relating to the
Registrable Common or in any amendment or supplement thereto or in any related
preliminary prospectus, or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages, liabilities or expenses arise out of, or are based
upon, any such untrue statement or omission or allegation thereof based upon
information furnished in writing to Apple by such Selling Stockholder or on such
Selling Stockholder's behalf expressly for use therein. In connection with an
underwritten offering of shares of Registrable Common, Apple will indemnify any
underwriters of the Registrable Common, their partners, officers and directors
and each person who controls such underwriters (within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act) on
substantially the same basis as that of the indemnification of the Selling
Stockholders provided in this SECTION 11(A). Notwithstanding the foregoing,
Apple's indemnification obligations with respect to any preliminary prospectus
shall not inure to the benefit of any Selling Stockholder or underwriter with
respect to any loss, claim, damage, liability (or actions in respect thereof) or
expense arising out of or based on any untrue statement or alleged untrue
statement or omission or alleged omission to state a material fact in such
preliminary prospectus, in any case where (i) a copy of the prospectus used to
confirm sales of shares of Registrable Common was not sent or given to the
person asserting such loss, claim, damage or liability at or prior to the
written confirmation of the sale to such person and (ii) such untrue statement
or alleged untrue statement or omission or alleged omission was corrected in
such prospectus.
(b) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Promptly after receipt
by a Selling Stockholder of notice of any claim or the commencement of any
action or proceeding brought or asserted against such Selling Stockholder in
respect of which indemnity may be sought from Apple, such Selling Stockholder
shall notify Apple in writing of the claim or the commencement of that action or
proceeding; PROVIDED, HOWEVER, that the failure to so notify Apple shall not
relieve Apple from any liability that it may have to the Selling Stockholder
otherwise than pursuant to the indemnification provisions of this Agreement. If
any such claim or action or proceeding shall be brought against a Selling
Stockholder and such Selling Stockholder shall have duly notified Apple thereof,
Apple shall have the right to assume the defense thereof, including the
employment of counsel. Such Selling Stockholder shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall be at the expense of such
Selling Stockholder unless (i) Apple has agreed to pay such fees and expenses or
(ii) the named parties to any such action or proceeding include both such
Selling Stockholder and Apple, and such Selling Stockholder shall have been
advised by counsel that there may be one or more legal defenses available to
such Selling Stockholder which are different from or additional to those
available to Apple, in which case, if such Selling Stockholder notifies Apple in
writing that it elects to employ separate
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counsel at the expense of Apple, Apple shall not have the right to assume the
defense of such action or proceeding on behalf of such Selling Stockholder; it
being understood, however, that Apple shall not, in connection with any one such
action or proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (together with appropriate local counsel) at any time for all
Selling Stockholders. Apple shall not be liable for any settlement of any such
action or proceeding effected without Apple's written consent.
(c) INDEMNIFICATION BY HOLDERS OF REGISTRABLE COMMON. In connection
with any registration in which a Selling Stockholder is participating, such
Selling Stockholder will furnish to Apple in writing such information and
affidavits as Apple reasonably requests for use in connection with any related
registration statement or prospectus. To the extent permitted by law, each
Selling Stockholder agrees to indemnify and hold harmless Apple, its directors
and officers who sign the registration statement relating to shares of
Registrable Common offered by such Selling Stockholder and each person, if any,
who controls Apple within the meaning of either Section 15 of the Securities Act
or Section 20 of the Exchange Act to the same extent as the foregoing indemnity
from Apple to such Selling Stockholder, but only with respect to information
concerning such Selling Stockholder furnished in writing by such Selling
Stockholder or on such Selling Stockholder's behalf expressly for use in any
registration statement or prospectus relating to shares of Registrable Common
offered by such Selling Stockholder, or any amendment or supplement thereto, or
any related preliminary prospectus. In case any action or proceeding shall be
brought against Apple or its directors or officers, or any such controlling
person, in respect of which indemnity may be sought against such Selling
Stockholder, such Selling Stockholder shall have the rights and duties given to
Apple, and Apple or its directors or officers or such controlling persons shall
have the rights and duties given to such Selling Stockholder, by the preceding
paragraph. Each Selling Stockholder also agrees to indemnify and hold harmless
any underwriters of the Registrable Common, their partners, officers and
directors and each person who controls such underwriters (within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act) on
substantially the same basis as that of the indemnification of Apple provided in
this SECTION 11(C). Notwithstanding anything to the contrary herein, in no event
shall the amount paid or payable by any Selling Stockholder under this SECTION
11(C) exceed the amount of proceeds received by such Selling Stockholder from
the offering of the Registrable Common.
(d) CONTRIBUTION. If the indemnification provided for in this
SECTION 11 is unavailable to any indemnified party in respect of any losses,
claims, damages, liabilities or expenses referred to herein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and expenses in such proportion as
is appropriate to reflect the relative fault of the indemnifying party and the
indemnified parties in connection with the actions that resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of such indemnifying party and
indemnified parties shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact
relates to information supplied by such
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indemnified party or indemnified parties and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action. Apple and the Selling Stockholders agree that it would not be just and
equitable if contribution pursuant to this SECTION 11(D) were determined by pro
rata allocation or by any other method of allocation that does not take account
of the equitable considerations referred to in this SECTION 11(D). No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. If indemnification is available
under this SECTION 11, the indemnifying parties shall indemnify each indemnified
party to the full extent provided in SECTIONS 11(A) and (C) without regard to
the relative fault of said indemnifying party or indemnified party or any other
equitable consideration provided for in this SECTION 11(D)
12. MISCELLANEOUS.
(a) AMENDMENTS AND WAIVERS. Except as otherwise provided herein, the
provisions of this Agreement may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given,
unless Apple has obtained the written consent of holders of at least 51% of the
shares of Registrable Common then outstanding.
(b) NOTICES. All notices and other communications provided for or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if delivered personally or sent by telex or telecopy, or registered or
certified mail (return receipt requested), postage prepaid, or courier to the
parties at the following addresses (or at such other address for any party as
shall be specified by like notice), PROVIDED that notices of a change of address
shall be effective only upon receipt thereof. Notices sent by mail shall be
effective when answered back, notices sent by telecopier shall be effective when
receipt is acknowledged, and notices sent by courier guaranteeing next day
delivery shall be effective on the next business day after timely delivery by
the courier. Notices shall be sent to the following addresses:
(i) if to a Stockholder, at the most current address given by such
Stockholder to Apple in a writing making specific reference to this
Agreement;
(ii) if to Apple, at the following address:
Apple Orthodontix, Inc.
One West Loop South
Suite 100
Houston, Texas 77027
Attn: Robert J. Syverson
Telecopy: (713) 964-6883
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with copies to: Jackson & Walker, L.L.P.
1100 Louisiana, Suite 4200
Houston, Texas 77002
Attn: Richard S. Roth, Esq.
Telecopy: (713) 752-4221
(c) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon the heirs, executors, administrators, successors and assigns
of each of the parties.
(d) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(e) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(f) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS
APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN
THAT STATE.
(g) SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby, it being intended that all the rights and privileges of the
Stockholders shall be enforceable to the fullest extent permitted by law.
(h) ENTIRE AGREEMENT; TERMINATION. This Agreement is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein. This Agreement supersedes all
prior agreements and understandings between the parties with respect to such
subject matter, including without limitation that certain registration rights
agreement by and among Apple and the Stockholders dated November 14, 1996. This
Agreement, except the provisions of SECTION 11 (which shall survive until the
expiration of the applicable statutes of limitations) and this SECTION 12, shall
terminate and be of no further force or effect on November 14, 2001.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
APPLE:
APPLE ORTHODONTIX, INC.
By:/s/ROBERT J. SYVERSON
Robert J. Syverson
President
STOCKHOLDERS:
TRICAP FUNDING I, L.L.C.
By:/s/J. CHRISTIAN BAKER, III
J. Christian Baker, III
Manager
John G. Vondrak, D.D.S.
<PAGE>
EXHIBIT A
STOCKHOLDER'S NAME NUMBER OF SHARES OF COMMON STOCK
- ------------------ --------------------------------
TriCap Funding I, L.L.C. 420
John G. Vondrak, D.D.S. 395.5
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered
into as of April 24, 1997, by and among Apple Orthodontix, Inc., a Delaware
corporation ("Apple"), and TriCap Partners, L.L.C. (the "Stockholder" and,
collectively with any assignee, the "Stockholders").
WHEREAS, Apple desires to provide the Stockholders with an opportunity to
achieve liquidity in their respective investments in Apple by granting the
Holders the right to participate in certain future public offerings of class A
common stock, par value $.001 per share, of Apple ("Common Stock");
WHEREAS, the Stockholder is this date accepting from the Company a warrant
(the "Warrant") entitling the Stockholder to purchase certain shares of Common
Stock; and
WHEREAS, as a condition to its acceptance of the Warrant, the Stockholder
is requiring the Company to enter into this Agreement relating to the
registration of shares of Common Stock which may be issued upon exercise of the
Warrant;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements set forth herein, the parties hereto agree as follows:
1 . DEFINITIONS. The following capitalized terms shall have the meanings
assigned to them in this SECTION 1 or in the parts of this Agreement referred to
below:
CODE: the Internal Revenue Code of 1986, as amended, and any successor
thereto.
COMMISSION: the Securities and Exchange Commission, and any successor
thereto.
DEMAND REGISTRATION: as defined in SECTION 3.
EFFECTIVE TIME: as defined in SECTION 3.
EXCHANGE ACT: the Securities Exchange Act of 1934, as amended, and any
successor thereto, and the rules and regulations thereunder.
EXEMPT OFFERING: as defined in SECTION 2.
<PAGE>
REGISTRABLE COMMON: shares of Common Stock issuable to the Stockholder
pursuant to the Warrant, and any additional shares of Common Stock issued or
distributed in respect of any other shares of Registrable Common by way of a
stock dividend or distribution or stock split or in connection with a
combination of shares, recapitalization, reorganization, merger, consolidation
or otherwise. For purposes of this Agreement, shares of Registrable Common will
cease to be Registrable Common when and to the extent that (i) a registration
statement covering such shares has been declared effective under the Securities
Act and such shares have been disposed of pursuant to such effective
registration statement, (ii) such shares are sold pursuant to Rule 144 or (iii)
such shares have been otherwise transferred to a person or entity, other than
pursuant to SECTION 11 hereof.
REGISTRATION NOTICE: as defined in SECTION 2.
RULE 144: Securities Act Rule 144 (or any similar or successor provision
under the Securities Act).
SECURITIES ACT: the Securities Act of 1933, as amended, and any successor
thereto, and the rules and regulations thereunder.
SELLING STOCKHOLDER: as defined in SECTION 12.
2. PIGGYBACK REGISTRATION RIGHTS. At any time before November 14, 2001, whenever
Apple proposes to register any Common Stock for its own account, or for the
account of any other person holding registration rights, under the Securities
Act for a public offering for cash, other than a registration relating to the
offering or issuance of shares in connection with (i) employee compensation or
benefit plans or (ii) one or more acquisition transactions under a Registration
Statement on either Form S-1 or Form S-4 under the Securities Act (or a
successor to either Form S-1 or Form S-4) (any such offering or issuance being
an "Exempt Offering"), Apple will give each Stockholder written notice of its
intent to do so (a "Registration Notice") at least 20 days prior to the filing
of the related registration statement with the Commission. Such notice shall
specify the approximate date on which Apple proposes to file such registration
statement and shall contain a statement that the Stockholders are entitled to
participate in such offering and shall set forth the number of shares of
Registrable Common (as hereinafter defined) that represents the best estimate of
the lead managing underwriter (or if not known or applicable, Apple) that will
be available for sale by the holders of Registrable Common in the proposed
offering. If Apple shall have delivered a Registration Notice, each Stockholder
shall be entitled to participate on the same terms and conditions as Apple in
the public offering to which such Registration Notice relates and to offer and
sell shares of Registrable Common therein only to the extent provided in this
SECTION 2. Each Stockholder desiring to participate in such offering shall
notify Apple no later than ten days following receipt of the Registration Notice
of the aggregate number of shares of Registrable Common that such Stockholder
then desires to sell in the offering. Each Stockholder desiring to participate
in such public offering may include shares of Registrable Common in the
registration statement relating to the offering to the extent that the inclusion
of such shares shall not reduce the number of shares of Common Stock to be
offered and sold by
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Apple to be included therein. If the lead managing underwriter selected by Apple
for a public offering (or, if the offering is not underwritten, a financial
advisor to Apple) determines that marketing factors require a limitation on the
number of shares of Registrable Common to be offered and sold in such offering,
there shall be included in the offering only that number of shares of
Registrable Common, if any, that such lead managing underwriter or financial
advisor, as the case may be, reasonably and in good faith believes will not
jeopardize the success of the offering, PROVIDED that if the lead managing
underwriter or financial advisor, as the case may be, determines that marketing
factors require a limitation on the number of shares of Common Stock to be
offered and sold as aforesaid and so notifies Apple in writing, the number of
shares of Common Stock to be offered and sold by holders desiring to participate
in the offering, shall be allocated among such holders on a pro rata basis based
on their holdings of Common Stock. Apple shall have the right at any time to
reduce the number of shares requested by any Stockholder to be included in such
registration to the extent that Apple reasonably concludes that inclusion of
such shares is likely to jeopardize the non-recognition status under the Code of
any acquisition transaction consummated pursuant to any of the acquisition
agreements entered into by Apple and one of its founding orthodontic practices;
PROVIDED that any determination to exclude shares from any such registration
pursuant to this provision shall be based on advice of tax counsel to Apple or
its independent accountants.
3. DEMAND REGISTRATION RIGHTS. At any time before May 31, 2002, the holders of
at least 33% of the shares of Registrable Common then outstanding may request
(the Stockholders making such request are herein referred to as the "Requesting
Holders") in writing that Apple file a registration statement under the
Securities Act covering the registration of all or a part of the shares of
Registrable Common then held by such Stockholders (a "Demand Registration").
Within ten days of the receipt of such request, Apple shall give written notice
of such request to all other Stockholders and shall use its best efforts to
effect as soon as practicable the registration under the Securities Act in
accordance with SECTION 4 hereof (including without limitation, the execution of
an undertaking to file post-effective amendments) of all shares of Registrable
Common which the Stockholders request be registered within 30 days after the
mailing of such notice; PROVIDED, HOWEVER, that (i) Apple shall not be obligated
to cause a registration statement respecting a Demand Registration to be filed
until the date that is one month before the expiration of any lock-up period set
forth in an underwriting agreement to which Apple is a party, and (ii) Apple
shall be obligated to effect only one Demand Registration pursuant to this
SECTION 3. In connection with a Demand Registration, the holders of a majority
of shares of Registrable Common included in such Demand Registration, in their
sole discretion, shall determine whether (a) to proceed with, withdraw from or
terminate such offering, (b) to select, subject to the approval of Apple (which
approval shall not be unreasonably withheld), a managing underwriter or
underwriters to administer such offering, (c) to enter into an underwriting
agreement for such offering and (d) to take such actions as may be necessary to
close the sale of Registrable Common contemplated by such offering, including,
without limitation, waiving any conditions to closing such sale that may not
have been fulfilled. In the event such holders exercise their discretion under
this paragraph to terminate a proposed Demand Registration, the terminated
Demand Registration shall not constitute the Demand Registration under this
SECTION 3, if the determination to terminate such Demand Registration (i)
follows the exercise by Apple of any
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of its rights provided by the last two paragraphs of this SECTION 3 or (ii)
results from a material adverse change in the condition (financial or other),
results of operations or business of the Company. Notwithstanding the foregoing,
a registration will not count as the Demand Registration under this SECTION 3
until such registration has become effective and unless the Requesting Holders
are able to register and sell at least 50% of the shares of Registrable Common
requested by them to be included in such registration.
Notwithstanding the preceding paragraph, if at the time of any request by
the Requesting Holders for a Demand Registration, Apple has fixed plans to file
within 90 days after such request for the sale of any of its securities in a
public offering under the Securities Act (other than an Exempt Offering), no
Demand Registration shall be initiated under this SECTION 3 until 20 days after
the effective date of such registration unless Apple is no longer proceeding
diligently to effect such registration; PROVIDED that Apple shall provide the
holders of Registrable Common the right to participate in such public offering
pursuant to, and subject to, SECTION 2 hereof.
4. REGISTRATION PROCEDURES. In connection with registrations under SECTIONS 2
AND 3 hereof, and subject to the terms and conditions contained therein, Apple
shall (a) use its best efforts to prepare and file with the Commission as soon
as reasonably practicable, a registration statement with respect to the
Registrable Common and use its best efforts to cause such registration to
promptly become and remain effective for a period, in the case of a registration
pursuant to SECTION 2, of at least 120 days, or, in the case of a registration
pursuant to SECTION 3 and subject to SECTION 6 hereof, until all the shares
Registrable Common requested to be registered thereby have been sold thereunder
(or, in each such case, such shorter period during which holders shall have sold
all Registrable Common which they requested to be registered); PROVIDED,
HOWEVER, that such 120-day period shall be extended for a period equal to the
period that a Stockholder agrees to refrain from selling any securities included
in such registration in accordance with SECTION 8 hereof; (b) prepare and file
with the Commission such amendments (including post-effective amendments) to
such registration statement and supplements to the related prospectus to
appropriately reflect the plan of distribution of the securities registered
thereunder until the completion of the distribution contemplated by such
registration statement or for so long thereafter as a dealer is required by law
to deliver a prospectus in connection with the offer and sale of the shares of
Registrable Common covered by such registration statement and/or as shall be
necessary so that neither such registration statement nor the related prospectus
shall contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading and so that such registration statement and the related
prospectus will otherwise comply with applicable legal requirements; (c) provide
to any Stockholder requesting to include shares of Registrable Common in such
registration statement and a single counsel for all holders of Registrable
Common requesting to include shares of Registrable Common in such registration
statement, which counsel shall be selected by the holders of a majority of
shares of Registrable Common requested to be included in such registration
statement and shall be reasonably satisfactory to Apple, an opportunity to
review and provide comments with respect to such registration statement (and any
post-effective amendment thereto) prior to such registration statement (or
post-effective amendment) becoming
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effective; (d) use its best efforts to register and qualify the Registrable
Common covered by such registration statement under applicable securities or
"Blue Sky" laws of such jurisdictions as the holders shall reasonably request
for the distribution of the Registrable Common; (e) take such other actions as
are reasonable and necessary to comply with the requirements of the Securities
Act; (f) furnish such number of prospectuses (including preliminary
prospectuses) and documents incident thereto as a Stockholder from time to time
may reasonably request; (g) provide to any Stockholder requesting to include
Registrable Common in such registration statement and any managing underwriter
participating in any distribution thereof, and to any attorney, accountant or
other agent retained by such Stockholder or managing underwriter, reasonable
access to appropriate officers and directors of Apple to ask questions and to
obtain information reasonably requested by any such Stockholder, managing
underwriter, attorney, accountant or other agent in connection with such
registration statement or any amendment thereto; PROVIDED, HOWEVER, that (i) in
connection with any such access or request, any such requesting persons shall
cooperate to the extent reasonably practicable to minimize any disruption to the
operation by Apple of its business and (ii) any records, information or
documents shall be kept confidential by such requesting persons, unless (A) such
records, information or documents are in the public domain or otherwise publicly
available or (B) disclosure of such records, information or documents is
required by court or administrative order or by applicable law (including,
without limitation, the Securities Act); (h) notify each Stockholder and the
managing underwriters participating in the distribution pursuant to such
registration statement promptly (i) when Apple is informed that such
registration statement or any post-effective amendment to such registration
statement becomes effective, (ii) of any request by the Commission for an
amendment or any supplement to such registration statement or any related
prospectus, (iii) of the issuance by the Commission of any stop order suspending
the effectiveness of such registration statement or of any order preventing or
suspending the use of any related prospectus or the initiation or threat of any
proceeding for that purpose, (iv) of the suspension of the qualification of any
shares of Registrable Common included in such registration statement for sale in
any jurisdiction or the initiation or threat of a proceeding for that purpose,
(v) of any determination by Apple that any event has occurred which makes untrue
any statement of a material fact made in such registration statement or any
related prospectus or which requires the making of a change in such registration
statement or any related prospectus in order that the same will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading and
(vi) of the completion of the distribution contemplated by such registration
statement if it relates to an offering by Apple; (i) in the event of the
issuance of any stop order suspending the effectiveness of such registration
statement or of any order suspending or preventing the use of any related
prospectus or suspending the qualification of any shares of Registrable Common
included in such registration statement for sale in any jurisdiction, use its
best efforts to obtain its withdrawal; (j) otherwise use its best efforts to
comply with all applicable rules and regulations of the Commission, and make
available to its security holders, as soon as reasonably practicable, but not
later than fifteen months after the effective date of such registration
statement, an earnings statement covering the period of at least twelve months
beginning with the first full fiscal quarter after the effective date of such
registration statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act; (k) use reasonable diligence to cause all
shares of Registrable Common included in such
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registration statement to be listed on any securities exchange (including, for
this purpose, the Nasdaq National Market) on which the Common Stock is then
listed at the initiation of Apple; (l) use reasonable diligence to obtain an
opinion from legal counsel (which may include the General Counsel of Apple) in
customary form and covering such matters of the type customarily covered by
opinions as the underwriters, if any, may reasonably request; (m) provide a
transfer agent and registrar for all such Registrable Common not later than the
effective date of such registration statement; (n) enter into such customary
agreements (including an underwriting agreement in customary form) as the
underwriters, if any, may reasonably request in order to expedite or facilitate
the disposition of such shares of Registrable Common; and (o) use reasonable
diligence to obtain a "comfort letter" from Apple's independent public
accountants in customary form and covering such matters of the type customarily
covered by comfort letters as the underwriters, if any, may reasonably request.
As used in this SECTION 4 and elsewhere herein, the term "underwriters" does not
include any Stockholder.
5. UNDERWRITING AGREEMENT. In connection with each registration pursuant to
SECTIONS 2 AND 3 covering an underwritten registered public offering, Apple and
each participating Stockholder agree to enter into a written agreement with the
managing underwriter in such form and containing such provisions as are
customary in the securities business for such an arrangement between such
underwriter and companies of Apple's size and investment stature, including
provisions for indemnification by Apple and each Selling Stockholder as more
fully described in SECTION 12 hereof.
6. AVAILABILITY OF RULE 144. Notwithstanding anything contained herein to the
contrary, (including SECTIONS 2 AND 3 hereof), Apple shall not be obligated to
register shares of Registrable Common held by any Stockholder when the resale
provisions of Rule 144(k) are available to such Stockholder or such Stockholder
is otherwise entitled to sell the shares of Registrable Common held by him or
her in a brokerage transaction without registration under the Securities Act and
without limitation as to volume or manner of sale or both.
7. RULE 144 REPORTING. With a view to making available the benefits of certain
rules and regulations of the Commission which may permit the sale of the shares
of Registrable Common held by the Stockholders to the public without
registration, Apple agrees to:
(a) make and keep public information available (as those terms are
understood and defined in Rule 144) at all times from and after 90 days
following the effective date of the registration statement;
(b) use its best efforts to file with the Commission in a timely manner
all reports and other documents required of Apple under the Securities Act and
the Exchange Act at any time that it is subject to such reporting requirements;
and
(c) so long as a Stockholder owns any shares of Registrable Common,
furnish to the Stockholder forthwith upon request a written statement by Apple
as to its compliance with the reporting requirements of Rule 144, the Securities
Act and the Exchange Act (at any time that
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it is subject to such reporting requirements), a copy of the most recent annual
or quarterly report of Apple, and such other reports and documents filed in
accordance with such reporting requirements as a Stockholder may reasonably
request in availing itself of any rule or regulation of the Commission allowing
a Stockholder to sell any such securities without registration; and
(d) if required by the transfer agent and registrar for the Common Stock,
use reasonable diligence to obtain an opinion from legal counsel (which may
include the General Counsel of Apple) addressed to such transfer agent and
registrar, with respect to any sale of shares of Registerable Common pursuant to
Rule 144 (or, at the option of Apple, pay the reasonable fees and expenses of
legal counsel retained by a Stockholder to provide such an opinion).
8. MARKET STANDOFF.
(a) In consideration of the granting to Stockholders of the registration
rights pursuant to this Agreement, each Stockholder agrees that, for so long as
such Stockholder holds shares of Registrable Common, except as permitted by
SECTIONS 2 AND 3 hereof, such Stockholder will not sell, transfer or otherwise
dispose of, including without limitation through put or short sale arrangements,
shares of Common Stock in the ten days prior to the effectiveness of any
registration (other than relating to an Exempt Offering) of Common Stock for
sale to the public and for up to 90 days following the effectiveness of such
registration.
(b) Except for Exempt Offerings or in connection with the acquisition by
Apple of another company or business, Apple shall not offer to sell or sell any
shares of capital stock of Apple during the 90-day period immediately following
the commencement of an underwritten public offering of shares of Registrable
Common pursuant to a Demand Registration.
9. REGISTRATION EXPENSES. All expenses incurred in connection with any
registration, qualification and compliance under this Agreement (including,
without limitation, all registration, filing, qualification, legal, printing and
accounting fees, and underwriting commissions and discounts applicable to shares
of Registrable Common included in the registrations under this Agreement) shall
be borne by Apple. Subject to the foregoing, all expenses incident to Apple's
performance of or compliance with this Agreement, including, without limitation,
all filing fees, fees and expenses of compliance with securities or Blue Sky
laws (including, without limitation, fees and disbursements of counsel in
connection with Blue Sky qualifications of the Registrable Common), printing
expenses, messenger and delivery expenses, internal expenses (including, without
limitation, all salaries and expenses of Apple's officers and employees
performing legal or accounting duties), the fees and expenses applicable to
shares of Registrable Common included in connection with the listing of the
securities to be registered on each securities exchange (including, for this
purpose, the Nasdaq National Market) on which similar securities issued by Apple
are then listed at the initiation of Apple, registrar and transfer agents' fees
and fees and disbursements of counsel for Apple and its independent certified
public accountants, securities act liability insurance of Apple and its officers
and directors (if Apple elects to obtain such insurance), the fees and expenses
of any special experts retained by Apple in connection with
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such registration and fees and expenses of other persons retained by Apple and
incurred in connection with each registration hereunder (but not including,
without limitation, any fees and expenses of counsel and any other special
experts retained by the holders of Registrable Common in connection with a
registration required hereunder, and transfer taxes, if any), will be borne by
Apple.
10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No holder of Registrable Common
may participate in any underwritten registration hereunder unless such holder
(a) agrees to sell such holder's securities on the basis provided in any
underwriting arrangements approved by the persons entitled hereunder to approve
such arrangements and (b) completes and executes all questionnaires, powers of
attorney, custody agreements, indemnities, underwriting agreements and other
documents reasonably required under the terms of such underwriting arrangements.
11. TRANSFER OF REGISTRATION RIGHTS; ADDITIONAL GRANTS OF REGISTRATION RIGHTS.
The registration rights provided to the holders of Registrable Common under
SECTIONS 2 AND 3 hereof may not be transferred to any other person or entity,
except to any person who the Stockholder may transfer the Warrant pursuant to
the terms thereof or pursuant to the laws of descent and distribution; PROVIDED
that such transferees are bound by and subject to the terms and conditions
contained herein. Nothing herein shall limit the ability of Apple to grant to
any person or entity any registration or similar rights in the future with
respect to Common Stock or other securities of Apple (whether pursuant to the
foregoing provision or otherwise).
12. INDEMNIFICATION AND CONTRIBUTION.
(a) INDEMNIFICATION BY THE COMPANY. To the extent permitted by law,
Apple agrees to indemnify and hold harmless each Stockholder who sells shares of
Registrable Common in a registered offering pursuant to either SECTION 2 OR
SECTION 3 hereof (a "Selling Stockholder"), each person, if any, who controls
such Stockholder within the meaning of either Section 15 of the Securities Act
or Section 20 of the Exchange Act and the officers, employees or members of the
Stockholder, from and against any and all losses, claims, damages, liabilities
and expenses (including reasonable legal expenses) arising out of or based upon
any untrue statement or alleged untrue statement of a material fact contained in
any registration statement or prospectus relating to the Registrable Common or
in any amendment or supplement thereto or in any related preliminary prospectus,
or arising out of or based upon any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or expenses arise out of, or are based upon, any such
untrue statement or omission or allegation thereof based upon information
furnished in writing to Apple by such Selling Stockholder or on such Selling
Stockholder's behalf expressly for use therein. In connection with an
underwritten offering of shares of Registrable Common, Apple will indemnify any
underwriters of the Registrable Common, their partners, officers and directors
and each person who controls such underwriters (within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act) on
substantially the same basis as that of the indemnification of the Selling
Stockholders provided in this SECTION 12(A). Notwithstanding the foregoing,
Apple's indemnification obligations with
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respect to any preliminary prospectus shall not inure to the benefit of any
Selling Stockholder or underwriter with respect to any loss, claim, damage,
liability (or actions in respect thereof) or expense arising out of or based on
any untrue statement or alleged untrue statement or omission or alleged omission
to state a material fact in such preliminary prospectus, in any case where (i) a
copy of the prospectus used to confirm sales of shares of Registrable Common was
not sent or given to the person asserting such loss, claim, damage or liability
at or prior to the written confirmation of the sale to such person and (ii) such
untrue statement or alleged untrue statement or omission or alleged omission was
corrected in such prospectus.
(b) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Promptly after receipt
by a Selling Stockholder of notice of any claim or the commencement of any
action or proceeding brought or asserted against such Selling Stockholder in
respect of which indemnity may be sought from Apple, such Selling Stockholder
shall notify Apple in writing of the claim or the commencement of that action or
proceeding; PROVIDED, HOWEVER, that the failure to so notify Apple shall not
relieve Apple from any liability that it may have to the Selling Stockholder
otherwise than pursuant to the indemnification provisions of this Agreement. If
any such claim or action or proceeding shall be brought against a Selling
Stockholder and such Selling Stockholder shall have duly notified Apple thereof,
Apple shall have the right to assume the defense thereof, including the
employment of counsel. Such Selling Stockholder shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall be at the expense of such
Selling Stockholder unless (i) Apple has agreed to pay such fees and expenses or
(ii) the named parties to any such action or proceeding include both such
Selling Stockholder and Apple, and such Selling Stockholder shall have been
advised by counsel that there may be one or more legal defenses available to
such Selling Stockholder which are different from or additional to those
available to Apple, in which case, if such Selling Stockholder notifies Apple in
writing that it elects to employ separate counsel at the expense of Apple, Apple
shall not have the right to assume the defense of such action or proceeding on
behalf of such Selling Stockholder; it being understood, however, that Apple
shall not, in connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one separate firm of attorneys (together with
appropriate local counsel) at any time for all Selling Stockholders. Apple shall
not be liable for any settlement of any such action or proceeding effected
without Apple's written consent.
(c) INDEMNIFICATION BY HOLDERS OF REGISTRABLE COMMON. In connection
with any registration in which a Selling Stockholder is participating, such
Selling Stockholder will furnish to Apple in writing such information and
affidavits as Apple reasonably requests for use in connection with any related
registration statement or prospectus. To the extent permitted by law, each
Selling Stockholder agrees to indemnify and hold harmless Apple, its directors
and officers who sign the registration statement relating to shares of
Registrable Common offered by such Selling Stockholder and each person, if any,
who controls Apple within the meaning of either Section 15 of the Securities Act
or Section 20 of the Exchange Act to the same extent as the foregoing indemnity
from Apple to such Selling Stockholder, but only with respect to
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information concerning such Selling Stockholder furnished in writing by such
Selling Stockholder or on such Selling Stockholder's behalf expressly for use in
any registration statement or prospectus relating to shares of Registrable
Common offered by such Selling Stockholder, or any amendment or supplement
thereto, or any related preliminary prospectus. In case any action or proceeding
shall be brought against Apple or its directors or officers, or any such
controlling person, in respect of which indemnity may be sought against such
Selling Stockholder, such Selling Stockholder shall have the rights and duties
given to Apple, and Apple or its directors or officers or such controlling
persons shall have the rights and duties given to such Selling Stockholder, by
the preceding paragraph. Each Selling Stockholder also agrees to indemnify and
hold harmless any underwriters of the Registrable Common, their partners,
officers and directors and each person who controls such underwriters (within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act) on substantially the same basis as that of the indemnification of
Apple provided in this SECTION 12(C). Notwithstanding anything to the contrary
herein, in no event shall the amount paid or payable by any Selling Stockholder
under this SECTION 12(C) exceed the amount of proceeds received by such Selling
Stockholder from the offering of the Registrable Common.
(d) CONTRIBUTION. If the indemnification provided for in this
SECTION 12 is unavailable to any indemnified party in respect of any losses,
claims, damages, liabilities or expenses referred to herein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and expenses in such proportion as
is appropriate to reflect the relative fault of the indemnifying party and the
indemnified parties in connection with the actions that resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of such indemnifying party and
indemnified parties shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact
relates to information supplied by such indemnified party or indemnified parties
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such action. Apple and the Selling
Stockholders agree that it would not be just and equitable if contribution
pursuant to this SECTION 12(D) were determined by pro rata allocation or by any
other method of allocation that does not take account of the equitable
considerations referred to in this SECTION 12(D). No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. If indemnification is available under this SECTION
12, the indemnifying parties shall indemnify each indemnified party to the full
extent provided in SECTIONS 12(A) and (C) without regard to the relative fault
of said indemnifying party or indemnified party or any other equitable
consideration provided for in this SECTION 12(D)
13. MISCELLANEOUS.
(a) AMENDMENTS AND WAIVERS. Except as otherwise provided herein, the
provisions of this Agreement may not be amended, modified or supplemented, and
waivers or consents to
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departures from the provisions hereof may not be given, unless Apple has
obtained the written consent of holders of at least 51% of the shares of
Registrable Common then outstanding.
(b) NOTICES. All notices and other communications provided for or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if delivered personally or sent by telex or telecopy, or registered or
certified mail (return receipt requested), postage prepaid, or courier to the
parties at the following addresses (or at such other address for any party as
shall be specified by like notice), PROVIDED that notices of a change of address
shall be effective only upon receipt thereof. Notices sent by mail shall be
effective when answered back, notices sent by telecopier shall be effective when
receipt is acknowledged, and notices sent by courier guaranteeing next day
delivery shall be effective on the next business day after timely delivery by
the courier. Notices shall be sent to the following addresses:
(i) if to a Stockholder, at the most current address given by such
Stockholder to Apple in a writing making specific reference to this
Agreement;
(ii) if to Apple, at the following address:
Apple Orthodontix, Inc.
One West Loop South
Suite 100
Houston, Texas 77027
Attn: H. Steven Walton
Telecopy: (713) 964-6877
with copies to: Jackson & Walker, L.L.P.
1100 Louisiana, Suite 4200
Houston, Texas 77002
Attn: Richard S. Roth, Esq.
Telecopy: (713) 752-4221
(c) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon the heirs, executors, administrators, successors and assigns
of each of the parties.
(d) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(e) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(f) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS
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APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN THAT STATE.
(g) SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby, it being intended that all the rights and privileges of the
Stockholders shall be enforceable to the fullest extent permitted by law.
(h) ENTIRE AGREEMENT; TERMINATION. This Agreement is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein. This Agreement supersedes all
prior agreements and understandings between the parties with respect to such
subject matter. This Agreement, except the provisions of SECTION 12 (which shall
survive until the expiration of the applicable statutes of limitations) and this
SECTION 13, shall terminate and be of no further force or effect on November 14,
2001.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
APPLE:
APPLE ORTHODONTIX, INC.
By:/s/ROBERT J. SYVERSON
Robert J. Syverson
President
STOCKHOLDERS:
TRICAP PARTNERS, L.L.C.
By:/s/A. JOHN KREFT
A. John Kreft
Manager
1996 STOCK OPTION PLAN
APPLE ORTHODONTIX, INC.
<PAGE>
APPLE ORTHODONTIX, INC. 1996 STOCK OPTION PLAN
ARTICLE I
THE PLAN
1.1 NAME. This Plan shall be known as the "Apple Orthodontix, Inc. 1996
Stock Option Plan." Capitalized terms used herein are defined in ARTICLE VII
hereof.
1.2 PURPOSE. The purpose of the Plan is to promote the growth and general
prosperity of the Company by permitting the Company to grant to Employees,
Nonemployee Directors, Advisors, and Orthodontists Options to purchase Common
Stock of the Company. The Plan is designed to help the Company and its
Subsidiaries attract and retain superior personnel for positions of substantial
responsibility and to provide Employees, Nonemployee Directors, Advisors, and
Orthodontists with an additional incentive to contribute to the success of the
Company. The Company intends that Incentive Stock Options granted pursuant to
ARTICLE III shall qualify as "incentive stock options" within the meaning of
Section 422 of the Code.
1.3 EFFECTIVE DATE. The Plan shall become effective upon the Effective
Date.
1.4 ELIGIBILITY TO PARTICIPATE. Any Employee, Nonemployee Director,
Advisor, or Orthodontist shall be eligible to participate in the Plan. Subject
to the following provisions, including without limitation SECTION 4.5, the
Committee may grant Options in accordance with such determinations as the
Committee from time to time in its sole discretion shall make; provided,
however, that Incentive Stock Options may be granted only to persons who are
Employees.
1.5 SHARES SUBJECT TO THE PLAN. The shares of Common Stock to be issued
pursuant to the Plan shall be either authorized and unissued shares of Common
Stock or shares of Common Stock issued and thereafter acquired by the Company.
1.6 MAXIMUM NUMBER OF PLAN SHARES. Subject to adjustment pursuant to the
provisions of SECTION 5.2, and subject to any additional restrictions elsewhere
in the Plan, the maximum aggregate number of shares of Common Stock that may be
issued and sold hereunder shall not exceed the greater of (a) 1,000,000 shares
or (b) 12 percent of the number of shares of Common Stock issued and outstanding
on the last day of each calendar quarter. No more than 500,000 shares of Common
Stock shall be available for Incentive Stock Options. Subject to adjustment
pursuant to the provisions of SECTION 5.2, and subject to any additional
restrictions elsewhere in the Plan, the maximum aggregate number of shares of
Common Stock with respect to which Options may be granted to any Optionee during
the term of the Plan shall not exceed 500,000 shares.
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1.7 OPTIONS AND STOCK GRANTED UNDER PLAN. Plan Shares with respect to
which an Option shall have been exercised shall not again be available for grant
hereunder. If Options terminate for any reason without being wholly exercised,
new Options may be granted hereunder covering the number of Plan Shares to which
such Option termination relates.
1.8 CONDITIONS PRECEDENT. The Company shall not issue any certificate for
Plan Shares pursuant to the Plan prior to fulfillment of all of the following
conditions:
(a) The admission of the Plan Shares to listing on all stock
exchanges on which the Common Stock is then listed, unless the Committee
determines in its sole discretion that such listing is neither necessary
nor advisable;
(b) The completion of any registration or other qualification of the
offer or sale of the Plan Shares under any federal or state law or under
the rulings or regulations of the Securities and Exchange Commission or
any other governmental regulatory body that the Committee shall in its
sole discretion deem necessary or advisable; and
(c) The obtaining of any approval or other clearance from any
federal or state governmental agency that the Committee shall in its sole
discretion determine to be necessary or advisable.
1.9 RESERVATION OF SHARES OF COMMON STOCK. During the term of the Plan,
the Company shall at all times reserve and keep available such number of shares
of Common Stock as shall be necessary to satisfy the requirements of the Plan as
to the number of Plan Shares. In addition, the Company shall from time to time,
as is necessary to accomplish the purposes of the Plan, seek or obtain from any
regulatory agency having jurisdiction any requisite authority that is necessary
to issue Plan Shares hereunder. The inability of the Company to obtain from any
regulatory agency having jurisdiction the authority deemed by the Company's
counsel to be necessary to the lawful issuance of any Plan Shares shall relieve
the Company of any liability in respect of the nonissuance of Plan Shares as to
which the requisite authority shall not have been obtained.
1.10 TAX WITHHOLDING.
(a) CONDITION PRECEDENT. The issuance of Plan Shares pursuant to the
exercise of any Option under the Plan is subject to the condition that if
at any time the Committee shall determine, in its discretion, that the
satisfaction of withholding tax or other withholding liabilities under any
federal, state or local law is necessary or desirable as a condition of,
or in connection with, such issuances, then the issuances shall not be
effective unless the withholding shall have been effected or obtained in a
manner acceptable to the Committee.
(b) MANNER OF SATISFYING WITHHOLDING OBLIGATION. When an Optionee is
required by the Committee to pay to the Company an amount required to be
withheld
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under applicable income tax laws in connection with the exercise of an
Option, such payment may be made (i) in cash, (ii) by check, (iii) if
permitted by the Committee, by delivery to the Company of shares of Common
Stock already owned by the Optionee having a Fair Market Value on the Tax
Date equal to the amount required to be withheld, (iv) through the
withholding by the Company ("Company Withholding") of a portion of the
Plan Shares acquired upon the exercise of the Options having a Fair Market
Value on the Tax Date equal to the amount required to be withheld or (v)
in any other form of valid consideration, as permitted by the Committee in
its discretion.
(c) NOTICE OF DISPOSITION OF STOCK ACQUIRED PURSUANT TO INCENTIVE
STOCK OPTIONS. The Company may require as a condition to the issuance of
Plan Shares covered by any Incentive Stock Option that the party
exercising such Option give a written representation to the Company, which
is satisfactory in form and substance to its counsel and upon which the
Company may reasonably rely, that he shall report to the Company any
disposition of such shares prior to the expiration of the holding periods
specified by Section 422(a)(1) of the Code. If and to the extent that the
realization of income in such a disposition imposes upon the Company
federal, state or local withholding tax requirements, or any such
withholding is required to secure for the Company an otherwise available
tax deduction, the Company shall have the right to require that the
recipient remit to the Company an amount sufficient to satisfy those
requirements; and the Company may require as a condition to the issuance
of Plan Shares covered by an Incentive Stock Option that the party
exercising such Option give a satisfactory written representation
promising to make such a remittance.
1.11 EXERCISE OF OPTIONS.
(a) METHOD OF EXERCISE. Each Option shall be exercisable in
accordance with the terms of the Option Agreement pursuant to which the
Option was granted. No Option may be exercised for a fraction of a Plan
Share.
(b) PAYMENT OF PURCHASE PRICE. The purchase price of any Plan Shares
purchased shall be paid at the time of exercise of the Option either (i)
in cash, (ii) by certified or cashier's check, (iii) if permitted by the
Committee, by shares of Common Stock, (iv) if permitted by the Committee,
by cash or certified or cashier's check for the par value of the Plan
Shares plus a promissory note for the balance of the purchase price, which
note shall provide for full personal liability of the maker and shall
contain such terms and provisions as the Committee may determine,
including without limitation the right to repay the note partially or
wholly with Common Stock, (v) by delivery of a copy of irrevocable
instructions from the Optionee to a broker or dealer, reasonably
acceptable to the Company, to sell certain of the Plan Shares purchased
upon exercise of the Option or to pledge them as collateral for a loan and
promptly deliver to the Company the amount of sale or loan proceeds
necessary to pay such purchase price or (vi) in any other form of valid
consideration, as permitted by the Committee in its discretion. If any
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portion of the purchase price or a note given at the time of exercise is
paid in shares of Common Stock, those shares shall be valued at the then
Fair Market Value.
1.12 ACCELERATION IN CERTAIN EVENTS. The Committee may accelerate the
exercisability of any Option in whole or in part at any time. Notwithstanding
the provisions of any Option Agreement, the following provisions shall apply:
(a) MERGERS, CONSOLIDATION, ETC. In the event that the Company
shall, pursuant to action by the Board, at any time enter into an
agreement whereby the Company will merge into, consolidate with, or sell
or otherwise transfer all or substantially all of its assets to another
corporation and provision is not made pursuant to the terms of such
transaction for the assumption by the surviving, resulting, or acquiring
corporation of outstanding Options, or for the substitution of new Options
with substantially equivalent benefit therefor, each outstanding Option
shall become fully (100%) vested. The Committee shall advise each
Optionee, in writing, of the manner and terms under which such fully
vested Options shall be exercised.
(b) CHANGE IN CONTROL. Anything contained herein to the contrary
notwithstanding, (1) an Optionee shall become fully (100%) vested in each
of his or her Options upon the occurrence of a change in control (as
defined below) or a threatened change in control (as determined by the
Committee in its sole discretion); and (2) no Option held by an Optionee
at the time a change in control or threatened change in control occurs or
at any time thereafter shall terminate for any reason before the end of
the Option's express term. For purposes of this section, "change in
control" means one or more of the following events:
(i) Any person within the meaning of Section 13(d) and 14(d) of the
Exchange Act, other than the Company (including its subsidiaries and
affiliates), has become the beneficial owner, within the meaning of Rule
13d-3 under the Exchange Act, of 33% or more of the combined voting power
of the Company's then outstanding Common Stock or equivalent in voting
power of any class or classes of the Company's outstanding securities
ordinarily entitled to vote in elections of directors ("voting
securities"); or
(ii) Shares representing 33% or more of the combined voting power of
the Company's voting securities are purchased pursuant to a tender offer
or exchange offer (other than an offer by the Company or its subsidiaries
or affiliates); or
(iii) As a result of, or in connection with, any tender offer or
exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions (a
"Transaction"), the persons who were Directors of the Company before the
Transaction shall cease to constitute a majority of the Board of the
Company or of any successor to the Company; or
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(iv) Following the Effective Date, the Company is merged or
consolidated with another corporation and as a result of such merger or
consolidation less than 40% of the outstanding voting securities of the
surviving or resulting corporation shall then be owned in the aggregate by
the former shareholders of the Company, other than (A) any party to such
merger or consolidation, or (B) any affiliates of any such party; or
(v) The Company transfers more than 50% of its assets, or the last
of a series of transfers results in the transfer of more than 50% of the
assets of the Company, to another entity that is not wholly-owned by the
Company. For purposes of this subsection (v), the determination of what
constitutes 50% of the assets of the Company shall be made by the
Committee, as constituted immediately prior to the events that would
constitute a change of control if 50% of the Company's assets were
transferred in connection with such events, in its sole discretion.
1.13 WRITTEN NOTICE REQUIRED. Any Option shall be deemed to be exercised
for purposes of the Plan when written notice of exercise has been received by
the Company at its principal office from the person entitled to exercise the
Option and payment for the Plan Shares with respect to which the Option is
exercised has been received by the Company in accordance with SECTION 1.11.
1.14 COMPLIANCE WITH SECURITIES LAWS. Plan Shares shall not be issued with
respect to any Option unless the issuance and delivery of the Plan Shares (and
the exercise of an Option, if applicable) shall comply with all relevant
provisions of state and federal law (including without limitation (i) the
Securities Act and the rules and regulations promulgated thereunder, and (ii)
the requirements of any stock exchange upon which the Plan Shares may then be
listed) and shall be further subject to the approval of counsel for the Company
with respect to such compliance. The Committee may also require an Optionee to
furnish evidence satisfactory to the Company, including without limitation a
written and signed representation letter and consent to be bound by any transfer
restrictions imposed by law, legend, condition, or otherwise, that the Plan
Shares are being acquired only for investment and without any present intention
to sell or distribute the shares in violation of any state or federal law, rule,
or regulation. Further, each Optionee shall consent to the imposition of a
legend on the certificate representing the Plan Shares issued pursuant to the
exercise of an Option restricting their transfer as required by law or this
section.
1.15 EMPLOYMENT OR SERVICE OF OPTIONEE. Nothing in the Plan or in any
Option granted hereunder shall confer upon any Employee any right to continued
employment by the Company or any of its Subsidiaries or limit in any way the
right of the Company or any Subsidiary at any time to terminate or alter the
terms of that employment. Nothing in the Plan or in any Option granted hereunder
shall confer upon any Nonemployee Director or Advisor any right to continued
service as a Nonemployee Director or Advisor of the Company or any of its
Subsidiaries or limit in any way the right of the Company or any Subsidiary at
any time to terminate or alter the terms of that service.
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1.16 RIGHTS OF OPTIONEES UPON TERMINATION OF EMPLOYMENT OR SERVICE. In the
event an Optionee ceases to be an Employee, Nonemployee Director, Advisor, or
Orthodontist for any reason other than death, Retirement, Permanent Disability,
for Cause or upon providing certain required notice of termination prior to an
annual anniversary of an Employee's employment agreement with the Company, (i)
the Committee shall have the ability to accelerate the vesting of the Optionee's
Option, in its sole discretion, and (ii) such Optionee's Option shall be
exercisable (to the extent exercisable on the date of termination of employment
or rendition of services, or, if the vesting of such Option has been
accelerated, to the extent exercisable following such acceleration) at any time
within three months after the date of termination of employment or rendition of
services, unless by its terms the Option expires earlier or unless, with respect
to a Nonqualified Stock Option, the Committee agrees, in its sole discretion, to
further extend the term of such Nonqualified Stock Option. In the event an
Optionee ceases to serve as an Employee, Nonemployee Director, Advisor, or
Orthodontist due to death, Permanent Disability, Retirement, for Cause or upon
providing certain required notice of termination prior to an annual anniversary
of an Employee's employment agreement with the Company, an Optionee's Options
may be exercised as follows:
(a) DEATH. Except as otherwise limited by the Committee at the of
the grant of an Option, if an Optionee dies while serving as an Employee,
Nonemployee Director, Advisor, or Orthodontist or within three months
after ceasing to be an Employee, Nonemployee Director, Advisor, or
Orthodontist his Option shall become fully exercisable on the date of his
death and shall expire 12 months thereafter, unless by its terms it
expires sooner or unless, with respect to a Nonqualified Stock Option, the
Committee agrees, in its sole discretion, to further extend the term of
such Nonqualified Stock Option. During such period, the Option may be
fully exercised, to the extent that it remains unexercised on the date of
death, by the Optionee's personal representative or by the distributees to
whom the Optionee's rights under the Option shall pass by will or by the
laws of descent and distribution.
(b) RETIREMENT. If an Optionee ceases to serve as an Employee or
Nonemployee Director as a result of Retirement, (i) the Committee shall
have the ability to accelerate the vesting of the Optionee's Option, in
its sole discretion, and (ii) such Optionee's Option shall be exercisable
(to the extent exercisable on the effective date of such Retirement or, if
the vesting of such Option has been accelerated, to the extent exercisable
following such acceleration) at any time within three months after the
effective date of such Retirement, unless by its terms the Option expires
earlier or unless, with respect to a Nonqualified Stock Option (other than
an Option granted pursuant to SECTION 4.5), the Committee agrees, in its
sole discretion, to further extend the term of such Nonqualified Stock
Option.
(c) DISABILITY. If an Optionee ceases to serve as an Employee,
Nonemployee Director, Advisor, or Orthodontist as a result of Permanent
Disability, the Optionee's Option shall become fully exercisable and shall
expire 12 months thereafter, unless by its terms it expires sooner or,
unless, with respect to a Nonqualified Stock Option (other
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than an Option granted pursuant to SECTION 4.5), the Committee agrees, in
its sole discretion, to extend the term of such Nonqualified Stock Option.
(d) CAUSE. If an Optionee ceases to be employed by the Company or a
Subsidiary or ceases to serve as a Nonemployee Director, Advisor, or
Orthodontist because the Optionee's relationship with the Company or a
Subsidiary is terminated for Cause, the Optionee's Options shall
automatically expire on the date of such termination. If any facts that
would constitute Cause for termination or removal of an Optionee are
discovered after the Optionee's relationship with the Company has ended,
any Options then held by the Optionee may be immediately terminated by the
Committee. Notwithstanding the foregoing, if an Optionee is an Employee
employed pursuant to a written employment agreement with the Company or a
Subsidiary, the Optionee's relationship with the Company or a Subsidiary
shall be deemed terminated for Cause for purposes of the Plan only if the
Optionee is considered under the circumstances to have been terminated
"for cause" for purposes of such written agreement or the Optionee
voluntarily ceases to be an Employee in breach of such Optionee's
employment agreement with the Company or a Subsidiary.
(e) NOTICE. If an Optionee's employment agreement with the Company
or a Subsidiary is terminated by either the Company, a Subsidiary, or the
Optionee by providing certain required notices of termination prior to an
annual anniversary of such Optionee's employment agreement, the Options
that are vested as of the date of termination shall remain exercisable for
a period of twelve months (three months if Incentive Stock Options) after
the date of termination and shall expire at the end of such twelve-month
period (three-month period if Incentive Stock Options).
1.17 TRANSFERABILITY OF OPTIONS. Except as may be agreed upon by the
Committee in accordance with the following paragraph, Options shall not be
transferable other than by will or the laws of descent and distribution or, with
respect to Nonqualified Stock Options, pursuant to the terms of a qualified
domestic relations order as defined by the Code or Title I of ERISA, or the
rules thereunder, and, with respect to Incentive Stock Options, may be exercised
during the lifetime of an Optionee only by that Optionee or by his legally
authorized representative. The designation by an Optionee of a beneficiary shall
not constitute a transfer of the Option. The Committee may, in its discretion,
provide in an Option Agreement that Nonqualified Stock Options granted hereunder
may be transferred by the Optionee to members of his immediate family, trusts
for the benefit of such immediate family members and partnerships in which such
immediate family members are the only partners.
1.18 INFORMATION TO OPTIONEES. The Company shall furnish to each Optionee
a copy of the annual report, proxy statements and all other reports sent to the
Company's shareholders. Upon written request, the Company shall furnish to each
Optionee a copy of its most recent Form 10-K Annual Report and each quarterly
report to shareholders issued since the end of the Company's most recent fiscal
year.
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ARTICLE II
ADMINISTRATION
2.1 COMMITTEE. Subject to SECTION 2.2, the Plan shall be administered by a
Committee of not fewer than two members of the Board. Each member of the
Committee shall be a "Non-Employee Director" within the meaning of Rule 16b-3
under the Exchange Act. Moreover, in the event any Options granted hereunder are
intended to qualify as performance-based compensation under Section 162(m) of
the Code, all members of the Committee shall be "outside directors" within the
meaning of Section 162(m) of the Code and the regulations thereunder. Subject to
the provisions of the Plan, the Committee shall have the sole discretion and
authority to determine from time to time the Employees, Non-Employee Directors,
Advisors, and Orthodontists to whom Options shall be granted and the number of
Plan Shares subject to each Option, to interpret the Plan, to prescribe, amend
and rescind any rules and regulations necessary or appropriate for the
administration of the Plan, to determine and interpret the details and
provisions of each Option Agreement, to modify or amend any Option Agreement or
waive any conditions or restrictions applicable to any Options (or the exercise
thereof), and to make all other determinations necessary or advisable for the
administration of the Plan.
2.2 APPOINTMENT OF COMMITTEE. The Committee shall be appointed by the
Board; provided that the Board may remove any Committee member, with or without
cause.
2.3 MAJORITY RULE; UNANIMOUS WRITTEN CONSENT. A majority of the members of
the Committee shall constitute a quorum, and any action taken by a majority
present at a meeting at which a quorum is present or any action taken without a
meeting evidenced by a writing executed by all members of the Committee shall
constitute the action of the Committee. Meetings of the Committee may take place
by telephone conference call.
2.4 COMPANY ASSISTANCE. The Company shall supply full and timely
information to the Committee on all matters relating to Employees, Nonemployee
Directors, Advisors, and Orthodontists, their employment, death, Retirement,
Permanent Disability, or other termination of employment or other relationship
with the Company, and such other pertinent facts as the Committee may require.
The Company shall furnish the Committee with such clerical and other assistance
as is necessary in the performance of its duties.
2.5 EXCULPATION OF COMMITTEE. No member of the Committee shall be
personally liable for, and the Company shall indemnify all members of the
Committee and hold them harmless against, any claims resulting directly or
indirectly from any action or inaction by the Committee pursuant to the Plan,
including without limitation any determination by the Committee regarding
whether a "change in control" (within the meaning of SECTION 1.12) is threatened
or any failure by the Committee to consider such a determination.
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ARTICLE III
INCENTIVE STOCK OPTIONS
3.1 TERMS AND CONDITIONS. The terms and conditions of Options granted
under this Article may differ from one another as the Committee shall, in its
discretion, determine, as long as all Options granted under this Article satisfy
the requirements of this Article.
3.2 DURATION OF OPTIONS. Each Option granted pursuant to this Article and
all rights thereunder shall expire on the date determined by the Committee, but
in no event shall any Option granted under this Article expire earlier than one
year or later than 10 years after the date on which the Option is granted. In
addition, each Option shall be subject to early termination as provided
elsewhere in the Plan.
3.3 PURCHASE PRICE. The purchase price for Plan Shares acquired pursuant
to the exercise, in whole or in part, of any Option granted under this Article
shall not be less than the Fair Market Value of the Plan Shares at the time of
the grant of the Option; provided, however, in the event of the grant of any
Option to an individual who, at the time the Option is granted, owns shares of
stock possessing more than 10% of the total combined voting power of all classes
of stock of the Company or any Subsidiary or affiliate thereof within the
meaning of Section 422 of the Code, the purchase price for the Plan Shares
subject to that Option must be at least 110% of the Fair Market Value of those
Plan Shares at the time the Option is granted and the Option must not be
exercisable after the expiration of five years from the date of its grant.
3.4 MAXIMUM AMOUNT OF OPTIONS FIRST EXERCISABLE IN ANY CALENDAR YEAR. The
aggregate Fair Market Value of Plan Shares (determined at the time the Option is
granted) with respect to which Options issued under this Article are exercisable
for the first time by any Employee during any calendar year under all incentive
stock option plans of the Company and its Subsidiaries and affiliates shall not
exceed $100,000. Any portion of an Option granted under the Plan in excess of
the foregoing limit shall be considered granted pursuant to ARTICLE IV.
3.5 INDIVIDUAL OPTION AGREEMENTS. Each Employee receiving Options pursuant
to this Article shall be required to enter into a written Option Agreement with
the Company. In such Option Agreement, the Employee shall agree to be bound by
the terms and conditions of the Plan, the Options made pursuant hereto, and such
other matters as the Committee deems appropriate.
ARTICLE IV
NONQUALIFIED STOCK OPTIONS
4.1 OPTION TERMS AND CONDITIONS. Subject to SECTION 4.5, the terms and
conditions of Options granted under this Article may differ from one another as
the Committee shall, in its
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discretion, determine as long as all Options granted under this Article satisfy
the requirements of this Article.
4.2 DURATION OF OPTIONS. Each Option granted pursuant to this Article and
all rights thereunder shall expire on the date determined by the Committee. In
addition, each Option shall be subject to early termination as provided
elsewhere in the Plan.
4.3 PURCHASE PRICE. The purchase price for the Plan Shares acquired
pursuant to the exercise, in whole or in part, of any Option granted under this
Article shall not be less than the Fair Market Value of the Plan Shares at the
time of the grant of the Option.
4.4 INDIVIDUAL OPTION AGREEMENTS. Each Optionee receiving Options pursuant
to this Article shall be required to enter into a written Option Agreement with
the Company. In such Option Agreement, the Optionee shall agree to be bound by
the terms and conditions of the Plan, the Options made pursuant hereto, and such
other matters as the Committee deems appropriate.
4.5 AUTOMATIC GRANTS TO NONEMPLOYEE DIRECTORS. Each Nonemployee Director
shall automatically be granted a Nonqualified Stock Option to purchase 10,000
shares of Common Stock either (i) upon initial election or appointment to the
Board or (ii) if the Nonemployee Director is serving on the Board on the date
the Plan is approved by the Company's stockholders, on the date the Plan is so
approved. Each Nonemployee Director will receive a Nonqualified Stock Option to
purchase 5,000 shares of Common Stock on the date of each annual meeting of
stockholders of the Company subsequent to his initial election as a director.
The purchase price for Plan Shares acquired pursuant to the exercise, in whole
or in part, of any Option received by Nonemployee Directors shall be the Fair
Market Value of the Plan Shares on the date of grant of such Option. One half of
each Option shall become exercisable on the first anniversary of the date of
grant of such Option and the remaining one half of each Option shall become
exercisable on the second anniversary of the date of grant. Each Option shall
expire on the day prior to the tenth anniversary of the date of grant of such
Option, unless otherwise specified herein. Nonemployee Directors shall not be
eligible to receive any other benefits or grants under the Plan other than as
provided in this Section.
ARTICLE V
TERMINATION, AMENDMENT, AND ADJUSTMENT
5.1 TERMINATION AND AMENDMENT. The Plan shall terminate on December 15,
2006. No Option shall be granted under the Plan after that date of termination.
Subject to the limitations contained in this Section, the Committee may at any
time amend or revise the terms of the Plan, including the form and substance of
the Option Agreements to be used in connection herewith; provided that no
amendment or revision may be made without the approval of the shareholders of
the Company if such approval is required under the Code, Rule 16b-3, or any
other applicable law or rule. No amendment, suspension, or termination of the
Plan shall, without the consent of the individual who has received an Option
hereunder, alter or impair any
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of that individual's rights or obligations under any Option granted under the
Plan prior to that amendment, suspension, or termination.
5.2 ADJUSTMENTS. If the outstanding Common Stock is increased, decreased,
changed into, or exchanged for a different number or kind of shares or
securities through merger, consolidation, combination, exchange of shares, other
reorganization, recapitalization, reclassification, stock dividend, stock split,
or reverse stock split, an appropriate and proportionate adjustment shall be
made in the maximum number and kind of Plan Shares as to which Options may be
granted under the Plan. A corresponding adjustment changing the number or kind
of shares allocated to unexercised Options or portions thereof, which shall have
been granted prior to any such change, shall likewise be made. Any such
adjustment in outstanding Options shall be made without change in the aggregate
purchase price applicable to the unexercised portion of the Options, but with a
corresponding adjustment in the price for each share covered by the Options. The
foregoing adjustments and the manner of application of the foregoing provisions
shall be determined solely by the Committee, and any such adjustment may provide
for the elimination of fractional share interests.
ARTICLE VI
MISCELLANEOUS
6.1 OTHER COMPENSATION PLANS. The adoption of the Plan shall not affect
any other stock option or incentive or other compensation plans in effect for
the Company or any Subsidiary or affiliate of the Company, nor shall the Plan
preclude the Company or any Subsidiary or affiliate thereof from establishing
any other forms of incentive or other compensation plans.
6.2 PLAN BINDING ON SUCCESSORS. The Plan shall be binding upon the
successors and assigns of the Company and any Subsidiary or affiliate of the
Company that adopts the Plan.
6.3 NUMBER AND GENDER. Whenever used herein, nouns in the singular shall
include the plural where appropriate, and the masculine pronoun shall include
the feminine gender.
6.4 HEADINGS. Headings of articles and sections hereof are inserted for
convenience of reference and constitute no part of the Plan.
ARTICLE VII
DEFINITIONS
As used herein with initial capital letters, the following terms have the
meanings hereinafter set forth unless the context clearly indicates to the
contrary:
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7.1 "ADVISOR" means any individual performing substantial BONA FIDE
services for the Company or any Subsidiary of the Company that has adopted the
Plan who is not an Employee or a Director.
7.2 "BOARD" means the Board of Directors of the Company.
7.3 "CAUSE" means conviction of a crime involving moral turpitude or a
crime providing for a term of imprisonment in a federal or state penitentiary;
failure or refusal to follow reasonable instructions of the Board; failure or
refusal to comply with the reasonable policies, standards and regulations of the
Company, which from time to time may be established; failure or refusal to
faithfully and diligently perform the usual customary duties of his employment
or service; acting in an unprofessional, unethical, immoral or fraudulent
manner; acting in a manner which discredits or is detrimental to the reputation,
character and standing of Company or a Subsidiary; or the commission of any
other act that causes or reasonably may be expected to cause substantial injury
to the Company.
7.4 "CODE" means the Internal Revenue Code of 1986, as amended.
7.5 "COMMITTEE" means the Committee appointed in accordance with SECTION
2.2.
7.6 "COMMON STOCK" means the Class A Common Stock, par value $0.001 per
share, of the Company or, in the event that the outstanding shares of such
Common Stock are hereafter changed into or exchanged for shares of a different
stock or security of the Company or some other corporation, such other stock or
security.
7.7 "COMPANY" means Apple Orthodontix, Inc., a Delaware corporation.
7.8 "DIRECTOR" means a member of the Board.
7.9 "EFFECTIVE DATE" means December 15, 1996.
7.10 "EMPLOYEE" means an employee (as defined in Section 3401(c) of the
Code and the regulations thereunder) of the Company or of any Subsidiary of the
Company that adopts the Plan, including Officers.
7.11 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
7.12 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
7.13 "FAIR MARKET VALUE" means such value as determined by the Committee
on the basis of such factors as it deems appropriate; provided that if the
Common Stock is traded on a national securities exchange or transactions in the
Common Stock are quoted on the Nasdaq National Market System, such value as
shall be determined by the Committee on the basis of
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the reported sales prices for the Common Stock on the date for which such
determination is relevant, as reported on the national securities exchange or
the Nasdaq National Market System, as the case may be. If the Common Stock is
not listed and traded upon a recognized securities exchange or on the Nasdaq
National Market System, the Committee shall make a determination of Fair Market
Value on a reasonable basis, which may include the mean between the closing bid
and asked quotations for such stock on the date for which such determination is
relevant (as reported by a recognized stock quotation service) or, in the event
that there shall be no bid or asked quotations on the date for which such
determination is relevant, then on the basis of the mean between the closing bid
and asked quotations on the date nearest preceding the date for which such
determination is relevant for which such bid and asked quotations were
available.
7.14 "INCENTIVE STOCK OPTION" means an Option granted pursuant to ARTICLE
III.
7.15 "NONEMPLOYEE DIRECTOR" means a member of the Board who is not an
Officer or Employee; provided that, as used in SECTION 2.1, the term
"Non-Employee Director" shall have the meaning provided in that section.
7.16 "NONQUALIFIED STOCK OPTION" means an Option granted pursuant to
ARTICLE IV.
7.17 "OFFICER" means an officer of the Company or any Subsidiary of the
Company.
7.18 "OPTION" means an Incentive Stock Option or a Nonqualified Stock
Option.
7.19 "OPTIONEE" means an Employee, Nonemployee Director, Advisor, or
Orthodontist to whom an Option has been granted hereunder.
7.20 "OPTION AGREEMENT" means an agreement between the Company and an
Optionee with respect to one or more Options.
7.21 "ORTHODONTIST" means an orthodontist who has a practice management
contract with the Company or a Subsidiary, or who is a member of or otherwise
associated with an orthodontic practice that has a practice management contract
with the Company or a Subsidiary.
7.22 "PERMANENT DISABILITY" has the same meaning as that provided in
Section 22(e)(3) of the Code.
7.23 "PLAN" means the Apple Orthodontix, Inc. 1996 Stock Option Plan, as
amended from time to time.
7.24 "PLAN SHARES" means shares of Common Stock issuable pursuant to the
Plan.
7.25 "RETIREMENT" occurs when an Employee or Director terminates his
relationship with the Company or a Subsidiary on or after the date he (a) turns
65 years old or (b) turns 55
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years old and has completed 10 years of service with the Company or a Subsidiary
as otherwise determined by the Board.
7.26 "RULE 16B-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor rule.
7.27 "SECURITIES ACT" means the Securities Act of 1933, as amended.
7.28 "SUBSIDIARY" means a subsidiary corporation of the Company, as
defined in Section 424(f) of the Code.
7.29 "TAX DATE" means the date on which the amount of tax to be withheld
is determined.
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EXHIBIT 10.8
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SERVICE AGREEMENT
DATED AS OF THE ____ DAY OF ________________, 1997
BY AND BETWEEN
APPLE ORTHODONTIX, INC.
APPLE ORTHODONTIX OF TEXAS, INC.
---------------------------------------------
---------------------------------------------
AND
---------------------------------------------
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<PAGE>
TABLE OF CONTENTS
ARTICLE I.................................................................. 1
Definitions.......................................................... 1
Section 1.1 Definitions........................................ 1
ARTICLE II................................................................. 6
Relationship of the Parties.......................................... 6
ARTICLE III................................................................ 6
Services to be Provided by Apple..................................... 6
Section 3.1 Overall Function................................... 6
Section 3.2 General Administrative Services. .................. 7
Section 3.3 Facilities......................................... 9
Section 3.4 Acquisition and Assistance......................... 10
Section 3.5 Inventory and Supplies............................. 10
Section 3.6 Advertising and Public Relations................... 10
Section 3.7 Personnel.......................................... 10
Section 3.8 Quality Assurance.................................. 11
Section 3.9 Other Consulting and Advisory Services............. 11
ARTICLE IV................................................................. 11
Obligations of the Orthodontic Entity and Orthodontist............... 11
Section 4.1 Employment of Orthodontist Employees............... 11
Section 4.2 Professional Services.............................. 12
Section 4.3 Orthodontic Practice............................... 12
Section 4.4 Orthodontic Entity's and Orthodontist's
Internal Matters................................... 13
Section 4.5 Compliance with Laws............................... 13
Section 4.6 Ancillary Services................................. 14
Section 4.7 Premises and Personal Property..................... 14
Section 4.8 Orthodontic Entity Employee Benefit Plans.......... 14
Section 4.9 Peer Review........................................ 15
Section 4.10 Additional Orthodontists.......................... 15
ARTICLE V.................................................................. 16
Restrictive Covenants and Liquidated Damages......................... 16
Section 5.1 Restrictive Covenants by the Orthodontic Entity.... 16
Section 5.2 Restrictive Covenants of Orthodontist.............. 16
Section 5.3 Acknowledgement of Proprietary Interest............ 17
Section 5.4 Covenant Not-to-Divulge Confidential and
Proprietary Information............................ 18
Section 5.5 Return of Materials to Apple....................... 18
Section 5.6 [INTENTIONALLY DELETED]............................ 18
Section 5.7 Restrictive Covenants of Orthodontic Entity
Professional Employees............................. 18
Section 5.8 RESTRICTIVE COVENANTS OF APPLE AND AOI............. 19
Section 5.9 Remedies........................................... 19
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ARTICLE VI................................................................. 19
Financial and Security Arrangements.................................. 19
Section 6.1 Service Fees...................................... 19
Section 6.2 Excluded Expenses.................................. 20
Section 6.3 Working Capital Loans.............................. 20
Section 6.4 Security Agreement................................. 21
ARTICLE VII................................................................ 21
Records.............................................................. 21
Section 7.1 Records Owned by Apple............................. 21
Section 7.2 Access to Records.................................. 21
ARTICLE VIII............................................................... 21
Insurance and Indemnity.............................................. 21
Section 8.1 Insurance to be Maintained by the Orthodontic
Entity and Orthodontist............................ 21
Section 8.2 Insurance to be Maintained by Apple................ 22
Section 8.3 Continuing Liability Insurance Coverage............ 22
Section 8.4 Additional Insureds................................ 22
Section 8.5 Indemnification.................................... 22
ARTICLE IX................................................................. 23
Term and Termination................................................. 23
Section 9.1 Term of Agreement.................................. 23
Section 9.2 Extended Term...................................... 23
Section 9.3 Termination by the Orthodontic Entity and
Orthodontist....................................... 23
Section 9.4 Termination by Apple............................... 24
Section 9.5 Termination by Orthodontist........................ 24
Section 9.6 Effective Date of Termination...................... 25
Section 9.7 Purchase of Assets................................. 25
Section 9.8 Terms of Purchase.................................. 26
Section 9.9 Exception to Purchase.............................. 26
Section 9.10 Effect Upon Termination........................... 26
ARTICLE X.................................................................. 27
General Provisions................................................... 27
Section 10.1 Assignment........................................ 27
Section 10.2 Amendments........................................ 27
Section 10.3 Waiver of Provisions.............................. 27
Section 10.4 Additional Documents.............................. 27
Section 10.5 Attorneys' Fees................................... 27
Section 10.6 Contract Modifications for Prospective
Legal Events...................................... 28
Section 10.7 Parties In Interest; No Third-Party Beneficiaries. 28
Section 10.8 Entire Agreement.................................. 28
Section 10.9 Severability...................................... 28
Section 10.10 Governing Law.................................... 28
Section 10.11 No Waiver; Remedies Cumulative................... 29
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Section 10.12 Language Construction............................ 29
Section 10.13 Communications................................... 29
Section 10.14 Captions......................................... 29
Section 10.15 Gender and Number................................ 29
Section 10.16 Reference to Agreement........................... 29
Section 10.17 Notice........................................... 29
Section 10.18 Choice of Forum.................................. 30
Section 10.19 Service of Process............................... 30
Section 10.20 Counterparts..................................... 31
Section 10.21 Defined Terms.................................... 31
EXHIBITS
Exhibit 1.1(u) Orthodontic Entity Professional Employment Agreements
Exhibit 7.3. Form of Security Agreement
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SERVICE AGREEMENT
This Service Agreement (this "Agreement"), dated as of __________________,
1997, is by and between Apple Orthodontix Inc., a Delaware corporation ("AOI"),
Apple Orthodontix of Texas, Inc., a Delaware corporation ("Apple"),
__________________________, __________________________, (collectively referred
to hereinafter as "Orthodontist") and __________________________, a
___________________ (the "Orthodontic Entity").
W I T N E S S E T H:
WHEREAS, Orthodontic Entity and Orthodontist provide comprehensive
professional orthodontic care to the general public in the Corpus Christi area;
and
WHEREAS, Apple is in the business of owning certain assets of orthodontic
clinics and providing consulting, administrative, and other support services to
and furnishing orthodontic practices with the necessary facilities, equipment,
non-orthodontist personnel, supplies and support staff services; and
WHEREAS, the Orthodontic Entity and Orthodontist desire to obtain the
services of Apple in performing such functions so as to permit the Orthodontic
Entity to devote its efforts on a concentrated and continuous basis to the
rendering of orthodontic services to its patients; and
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, and on the terms and subject to the
conditions herein set forth, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINITIONS. For the purposes of this Agreement, the following
definitions shall apply:
(a) "Acquisition" shall mean the acquisition described in the
Acquisition Agreement.
(b) "Acquisition Agreement" shall mean the Agreement and Plan of
Reorganization, dated as of February , 1997, among AOI,
__________________________, and __________________________.
(c) "Acquisition Closing Date" shall mean the date the Acquisition
is effective pursuant to the terms of the Acquisition Agreement.
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(d) "Affiliate" with respect to any person shall mean a person that
directly or indirectly through one or more intermediaries, controls, or is
controlled by or is under common control with, such person.
(e) "AOI Group" shall mean Apple, AOI, Affiliates of Apple or AOI
and all professional associations or corporations or other entities for
which Apple or its Affiliates provides management services.
(f) "AOI Plans" shall have the meaning set forth in SECTION 4.8(b).
(g) "Apple Expenses" shall mean, pursuant to GAAP applied on a
consistent basis:
(i) Any corporate overhead charges of Apple or AOI and other
items incurred by Apple or AOI that are not incurred specifically
for the purpose of providing services to the Orthodontic Entity or
Orthodontist or are not directly attributable to the Orthodontic
Entity or Orthodontist as reasonably determined by Apple, including
without limitation, salaries and benefits of executive officers of
Apple or AOI, except as otherwise provided for in the definition of
Orthodontic Entity and Orthodontist Expenses;
(ii) Any legal and accounting expenses incurred by Apple or
AOI in connection with the Acquisition;
(iii) All taxes of Apple, including but not limited to state
and federal income taxes and franchise taxes, but excluding state
and federal employee taxes related to Orthodontist or employees who
provide services for the Orthodontic Entity or Orthodontist,
property taxes on assets used by the Orthodontic Entity or
Orthodontist and other taxes specifically included in Excluded
Orthodontic Entity and Orthodontist Expenses; and
(iv) Any other expenses specifically included in "Apple
Expenses" in this Agreement.
(h) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(i) "Confidential and Proprietary Information" shall have the
meaning set forth in SECTION 5.3.
(j) "Disabled" or "Disability" shall mean, with respect to
Orthodontist, (a) having a mental or physical incapacity sufficiently
serious that Apple may reasonably anticipate that Orthodontist will be
unable to resume the normal performance of Orthodontist's duties within
the two years succeeding the commencement of Orthodontist's incapacity, or
(b) Orthodontist's receipt of benefits for a period of six consecutive
months by reason of disability under a salary continuation, or other
disability plan, maintained for Orthodontist's benefit. In the event of
such mental or physical incapacity, each Orthodontist agrees upon Apple's
request to submit Orthodontist's
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medical and other related records to be examined by an independent
third-party doctor selected by Apple whose decision shall govern for
purposes of determining the existence of a disability.
(k) "ERISA" shall have the meaning set forth in SECTION 4.8(a).
(l) "Excluded Orthodontic Entity and Orthodontist Expenses" shall
mean, (i) any salaries or other distributions made to Orthodontist or any
shareholder of the Orthodontic Entity, whether for professional fee income
or otherwise, and any expenses related thereto, including payroll and
other taxes associated therewith, and any expenses or costs associated
with benefits provided to Orthodontist or any shareholder of the
Orthodontic Entity, including pension benefits and life and health
insurance, (ii) any federal, state or other income taxes applicable to the
Orthodontic Entity or Orthodontist, (iii) legal, accounting and other
costs incurred by the Orthodontic Entity or Orthodontist in connection
with the negotiation, preparation of or closing of the transactions
contemplated by the Acquisition Agreement, this Agreement or any other
document executed in connection herewith or therewith, (iv) any amounts
paid as Minimum Monthly Payments pursuant to Section 6.1, (v) any
expenses, costs or charges incurred by the Orthodontic Entity or
Orthodontist that would cause the Net Operating Amount (as defined in
Section 6.1 hereof) in any month to be less than 45% of gross revenue
received from patients for orthodontic services provided for such month on
a cash basis, and (vi) any other expenses specifically included in
"Excluded Orthodontic Entity and Orthodontist Expenses" in this Agreement.
(m) "Fair Market Value" shall mean as to any assets, the fair market
value of such assets as determined by Apple and the Orthodontic Entity. In
the event the parties are unable to agree upon the fair market value, then
Apple and the Orthodontic Entity shall each select an independent
appraiser who will then select a third independent appraiser who will
determine the fair market value of the asset in question.
(n) "GAAP" shall mean generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board
or in such other statements by such other entity or other practices and
procedures as may be approved by a significant segment of the accounting
profession, which are applicable to the circumstances as of the date of
determination.
(o) "Initial Working Capital Line" shall have the meaning set forth
in SECTION 6.3.
(p) "Loan Termination Date" shall have the meaning set forth in
SECTION 6.3.
(q) "Orthodontic Entity" shall include the Orthodontic Entity as
defined in the first paragraph of this Agreement and all satellite
locations and related businesses of such Orthodontic Entity.
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(r) "Orthodontic Entity and Orthodontist Expenses" shall mean all
operating and non-operating expenses of Apple or AOI with respect to the
Orthodontic Entity for services requested by the Orthodontic Entity or
Orthodontist and all operating and non-operating expenses of the
Orthodontic Entity and Orthodontist incurred by the Orthodontic Entity or
Orthodontist in the operation of the Orthodontic Entity or the practice of
orthodontics by Orthodontist, including, without limitation:
(i) Salaries, benefits and other direct costs of all employees
of Apple or AOI who perform services for the benefit of the
Orthodontic Entity or Orthodontist and all salaries and benefits of
Orthodontic Entity Professional Employees and Orthodontic Entity
Employees, including, without limitation, federal and state employee
taxes and costs related to workers' compensation; provided, however,
only the portion of salaries, benefits and other direct costs
related to such employee, without mark-up, that is allocable to work
performed at or for the benefit of the Orthodontic Entity or
Orthodontist and approved by the Orthodontic Entity or Orthodontist
will be included in Orthodontic Entity and Orthodontist Expenses;
(ii) Direct costs of all employees or consultants of Apple,
AOI and their Affiliates to provide services at or in connection
with the Orthodontic Entity or for the Orthodontist at or in
connection with the Orthodontic Entity for improved performance;
provided, however, (x) only the portion of salaries, benefits and
other direct costs related to such employee or consultant, without
mark-up, that is allocable to work performed at or for the benefit
of the Orthodontic Entity or Orthodontist and approved by the
Orthodontic Entity or Orthodontist will be included in Orthodontic
Entity and Orthodontist Expenses, and (y) the salaries, other
employee benefits or consulting fees paid by Apple, AOI and their
Affiliates to the consultants who will provide three days per annum
of marketing consulting services and one day per annum of health and
safety consulting services shall not be included in Orthodontic
Entity and Orthodontist Expenses but shall be Apple Expenses;
(iii) Personal property and intangible taxes assessed against
assets of Apple or any of its Affiliates which are leased or
utilized for the benefit of the Orthodontic Entity or Orthodontist
under this Agreement, commencing on the date of this Agreement;
provided, however, only the portion of the taxes related to such
assets, without mark-up, that is allocable to the use of such assets
at or for the benefit of the Orthodontic Entity or Orthodontist and
approved by the Orthodontic Entity or Orthodontist will be included
in Orthodontic Entity and Orthodontist Expenses;
(iv) All costs, fees, expenses and other disbursements
incurred in connection with the Premises (as defined in SECTION 3.3)
and the Personal Property (as defined in SECTION 3.3), including,
without limitation, all costs of repairs, maintenance and
improvements, utility expenses (i.e., telephone, electric, gas and
water), janitorial services, refuse disposal, real or personal
property lease cost payments and expenses, taxes and casualty,
liability and other insurance,
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(v) Any provider tax or license fee assessed against the
Orthodontic Entity or Orthodontist by the State of Texas and any
sales and use taxes assessed against Apple, AOI and their
Affiliates, the Orthodontic Entity or Orthodontist related to
Orthodontic Entity operations, the practice of orthodontics by
Orthodontist or assessed against Apple related to services provided
hereunder;
(vi) Expenses related to professional meetings, seminars and
dues and professional licensing fees of Orthodontist or any
Orthodontic Entity Professional Employee or related to the business
of the Orthodontic Entity;
(vii) All expenses specifically included in "Orthodontic
Entity and Orthodontist Expenses" in this Agreement; and
(viii) Depreciation and amortization of all assets purchased
subsequent to the Acquisition for use by the Orthodontic Entity and
Orthodontist.
Provided, however, that, notwithstanding anything contained herein, Apple
Expenses and Excluded Orthodontic Entity and Orthodontist Expenses shall
not be included in Orthodontic Entity and Orthodontist Expenses.
(s) "Orthodontic Entity Employees" shall mean (i) those individuals
who are employed by or otherwise under contract or associated with the
Orthodontic Entity or Orthodontist that generate a professional charge,
and (ii) those individuals required by law to be employed by the
Orthodontic Entity or Orthodontist.
(t) "Orthodontic Entity Professional Employees" shall mean those
individuals who are orthodontists, dental hygienist or licensed
professionals employed by the Orthodontic Entity or Orthodontist or
otherwise under contract or associated with the Orthodontic Entity or
Orthodontist to provide professional orthodontic services to patients of
the Orthodontic Entity or Orthodontist, provided, however, that
Orthodontist shall be excluded from the definition of Orthodontic Entity
Professional Employees.
(u) "Orthodontic Entity Professional Employment Agreements" shall
mean the employment agreements entered into of even date herewith between
the Orthodontic Entity or Orthodontist and each Orthodontic Entity
Professional Employee (not including Orthodontic Entity Employees) in
substantially the form attached to the Acquisition Agreement as EXHIBIT
1.1(U).
(v) "Orthodontic Entity Related Liabilities" shall have the meaning
set forth in SECTION 9.7(b).
(w) "Personal Property" shall have the meaning set forth in SECTION
3.3(b).
(x) "Practice Plans" shall have the meaning set forth in SECTION
4.8(a).
(y) "Premises" shall have the meaning set forth in SECTION 3.3(a).
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(z) "Purchase Assets" shall have the meaning set forth in SECTION
9.7(a).
(aa) "Purchase Closing" shall have the meaning set forth in SECTION
9.8.
(ab) "Security Agreement" shall have the meaning set forth in
SECTION 6.4.
(ac) "Tax Returns" shall include all federal, state, local,
franchise, property and other tax returns.
(ad) "Termination Date" shall have the meaning set forth in SECTION
9.6.
ARTICLE II
RELATIONSHIP OF THE PARTIES
The Orthodontic Entity, Orthodontist and Apple intend to act and perform
as independent contractors, and the provisions hereof are not intended to create
any partnership, joint venture, agency or employment relationship between the
parties. Apple, the Orthodontic Entity and Orthodontist agree that the
Orthodontic Entity and Orthodontist shall retain the authority to direct the
orthodontic, professional, and ethical aspects of their orthodontic practice.
Apple shall neither exercise control over nor interfere with the
orthodontist-patient relationships of the Orthodontic Entity and Orthodontist,
which shall be maintained strictly between the orthodontists of the Orthodontic
Entity and their patients. The parties hereby agree that neither the benefits to
the Orthodontic Entity and Orthodontist hereunder, nor the payment of services
fees to Apple, require, are payment for, or are in any way contingent upon the
admission, referral or any other arrangement for the provision of any item or
service offered by Apple or any of its Affiliates to any of the Orthodontic
Entity's or Orthodontist's patients in any facility or laboratory controlled,
managed or operated by Apple.
ARTICLE III
SERVICES TO BE PROVIDED BY APPLE
SECTION 3.1 OVERALL FUNCTION. In accordance with the terms hereof, Apple
shall provide or arrange for the services set forth in this ARTICLE , and the
costs, fees, expenses and other disbursements incurred by Apple or AOI in
connection therewith shall be included in Orthodontic Entity and Orthodontist
Expenses, except to the extent such costs, fees or expenses are Apple Expenses
or Excluded Orthodontic Entity and Orthodontist Expenses. Apple is authorized to
perform its services hereunder as is necessary or appropriate for the efficient
operation of the Orthodontic Entity. The Orthodontic Entity and Orthodontist
will not act in a manner which would prevent Apple from performing its duties
hereunder and will provide such information and assistance to Apple as is
reasonably required by Apple to perform its services hereunder. Apple shall, and
shall use its best efforts to cause its employees, to comply with all federal,
state and local laws, rules and regulations in its provision of services
hereunder.
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SECTION 3.2 GENERAL ADMINISTRATIVE SERVICES.
(a) The Orthodontic Entity hereby appoints Apple to serve as its
exclusive manager and administrator of non-orthodontist services relating
to the operation of the Orthodontic Entity and the practice of
orthodontics by Orthodontist, subject to matters reserved for the
Orthodontic Entity or Orthodontist as herein provided, and Apple shall
have all necessary authority to perform such services in accordance with
the terms of this Agreement. The Orthodontic Entity agrees that the
purpose and intent of this Agreement is to relieve the Orthodontic Entity
and Orthodontist to the maximum extent possible of the administrative,
accounting, non-orthodontist personnel and business aspects of its
practice. Apple agrees that the Orthodontic Entity, Orthodontist,
Orthodontic Entity Employees and the Orthodontic Entity Professional
Employees, and only the Orthodontic Entity, Orthodontist, Orthodontic
Entity Employees and the Orthodontic Entity Professional Employees, will
perform the orthodontic functions of their respective practices; provided,
however, that to the extent that an Apple employee assists Orthodontist,
any Orthodontic Entity Professional Employee or the Orthodontic Entity in
performing orthodontic functions, such Apple employee shall be subject to
the professional direction and supervision of Orthodontist, Orthodontic
Entity Professional Employee or Orthodontic Entity and in the performance
of such orthodontic functions, shall not be subject to any direction or
control by, or liability to, Apple, except as may be specifically
authorized by Apple. Apple will have no authority, directly or indirectly,
to perform or supervise, and will not perform or supervise, any
orthodontic function. Apple may, however, advise the Orthodontic Entity
and Orthodontist as to the relationship between its performance of
orthodontic functions and the overall administrative and business
functions of the practice to the extent permitted by applicable law. Apple
shall cause to be paid all federal and state employment taxes and related
tax reports for its employees.
(b) Apple shall, on behalf of Orthodontist and the Orthodontic
Entity, provide all services related to the billing of patients, insurance
companies and other third-party payors and collect the professional fees
for orthodontic services rendered by Orthodontist and the Orthodontic
Entity, for services performed outside the Orthodontic Entity for its
patients, and for all other professional and Orthodontic Entity services
and products and for services rendered by Orthodontist in accordance with
all applicable legal requirements and the policies and procedures of
third-party payors. To the extent necessary to comply with applicable laws
or the terms of any third-party payor arrangements, Apple shall bill in
the name of and on behalf of the Orthodontic Entity and Orthodontist. The
Orthodontic Entity hereby appoints Apple for the term of this Agreement to
be its true and lawful attorney-in-fact, for the following purposes: (i)
to bill patients, insurance companies and other third-party payors in the
Orthodontic Entity's and Orthodontist's name and on their behalf pursuant
to the fee schedule prepared by the Orthodontic Entity and Orthodontist;
(ii) to collect accounts receivable resulting from such billing in the
Orthodontic Entity's and Orthodontist's name and on their behalf; (iii) to
receive payments from insurance companies, prepayments received from
health care plans and all other third party payors; (iv) to take
possession of and endorse in the name of the Orthodontic Entity (and/or in
the name of an individual orthodontist, such payment intended for purpose
of payment of a orthodontist's bill related to the Orthodontic Entity
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or Orthodontist) any notes, checks, money orders, insurance payments and
other instruments received in payment of accounts receivable; and (v) in
each case, after approval by the Orthodontist, to initiate the institution
of legal proceedings in the name of the Orthodontic Entity or Orthodontist
or Orthodontic Entity Professional Employee to collect any accounts and
monies owed to the Orthodontic Entity or Orthodontist or Orthodontic
Entity Professional Employee, to enforce the rights of the Orthodontic
Entity or Orthodontist or Orthodontic Entity Professional Employee as
creditors under any contract or in connection with the rendering of any
service, and to contest adjustments and denials by third-party payors. The
Orthodontic Entity and Orthodontist shall, and shall cause each
Orthodontic Entity Professional Employee to, execute a Power of Attorney
in form and substance acceptable to the parties hereto in connection with
the rights and powers granted to Apple pursuant to this SECTION 3.2(b).
All monies shall be accounted for by Apple as being distinctly
attributable to the Orthodontic Entity. The Orthodontic Entity may perform
the functions or exercise the rights set forth in this SECTION 3.2(b) only
with the consent of Apple. The Orthodontic Entity and Orthodontist will
assist Apple with the functions set forth herein at the request of Apple.
(c) Apple shall supply to the Orthodontic Entity the ordinary,
necessary or appropriate services for the efficient operation of the
Orthodontic Entity, including without limitation, necessary clerical,
accounting, payroll, legal, bookkeeping and computer services, information
management, information for the preparation of Tax Returns, printing,
postage and duplication services and orthodontic transcribing services.
Apple shall prepare monthly and annual unaudited financial statements for
the Orthodontic Entity containing a balance sheet and income statement,
which shall be delivered to the Orthodontic Entity within 45 days after
the end of each calendar month and 120 days after the end of each calendar
year. Any audits to be conducted with respect to such financial statements
shall be an Excluded Orthodontic Entity and Orthodontist Expense.
(d) Apple shall maintain all files and records of the Orthodontic
Entity and Orthodontist relating to the operation of the Orthodontic
Entity or the practice of orthodontics by Orthodontist, including, but not
limited to, accounting, billing, collection and customary financial
records and patient files. The management of all files and records shall
comply with all applicable federal, state and local statutes and
regulations, and all files and records shall be located so that they are
readily accessible for patient care, consistent with ordinary records
management practices. The Orthodontic Entity and Orthodontist shall
supervise the preparation of, and direct the contents of, patient
orthodontic records, all of which shall remain confidential. All original
patient records shall be and remain the property of the Orthodontic Entity
or Orthodontist, as applicable; provided that, to the extent permitted by
applicable law, Apple shall have the right to copy such patient records
and to retain and use such copies.
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SECTION 3.3 FACILITIES.
(a) Apple shall make available to the Orthodontic Entity and
Orthodontist the premises that are described in SCHEDULE 3.3 attached
hereto (which describes each location where the Orthodontist provided
orthodontic services to patients on January 31, 1997 and each location
proposed to be opened to provide such services on such date) and such
other real property acquired (with the consent of the Orthodontic Entity
and Orthodontist) and improvements made by Apple or AOI for the use of the
Orthodontic Entity and Orthodontist hereunder (collectively, the
"Premises"); provided, that in the event that Apple's rights to use any
such premises shall terminate, Apple shall use reasonably commercial
efforts to provide other suitable premises to be used by the Orthodontic
Entity and Orthodontist, which premises shall be approved by the
Orthodontic Entity and Orthodontist, such approval not to be unreasonably
withheld. Apple shall obtain for the Orthodontic Entity and Orthodontist
all utilities reasonably required in connection with the use of the
Premises and shall provide for the proper cleanliness of the Premises,
including normal janitorial services and refuse disposal.
(b) Apple shall provide the Orthodontic Entity and Orthodontist with
the use of the equipment, furniture, fixtures, furnishings and other
tangible personal property acquired by Apple in the Acquisition, together
with replacements thereof and such other equipment, furniture, fixtures,
furnishings and tangible personal property acquired (with the consent of
the Orthodontic Entity or Orthodontist) by Apple or AOI for the use of
Orthodontic Entity and Orthodontist pursuant to the terms hereof
(collectively, the "Personal Property").
(c) Apple shall provide, finance, or cause to be provided or
financed, orthodontic related equipment as required by the Orthodontic
Entity. Apple may consult the Orthodontic Entity on the relationship
between its orthodontic equipment decisions and the overall administrative
and financial operations of the practice. All orthodontic and
non-orthodontic equipment acquired for the use of the Orthodontic Entity
shall be owned by Apple but shall be utilized solely by the Orthodontic
Entity so long as the Orthodontic Entity is repaying its portion of the
cost thereof. Apple and Orthodontic Entity will share equally in the cost
to purchase any new or replacement orthodontic or non-orthodontic
equipment to be acquired after consummation of the Acquisition (except
with respect to the first $100,000 worth of such equipment, which shall be
purchased by Apple), provided that the Orthodontic Entity and Apple
mutually agree to acquire such equipment. Apple may advance or cause to be
financed the total purchase value of any equipment acquired. The
Orthodontic Entity may repay in full its share of the cost or finance such
amount due to Apple in equal payments over a term of up to 60 months at a
rate of prime plus 1%. The amount, if any, due to Apple will be paid
monthly by the Orthodontic Entity. Any amounts paid to Apple by the
Orthodontic Entity pursuant to this Section 3.3(c) are Excluded
Orthodontic Entity and Orthodontist Expenses.
(d) In the event Apple and the Orthodontic Entity jointly determine
to open a satellite orthodontic office, (i) Apple will bear 60% of the
capital costs, and the Orthodontic Entity will bear 40% of the capital
costs, of opening such satellite office, and (ii) Apple shall make
available loans accruing annual interest at the prime rate of
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NationsBank of Texas, N.A. plus 1% to finance the Orthodontic Entity's and
Orthodontist's portion of such costs. No principal or interest payments
for any such loan shall be due until the first day of the sixteenth month
following the date of the loan (the "First Payment Date"). The amount of
interest that accrues until the date fifteen months after the origination
date of the loan shall be added to the original principal amount of the
loan to determine the principal amount payable by the Orthodontic Entity.
Sixty equal principal payments plus accrued interest shall be payable
beginning on the First Payment Date and ending on the first day of the
fifty-ninth month thereafter.
SECTION 3.4 ACQUISITION AND ASSISTANCE. In the event a decision is made by
the Orthodontic Entity or Orthodontist to employ additional orthodontists or
acquire orthodontist groups or practices, Apple may assist the Orthodontic
Entity in the identification and selection of orthodontists or orthodontist
groups or practices that may be beneficial in the operation of the Orthodontic
Entity. In the event that a decision is made by the Orthodontic Entity or
Orthodontist to pursue the employment of selected orthodontists or the
acquisition of a particular orthodontist group or practice, Apple may provide
recruiting, consulting, negotiating and other services and may provide for
legal, accounting and other professional advisor services in connection with
such transaction.
SECTION 3.5 INVENTORY AND SUPPLIES. Apple shall order and purchase
inventory and supplies, and such other ordinary, necessary or appropriate
materials which are reasonably necessary in the operation of the Orthodontic
Entity and which are requested by Orthodontist to deliver quality orthodontic
services in a cost-effective manner. Such inventory, supplies and other
materials shall be included in Orthodontic Entity and Orthodontist Expense at
their purchase price less discounts or rebates, if any.
SECTION 3.6 ADVERTISING AND PUBLIC RELATIONS. In consultation with the
Orthodontic Entity and Orthodontist, Apple shall design and produce (where
requested) any appropriate local public relations or advertising program on
behalf of the Orthodontic Entity, with appropriate emphasis on public awareness
of the availability of services at the Orthodontic Entity. Any design and
production costs incurred by Apple related to local public relations or
advertising programs requested by the Orthodontic Entity or Orthodontist shall
be Apple Expenses. All other costs of local advertising programs on behalf of
the Orthodontic Entity will be included in Orthodontic Entity and Orthodontist
Expenses, including, but not limited to, out-of-pocket costs incurred by Apple
or AOI. All public relations and advertising programs shall be conducted in
compliance with applicable standards of orthodontic ethics, laws and
regulations. Apple shall make available interest-free loans (up to an amount
equal to the lesser of the Orthodontic Entity's costs of local advertising and
6% of the Transaction Value (as defined in the Acquisition Agreement)) to
finance the Orthodontic Entity's costs of local advertising until the first
anniversary of the date of this Agreement. The principal amount of any such
loans shall be repaid by the Orthodontic Entity in twelve equal monthly
installments beginning on the first anniversary of the date of this Agreement.
SECTION 3.7 PERSONNEL. Apple shall provide non-orthodontist professional
support and administrative personnel, clerical, secretarial, bookkeeping and
collection personnel reasonably necessary for the conduct of the Orthodontic
Entity's operations. Apple will consult with the orthodontist to determine the
salaries and fringe benefits to be paid to all such personnel. Such
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personnel shall be under the direction, supervision and control of Apple, with
those personnel performing patient care services subject to the professional
supervision of Orthodontist while such personnel are performing such patient
care services. If Orthodontist is dissatisfied with the services of any person,
Orthodontist shall consult with Apple. Apple shall in good faith determine
whether the performance of that employee could be brought to acceptable levels
through counsel and assistance, or whether such employee should be reassigned or
terminated. All of Apple's obligations regarding staff shall be governed by the
overriding principle and goal of providing high quality orthodontic care.
Employee assignments shall be made to assure consistent and continued rendering
of high quality orthodontic support services and to ensure prompt availability
and accessibility of individual orthodontic support personnel to orthodontists
in order to develop constant, familiar and routine working relationships between
individual orthodontists and individual members of the orthodontic support
personnel. Apple shall maintain established working relationships wherever
possible and Apple shall make every effort consistent with sound business
practices to honor the specific requests of Orthodontist with regard to the
assignment of its employees. Apple shall provide administrative services such as
scheduling, personnel policies and payroll administration for Orthodontic Entity
Employees. Apple and the Orthodontic Entity shall use their best efforts to
define who are their respective employees for all administrative purposes.
SECTION 3.8 QUALITY ASSURANCE. Apple shall assist the Orthodontic Entity
in fulfilling its obligations to its patients to maintain a high quality of
orthodontic and professional services and any expenses incurred by Apple related
to such in connection therewith shall be included in Orthodontic Entity and
Orthodontist Expenses.
SECTION 3.9 OTHER CONSULTING AND ADVISORY SERVICES. Apple will provide
such consulting and other advisory services as requested by the Orthodontic
Entity or Orthodontist in all areas of the Orthodontic Entity's or
Orthodontist's business functions, including, without limitation, financial
planning, acquisition and expansion strategies, development of long-term
business objectives and other related matters. Subject to the provisions of
SECTION 1.1(r)(ii) hereof, the costs and expenses of third-party consultants
engaged by Apple to provide such services shall be Orthodontic Entity and
Orthodontist Expenses.
ARTICLE IV
OBLIGATIONS OF THE ORTHODONTIC ENTITY AND ORTHODONTIST
SECTION 4.1 EMPLOYMENT OF ORTHODONTIST EMPLOYEES. The Orthodontist shall
have complete control of and responsibility for the hiring, compensation,
supervision, evaluation and termination of any orthodontist employed by the
Orthodontic Entity, although at the request of the Orthodontic Entity or
Orthodontist, Apple shall consult with the Orthodontic Entity and Orthodontist
with respect to such matters. Although Apple may provide payroll and other
related services to the Orthodontic Entity and Orthodontist, the Orthodontic
Entity and Orthodontist shall be solely responsible for the payment of their
respective Orthodontic Entity Professional Employees' and Orthodontic Entity
Employees' salaries and wages, payroll taxes and all other taxes and charges now
or hereafter applicable to them. Neither the Orthodontic Entity, Orthodontist,
their respective Orthodontic Entity Professional Employees nor their
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respective Orthodontic Entity Employees shall have any claim under this
Agreement or otherwise against Apple or AOI for workers' compensation,
unemployment compensation, Social Security benefits or any other employee
benefits, all of which shall be the sole responsibility of the Orthodontic
Entity and Orthodontist. The Orthodontic Entity and Orthodontist shall only
employ and contract with licensed orthodontists and other persons meeting
applicable credentialling guidelines established by the Orthodontic Entity and
Orthodontist and approved by Apple, which approval will not be unreasonably
withheld. The Orthodontic Entity and Orthodontist shall cooperate in the
obtaining and retaining of professional liability insurance by ensuring that
their respective Orthodontic Entity Professional Employees and Orthodontic
Entity Employees and other employees who have malpractice exposure or liability
are insurable, and participating in an on-going risk management program.
SECTION 4.2 PROFESSIONAL SERVICES. The Orthodontic Entity and Orthodontist
shall provide professional services to patients in compliance at all times with
ethical standards, laws, rules and regulations applying to the Orthodontic
Entity, Orthodontist, the Orthodontic Entity Professional Employees and the
Orthodontic Entity Employees. The Orthodontic Entity and Orthodontist shall
ensure that Orthodontist, Orthodontic Entity Professional Employees and
Orthodontic Entity Employees have all required licenses, credentials, approvals
or other certifications to perform his or her duties and services. In the event
that any disciplinary actions or orthodontic malpractice actions are initiated
against Orthodontist, an Orthodontic Entity Professional Employee or an
Orthodontic Entity Employee, the Orthodontic Entity shall immediately inform
Apple of such action and the underlying facts and circumstances. The Orthodontic
Entity and Orthodontist shall carry out a program to monitor the quality of
orthodontic care practiced at the Orthodontic Entity. The Orthodontic Entity
shall employ such Orthodontic Entity Professional Employees as is necessary to
provide efficient orthodontic care to patients of the Orthodontic Entity.
Orthodontist and the Orthodontic Entity shall make all reports and inquiries to
any state data bank required by applicable law.
SECTION 4.3 ORTHODONTIC PRACTICE. The Orthodontic Entity and Orthodontist
shall use and occupy the Premises exclusively for the practice of orthodontics
and for providing other related services and products. Unless otherwise approved
in writing by the Orthodontic Entity and Apple, it is expressly acknowledged by
the Orthodontic Entity and Orthodontist that the orthodontic practice or
practices conducted at the Orthodontic Entity shall be conducted solely by
orthodontists associated with the Orthodontic Entity, and that the Orthodontic
Entity and Orthodontist shall not permit any other orthodontist or dental
practitioner to use or occupy the Orthodontic Entity. The Orthodontic Entity and
Orthodontist shall be solely and exclusively in control of all aspects of the
practice of orthodontics and the delivery of orthodontic services by
Orthodontist or at the Orthodontic Entity's facilities. The rendition of all
orthodontic professional services, including, but not limited to, diagnosis,
treatment, therapy, the prescription of medicine and drugs, and the supervision
and preparation of orthodontic reports shall be the sole responsibility of the
Orthodontic Entity and Orthodontist. Apple shall have no authority whatsoever
with respect to the establishment of fees or charges for the rendition of such
services; provided, however, that in the event the Orthodontic Entity or the
Orthodontist renders orthodontic services to a patient in consideration for
anything other than cash, Apple will determine the value of such consideration
for purposes of determining the amount of revenues received by the Orthodontic
Entity or Orthodontist. From time to time, the Orthodontic Entity and
Orthodontist in their discretion will adopt and implement fee schedules for
non-prepaid
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patients which shall be reasonable in relation to fees generally being obtained
in the same or similar market areas. Notwithstanding any provision of this
Agreement to the contrary, nothing herein shall be construed as precluding Apple
or AOI from permitting the use of or from entering into agreements with other
orthodontists or entities owned by other orthodontists similar to this
Agreement, with respect to the Premises, Personal Property and tradenames,
trademarks and other intangible assets of Apple or AOI utilized by the
Orthodontic Entity or Orthodontist pursuant to this Agreement; provided any such
other agreement shall not eliminate or diminish Apple's obligations hereunder or
interfere with the Orthodontic Entity's or Orthodontist's business.
SECTION 4.4 ORTHODONTIC ENTITY'S AND ORTHODONTIST'S INTERNAL MATTERS. The
Orthodontic Entity and Orthodontist shall be responsible for matters involving
their respective corporate governance, employees and similar internal matters,
including, but not limited to, preparation and contents of such reports to
regulatory authorities governing the Orthodontic Entity and Orthodontist that
the Orthodontic Entity or Orthodontist are required by law to provide,
distribution of professional fee income among Orthodontist or the shareholders
of the Orthodontic Entity, disposition of the Orthodontic Entity's and
Orthodontist's property and stock and hiring and firing of their employees and
licensing. Except for the expenses attributable to the distribution of
professional fee income among Orthodontist or the shareholders of the
Orthodontic Entity which will be included in Excluded Orthodontic Entity and
Orthodontist Expenses, the costs incurred in connection with the foregoing
matters shall be Orthodontic Entity and Orthodontist Expenses. The legal,
accounting and other professional services fees incurred by Orthodontist or the
Orthodontic Entity in connection with the internal matters of the Orthodontic
Entity, the personal accounting of the Orthodontic Entity and Orthodontist and
similar internal and personal matters, including without limitation, the costs
associated with enforcing any contract with a Orthodontic Entity Professional
Employee (other than as set forth in SECTION 5.8), shall be Excluded Orthodontic
Entity and Orthodontist Expenses.
SECTION 4.5 COMPLIANCE WITH LAWS. The Orthodontic Entity and Orthodontist
shall, and shall use their best efforts to cause Orthodontist and Orthodontic
Entity Professional Employees to, comply with all applicable federal, state and
local laws, rules, regulations and restrictions in the conduct of the
Orthodontic Entity's and Orthodontist's business. Without limiting the
generality of the foregoing, the Orthodontic Entity and Orthodontist shall use
their best efforts to forbid Orthodontist and each Orthodontic Entity
Professional Employee to:
(a) enter into any contract, lease, agreement or arrangement,
including, but not limited to, any joint venture or consulting agreement,
to provide services, lease space, lease equipment or engage in any other
venture or activity with any orthodontist, hospital, pharmacy, home health
agency or other person or entity which is in a position to make or
influence referrals to, or otherwise generate business for, the
Orthodontic Entity or Orthodontist, if such transaction is in violation of
any applicable law, rule or regulation;
(b) knowingly and willfully make or cause to be made a false
statement or representation of a material fact in any application for any
benefit or payment;
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(c) knowingly and willfully make or cause to be made a false
statement or representation of a material fact for use in determining
rights to any benefit or payment; and
(d) fail to disclose knowledge by a claimant of the occurrence of
any event affecting the initial or continued right to any benefit or
payment on its own behalf or on behalf of another, with intent to
fraudulently secure such benefit or payment.
SECTION 4.6 ANCILLARY SERVICES. The Orthodontic Entity and Orthodontist
agree not to acquire, establish or operate any satellite location, orthodontic
office, health maintenance organization, preferred provider organization,
exclusive provider organization or similar entity or organization established or
operated by the Orthodontic Entity or Orthodontist after the date hereof without
the prior written consent of Apple. Orthodontist and the Orthodontic Entity
shall not merge or consolidate with any other entity or individual or liquidate
or dissolve or wind-up Orthodontist's or the Orthodontic Entity's affairs or
enter into any partnerships, joint ventures or sale-leaseback transactions or
purchase or otherwise acquire (in one or a series of transactions) any part of
the property or assets of any other person or entity without the prior written
consent of Apple. Apple's consent shall be required for the Orthodontist to
provide orthodontic services at a location other than the Orthodontic Entity or
on behalf of an entity or person other than the Orthodontic Entity.
SECTION 4.7 PREMISES AND PERSONAL PROPERTY. The Orthodontic Entity and
Orthodontist shall use the Premises and Personal Property for their intended use
to minimize the risk of damage, excessive wear and tear, and malfunction or
other breakdown of the Premises and Personal Property or any part thereof. The
Orthodontic Entity and Orthodontist shall promptly inform Apple in writing of
any and all material replacements, repairs or maintenance to any of the Premises
or Personal Property and any failures of equipment that they become aware of.
The Orthodontic Entity and the Orthodontist shall comply with all covenants and
provisions set forth in any leases for the Premises entered into or assumed by
Apple and Apple agrees to provide copies of all such leases to the Orthodontic
Entity and Orthodontist.
SECTION 4.8 ORTHODONTIC ENTITY EMPLOYEE BENEFIT PLANS.
(a) Effective immediately before the Acquisition Closing Date, the
Orthodontic Entity and Orthodontist shall freeze or terminate all
"employee benefit plans" (as that term is defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"))
that are (i) sponsored or maintained by the Orthodontic Entity or
Orthodontist and (ii) are set forth on SCHEDULE 4.8(A) (the "Practice
Plans"). In connection with such actions, all account balances and accrued
benefits under all tax-qualified Practice Plans (within the meaning of
Section 401(a) of the Code) shall be made fully vested and nonforfeitable.
(b) Effective on the Acquisition Closing Date, Orthodontist shall
become a participating employer in AOI's employee benefit plans set forth
on SCHEDULE 4.8(B) (the "AOI Plans") with respect to Orthodontist's
employees. Orthodontist acknowledges that AOI will sponsor a defined
contribution plan and that Orthodontist may be precluded by Section
401(k)(2)(B)(i) from paying distributions in connection with the
termination of
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any Practice Plan that contains a "cash or deferred arrangement" within
the meaning of Section 401(k) of the Code. Accordingly, AOI shall take all
actions as it may determine to be reasonable to facilitate the merger of
the assets and liabilities of any tax-qualified Practice Plan into a
tax-qualified AOI Plan if such merger of tax-qualified plans is requested
by Orthodontist.
(c) With respect to any Practice Plan or AOI Plan, neither
Orthodontist nor AOI shall take any action or make any contribution to
such plan that would cause such plan to become disqualified for federal
tax purposes. Orthodontist shall not adopt, maintain, or continue any
employee benefit plan after the Acquisition Closing Date without the prior
written approval of AOI.
(d) Expenses incurred in connection with Practice Plans, including
without limitation the compensation of counsel, accountants, corporate
trustees, and other agents shall be Excluded Orthodontic Entity and
Orthodontist Expenses.
(e) The contribution and administration expenses for the
Orthodontist, Orthodontic Entity Professional Employees (which are not
expenses payable by the AOI Plans or by the participants in the AOI Plans)
shall be included in Orthodontist's operating budget. Orthodontist and AOI
shall not make employee benefit plan contributions or payments for their
respective employees in excess of such budgeted amounts unless required by
law or the terms of the AOI Plans. AOI shall make contributions or
payments with respect to the AOI Plans on behalf of eligible Orthodontic
Entity Professional Employees and Orthodontic Entity Employees and those
contributions or payments shall be treated as Orthodontic Entity and
Orthodontist Expenses, Apple Expenses or Excluded Orthodontic Entity and
Orthodontist Expenses as elsewhere provided in this Agreement.
(f) AOI shall have the sole and exclusive authority to adopt, amend,
or terminate any employee benefit plan for the benefit of its employees
and employees of other entities aggregated with AOI pursuant to Section
414(b), (c), (m) (o) of the Code.
SECTION 4.9 PEER REVIEW. Orthodontist and the Orthodontic Entity agree to
cooperate with Apple in establishing a system of peer review within and among
the orthodontic practices associated with Apple or its Affiliates. In connection
therewith, Orthodontist and the Orthodontic Entity agree to assist in the
formulation of orthodontic provider guidelines for each treatment or modality.
SECTION 4.10 ADDITIONAL ORTHODONTISTS. The Orthodontic Entity and
Orthodontist shall require, as a condition to an additional orthodontist
becoming a shareholder of the Orthodontic Entity, that such shareholder execute
an agreement in form and substance similar to this Agreement or become a party
to this Agreement by amendment hereto.
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ARTICLE V
RESTRICTIVE COVENANTS AND LIQUIDATED DAMAGES
The parties recognize that the services to be provided by Apple hereunder
shall be feasible only if the Orthodontic Entity and Orthodontist operate an
active orthodontic practice to which the orthodontists associated with the
Orthodontic Entity devote their full business time and attention. Accordingly,
the parties hereto agree as follows:
SECTION 5.1 RESTRICTIVE COVENANTS BY THE ORTHODONTIC ENTITY.
(a) During the term of this Agreement and for a period of two years
after termination of this Agreement for any reason other than pursuant to
SECTION 9.3 hereof, the Orthodontic Entity shall not without the prior
written consent of Apple (i) establish, operate or provide orthodontic
services at any orthodontic office, clinic or other health care facility
providing services similar to those provided by the Orthodontic Entity, or
(ii) engage or participate in any business which engages in competition
with the business conducted by AOI Group; in either case anywhere within
50 miles of any Premises.
(b) The Orthodontic Entity agrees that in the event of a breach of
SECTION 5.1(a) above, the Orthodontic Entity shall pay to Apple an amount
equal to the greater of (i) $200,000, and (ii) an amount equal to the
gross cash receipts of the Orthodontic Entity for the preceding twelve
(12) months.
(c) The Orthodontic Entity agrees that the noncompetition
restrictions set forth in this Agreement are reasonable as to time and
geographic area.
SECTION 5.2 RESTRICTIVE COVENANTS OF ORTHODONTIST.
(a) Orthodontist agrees and acknowledges that, until the later of
(i) the expiration of the fifth anniversary of the date of this Agreement,
or (ii) five years from the date Orthodontist becomes a shareholder of the
Orthodontic Entity, Orthodontist will devote Orthodontist's full business
time and attention to rendering professional services on behalf of the
Orthodontic Entity and in furtherance of the Orthodontic Entity's best
interest.
(b) Orthodontist hereby agrees that during the period set forth in
SECTION 5.2(a) above and for a period of two (2) years after the
termination of this Agreement for any reason other than termination of
this Agreement as to the Orthodontist pursuant to SECTION 9.3 hereof,
Orthodontist will not (i) directly or indirectly establish, operate or
provide orthodontist services at any orthodontic office, clinic or other
facility providing services similar to those provided by the Orthodontic
Entity or engage or participate in or finance any business which engages
in direct competition with the business being conducted by AOI Group, in
either case, anywhere within 50 miles of any Premises, (ii) directly or
indirectly compete with the Orthodontic Entity or member of the AOI Group
in any way, (iii) act as an officer, director, employee, consultant,
shareholder, lender, guarantor or agent of, or otherwise assist any entity
which is engaged in any
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business of the same nature as, or in direct competition with, the
business in which the AOI Group is now engaged or other business in which
the AOI Group becomes engaged, or (iv) induce or attempt to influence any
employee of the AOI Group to terminate his or her employment, or to hire
any such employee, whether or not so induced or influenced, except that
any such employee may be hired with the prior written consent of AOI.
(c) Orthodontist agrees that in the event of a breach of SECTION
5.2(a) above, Orthodontist shall pay to Apple an amount equal to the
greater of (i) $200,000, and (ii) an amount equal to the gross cash
receipts of the Orthodontic Entity for the preceding twelve (12) months.
(d) Orthodontist agrees that in the event of a breach of SECTION
5.2(b) above, Orthodontist shall pay to Apple an amount equal to the
greater of (i) $200,000, and (ii) an amount equal to the gross cash
receipts of the Orthodontic Entity for the preceding twelve (12) months.
(e) Orthodontist acknowledges and recognizes that enforcement of
SECTIONS 5.2(a) and 5.2(b) above by Apple or AOI will not interfere with
Orthodontist's ability to pursue a proper livelihood. Orthodontist agrees
that the noncompetition restrictions set forth in this Agreement are
reasonable as to time and geographic area.
Notwithstanding the foregoing, however, this SECTION 5.2 shall not
prohibit Orthodontist or any of his or her Affiliates (including the
Orthodontic Entity) from purchasing or holding an aggregate publicly
traded equity interest of up to 2%, so long as Orthodontist and his or her
affiliates (including the Orthodontic Entity and the other orthodontist
owning an equity interest in the Orthodontic Entity) do not purchase or
hold an aggregate equity interest of more than 5% in any business in
direct competition with the AOI Group.
SECTION 5.3 ACKNOWLEDGEMENT OF PROPRIETARY INTEREST. The Orthodontic
Entity and Orthodontist recognize the proprietary interest of AOI Group in any
Confidential and Proprietary Information (as hereinafter defined) of AOI Group.
The Orthodontic Entity and Orthodontist acknowledge and agree that any and all
Confidential and Proprietary Information communicated to, learned of, developed
or otherwise acquired by the Orthodontic Entity and Orthodontist during the term
of this Agreement shall be the property of AOI Group. The Orthodontic Entity and
Orthodontist further acknowledge and understand that their disclosure of any
Confidential and Proprietary Information will result in irreparable injury and
damage to AOI Group. As used herein, "Confidential and Proprietary Information"
means all trade secrets and other confidential and/or proprietary information of
AOI Group, including information derived from reports, investigations, research,
work in progress, codes, marketing and sales programs, financial projections,
cost summaries, pricing formula, contracts analyses, financial information,
projections, confidential filings with any state or federal agency, and all
other confidential concepts, methods of doing business, ideas, materials or
information (other than the Orthodontic Entity's and Orthodontist's original
patient records) prepared or performed for, by or on behalf of AOI Group by its
employees, officers, directors, agents, representatives, or consultants.
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SECTION 5.4 COVENANT NOT-TO-DIVULGE CONFIDENTIAL AND PROPRIETARY
INFORMATION. The Orthodontic Entity and Orthodontist acknowledge and agree that
AOI Group is entitled to prevent the disclosure of Confidential and Proprietary
Information. The Orthodontic Entity and Orthodontist agree at all times during
the term of this Agreement and thereafter to hold in strictest confidence and
not to disclose to any person, firm or corporation, other than to Orthodontic
Entity Professional Employees and persons engaged by Apple to further the
business of the Orthodontic Entity, and not to use except in the pursuit of the
business of AOI Group, Confidential and Proprietary Information, without the
prior written consent of Apple; unless (i) such information becomes known or
available to the public generally through no wrongful act of the Orthodontic
Entity or Orthodontist or its employees, (ii) disclosure is required by law or
the rule, regulation or order of any governmental authority under color of law,
provided, that prior to disclosing any Confidential and Proprietary Information
pursuant to this clause (ii), the Orthodontic Entity and Orthodontist shall, if
possible, give prior written notice thereof to Apple and provide Apple with the
opportunity to contest such disclosure, or (iii) the Orthodontic Entity and
Orthodontist reasonably believe that such disclosure is required in connection
with a lawsuit to which the Orthodontic Entity or Orthodontist is a party.
SECTION 5.5 RETURN OF MATERIALS TO APPLE. In the event of any termination
of this Agreement for any reason whatsoever, or at any time upon the request of
Apple, the Orthodontic Entity or the Orthodontist for whom the termination is
applicable will promptly deliver to Apple all documents, data and other
information in the Orthodontic Entity's or Orthodontist's possession that
contains any Confidential and Proprietary Information. The Orthodontic Entity
and Orthodontist shall not take or retain any documents or other information, or
any reproduction or excerpt thereof, containing any Confidential and Proprietary
Information, unless otherwise authorized in writing by Apple.
SECTION 5.6 [INTENTIONALLY DELETED].
SECTION 5.7 RESTRICTIVE COVENANTS OF ORTHODONTIC ENTITY PROFESSIONAL
EMPLOYEES. Each Orthodontic Entity Professional Employment Agreement contains
certain restrictive covenants thereof pertaining to covenants not to compete
with and not to divulge the confidential and proprietary information of Apple,
Orthodontist and the Orthodontic Entity. During the term of this Agreement, the
Orthodontic Entity and Orthodontist shall obtain written agreements which
contain restrictive covenants in substantially the same form from each
Orthodontic Entity Professional Employee (other than Orthodontic Entity
Employees) associated with the Orthodontic Entity or Orthodontist after the date
hereof. Except with respect to sections of the Orthodontic Entity Professional
Employment Agreements pertaining to matters of compensation, during the term of
this Agreement, the Orthodontic Entity and Orthodontist shall not amend, alter
or otherwise change any term or provision of any Orthodontic Entity Professional
Employment Agreement without the prior written consent of AOI, which consent
shall not be unreasonably withheld. Following termination of this Agreement, the
Orthodontic Entity and Orthodontist shall not amend, alter or otherwise change
any term or provision of the restrictive covenants contained in such Orthodontic
Entity Professional Employment Agreement unless such provisions are no longer in
force and effect pursuant to the terms of the applicable agreement at the time
of termination of this Agreement.
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SECTION 5.8 RESTRICTIVE COVENANTS OF APPLE AND AOI. Apple and AOI each
hereby agrees that during the term of this Agreement, it will not engage or
participate in or finance any orthodontist's practice (whether through the
acquisition of another existing orthodontic practice, affiliation with another
orthodontist or the opening of a satellite office) anywhere within 50 miles of
any location from which the Orthodontic Entity provides orthodontic services to
patients on the date hereof (each an "Orthodontic Entity Location") without the
prior written consent of the Orthodontist.
SECTION 5.9 REMEDIES. Apple, Orthodontist and the Orthodontic Entity
acknowledge and agree that a remedy at law for any breach or attempted breach of
the provisions of this ARTICLE V shall be inadequate, and therefore, either
party shall be entitled to specific performance and injunctive or other
equitable relief in the event of any such breach or attempted breach, in
addition to any other rights or remedies available to either party at law or in
equity. Each party hereto waives any requirement for the securing or posting of
any bond in connection with the obtaining of any such injunctive or other
equitable relief. If any provision of the restrictive covenants contained in the
Orthodontic Entity Professional Employment Agreements or this ARTICLE V relating
to the restrictive period, scope of activity restricted and/or the territory
described therein shall be declared by a court of competent jurisdiction to
exceed the maximum time period, scope of activity restricted or geographical
area such court deems reasonable and enforceable under applicable law, the time
period, scope of activity restricted and/or area of restriction held reasonable
and enforceable by the court shall thereafter be the restrictive period, scope
of activity restricted and/or the territory applicable to such provision of the
restrictive covenants or this ARTICLE V. The invalidity or non-enforceability
of any provision of the restrictive covenants or this ARTICLE V in any respect
shall not affect the validity or enforceability of the remainder of the
restrictive covenants or this ARTICLE V or of any other provisions of this
Agreement.
ARTICLE VI
FINANCIAL AND SECURITY ARRANGEMENTS
The Orthodontic Entity and Apple agree that the compensation set forth in
this ARTICLE VI is being paid to Apple in consideration of the services provided
and the substantial commitment and effort made by Apple hereunder and that such
fees have been negotiated at arm's length, and are fair and reasonable and
consistent with fair market value.
SECTION 6.1 SERVICE FEES. Apple shall charge the Orthodontic Entity for
services on a monthly basis an amount equal to the sum of the following:
(a) Total monthly revenue of the Orthodontic Entity and Orthodontist,
which is equal to the sum of (i) 24% of the Initial Monthly Contract Balance and
(ii) the Monthly Contract Residual,
(b) Less the amounts retained by the Orthodontic Entity, which are equal
to (i) 70% of that portion of the Net Operating Amount that is equal to 45% of
the Orthodontic Entity's and Orthodontist's gross revenue received during such
month from patients for orthodontic services
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provided ("Cash Receipts") and (ii) 75% of that portion of the Net Operating
Amount, if any, which exceeds 45% of the Orthodontic Entity's and Orthodontist's
Cash Receipts during such month; and
(c) Plus any Excluded Orthodontic Entity and Orthodontist Expenses as
defined under the terms of Section 1.1 (l).
In no event shall the amount determined pursuant to Section 6.1 (b), less the
amount determined pursuant to Section 6.1 (c), be less than $_____ ("Minimum
Monthly Payment").
For purposes of this Section , (i) "Net Operating Amount" for any month
shall mean the Orthodontic Entity's and Orthodontist's gross revenues less
Orthodontic Entity and Orthodontist Expenses on a cash basis, (ii) "Contract"
shall mean any contract, understanding, arrangement or agreement between a
patient of the Orthodontic Entity or Orthodontist for the provision of
orthodontic services at a predetermined fee-for-service amount (whether or not
payable in cash), (iii) "Initial Monthly Contract Balance" for a given month
shall mean the total value of any Contracts entered into on or prior to the last
business day of each month (unless included in the Initial Monthly Contract
Balance of a previous month), and (iv) "Monthly Contract Residual" shall mean
the quotient of (a) the lesser of 76% of the total amount payable by the patient
pursuant to a Contract or the remaining balance due from the patient under any
Contract, divided by (b) the remaining term of such Contract. That portion of
Cash Receipts the Orthodontic Entity is not entitled to retain pursuant to
Section 6.1(b) plus the amount determined pursuant to Section 6.1(c) shall be
paid to Apple at the end of each month, but no later than the 15th day after the
end of each month (or the first preceding day that is a business day if the 15th
day is not a business day).
SECTION 6.2 EXCLUDED EXPENSES. Any amounts reimbursed to Apple under
Section 6.1(c) shall be available to reduce amounts due to Apple in future
months to the extent the Net Operating Amount for such future month exceeds 45%
of the Orthodontic Entity's and Orthodontist's Cash Receipts so long as the
applicable month to which this Section 6.2 applies is within the same calendar
year as the month in which the obligation to reimburse Apple for amounts under
Section 6.1(c) arose.
SECTION 6.3 WORKING CAPITAL LOANS. As part of the services provided by
Apple hereunder, Apple may make available loans to assist the Orthodontic Entity
in maintaining reasonable cash flow for the payment of Excluded Orthodontic
Entity and Orthodontist Expenses.
(a) Initial Working Capital. Apple shall make available to the Orthodontic
Entity an interest free line of credit ("Initial Working Capital Line") for the
initial working capital needs of the Orthodontic Entity, up to a maximum amount
equal to the reduction in Net Operating Amount attributable to changes in
patient payment schedules. The Orthodontic Entity shall be entitled to draw
funds from the Initial Working Capital Line up until six (6) months after the
Acquisition Closing Date ("Loan Termination Date"). The amount, if any, of the
Initial Working Capital Line outstanding on the Loan Termination Date shall be
repaid, in equal monthly installments (without interest) over a two-year period
commencing on the Loan Termination Date.
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(b) Subsequent Working Capital. Apple may make available to the
Orthodontic Entity loans for subsequent working capital requirements in amounts
not to exceed Excluded Orthodontic Entity and Orthodontic Expenses. Such loans
shall accrue interest beginning on the day of the advance at an interest rate
equal to the prime rate then in effect, plus 1%. The loans, if any, shall be
repaid to Apple out of the Net Operating Amount generated in subsequent months
and become immediately due and payable if the Orthodontist terminates his
employment with the Orthodontic Entity, for any reason.
Any principle or interest paid to Apple by the Orthodontic Entity pursuant
to Sections 6.3(a) or 6.3(b) are Excluded Orthodontic Entity and Orthodontist
Expenses.
SECTION 6.4 SECURITY AGREEMENT. To secure their obligations hereunder, the
Orthodontic Entity and Orthodontist shall execute a Security Agreement in
substantially the form attached hereto as EXHIBIT 6.4 (the "Security
Agreement"), which Security Agreement grants a security interest in all of the
Orthodontic Entity's and Orthodontist's accounts receivable (as more fully
described in the Security Agreement) to Apple. In addition, the Orthodontic
Entity and Orthodontist shall cooperate with Apple and execute all necessary
documents in connection with the pledge of such accounts receivable to Apple or
at Apple's option, its lenders. All collections in respect of such accounts
receivable shall be deposited in a bank account at a bank designated by Apple.
To the extent that the Orthodontic Entity or Orthodontist comes into possession
of any payments in respect of such accounts receivable, the Orthodontic Entity
or Orthodontist shall promptly remit such payments to Apple.
ARTICLE VII
RECORDS
SECTION 7.1 RECORDS OWNED BY APPLE. All records (other than patients'
orthodontic records) relating in any way to the operation of the Orthodontic
Entity shall at all times be the property of Apple. During the term of, and upon
termination, of this Agreement, to the extent permitted by law, and expressly
acknowledging the confidential nature of same, Apple shall be entitled to have
access to and copy and retain such copies of patient orthodontic records.
SECTION 7.2 ACCESS TO RECORDS. During the term of this Agreement, and for
a reasonable time thereafter, the Orthodontic Entity and Orthodontists or their
respective agents shall have reasonable access during normal business hours to
the Orthodontic Entity's and Apple's financial records, including, but not
limited to, records of collections, expenses and disbursement as kept by Apple
in performing Apple's obligations under this Agreement, and the Orthodontic
Entity and Orthodontist may copy any or all such records.
ARTICLE VIII
INSURANCE AND INDEMNITY
SECTION 8.1 INSURANCE TO BE MAINTAINED BY THE ORTHODONTIC ENTITY AND
ORTHODONTIST. During the term of this Agreement, the Orthodontic Entity and
Orthodontist shall
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maintain comprehensive professional liability insurance with such carrier
as determined jointly by Apple and the Orthodontic Entity, with limits of not
less than $1,000,000 per claim and with aggregate policy limits of not less than
$3,000,000 per orthodontist and a separate limit for the Orthodontic Entity
(each such amount being subject to adjustment every three years based on cost of
living increases during any such period) with such deductible as is mutually
agreeable by Apple and the Orthodontic Entity. All malpractice premiums and
deductibles related thereto that are paid by Apple shall be included in
Orthodontic Entity and Orthodontist Expenses. All costs, expenses and
liabilities incurred by Orthodontic Entity, Orthodontist or Apple in excess of
the limits of such policies shall be included in Excluded Orthodontic Entity and
Orthodontist Expenses. Apple shall have the option of providing such
professional liability insurance through an alternative program, provided such
program meets the requirements of the Insurance Commissioner of the State of
Texas. If Orthodontist's existing professional liability insurance program is
cancelled and replaced by a professional liability insurance program initiated
by Apple, Apple shall pay over to Orthodontist any unearned professional
liability insurance premiums paid by Orthodontist to the extent Orthodontist's
carrier pays such amounts to Apple.
SECTION 8.2 INSURANCE TO BE MAINTAINED BY APPLE. During the term of this
Agreement, Apple will use reasonable efforts to provide and maintain, as a
Orthodontic Entity and Orthodontist Expense, comprehensive professional
liability insurance for all professional employees of Apple, and comprehensive
general liability and property insurance covering the Orthodontic Entity
premises and operations with such limits as determined reasonable and
appropriate by Apple and after obtaining the Orthodontic Entity's approval to
purchase any such insurance.
SECTION 8.3 CONTINUING LIABILITY INSURANCE COVERAGE. The Orthodontic
Entity and Orthodontist shall obtain or require each of Orthodontist and their
Orthodontic Entity Professional Employees to obtain continuing liability
insurance coverage under either a "tail policy" or a "prior acts policy," with
the same limits and deductibles as the insurance coverage provided pursuant to
SECTION 8.1 for each orthodontist associated with the Orthodontic Entity upon
the termination of such orthodontist's relationship with the Orthodontic Entity
for any reason. In the event that neither the Orthodontic Entity, Orthodontist
nor the Orthodontic Entity Professional Employees obtains such continuing
liability insurance coverage, Apple may do so. The costs of continuing liability
insurance coverage shall be included in Orthodontic Entity and Orthodontist
Expenses unless such cost is borne by Orthodontist or the Orthodontic Entity
Professional Employee.
SECTION 8.4 ADDITIONAL INSUREDS. The Orthodontic Entity, Orthodontist and
Apple agree to use their reasonable efforts to have each other named as an
additional insured on the other's respective professional liability insurance
programs. The additional cost, if any, associated therewith shall be paid by
Apple and shall be a Orthodontic Entity and Orthodontist Expense.
SECTION 8.5 INDEMNIFICATION. To the extent permitted under insurance
policies in place on the date hereof or policies to be entered into with
insurers acceptable to Apple, the Orthodontic Entity and Orthodontist, jointly
and severally, shall indemnify, defend and hold Apple, AOI, their respective
officers, directors, stockholders, employees, agents and consultants (other than
such persons who are also officers, directors, shareholders, employees, agents
or
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consultants of the Orthodontic Entity) harmless, from and against any and all
liabilities, losses, damages, claims, causes of action and expenses (including
reasonable attorneys' fees), whether or not covered by insurance (including
self-insured insurance and reserves), whenever arising or incurred, that are
caused or asserted to have been caused, directly or indirectly, by or as a
result of the performance of orthodontic services or the performance of any
intentional acts, negligent acts or omissions by Orthodontist, the Orthodontic
Entity and/or its shareholders, agents, employees and/or subcontractors (other
than Apple or AOI) during the term of this Agreement. Apple shall indemnify,
defend and hold Orthodontist and the Orthodontic Entity, its officers,
shareholders, directors, employees, agents and consultants, harmless from and
against any and all liabilities, losses, damages, claims, causes of action and
expenses (including reasonable attorneys' fees), whether or not covered by
insurance (including self-insured insurance and reserves) that are caused or
asserted to have been caused, directly or indirectly, by or as a result of the
performance of any intentional acts, negligent acts or omissions by Apple and/or
its stockholders, agents, employees and/or subcontractors (other than the
Orthodontic Entity) during the term of this Agreement.
ARTICLE IX
TERM AND TERMINATION
SECTION 9.1 TERM OF AGREEMENT. This Agreement shall commence on the date
hereof and shall expire on the 20th anniversary hereof unless earlier terminated
pursuant to the terms of either SECTION 9.3 or SECTION 9.4or automatically
extended pursuant to the terms of SECTION 9.2.
SECTION 9.2 EXTENDED TERM. Unless earlier terminated as provided for in
either SECTION 9.3 or SECTION 9.4, the term of this Agreement shall be
automatically extended for additional terms of five (5) years each, unless
either party delivers to the other party, not less than twelve (12) months nor
earlier than fifteen (15) months prior to the expiration of the preceding term,
written notice of such party's intention not to extend the term of this
Agreement.
SECTION 9.3 TERMINATION BY THE ORTHODONTIC ENTITY AND ORTHODONTIST. The
Orthodontic Entity or Orthodontist may terminate this Agreement with respect to
such party by giving written notice thereof to Apple (after the giving of any
required notices and the expiration of any applicable waiting periods set forth
below) upon the occurrence of any the following events:
(a) Apple or AOI shall admit in writing its inability to generally
pay its debts when due, apply for or consent to the appointment of a
trustee, receiver or liquidator of all or substantially all of its assets,
file a petition in voluntary bankruptcy or make an assignment for the
benefit of creditors, or upon other action taken or suffered by Apple,
voluntarily or involuntarily, under any federal or state law for the
benefit of debtors, except for the filing of a petition in involuntary
bankruptcy against Apple or AOI, as the case may be, which is dismissed
within sixty (60) days thereafter.
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(b) Apple or AOI shall default in the performance of any material
duty or material obligation imposed upon it by this Agreement and such
default shall continue for a period of forty-five (45) days after written
notice thereof has been given to Apple by the Orthodontic Entity or
Orthodontist, provided that the Orthodontic Entity may terminate this
Agreement, if and only if, such termination shall have been approved by
the affirmative vote of the holders of two-thirds of the interests of the
shareholders of the Orthodontic Entity.
SECTION 9.4 TERMINATION BY APPLE. Apple may terminate this Agreement in
its entirety or with respect to the Orthodontic Entity or Orthodontist by giving
written notice thereof to the Orthodontic Entity and Orthodontist (after the
giving of any required notices and the expiration of any applicable waiting
periods set forth below) upon the occurrence of any the following events:
(a) The Orthodontic Entity or Orthodontist shall admit in writing
its inability to generally pay its debts when due, apply for or consent to
the appointment of a trustee, receiver or liquidator of all or
substantially all of its assets, file a petition in voluntary bankruptcy
or make an assignment for the benefit of creditors, or upon other action
taken or suffered by the Orthodontic Entity, voluntarily or involuntarily,
under any federal or state law for the benefit of debtors, except for the
filing of a petition in involuntary bankruptcy against the Orthodontic
Entity or Orthodontist which is dismissed within sixty (60) days
thereafter.
(b) The Orthodontic Entity or Orthodontist shall default in the
performance of any material duty or material obligation imposed upon it by
this Agreement and such default shall continue for a period of ninety (90)
days after written notice thereof has been given to the Orthodontic Entity
or Orthodontist by Apple.
(c) The Orthodontic Entity, Orthodontist or any Orthodontic Entity
Professional Employee (i) engages in any conduct for which the
Orthodontist's or such Orthodontic Entity Professional Employee's license
to practice orthodontics is revoked or suspended, or (ii) is the subject
of any restrictions or limitations by any governmental authority to such
an extent that he, she or it cannot engage in the practice of
orthodontics.
(d) With respect to Orthodontist, Orthodontist shall become Disabled
and Apple shall give notice of termination to Orthodontist's estate within
ninety (90) days of the date Apple becomes aware of such Disability.
(e) With respect to Orthodontist, Orthodontist shall die.
SECTION 9.5 TERMINATION BY ORTHODONTIST.
(a) This Agreement shall terminate with respect to Orthodontist in
the event of a voluntary termination by the Orthodontist of his
Orthodontic Entity Professional Employment Agreement after the five (5)
year period set forth in SECTION 5.2(a); provided, however, that
Orthodontist shall give Apple at least one (1) year notice of such
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voluntary termination. In the event termination with respect to the
Orthodontist in accordance with this SECTION 9.5, the restrictive
covenants contained in SECTION 5.2(b) shall apply with respect to
Orthodontist for two (2) years following the effective date of such
termination and not for the term of this Agreement.
(b) This Agreement (including the restrictive covenants in Section
5.2(b)) shall terminate with respect to the Orthodontist in the event (i)
of the imposition (by a final, unappealable order) of any restrictions or
limitations by any governmental authority having jurisdiction over the
Orthodontist to such an extent that he cannot engage in the professional
practice of orthodontics for the five-year period set forth in Section
5.2(a) and (ii) this Agreement cannot be reformed pursuant to Section 10.6
or Section 10.9 hereof to the extent necessary to render such order
inapplicable.
SECTION 9.6 EFFECTIVE DATE OF TERMINATION. Any termination of this
Agreement shall be effective (the "Termination Date") as follows:
(a) Immediately upon receipt of a termination notice pursuant to
either SECTION 9.3 or SECTION 9.4;
(b) Upon the expiration of this Agreement pursuant to SECTIONS 9.1
and 9.2; or
(c) If terminated for any reason other than as set forth in the
immediately preceding clauses (a) and (b), as of the Purchase Closing.
SECTION 9.7 PURCHASE OF ASSETS. Upon expiration or termination of this
Agreement for any reason other than pursuant to SECTION 9.4(d), SECTION 9.4(e)
or SECTION 9.5 hereof, the Orthodontic Entity shall have the option to, and
Apple shall have the option to require the Orthodontic Entity to,:
(a) Purchase from Apple at Fair Market Value all tangible assets of
Apple or its Affiliates that relate primarily to the Orthodontic Entity
other than Apple's accounting and financial records and other records and
files relating to the operation of the Orthodontic Entity (the "Purchase
Assets"), including, but not limited to, (i) all tangible assets set forth
on Apple's balance sheet as of the Termination Date relating primarily to
the Orthodontic Entity, (ii) all equipment, furniture, fixtures,
furnishings, inventory, supplies, improvements, additions and leasehold
improvements utilized by the Orthodontic Entity, and (iii) any real estate
owned by Apple, AOI or an Affiliate that is exclusively associated with
the Orthodontic Entity; and
(b) Assume all liabilities, debt, payables and other obligations
(including lease and other contractual obligations) of Apple and any of
its Affiliates which relate exclusively to the Orthodontic Entity or to
the performance of Apple's obligations under this Agreement (the
"Orthodontic Entity Related Liabilities").
The Orthodontic Entity shall be able to exercise its option under this Section
(unless this Agreement is terminated pursuant to SECTION 9.4) and Apple shall be
able to exercise its option
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under this Section (unless this Agreement is terminated pursuant to SECTION 9.3)
by giving written notice thereof in the Termination Notice, if applicable, or
prior to ninety (90) days before the Termination Date if this Agreement is
terminated pursuant to SECTIONS 9.1 and 9.2. In connection with the purchase and
sale of the Purchase Assets pursuant to this SECTION 9.7, Apple shall cause the
Purchase Assets to be conveyed free of any lien, claim or encumbrance, other
than those arising out of the Orthodontic Entity Related Liabilities.
SECTION 9.8 TERMS OF PURCHASE. The closing of the transactions
contemplated by SECTION 9.7 (the "Purchase Closing") shall occur (a) on the
Termination Date if this Agreement expires pursuant to the terms of SECTIONS 9.1
and 9.2, or (b) on a date mutually acceptable to the parties hereto that shall
be within 180 days of receipt of a termination notice by the applicable party
pursuant to either SECTION 9.3 or 9.4. Subject to the conditions set forth
below, at the Purchase Closing, Apple shall transfer and assign the Purchase
Assets to the Orthodontic Entity, and in consideration therefor, the Orthodontic
Entity shall (a) pay to Apple an amount in cash equal to the Fair Market Value
of the Purchase Assets as of the Purchase Closing and (b) assume the Orthodontic
Entity Related Liabilities. Each party shall execute such documents or
instruments as is reasonably necessary, in the opinion of each party and its
counsel, to effect the foregoing transaction. The Orthodontic Entity shall, and
shall use its best efforts to cause each shareholder of the Orthodontic Entity
to, execute such documents or instruments as may be necessary to cause the
Orthodontic Entity to assume the Orthodontic Entity Related Liabilities and to
release Apple from any liability or obligation with respect thereto.
SECTION 9.9 EXCEPTION TO PURCHASE. Notwithstanding anything contained
herein to the contrary, Apple shall not be obligated to sell the Purchase Assets
to the Orthodontic Entity if the Orthodontic Entity is not able to pay the
Purchase Price in cash and assume the Orthodontic Entity Related Liabilities at
the Purchase Closing. In such event, the Orthodontic Entity shall surrender the
Purchase Assets to Apple as of the Purchase Closing. If the Orthodontic Entity
fails to so surrender the Purchase Assets, Apple may, without prejudice to any
other remedy which it may have hereunder or otherwise, enter the Premises and
take possession of the Purchase Assets and expel or remove the Orthodontic
Entity and any other person who may be occupying the Premises or any part
thereof, by force if necessary, without being liable for prosecution or any
claim for damages therefor.
SECTION 9.10 EFFECT UPON TERMINATION. Upon the Termination Date, this
Agreement shall terminate and shall be of no further force and effect; provided,
however:
(a) Apple shall use its best efforts to cooperate with the
Orthodontic Entity and Orthodontist for the appropriate transfer of
management services.
(b) Each party hereto shall provide the other party with reasonable
access to books and records owned by it to permit such requesting party to
satisfy reporting and contractual obligations which may be required of it.
(c) On the Termination Date, any amounts due and owing but unpaid to
either Apple or the Orthodontic Entity (including, without limitation, any
amounts due under the Initial Working Capital Line) as of the Termination
Date shall be paid promptly by the appropriate party.
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(d) Any and all covenants and obligations of either party hereto
which by their terms or by reasonable implication are to be performed, in
whole or in part, after the termination of this Agreement, shall survive
such termination, including, without limitation, the obligations of the
parties pursuant to the following Sections:4.5, 4.7, 5.1, 5.2, 5.4, 5.5,
5.6, 5.7, 5.8, 6.4, 7.2, 8.5, 9.8, 9.10 and the applicable provisions of
ARTICLE X.
ARTICLE X
GENERAL PROVISIONS
SECTION 10.1 ASSIGNMENT. Apple shall have the right to assign its rights
hereunder to AOI or any direct or indirect wholly owned subsidiary of Apple or
AOI. The Orthodontic Entity and Orthodontist hereby agree that Apple has the
right to grant a security interest in its rights hereunder to any lending
institution from which Apple or the AOI obtains financing. The Orthodontic
Entity and Orthodontist shall not have the right to assign their rights or
obligations hereunder (i) to any person who is not a graduate of an accredited
orthodontic program or (ii) to any person who is a graduate of an accredited
orthodontic program without the prior written consent of Apple and AOI, which
consent shall not be unreasonably withheld. In the event the parties are unable
to agree upon the reasonableness of any such assignment, then each of Apple and
the Orthodontist shall each promptly thereafter select an arbitrator and Apple
and the Orthodontist shall each give prompt notice to the other of such
appointment in writing. The two arbitrators first appointed under the terms
hereof shall, within five (5) days after receipt of notification of selection,
together select a third arbitrator. The decision of the majority of arbitrators
so appointed shall be final and binding upon the parties hereto and may be
enforced in any court of competent jurisdiction. The expense of the arbitrators
appointed by each party shall be borne by the party appointing such arbitrator,
and the expense of the third arbitrator shall be borne by both parties equally.
The arbitrators shall give prompt notice in writing of their decision to each
party.
SECTION 10.2 AMENDMENTS. This Agreement shall not be modified or amended
except by a written document executed by both parties to this Agreement, and
such written modification(s) or amendment(s) shall be attached hereto.
SECTION 10.3 WAIVER OF PROVISIONS. Any waiver of any terms and conditions
hereof must be in writing, and signed by the parties hereto. The waiver of any
of the terms and conditions of this Agreement shall not be construed as a waiver
of any other terms and conditions hereof.
SECTION 10.4 ADDITIONAL DOCUMENTS. Each of the parties hereto agrees to
execute any document or documents that may be requested from time to time by the
other party to implement or complete such party's obligations pursuant to this
Agreement.
SECTION 10.5 ATTORNEYS' FEES. If legal action is commenced by either party
to enforce or defend its rights under this Agreement, the prevailing party in
such action shall be entitled to recover its costs and reasonable attorneys'
fees in addition to any other relief granted.
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SECTION 10.6 CONTRACT MODIFICATIONS FOR PROSPECTIVE LEGAL EVENTS. In the
event any state or federal laws or regulations, now existing or enacted or
promulgated after the date hereof, are interpreted by judicial decision, a
regulatory agency or legal counsel in such a manner as to indicate that this
Agreement or any provision hereof may be in violation of such laws or
regulations, the Orthodontic Entity, Orthodontist and Apple shall amend this
Agreement as necessary to preserve the underlying economic and financial
arrangements between the Orthodontic Entity, Orthodontist and Apple and without
substantial economic detriment to either party. To the extent any act or service
required of Apple in this Agreement should be construed or deemed, by any
governmental authority, agency or court to constitute the practice of
orthodontics, the performance of said act or service by Apple shall be deemed
waived and forever unenforceable and the provisions of this SECTION 10.6 shall
be applicable. Neither party shall claim or assert illegality as a defense to
the enforcement of this Agreement or any provision hereof; instead, any such
purported illegality shall be resolved pursuant to the terms of this SECTION
10.6 and SECTION 10.10. In the event any governmental authority, agency or court
institutes proceedings against Apple, the Orthodontic Entity or the Orthodontist
challenging the legality, validity or enforceability of any provision of this
Agreement, Apple agrees that the fees, expenses and disbursements of counsel
engaged to represent Apple, the Orthodontic Entity and the Orthodontist shall be
Apple Expenses.
SECTION 10.7 PARTIES IN INTEREST; NO THIRD-PARTY BENEFICIARIES. Except as
otherwise provided herein, the terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the respective heirs, legal
representatives, successors and permitted assigns of the parties hereto. Neither
this Agreement nor any other agreement contemplated hereby shall be deemed to
confer upon any person not a party hereto or thereto any rights or remedies
hereunder or thereunder.
SECTION 10.8 ENTIRE AGREEMENT. This Agreement and the agreements
contemplated hereby constitute the entire agreement of the parties regarding the
subject matter hereof, and supersede all prior agreements and understandings,
both written and oral, among the parties, or any of them, with respect to the
subject matter hereof.
SECTION 10.9 SEVERABILITY. If any provision of this Agreement is held to
be illegal, invalid or unenforceable under present or future laws effective
during the term hereof, such provision shall be fully severable and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision never comprised a part hereof; and the remaining
provisions hereof shall remain in full force and effect and shall not be
affected by the illegal, invalid or unenforceable provision or by its severance
herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as part of this Agreement a
provision as similar in its terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.
SECTION 10.10 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF
LAWS) OF THE STATE OF TEXAS. THE PARTIES AGREE THAT THIS AGREEMENT SHALL BE
PERFORMABLE IN ____________________________.
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SECTION 10.11 NO WAIVER; REMEDIES CUMULATIVE. Apple shall not by any act
(except by written instrument pursuant to SECTION 10.3 hereof), delay,
indulgence, omission or otherwise be deemed to have waived any right or remedy
hereunder or to have acquiesced in any default in or breach of any of the terms
and conditions hereof. No failure to exercise, nor any delay in exercising, on
the part of Apple, any right, power or privilege hereunder shall operate as a
waiver thereof. No single or partial exercise of any right, power or privilege
hereunder shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. No remedy set forth in this Agreement or
otherwise conferred upon or reserved to any party shall be considered exclusive
of any other remedy available to any party, but the same shall be distinct,
separate and cumulative and may be exercised from time to time as often as
occasion may arise or as may be deemed expedient.
SECTION 10.12 LANGUAGE CONSTRUCTION. The language in all parts of this
Agreement shall be construed, in all cases, according to its fair meaning, and
not for or against either party hereto. The parties acknowledge that each party
and its counsel have reviewed and revised this Agreement and that the normal
rule of construction to the effect that any ambiguities are to be resolved
against the drafting party shall not be employed in the interpretation of this
Agreement.
SECTION 10.13 COMMUNICATIONS. The Orthodontic Entity, Orthodontist and
Apple agree that good communication between the parties is essential to the
successful performance of this Agreement, and each pledges to communicate fully
and clearly with the other on matters relating to the successful operation of
the Orthodontic Entity and the practice of orthodontics by Orthodontist.
SECTION 10.14 CAPTIONS. The captions in this Agreement are for convenience
of reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.
SECTION 10.15 GENDER AND NUMBER. When the context requires, the gender of
all words used herein shall include the masculine, feminine and neuter and the
number of all words shall include the singular and plural.
SECTION 10.16 REFERENCE TO AGREEMENT. Use of the words "herein", "hereof",
"hereto" and the like in this Agreement shall be construed as references to this
Agreement as a whole and not to any particular Article, Section or provision of
this Agreement, unless otherwise noted.
SECTION 10.17 NOTICE. Whenever this Agreement requires or permits any
notice, request, or demand from one party to another, the notice, request, or
demand must be in writing to be effective and shall be deemed to be delivered
and received (i) if personally delivered or if delivered by telex, telegram,
facsimile or courier service, when actually received by the party to whom notice
is sent or (ii) if delivered by mail (whether actually received or not), at the
close of business on the third business day next following the day when placed
in the mail, postage prepaid, certified or registered, addressed to the
appropriate party or parties, at the address of such party set forth below (or
at such other address as such party may designate by written notice to all other
parties in accordance herewith):
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If to Apple: Apple Orthodontix of Texas, Inc.
One West Loop South, Suite 100
Houston, Texas 77027
Fax No.:
Attn:
with a copy to: Jackson & Walker, L.L.P.
1100 Louisiana, Suite 4200
Houston, Texas 77002
Fax No.: (713) 752-4221
Attn: Richard S. Roth
If to the Orthodontic Entity:
------------------------------
with a copy to:
SECTION 10.18 CHOICE OF FORUM. The parties hereto agree that should any
suit, action or proceeding arising out of this Agreement be instituted by any
party hereto (other than a suit, action or proceeding to enforce or realize upon
any final court judgment arising out of this Agreement), such suit, action or
proceeding shall be instituted only in a state or federal court in Houston,
Texas. Each of the parties hereto consents to the IN PERSONAM jurisdiction of
any state or federal court in Houston, Texas and waives any objection to the
venue of any such suit, action or proceeding. The parties hereto recognize that
courts outside Houston, Texas may also have jurisdiction over suits, actions or
proceedings arising out of this Agreement, and in the event that any party
hereto shall institute a proceeding involving this Agreement in a jurisdiction
outside Houston, Texas, the party instituting such proceeding shall indemnify
any other party hereto for any losses and expenses that may result from the
breach of the foregoing covenant to institute such proceeding only in a state or
federal court in Houston, Texas, including without limitation any additional
expenses incurred as a result of litigating in another jurisdiction, such as
reasonable fees and expenses of local counsel and travel and lodging expenses
for parties, witnesses, experts and support personnel.
SECTION 10.19 SERVICE OF PROCESS. Service of any and all process that may
be served on any party hereto in any suit, action or proceeding arising out of
this Agreement may be made in the manner and to the address set forth in SECTION
10.17 and service thus made shall be taken and held to be valid personal service
upon such party by any party hereto on whose behalf such service is made.
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SECTION 10.20 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
SECTION 10.21 DEFINED TERMS. Terms used in the Exhibits attached hereto
with their initial letter capitalized and not otherwise defined therein shall
have the meanings assigned to such terms in this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
Orthodontic Entity:
__________________________________
By: ______________________________
Name: ____________________________
Title: ___________________________
Orthodontist:
__________________________________
__________________________________
Apple:
APPLE ORTHODONTIX OF TEXAS, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
AOI:
APPLE ORTHODONTIX, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
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LIST OF EXHIBITS
EXHIBIT DESCRIPTION
1.1(u) Orthodontic Entity Professional Employment Agreements
6.4 Form of Security Agreement
<PAGE>
EXHIBIT 1.1(U)
to the
Service Agreement dated _______________________, 1997
by and between
Apple Orthodontix, Inc.
Apple Orthodontix of Texas, Inc.
---------------------------------------------
---------------------------------------------
and
---------------------------------------------
ORTHODONTIC ENTITY PROFESSIONAL EMPLOYMENT AGREEMENTS
<PAGE>
EXHIBIT 6.4
to the
Service Agreement dated _______________________, 1997
by and between
Apple Orthodontix, Inc.
Apple Orthodontix of Texas, Inc.
---------------------------------------------
---------------------------------------------
and
---------------------------------------------
FORM OF SECURITY AGREEMENT
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our firm) included in or made a part of the
Registration
ARTHUR ANDERSEN LLP
March 25, 1997
