AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 21, 1997
REGISTRATION NO. 333-22785
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
APPLE ORTHODONTIX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8021
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
74-2795193
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
------------------------
APPLE ORTHODONTIX, INC.
ONE WEST LOOP SOUTH, SUITE 100
HOUSTON, TEXAS 77027
(713) 964-6882
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE
OFFICES)
MICHAEL W. HARLAN
APPLE ORTHODONTIX, INC.
ONE WEST LOOP SOUTH, SUITE 100
HOUSTON, TEXAS 77027
(713) 964-6882
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
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. [ ]
------------------------
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 MARCH 21, 1997
PROSPECTUS
SHARES
APPLE ORTHODONTIX, INC.
CLASS A COMMON STOCK
------------------------
All of the ____________ 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
$____ and $____ 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. Apple has applied to
have the shares of Common Stock approved for inclusion on the Nasdaq National
Market, under the symbol "APPL."
------------------------
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.
<TABLE>
<CAPTION>
=======================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS(1) TO COMPANY(2)
- - -------------------------------------------------------------------------------------------------------
<S> <C>
Per Share............................ $ $ $
- - -------------------------------------------------------------------------------------------------------
Total(3)............................. $ $ $
=======================================================================================================
</TABLE>
(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 $ .
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to _______ 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.
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 NASDAQ NATIONAL MARKET 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 $.01 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 $ PER SHARE (THE MIDPOINT OF THE ESTIMATED
INITIAL PUBLIC OFFERING PRICE RANGE). UNLESS OTHERWISE INDICATED BY THE CONTEXT,
REFERENCES HEREIN TO (I) "APPLE" MEAN APPLE ORTHODONTIX, INC., (II) THE
"COMPANY" MEAN APPLE AND THE FOUNDING AFFILIATED PRACTICES AND (III)
"AFFILIATED PRACTICES" MEAN THE FOUNDING AFFILIATED PRACTICES AND ANY
ORTHODONTIC PRACTICES WITH WHICH THE COMPANY MAY ENTER INTO SIMILAR
RELATIONSHIPS IN THE FUTURE.
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 $.01
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 average patient revenues 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 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.
3
<PAGE>
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 transferred the operation of this practice to an
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 further
increases in 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
<TABLE>
<S> <C>
Common Stock offered by the
Company............................ shares
Common Stock to be outstanding after
the Offering....................... shares(1)
Class B Stock to be outstanding after
the Offering....................... 4,106,852
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 to elect as a
class one member of the Board of Directors. The Common
Stock and Class B Stock possess ordinary voting rights and
vote together as a single class in the election of all
other directors and in respect of other corporate matters.
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 acquires
beneficial ownership of 15% or more of the outstanding
shares of capital stock of the Company, (iii) in the event
any person 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 that
number of shares of Common Stock and Class B Stock, voting
together as a single class, with a majority of the
outstanding voting power 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 Nasdaq National Market
symbol............................... APPL
</TABLE>
- - ------------
(1) Includes 2,143,148 shares of Common Stock to be issued in connection with
the Acquisitions and excludes (i) an aggregate of 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 $ 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 $ per share under Apple's 1996 Stock Option Plan (the "1996 Stock Option
Plan"), (iii) approximately 240,000 shares reserved for future issuance
under the 1996 Stock Option Plan and (iv) 229,500 shares of Common Stock
issuable upon the exercise of a warrant, with an exercise price per share
equal to the price to public per share set forth on the cover page of this
Prospectus, to be issued to an affiliate of TriCap upon consummation of the
Offering. The number of shares to be outstanding on completion of the
Offering will decrease if the initial public offering price is higher, and
will
5
<PAGE>
increase if the initial public offering price is lower, than $ per
share. For example, an aggregate of shares of Common Stock and
Class B Stock would be outstanding if that price is $ while an
aggregate of shares of Common Stock and Class B Stock would be
outstanding if that price is $ . See "Management -- 1996 Stock Option
Plan."
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 DOES NOT INCLUDE GENERAL DENTISTS WHO ALSO
PERFORM ORTHODONTIC SERVICES.
6
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following summary unaudited pro forma financial information assumes
Apple has acquired the assets and assumed certain liabilities of the Founding
Affiliated Practices, and assumed certain liabilities related to those assets,
executed management service agreements with the Founding Affiliated Practices
pursuant to the Acquisitions and completed the Offering. This information is
derived from the unaudited pro forma consolidated financial statements of Apple
contained elsewhere in this Prospectus.
The unaudited pro forma consolidated financial statements have been
prepared by the Company based on assumptions deemed appropriate by the Company.
These pro forma financial statements may not be indicative of actual results 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 have been reflected in such pro forma financial data. The pro forma
consolidated balance sheet as of December 31, 1996 gives effect to the
Acquisitions and the Offering as if such transactions had occurred on December
31, 1996. The pro forma consolidated statement of operations for the year ended
December 31, 1996 assumes the Company had completed those transactions on
January 1, 1996.
UNAUDITED PRO FORMA(1)
FOR THE YEAR
ENDED DECEMBER 31, 1996
-----------------------
STATEMENT OF OPERATIONS DATA
Management service revenues(2).......... $ 18,138
-----------------------
Costs and expenses:
Salaries, wages and benefits........ 7,008
Orthodontic supplies................ 2,548
Rent................................ 1,943
Advertising and marketing........... 438
General and administrative
expenses........................... 3,680
Depreciation and amortization....... 869
Other (income)/expenses, net........ 4
-----------------------
Total costs and expenses................ 16,490
-----------------------
Income before income taxes.............. 1,648
Provision for income taxes.............. 627
-----------------------
Net income.............................. $ 1,021
=======================
Net income per share.................... $ 0.14
=======================
Number of shares used in net income per
share calculation(3).................. 7,459,120
=======================
UNAUDITED PRO FORMA(1)
AS OF DECEMBER 31, 1996
-----------------------
BALANCE SHEET DATA
Working capital......................... $ 10,887
Total assets............................ 16,795
Long-term liabilities, net of current
portion............................... 927
Stockholders' equity.................... 13,883
- - ------------
(1) See the Unaudited Pro Forma Consolidated Financial Statements included
elsewhere in this Prospectus for a discussion of the assumptions made and
adjustments applied in the preparation of this information.
(2) Represents estimated management service revenues calculated by applying the
terms of the management service agreements to the historical operating
results of the individual Founding Affiliated Practices. No assumptions were
made regarding Affordable Payment Plans as discussed in "Business."
(3) Computed on the basis described in Note FF of 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. While the laws of some
states permit the Company to participate in the negotiations by Affiliated
Practices of managed care contracts, preferred provider arrangements and other
negotiated price agreements, the Affiliated Practices are the contracting
parties for all such relationships, and the Company will be dependent on the
Affiliated Practices for the success of those relationships. Accordingly, the
profitability of those payor relationships, 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."
8
<PAGE>
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 in suitable markets and in good
locations within those markets, (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 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 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 may 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
9
<PAGE>
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
additional $70,000 from the proceeds of the Offering to repay the remainder of
such expenses. See "Use of Proceeds" and "Certain Transactions -- Agreements
with TriCap."
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.
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 %, % and none,
respectively, of the outstanding shares of Common Stock (or an aggregate of
approximately ___%). The shares of Common Stock and Class B Stock beneficially
owned by Dr. Vondrak, such officers and directors as a group and TriCap
represent approximately %, % and 9.3%, respectively, of the voting power
of the capital stock of the Company (or an aggregate of approximately _____%).
These persons, if acting in concert, will be able to exercise control over the
10
<PAGE>
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."
DEPENDENCE ON KEY PERSONNEL
The Company's future performance depends in significant part on the
continued service of its senior management and other key personnel. There can be
no assurance 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
the Founding Affiliated Practices will maintain a separate limit 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
11
<PAGE>
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 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, 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
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 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
12
<PAGE>
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 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 treatment
centers, 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 $ 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."
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<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 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 including 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 $18.2 million
(approximately $21.9 million if the Underwriters' over-allotment option is
exercised in full).
Of the $18.2 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 and (ii) $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.
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<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of December 31,
1996 was $____ 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 ____ shares of Common Stock offered at an assumed price of $_____
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 $____ per share. This
represents an immediate increase in the net tangible book value of $____ per
share to existing stockholders and an immediate dilution to new investors
purchasing Common Stock in the Offering of $____ 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)......................... $
Pro forma net tangible book value per
share as of December 31, 1996
before the Offering................ $
Increase per share attributable to
the Offering.......................
---------
Pro forma net tangible book value per
share after the Offering...........
---------
Dilution per share to initial public
offering investors................... $
=========
- - ------------
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 $12.00 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>
TOTAL CONSIDERATION
SHARES PURCHASED ----------------------- AVERAGE
--------------------- AMOUNT PRICE
NUMBER PERCENT (IN 000'S) PERCENT PER SHARE
--------- ------- ----------- ------- ----------
<S> <C> <C> <C>
Existing stockholders(2)............. % $ % $
New investors........................
--------- ------- ----------- -------
Total........................... 100.0% $ 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 _________ shares of Common Stock offered
hereby (assuming an offering price of $____ 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.................... $-- $ 121
---------- ---------
Total short-term debt and
capital lease obligations...... $-- $ 121
========== =========
Long-term debt and capital lease
obligations:
Long-term debt and capital lease
obligations, net of current
portion........................ $ 515 $ 927
Stockholders' equity (deficit):
Class A Common Stock, $0.01 par
value, 50,000,000 shares
authorized; shares issued and
outstanding as adjusted(1)..... -- 42
Class B Common Stock, $0.01 par
value, 4,106,852 shares
authorized; 4,106,852 shares
issued and outstanding as
adjusted....................... 41 41
Additional paid-in capital........... -- 14,527
Retained earnings (deficit).......... (727) (727)
---------- ---------
Total stockholders' equity
(deficit)...................... (686) 13,883
---------- ---------
Total capitalization............ $ (171) $14,810
========== =========
- - ------------
(1) Excludes (i) an aggregate of ______ 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) 229,500 shares of Common Stock issuable upon the exercise of a
warrant, with an exercise price per share equal to the price to public per
share set forth on the cover page of this Prospectus, to be issued to an
affiliate of TriCap upon consummation of the Offering. See "ManaGement -
1996 Stock Option Plan"
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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 and assumed certain liabilities related to those assets, 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 7,008
Orthodontic supplies............. -- 2,548
Rent............................. 20 1,943
Advertising and marketing........ -- 438
General and administrative
expenses........................ 3,680
Depreciation and amortization.... 5 869
Other (income)/expenses, net..... 35 4
---------- ------------
Total costs and expenses......... 687 16,490
---------- ------------
Income/(loss) before income taxes.... (687) 1,648
Provision for income taxes........... -- 627
---------- ------------
Net income /(loss)................... $ (687) $ 1,021
========== ============
Net income per share................. $ .14
============
Shares outstanding(3)................ 7,459,120
============
DECEMBER 31, 1996
---------------------------
HISTORICAL PRO FORMA
---------- ------------
BALANCE SHEET DATA:
Working capital...................... $ (216) $ 10,887
Total assets......................... 1,659 16,795
Long-term debt and capital lease
obligations, net of current
portion............................ 515 927
Stockholders' equity................. (686) 13,883
- - ------------
(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
Affordable Payment Plans as discussed in "Business."
(3) Computed on the basis described in Note FF of the Notes to Unaudited Pro
Forma Consolidated Financial Statements.
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<PAGE>
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 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 Affiliated Practice's pre-existing patient contracts
(I.E., 76% of each contract amount pro rated on a monthly basis over the
treatment period). This revenue computation methodology is based on the
Company's understanding of accepted industry convention and is only an element
of the service fee calculation. The amount retained by the orthodontic entity
will generally be dependent on its financial performance, based on cash receipts
and disbursements provided in the Service Agreements. Accordingly, orthodontists
affiliated with an Affiliated Practice generally will have a financial incentive
to maximize profits of the 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 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 would be
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accounted for using the purchase method of accounting. Future acquisitions
accounted for as purchases 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. No
adjustment was made for 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 $10.9 million at that date. The
approximately $1.0 million of pro forma indebtedness of the Company as of
December 31, 1996 consists primarily of capital lease obligations, debt of the
practices that Apple has agreed to assume and financing provided by TriCap.
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 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.
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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
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 average patient revenues of
approximately $800,000.
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 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
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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, 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 cases. 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 360 per practice,
respectively. Individual practices on average generated over one-half of their
referrals from dentists. Less than 7% of the practices utilized commercial
advertising as a referral source. The median case acceptance rate (number of
case starts divided by the number of examinations) was 60%. 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.
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 and a higher than average
percentage of new case starts generated from patient referrals and multimedia
advertising.
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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.
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 transferred the operation of this practice to an
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 further
increases in 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 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.
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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 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 30-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
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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. 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.
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, seven of the 31 Founding Affiliated
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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
======= ==
SERVICE AGREEMENTS
Upon consummation of the Acquisitions, the Company will enter into a
Service Agreement with each Founding Affiliated Practice 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. 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, 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 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
25
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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. The
Service Agreement may be terminated by either party 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.
During the term of the Service Agreement and, subject to certain
limitations, for a period of two years thereafter, the Founding Affiliated
Practice 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 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. If
employment of an orthodontist is terminated during the initial term for any
reason other than the orthodontist's death or disability or the occurrence of
certain events outside the orthodontist's control, the orthodontist will be
required to pay to the Founding Affiliated Practice liquidated damages. The
Orthodontist Employment Agreements provide that the employee orthodontist will
not compete with the Affiliated Practice during the term of the agreement and
following the termination of the agreement for a term of two years in a
specified geographical area, if termination occurs within the initial term, or
for one year if termination occurs after the initial term.
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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 $1,000,000 per claim and with
aggregate policy limits of not less than $3,000,000 per orthodontist and a
separate limit for each Affiliated Practice 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.
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 the Company believes are without
merit.
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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. 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 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
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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.
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.
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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 January 31, 1997):
<TABLE>
<CAPTION>
NAME AGE POSITION
- - ----------------------------------------------- --- ---------------------------------------------------
<S> <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............................... 40 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., a publicly traded,
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., a
national 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 Energy
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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
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. 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. Bonuses are capped at 50% of base salary.
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 (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 shall lapse with respect to 50% of each holder's
shares upon consummation of the Offering and that the
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<PAGE>
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 and 179,295 shares of Common Stock to Dr. Vondrak,
Mr. Syverson, Mr. Harlan and Mr. Walton, 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. 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.
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.
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<PAGE>
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 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.
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.
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CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
On October 11, 1996, the Company issued to TriCap, Dr. Vondrak, Mr.
Syverson and Mr. Cook (collectively, the "Founding Stockholders"), 1,685,274,
1,667,217, 160,502 and 210,659, respectively, shares of Class B Stock at an
aggregate purchase price of $4.20, $4.16, $0.40 and $0.53, respectively. On
December 9, 1996, the Company issued to Mr. Harlan 94,295 shares of Class B
Stock at an aggregate purchase price of $70.50. In connection with the
Acquisition of JGVAOI, Dr. Vondrak will receive approximately 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."
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 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
229,500 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.
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.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows, as of February 28, 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>
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............... (2)(3) % 1,586,966 38.6%
W. Daniel Cook....................... (3) * 210,659 5.1%
Robert J. Syverson................... (3) * 160,502 3.9%
Michael W. Harlan.................... (3) * 94,295 2.3%
H. Steven Walton..................... (3) %
William W. Sherrill.................. (3) * -- --
All executive officers and directors
as a group
(6 persons)........................ (3) % 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 February 28, 1997.
(2) Includes 151,656 shares issued in connection with the acquisition of JGVAOI.
(3) Includes shares that may be acquired pursuant to outstanding options within
60 days of February 28, 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.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 50,000,000 shares of
Class A Common Stock, par value $.01 per share, 4,106,852 shares of Class B
Common Stock, par value $0.01 per share, and 10,000,000 shares of preferred
stock, par value $.01 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
Holders of the Class B Stock are entitled to elect as a class one member of
the Board of Directors. The Common Stock and Class B Stock possess ordinary
voting rights and vote together as a single class for the election of all other
directors and 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.
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 acquires beneficial ownership of 15%
or more of the outstanding shares of capital stock of the Company, (iii) in the
event any person 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 that number of shares of Common Stock and Class B
Stock, voting together as a single class, constituting a majority of the
outstanding voting power 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 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
37
<PAGE>
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 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.
38
<PAGE>
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 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 .
39
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Acquisitions and the Offering, the Company will
have outstanding (i) _________ shares of Common Stock (_________ if the
Underwriters' over-allotment option is exercised in full) of which the
_________ shares sold in the Offering (_________ 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
_________ 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 currently in effect, 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
40
<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 a separate registration
rights agreement with TriCap and Dr. Vondrak, both TriCap and Dr. Vondrak 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.
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.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Company, Bear, Stearns & Co. Inc. and _________________ 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.................
------------
Total.........................
============
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 312,500 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.
42
<PAGE>
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 this 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 this 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.
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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.
<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>
After the stock split discussed in Note 2 to the Apple Orthodontix, Inc.'s
financial statements is effected, we expect to be in a position to render the
following audit report.
Arthur Andersen LLP
February 28, 1997
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
, 1997
F-2
<PAGE>
APPLE ORTHODONTIX, INC.
BALANCE SHEET -- DECEMBER 31, 1996
ASSETS
CASH AND CASH EQUIVALENTS............... $ 21,254
DEFERRED ISSUANCE COSTS................. 1,592,582
ORGANIZATION COSTS, net of accumulated
amortization of $4,510................ 44,687
------------
Total assets.................. $ 1,658,523
============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES........................... $ 1,799,565
AMOUNTS DUE TO A FOUNDING AFFILIATED
PRACTICE.............................. 30,444
AMOUNTS DUE TO VENTURE CAPITAL
INVESTORS............................. 515,000
------------
Total liabilities............. 2,345,009
STOCKHOLDERS' EQUITY (DEFICIT):
Class A Common Stock, $.01 par
value, no shares authorized,
issued and outstanding............ --
Class B Common Stock, $.01 par
value, 4,106,852 shares
authorized,
4,106,852 issued and
outstanding....................... 41,069
Retained deficit................... (727,555)
------------
Total stockholders' equity
(deficit).................... (686,486)
------------
Total liabilities and
stockholders' equity
(deficit).................... $ 1,658,523
============
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
Other expenses.................. 35,000
------------
Total costs and expenses... 686,662
PROVISION FOR INCOME TAXES........... --
------------
NET LOSS............................. $ (686,662)
============
NET LOSS PER SHARE................... $ (0.17)
============
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
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK STOCKHOLDERS'
---------------------- RETAINED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
----------- ------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, July 15, 1996............... -- $ -- $ -- $ --
Issuance of stock............... 4,106,852 41,069 (40,893) 176
Net loss........................ -- -- (686,662) (686,662)
----------- ------- ------------ -------------
BALANCE, December 31, 1996........... 4,106,852 $41,069 $ (727,555) $(686,486)
=========== ======= ============ =============
</TABLE>
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........................ $ (686,662)
Amortization of organization
costs........................... 4,510
Increase in deferred issuance
costs.......................... (1,592,582)
Increase in accounts payable and
accrued liabilities............. 1,799,565
--------------
Net cash used in 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 provided by
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.
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 $.01 per share received
in consideration 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 $3.00 per share
received in consideration 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. 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 this 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.
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 $12 per share.
F-7
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 798,000 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 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 to purchase 229,500 shares of
Common Stock at an exercise price per share equal to the initial offering price
to public per share.
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
F-8
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 purchases,
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 acquired nonmonetary
assets and assumed liabilities will be accounted for at the historical cost
basis of the Founding Affiliated Practices. 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.
The combined detail of the Founding Affiliated Practices' assets to be
acquired and liabilities to be assumed is as follows:
COMBINED PRESENTATION OF ASSETS TO BE ACQUIRED 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
Current portion of capital lease
obligations........................ (121,000)
Accounts payable and accrued
liabilities........................ (1,627,000)
Long-term portion of capital lease
obligations........................ (312,000)
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
F-9
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 on a
percentage-of-completion basis, with approximately 24 percent being recognized
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.
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
==============
F-10
<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. 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 this 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 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 $ 17,100(B) $ 11,869
(6,429)(C)
1,177(C)
Receivables from orthodontic
practices..................... -- 866(C) 866
Deferred issuance costs and
other current assets.......... 1,593 3,407(A) --
(5,000)(B)
137(C) 137
------ ------------ ----------
Total current assets....... 1,614 11,258 12,872
PROPERTY AND EQUIPMENT, net.......... -- 2,087(C) 2,500
413(D)
OTHER NONCURRENT ASSETS, net......... 45 431(C) 1,423
947(E)
------ ------------ ----------
Total assets............... $1,659 $ 15,136 $ 16,795
====== ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities................... $1,830 $ 3,407(A) $ 1,864
(5,000)(B)
1,627(C)
Current portion of long-term
liabilities................... -- 121(C) 121
------ ------------ ----------
Total current
liabilities............. 1,830 155 1,985
OTHER LONG-TERM LIABILITIES.......... 515 312(C) 927
100(E)
------ ------------ ----------
Total liabilities.......... 2,345 567 2,912
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock.................... 41 21(B) 83
21(C)
Additional paid-in capital...... -- 17,079(B) 14,527
(3,812)(C)
413(D)
847(E)
Retained deficit................ (727) -- (727)
------ ------------ ----------
Total stockholders' equity
(deficit)............... (686) 14,569 13,883
------ ------------ ----------
Total liabilities and
stockholders' equity
(deficit)............... $1,659 $ 15,136 $ 16,795
====== ============ ==========
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)
<TABLE>
<CAPTION>
APPLE ADJUSTMENTS PRO FORMA
------ ------------ ----------
<S> <C> <C> <C>
REVENUES:
Management service revenues..... $ -- $ 18,138(AA) $ 18,138
------ ------------ ----------
COSTS AND EXPENSES:
Salaries, wages and benefits.... 627 6,381(BB) 7,008
Orthodontic supplies............ -- 2,548(BB) 2,548
Rent............................ 20 1,923(BB) 1,943
Advertising and marketing....... -- 438(BB) 438
General and administrative
expenses...................... -- 3,680(BB) 3,680
Depreciation and amortization... 5 864(BB) 869
Other (income) expense, net..... 35 47(CC) 4
(78)(DD)
------ ------------ ----------
Total costs and expenses... 687 15,803 16,490
------ ------------ ----------
INCOME (LOSS) BEFORE INCOME TAXES.... (687) 2,335 1,648
PROVISION FOR INCOME TAXES........... -- 627(EE) 627
------ ------------ ----------
NET INCOME (LOSS).................... $ (687) $ 1,708 $ 1,021
====== ============ ==========
NET INCOME (LOSS) PER SHARE.......... $ 0.14
==========
NUMBER OF SHARES USED IN NET INCOME
PER SHARE CALCULATION.............. 7,459,120(FF)
==========
</TABLE>
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 2,083,333 shares of Class A common stock by
the Company in the Offering at an assumed initial public offering price of
$12.00 per share, net of underwriters' commissions of $1,750 and the
reclassification of deferred issuance costs of $6,150 (including estimated
additional fees at closing of $1,150) in total against the Offering proceeds.
The resulting net proceeds of $18,200 are reflected as Class A common stock, par
value of $.01 per share, totaling $21, with the remaining amount recorded as
additional paid-in capital of $17,079.
(C) Reflects completion of the Acquisitions, which will involve (1) the
issuance of 2,143,148 shares of Class A Common Stock based on the assumed
initial public offering price of $12 per share and (2) the declaration of an
$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 and liabilities of the Founding Affiliated Practices being
acquired and 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
Current portion of capital lease
obligations........................ (121)
Accounts payable and accrued
liabilities........................ (1,627)
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 $304 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
=========
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) The number of shares used in the pro forma net income per share
calculation are determined as follows:
Estimated outstanding Apple shares after
the Acquisitions and Offering......... 8,333,333
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........................ 15,000
Less -- Shares not required for the
Acquisitions and other uses of
proceeds ($10,671/$12.00)............. (889,213)
-----------
Total.............................. 7,459,120
==========
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................................ 20
Management.............................. 30
Certain Transactions.................... 35
Security Ownership of Certain Beneficial
Owners and Management................. 36
Description of Capital Stock............ 37
Shares Eligible for Future Sale......... 40
Underwriting............................ 42
Legal Matters........................... 43
Experts................................. 43
Additional Information.................. 43
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.
SHARES
APPLE ORTHODONTIX, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
BEAR, STEARNS & CO. INC.
, 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................. $ 9,439
NASD Filing Fee...................... 3,615
Nasdaq National Market Listing Fee... 26,000
Blue Sky Fees and Expenses........... *
Printing Costs....................... *
Legal Fees and Expenses.............. *
Accounting Fees and Expenses......... *
Transfer Agent and Registrar Fees and
Expenses........................... *
Premiums for D&O Insurance........... *
---------
Miscellaneous........................ *
---------
Total...................... $
=========
* To be provided by amendment.
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
II-1
<PAGE>
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
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
2,143,148 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
- - ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
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 Reroganization
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.
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 Service Agreement
10.7-- Employment Agreement of H. Steven Walton
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.
(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
II-4
<PAGE>
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 MARCH 21, 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 MARCH 21, 1997.
<TABLE>
<CAPTION>
SIGNATURES TITLE
- - ------------------------------------------------ ----------------------------------------
<S> <C>
/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
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
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 Reroganization
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.
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 Service Agreement
10.7-- Employment Agreement of H. Steven Walton
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.
<PAGE>
Charles S. Gilbert
(214) 953-5674
______________________________, 1997
VIA EDGAR
File Desk
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Apple Orthodontix, Inc. ("Apple")
Registration Statement on Form S-1
Dear Madame or Sir:
On behalf of Apple, please find an electronic transmission of Apple's
Registration Statement on Form S-1. Apple has transmitted $[ ]by wire
transfer to cover the applicable filing fee.
Very truly yours,
Charles S. Gilbert
Enclosure
cc:
EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF FEBRUARY __, 1997
BY AND AMONG
APPLE ORTHODONTIX, INC.,
-----------------------
AND
THE STOCKHOLDERS NAMED HEREIN
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I. DEFINITIONS........................................................ 1
Section 1.01 Certain Defined Terms....................................... 1
ARTICLE II. THE MERGER AND RELATED MATTERS.................................... 4
Section 2.01 Certificate of Merger....................................... 4
Section 2.02 The Effective Time.......................................... 4
Section 2.03 Certain Effects of the Merger............................... 4
Section 2.04 Effect of the Merger on Capital Stock....................... 5
Section 2.05 Delivery, Exchange and Payment.............................. 5
Section 2.06 Fractional Shares........................................... 6
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF EACH
STOCKHOLDER.............................................................. 6
Section 3.01 By Each Stockholder......................................... 6
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE
COMPANY AND THE STOCKHOLDERS............................................. 8
Section 4.01 By the Company and Each Stockholder......................... 8
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF APPLE............................ 9
Section 5.01 By Apple.................................................... 9
ARTICLE VI. COVENANTS EXTENDING TO THE EFFECTIVE TIME......................... 9
Section 6.01 Of Each Party............................................... 9
ARTICLE VII. THE CLOSING AND CONDITIONS TO CLOSING AND
CONSUMMATION............................................................. 9
Section 7.01 The Closing and Certain
Conditions.................................................. 9
ARTICLE VIII. COVENANTS FOLLOWING THE EFFECTIVE TIME......................... 11
Section 8.01 Of Each Party Other Than the Company....................... 11
ARTICLE IX. INDEMNIFICATION.................................................. 11
Section 9.01 Indemnification Rights and Obligations..................... 11
ARTICLE X. LIMITATIONS ON COMPETITION........................................ 11
Section 10.01 Prohibited Activities..................................... 11
Section 10.02 .......................................................... 12
Section 10.03 Reasonable Restraint...................................... 12
Section 10.04 Severability; Reformation................................. 12
Section 10.05 Independent Covenant...................................... 12
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<PAGE>
Section 10.06 Materiality............................................... 13
ARTICLE XI. GENERAL PROVISIONS............................................... 13
Section 11.01 Treatment of Confidential Information..................... 13
Section 11.02 Restrictions on Transfer of Apple Common Stock............ 13
Section 11.03 Brokers and Agents........................................ 14
Section 11.04 Assignment; No Third Party Beneficiaries.................. 14
Section 11.05 Entire Agreement; Amendment; Waivers...................... 15
Section 11.06 Counterparts.............................................. 15
Section 11.07 Expenses.................................................. 15
Section 11.08 Notices................................................... 16
Section 11.09 Governing Law............................................. 16
Section 11.10 Exercise of Rights and Remedies........................... 17
Section 11.11 Time...................................................... 17
Section 11.12 Reformation and Severability.............................. 17
Section 11.13 Remedies Cumulative....................................... 17
Section 11.14 Respecting the IPO........................................ 17
ARTICLE XII. TERMINATION..................................................... 17
Section 12.01 Termination of this Agreement............................. 17
Section 12.02 Liabilities in Event of Termination....................... 18
ii
<PAGE>
ADDENDUM 1 - Listing of Founding Companies
ANNEX 1 - Uniform Provisions
DISCLOSURE STATEMENT
EXHIBIT 4.01(d) - Form of General Release
EXHIBIT 7.01(d) - Form of Service Agreement
EXHIBIT 7.03(b)(iv) - Form of Registration Rights Agreement
EXHIBIT 7.04(a)(ii)(B)(5) - Form of IRC Section 1445 Certificate
iii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is
made as of February __, 1997, by and among Apple Orthodontix, Inc., a Delaware
corporation ("Apple"), , a professional [CORPORATION] [ASSOCIATION] (the
"Company"), and the persons listed on the signature pages hereof under the
caption "Stockholders" (collectively, the "Stockholders," and each of those
persons, individually, a "Stockholder"). This Agreement consists of the
Agreement and Plan of Reorganization set forth below and a separate document of
Uniform Provisions, which shall be a part hereof for all purposes.
PRELIMINARY STATEMENT
The parties to this Agreement have determined it is in their best
long-term interests to effect a business combination pursuant to which:
(a) The Company will merge into Apple on the terms and subject to
the conditions set forth herein (that merger being the "Merger");
(b) Apple will merge with, or acquire substantially all of the
tangible and intangible assets of, all or some of the orthodontic
practices listed in the accompanying Addendum 1 (each an "Other Founding
Company" and, collectively with the Company, the "Founding Companies")
pursuant to agreements that are (i) similar to this Agreement and (ii)
entered into among those entities and/or their owners and Apple
(collectively, the "Other Agreements"); and
(c) Apple shall effect a public offering of shares of its common
stock and issue and sell those shares.
The respective boards of directors of Apple and the Company have
approved and adopted this Agreement, intending to effect a transaction pursuant
to Section 368(a) of the Code.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements, representations and undertakings contained herein, the parties
hereto hereby agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.01 CERTAIN DEFINED TERMS. As used in this Agreement,
the following terms have the meanings assigned to them below in this Section
1.01. Capitalized terms used in this Agreement and not defined below in this
Section 1.01 have the respective meanings assigned to them in the Preliminary
Statement or Section 1.02 found in the Uniform Provisions.
<PAGE>
"Agreed Rate" means 8.0% per annum.
"Agreement" means this Agreement, including the Disclosure
Statement relating to this Agreement and all attached Addenda, Annexes
and Exhibits, as each of the same may be amended, modified or
supplemented from time to time pursuant to the provisions hereof or
thereof.
"Apple" means Apple Orthodontix, Inc., a Delaware corporation.
"Apple Acquisition Candidate" means any Entity engaged in any of
the businesses of providing orthodontic services to patients (i) which
was called on by any of the Company, Apple or the Subsidiaries of the
Company in connection with the possible acquisition by any of them of
that Entity or (ii) of which any of them has made an acquisition
analysis.
"BCA" means the Business Corporation Act.
"Closing" has the meaning specified in Section 7.01.
"Closing Memorandum" means the form of closing memorandum to be
prepared by Apple for the Closing under this Agreement in which are
included the forms of certificates of officers, the opinions of counsel
and certain other documents to be delivered at the Closing as provided
in Article VII.
"Company" means , a professional [CORPORATION]
[ASSOCIATION].
"Company Common Stock" means the common stock, par value
$_________ per share, of the Company.
"Counsel for Apple" means Jackson & Walker, L.L.P.
"Counsel for the Company and the Stockholders" means .
"Current Balance Sheet" means the unaudited balance sheet of the
Company as at the Current Balance Sheet Date.
"Current Balance Sheet Date" means September 30, 1996.
"Disclosure Statement" means the written statement attached to
and made a part of this Agreement in which (a) exceptions are taken to
certain of the representations and warranties made by the Company and
the Stockholders herein, (b) it is confirmed that no exception is taken
to that representation and warranty or (c) additional information is
provided with respect to a particular provision herein or in the Uniform
Provisions.
"Dissenting Shares" has the meaning specified in Section 2.04.
2
<PAGE>
"Founding Companies" has the meaning specified in the Preliminary
Statement of this Agreement.
"Initial Financial Statements" means (a) the consolidated balance
sheet of the Company as at September 30, 1996 and the related
consolidated statements of income (operations), cash flows and
stockholders' equity for the Company's nine-month period ended September
30, 1996, and (b) the Current Balance Sheet and the related unaudited
consolidated statements of income (operations), cash flows and
stockholders' equity for the nine-month period ended on the Current
Balance Sheet Date.
"Merger" has the meaning specified in the Preliminary Statement
of this Agreement.
"Merger Consideration" has the meaning specified in Section 2.04.
"Orthodontic Entity" means the _____________________ professional
corporation or association to be formed pursuant to Section 6.06.
"Orthodontic Entity Common Stock" has the meaning specified in
Section 3.01.
"Other Agreements" has the meaning specified in the Preliminary
Statement of this Agreement.
"Other Founding Company" has the meaning specified in the
Preliminary Statement of this Agreement.
"Pro Rata Share" means for each Stockholder the fraction
expressed as a percentage (a) the numerator of which is the number of
shares of outstanding Company Common Stock owned by that Person, as set
forth in Section 3.02 of the Disclosure Statement, and (b) the
denominator of which is the total number of shares of outstanding
Company Common Stock owned by all Stockholders, as set forth in Section
3.02 of the Disclosure Statement.
"Purchaser Representative" means a "purchaser representative" as
defined in Securities Act Rule 501(h).
"Required Stockholders" means, at the time of any determination,
Stockholders who, at the Effective Time, will be or were entitled,
subject to the provisions of Section 2.05, to receive Merger
Consideration representing not less than 80% of the total Merger
Consideration to be received by all Stockholders pursuant to Section
2.04.
"Responsible Officer" means .
"Restricted Period" has the meaning specified in Section 11.02.
"Scheduled Agreements" means the agreements described in Section
4.11 of the Disclosure Statement.
3
<PAGE>
"Service Agreement" means the Service Agreement to be entered
into as of the IPO Pricing Date among Apple, the Stockholders and the
Orthodontic Entity.
"Stockholder" has the meaning specified in the preamble of this
Agreement.
"Stockholder Employment Agreement" means the Employment Agreement
to be entered into as of the IPO Pricing Date between the Orthodontic
Entity and the Stockholder.
"Surviving Corporation" means Apple, the Person to be designated
in the Certificate of Merger as the surviving corporation of the Merger.
"Territory" has the meaning specified in Section 10.01.
"Threshold Amount" means 2% of the Transaction Value.
"Transaction Value" means an amount equal to the Company's gross
revenues (less bad debt) for the 12-month period ended December 31, 1996
multiplied by 1.2.
"Transfer Taxes" has the meaning specified in Section 11.07.
"Uniform Provisions" means the Uniform Provisions for the
Acquisition of Founding Companies attached hereto as Annex 1.
ARTICLE II.
THE MERGER AND RELATED MATTERS
Section 2.01 CERTIFICATE OF MERGER. Subject to the terms and
conditions hereof, the Company will cause a Certificate of Merger to be duly
executed and delivered on or promptly after the date of the Closing to the
Secretary of State of the State of _______________.
Section 2.02 THE EFFECTIVE TIME. The effective time of the Merger
(the "Effective Time") will be the time on the IPO Closing Date which the
Certificate of Merger specifies or, if the Certificate of Merger does not
specify another time, 8:00 a.m., eastern daylight or standard time, on the IPO
Closing Date.
Section 2.03 CERTAIN EFFECTS OF THE MERGER. At and as of the
Effective Time, (a) the Company will be merged with and into Apple in accordance
with the provisions of the BCA, (b) the Company will cease to exist as a
separate legal entity, (c) Apple will be the Surviving Corporation and, as such,
will, all with the effect provided by the BCA, (i) possess all the properties
and rights, and be subject to all the restrictions and duties, of the Company
and Apple and (ii) be governed by the laws of the State of Delaware, (d) the
Charter Documents of Apple then in effect will become and thereafter remain
(until changed in accordance with (i) the applicable law (in the case of the
articles of incorporation) or (ii) its terms (in the case of the bylaws)) the
Charter Documents of the Surviving Corporation, (e) the board of directors of
4
<PAGE>
Apple immediately prior to the Effective Time will be the board of directors of
the Surviving Corporation, and those persons will hold the office of director of
the Surviving Corporation subject to the provisions of the applicable laws of
the State of Delaware and the Charter Documents of the Surviving Corporation,
and (f) the officers of Apple immediately prior to the Effective Time will be
the respective officers of the Surviving Corporation, subject to the provisions
of the Charter Documents of the Surviving Corporation, until that person's
successor is duly elected to, and, if necessary, qualified for, that office.
Section 2.04 EFFECT OF THE MERGER ON CAPITAL STOCK. As of the
Effective Time, as a result of the Merger and without any action on the part of
any holder thereof:
(a) the shares of Company Common Stock issued and outstanding
immediately prior to the Effective Time will (i) be converted into the
right to receive, subject to the provisions of Section 2.05, without
interest, on surrender of the certificate evidencing those shares, (A)
the amount of cash and the number of whole shares of Apple Common Stock
determined as provided in Section 2.04 of the Disclosure Statement (the
"Merger Consideration"), (ii) cease to be outstanding and to exist and
(iii) be canceled and retired;
(b) each share of Company Common Stock held in the treasury of
the Company or any Company Subsidiary will (i) cease to be outstanding
and to exist and (ii) be canceled and retired; and
(c) each share of Apple Common Stock issued and outstanding
immediately prior to the Effective Time will remain outstanding as one
share of Common Stock, par value $0.01 per share, of the Surviving
Corporation.
Each holder of a certificate representing shares of Company Common Stock
immediately prior to the Effective Time will, as of the Effective Time and
thereafter, cease to have any rights respecting those shares other than the
right to receive, subject to the provisions of Sections 2.05 and 2.06, without
interest, the Merger Consideration. Notwithstanding the foregoing, the right to
receive the Merger Consideration will not apply to any shares of Company Common
Stock which shall have statutory appraisal rights perfected with respect thereto
("Dissenting Shares"), if those rights are available, pursuant to the provisions
of ___________________ of the BCA, it being intended and agreed that any holder
of those shares shall have in consideration for the cancellation thereof only
the rights, if any, afforded to that holder under ________________ of the BCA.
Section 2.05 DELIVERY, EXCHANGE AND PAYMENT. (a) At or after the
Effective Time: (i) each Stockholder, as the holder of certificates representing
shares of Company Common Stock, will, on surrender of those certificates to
Apple (or any agent that may be appointed by Apple for purposes of this Section
2.05), receive, subject to the provisions of this Section 2.05 and Section 2.06,
his Pro-Rata Share of the Merger Consideration; and (ii) until any certificate
representing Company Common Stock has been surrendered and replaced pursuant to
this Section 2.05, that certificate will, for all purposes, be deemed to
evidence ownership of the number of whole shares of Apple Common Stock included
in the Merger Consideration payable in respect of that certificate pursuant to
Section 2.04. All shares of Apple
5
<PAGE>
Common Stock issuable in the Merger will be deemed for all purposes to have been
issued by Apple at the Effective Time.
(b) Each Stockholder will deliver to Apple (or any agent that may
be appointed by Apple for purposes of this Section 2.05) on or before the IPO
Closing Date the certificates representing Company Common Stock owned by the
Stockholder, duly endorsed in blank by that Person, or accompanied by duly
executed stock powers in blank, and with all necessary transfer tax and other
revenue stamps, acquired at that Person's expense, affixed and canceled. Each
Stockholder shall cure any deficiencies in the endorsement of the certificates
or other documents of conveyance respecting, or in the stock powers
accompanying, the certificates representing Company Common Stock delivered by
that Person.
(c) No dividends (or interest) or other distributions declared or
earned after the Effective Time with respect to Apple Common Stock and payable
to the holders of record thereof after the Effective Time will be paid to the
holder of any unsurrendered certificates representing shares of Company Common
Stock for which shares of Apple Common Stock have been issued in the Merger
until those certificates are surrendered as provided herein, but (i) on that
surrender Apple will cause to be paid, to the Person in whose name the
certificates representing such shares of Apple Common Stock shall then be
issued, the amount of dividends or other distributions previously paid with
respect to such whole shares of Apple Common Stock with a record date, or which
have accrued, subsequent to the Effective Time, but prior to surrender, and the
amount of any cash payable to such Person for and in lieu of fractional shares
pursuant to Section 2.06 and (ii) at the appropriate payment date or as soon as
practicable thereafter, Apple will cause to be paid to that Person the amount of
dividends or other distributions with a record date, or which have been accrued,
subsequent to the Effective Time, but which are not payable until a date
subsequent to surrender, which are payable with respect to such whole shares of
Apple Common Stock, subject in all cases to any applicable escheat laws. No
interest will be payable with respect to the payment of such dividends or other
distributions or cash for and in lieu of fractional shares on surrender of
outstanding certificates.
Section 2.06 FRACTIONAL SHARES. Notwithstanding any other
provision herein, no fractional shares of Apple Common Stock will be issued, and
any Stockholder entitled hereunder to receive a fractional share of Apple Common
Stock but for this Section 2.06 will have the cash portion of the Merger
Consideration hereunder reduced in an amount sufficient to enable the issuance
of an additional whole share of Apple Common Stock.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF EACH STOCKHOLDER
Section 3.01 BY EACH STOCKHOLDER. Each of the Stockholders
represents and warrants to Apple that, as applied solely to himself, all the
following representations and warranties in this Article III are as of the date
of this Agreement, and will be, as amended or supplemented pursuant to Section
6.08, on the date of the Closing and the IPO Closing Date, true and correct:
6
<PAGE>
(a) (i) he will be acquiring the shares of Apple Common Stock to
be issued pursuant to Section 2.04 to him solely for his account, for
investment purposes only and with no current intention or plan to
distribute, sell or otherwise dispose of any of those shares in
connection with any distribution; (ii) he is not a party to any
agreement or other arrangement for the disposition of any shares of
Apple Common Stock other than this Agreement and the Registration Rights
Agreement; (iii) he is either an "accredited investor" as defined in
Securities Act Rule 501(a) or, if he is not such an investor, Section
3.01(a) of the Disclosure Statement sets forth the name and address of
his Purchaser Representative; (iv) he (A) is able to bear the economic
risk of an investment in the Apple Common Stock acquired pursuant to
this Agreement, (B) can afford to sustain a total loss of that
investment, and (C) either (1) has such knowledge and experience in
financial and business matters that he is capable of evaluating the
merits and risks of the proposed investment in the Apple Common Stock,
or (2) his Purchaser Representative has had an adequate opportunity to
ask questions and receive answers from the officers of Apple concerning
any and all matters relating to the transactions contemplated hereby,
including the background and experience of the current and proposed
officers and directors of Apple, the plans for the operations of the
business of Apple, the business, operations and financial condition of
the Other Founding Companies and any plans of Apple for additional
acquisitions, or his Purchaser Representative has asked all questions of
the nature described in the immediately preceding clause, and all those
questions have been answered to his satisfaction and the satisfaction of
his Purchaser Representative;
(b) the capitalization of the Orthodontic Entity shall be in
compliance with the requirements of the applicable regulations in the
Organization State, and no shares of capital stock of the Orthodontic
Entity (the "Orthodontic Entity Common Stock") are, or will be, held in
treasury;
(c) except as set forth in Section 3.01(c) of the Disclosure
Statement, the Stockholders own, or will own, all of the issued and
outstanding shares of Orthodontic Entity Common Stock, free and clear of
all security interests, liens, adverse claims, encumbrances, equities,
proxies and shareholders' agreements;
(d) each outstanding share of Orthodontic Entity Common Stock has
been, or will be, legally and validly issued and is, or will be, fully
paid and nonassessable, and there exist no options, warrants,
subscriptions or other rights to purchase, or securities convertible
into or exchangeable for, any of the authorized or outstanding
securities of the Orthodontic Entity;
(e) no shares of capital stock of the Orthodontic Entity have
been issued or disposed of in violation of the preemptive rights, rights
of first refusal or similar rights of any of the Orthodontic Entity's
stockholders; and
(f) the representations and warranties contained in Article III
of the Uniform Provisions (the text of which Article hereby is
incorporated herein by this reference) are
7
<PAGE>
true and correct as applied solely to himself, and his agreements set
forth in that Article hereby are agreed to.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
OF
THE COMPANY AND THE STOCKHOLDERS
Section 4.01 BY THE COMPANY AND EACH STOCKHOLDER. The Company and
each Stockholder jointly and severally represent and warrant to, and agree with,
Apple that all the following representations and warranties in this Article IV
are as of the date of this Agreement, and will be, as amended or supplemented
pursuant to Section 6.08, on the date of the Closing and the IPO Closing Date,
true and correct:
(a) the Organization State of each of the Company and the Company
Subsidiaries is the State of _________________, and each of the Company
and the Company Subsidiaries (i) is a corporation duly organized,
validly existing and in good standing under the laws of that State, (ii)
has all requisite corporate power and authority under those laws and its
Charter Documents to own or lease and to operate its properties and to
carry on its business as now conducted and (iii) is duly qualified and
in good standing as a foreign corporation in all jurisdictions (other
than the State of _____________) in which it owns or leases property or
in which the carrying on of its business as now conducted so requires
except where the failure to be so qualified, singly or in the aggregate,
would not have a Material Adverse Effect;
(b) (i) the authorized Capital Stock of the Company is comprised
of ________ shares of Company Common Stock, of which _________ shares
have been issued and are now outstanding and no shares are held by the
Company as treasury shares, and (ii) no outstanding Derivative
Securities of the Company exist;
(c) (i) the terms and conditions of each of the Scheduled
Agreements are no less favorable to the Company than the Company
reasonably could have expected to obtain in an arm's-length transaction
with a Person other than an Affiliate of the Company, (ii) the rentals
provided for in the Scheduled Agreements constituting leases do not and
will not exceed fair market rentals of the properties being rented or
leased under those Scheduled Agreements and (iii) the payments provided
to be made in the other Scheduled Agreements do not exceed the fair
market value of the services performed;
(d) prior to the IPO Pricing Date: (i) (A) the articles of
incorporation of the Company shall have been duly amended by all
necessary corporate action on the part of the Company and the
Stockholders to (1) authorize the Company to engage in any business in
which the BCA permits a corporation incorporated thereunder lawfully to
engage (if the applicable Organization State laws governing the Company
so permit) and (2) abolish the preemptive rights of holders of Company
Common Stock and (B) the
8
<PAGE>
articles reflecting these amendments shall have been duly filed with and
accepted by the Secretary of State of the State of _______________; and
(ii) each Stockholder shall have executed and delivered to the Company,
in form and substance satisfactory to Apple, a written instrument that:
(A) acknowledges the Company is and has, and releases the Company for
having and continuing to be, engaged in businesses beyond the purposes
presently set forth in the Company's articles of incorporation; and (B)
(1) acknowledges the Company may have issued and sold Company Common
Stock to one or more of the other Stockholders in violation of the
preemptive rights the BCA affords the acknowledging Stockholder and (2)
releases all claims of every kind the acknowledging Stockholder has or
might have against the Company and each other Stockholder as a result of
those sales; and
(e) the representations and warranties contained in Article IV of
the Uniform Provisions (the text of which Article hereby is incorporated
herein by this reference) are true and correct, and the agreements set
forth in that Article hereby are agreed to.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF APPLE
Section 5.01 BY APPLE. Apple represents and warrants to the
Company and each Stockholder that all the following representations and
warranties in this Article V are as of the date of this Agreement, and will be
on the date of the Closing and the IPO Closing Date, true and correct: the
representations and warranties contained in Article V of the Uniform Provisions
(the text of which Article hereby is incorporated herein by this reference) are
true and correct.
ARTICLE VI.
COVENANTS EXTENDING TO THE EFFECTIVE TIME
Section 6.01 OF EACH PARTY. Until the Effective Time, subject to
the waiver provisions of Section 11.05, each party hereto will comply with each
covenant for which provision is made in Article VI of the Uniform Provisions
(the text of which Article hereby is incorporated herein by this reference) to
be performed or observed by that party.
ARTICLE VII.
THE CLOSING AND CONDITIONS TO CLOSING AND CONSUMMATION
Section 7.01 THE CLOSING AND CERTAIN CONDITIONS. (a) THE CLOSING.
On or before the IPO Pricing Date, the parties hereto will take all actions
necessary to (i) effect the Merger (including, as permitted by the BCA, (A) the
execution of a Certificate of Merger (1) meeting the requirements of the BCA and
(2) providing that the Merger will become effective on the IPO Closing Date and
(B) the filing of such Certificate of Merger with the Secretary of State of the
State of __________________), (ii) verify the existence and ownership of the
certificates evidencing the Company Common Stock to be exchanged for the Merger
9
<PAGE>
Consideration pursuant to Section 2.05 and (iii) satisfy the document delivery
requirements to which the obligations of the parties to effect the Merger and
the other transactions contemplated hereby are conditioned by the provisions of
this Article VII (all those actions collectively being the "Closing"). The
Closing will take place at the offices of Jackson & Walker, L.L.P., 42nd Floor,
1100 Louisiana, Houston, Texas at 10:00 a.m., Houston time, or at such later
time on the IPO Pricing Date as Apple shall specify by written notice to Robert
J. Syverson. The actions taken at the Closing will not include the completion of
either the Merger or the delivery of the Company Common Stock or the Merger
Consideration pursuant to Section 2.05. Instead, on the IPO Closing Date, the
Certificates of Merger will become effective pursuant to Section 2.02, and all
transactions contemplated by this Agreement to be closed or completed on or
before the IPO Closing Date, including the surrender of the Company Common Stock
in exchange for the Merger Consideration (including a certified check or checks
in an amount equal to the cash portion of the Merger Consideration) will be
closed or completed, as the case may be. During the period from the Closing to
the IPO Closing Date, this Agreement may be terminated by the parties only
pursuant to Section 12.01(b)(i).
(b) CERTAIN CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND THE
STOCKHOLDERS. The obligations of the Company and the Stockholders with respect
to the actions to be taken by them at or before the Closing are subject to the
satisfaction on or before the date of the Closing, or waiver by them pursuant to
Section 11.05, of all the conditions set forth in Sections 7.02(a) and 7.03. The
obligations of the Stockholders with respect to the actions to be taken on the
IPO Closing Date are subject to the satisfaction on that date of all the
conditions set forth in Section 7.02(b) and 7.03.
(c) CERTAIN CONDITIONS TO THE OBLIGATIONS OF APPLE. The
obligations of Apple with respect to actions to be taken at or before the
Closing are subject to the satisfaction on or before the date of the Closing, or
waiver by them pursuant to Section 11.05, of the following conditions: (i) the
Company shall have delivered to Apple copies of the articles of incorporation,
each as amended to the date of the Closing and certified by the Secretary of
State of the State of _______________ as of a Current Date, of the Company and
each Company Subsidiary; and (ii) all the conditions set forth in Sections
7.02(a) and 7.04(a). The obligations of Apple with respect to the actions to be
taken on the IPO Closing Date are subject to the satisfaction on that date of
the following conditions: (i) the Stockholder Employment Agreement and the
Service Agreement in substantially the form attached hereto as Exhibit 7.01(d),
then shall be in full force and effect; and (ii) all the conditions set forth in
Sections 7.02(b) and 7.04(b).
(d) The text of Article VII of the Uniform Provisions hereby is
incorporated herein by this reference.
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ARTICLE VIII.
COVENANTS FOLLOWING THE EFFECTIVE TIME
Section 8.01 OF EACH PARTY OTHER THAN THE COMPANY. From and after
the Effective Time, subject to the waiver provisions of Section 11.05, each
party hereto (other than the Company) will comply with each covenant for which
provision is made in Article VIII of the Uniform Provisions (the text of which
Article hereby is incorporated herein by this reference) to be performed or
observed by that party.
ARTICLE IX.
INDEMNIFICATION
Section 9.01 INDEMNIFICATION RIGHTS AND OBLIGATIONS. The text of
Article IX of the Uniform Provisions hereby is incorporated herein by this
reference. For purposes of Section 9.07(a), the Pro Rata Shares of the
Transaction Value are ___% and ___%, respectively, for _______________ and
________________.
ARTICLE X.
LIMITATIONS ON COMPETITION
Section 10.01 PROHIBITED ACTIVITIES. Each Stockholder agrees,
severally and not jointly with any other Person, that he will not, during the
period beginning on the date hereof and ending on the fifth anniversary of the
date hereof, directly or indirectly, for any reason, for his own account or on
behalf of or together with any other Person:
(a) engage as an officer, director or in any other managerial
capacity or as an owner, co-owner or other investor of or in, whether as
an employee, independent contractor, consultant or advisor, or as a
sales representative or distributor of any kind, in any business selling
any products or providing any services in competition with the Company,
any Company Subsidiary or Apple or any Subsidiary of Apple (Apple and
its Subsidiaries collectively being "Apple" for purposes of this Article
X) within a radius of ____ miles of each location in which any of the
Company or the Company Subsidiaries was engaged in business on the date
hereof or immediately prior to the Effective Time (those locations
collectively being the "Territory");
(b) call on any natural person who is at that time employed by
the Company, any Company Subsidiary or Apple with the purpose or intent
of attracting that person from the employ of the Company, any Company
Subsidiary or Apple, provided that the Stockholder may call on and hire
any of his Immediate Family Members;
(c) call on any Person that at that time is, or at any time
within one year prior to that time was, a customer of the Company, any
Company Subsidiary or Apple within the Territory, (i) for the purpose of
soliciting or selling any product or service in
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competition with the Company, any Company Subsidiary or Apple within the
Territory and (ii) with the knowledge of that customer relationship; or
(d) call on any Apple Acquisition Candidate, with the knowledge
of that Person's status as an Apple Acquisition Candidate, for the
purpose of acquiring that Person or arranging the acquisition of that
Person by any Person other than Apple.
Notwithstanding the foregoing, any Stockholder may own and hold as a passive
investment up to 1% of the outstanding Capital Stock of a competing Entity if
that class of Capital Stock is listed on the New York Stock Exchange or included
in the Nasdaq National Market. For purposes hereof and the respective Tax
reporting positions of the parties hereto, each party hereto agrees that the
percentage of the cash portion of the Merger Consideration to be received by
each Stockholder pursuant to Section 2.04 which equals 1% of that Stockholder's
Pro Rata Share of the Transaction Value will represent, and be received as,
consideration for that Stockholder's agreement to observe the covenants in this
Section 10.01.
Section 10.02 DAMAGES. Because of the difficulty of measuring
economic losses to Apple as a result of any breach by a Stockholder of his
covenants in Section 10.01, and because of the immediate and irreparable damage
that could be caused to Apple for which it would have no other adequate remedy,
each Stockholder agrees that Apple may enforce the provisions of Section 10.01
by injunctions and restraining orders against that Stockholder if he breaches
any of those provisions.
Section 10.03 REASONABLE RESTRAINT. The parties hereto each agree
that Sections 10.01 and 10.02 impose a reasonable restraint on the Stockholders
in light of the activities and business of Apple on the date hereof, the current
business plans of Apple and the investment by each Stockholder in Apple as a
result of the Merger.
Section 10.04 SEVERABILITY; REFORMATION. The covenants in this
Article X are severable and separate, and the unenforceability of any specific
covenant in this Article X is not intended by any party hereto to, and shall
not, affect the provisions of any other covenant in this Article X. If any court
of competent jurisdiction shall determine that the scope, time or territorial
restrictions set forth in Section 10.01 are unreasonable as applied to any
Stockholder, the parties hereto, including that Stockholder, acknowledge their
mutual intention and agreement that those restrictions be enforced to the
fullest extent the court deems reasonable, and thereby shall be reformed to that
extent as applied to that Stockholder and any other Stockholder similarly
situated.
Section 10.05 INDEPENDENT COVENANT. All the covenants in this
Article X are intended by each party hereto to, and shall, be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of any Stockholder against Apple,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Apple of any covenant in this Article X. It is
specifically agreed that the period specified in Section 10.01 shall be computed
in the case of each Stockholder by excluding from that computation any time
during which that Stockholder
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is in violation of any provision of Section 10.01. The covenants contained in
this Article X shall not be affected by any breach of any other provision hereof
by any party hereto.
Section 10.06 MATERIALITY. The Company and each Stockholder,
severally and not jointly with any other Person, hereby agree that this Article
X is a material and substantial part of the transactions contemplated hereby.
ARTICLE XI.
GENERAL PROVISIONS
Section 11.01 TREATMENT OF CONFIDENTIAL INFORMATION. Each party
hereto will comply with each covenant for which provision is made in Section
11.15 of the Uniform Provisions (the text of which Section hereby is
incorporated herein by this reference) to be performed or observed by that
party.
Section 11.02 RESTRICTIONS ON TRANSFER OF APPLE COMMON STOCK. (a)
During the two-year period ending on the second anniversary of the IPO Closing
Date (the "Restricted Period") (or if the two-year "holding" period for
restricted securities under Rule 144 under the Securities Act is reduced by the
SEC, the Restricted Period will be correspondingly reduced), no Stockholder
voluntarily will, except pursuant to and in accordance with the applicable
provisions of the Registration Rights Agreement: (i) sell, assign, exchange,
transfer, encumber, pledge, distribute, appoint or otherwise dispose of (A) any
shares of Apple Common Stock received by any Stockholder in the Merger or (B)
any interest in (including any option to buy or sell) any of those shares of
Apple Common Stock, in whole or in part, and Apple will have no obligation to,
and shall not, treat any such attempted transfer as effective for any purpose;
or (ii) engage in any transaction, whether or not with respect to any shares of
Apple Common Stock or any interest therein, the intent or effect of which is to
reduce the risk of owning the shares of Apple Common Stock acquired pursuant to
Section 2.04 (including, for example engaging in put, call, short-sale, straddle
or similar market transactions); provided, however, that this Section 11.02
shall not restrict any transfer of Apple Common Stock acquired by a Stockholder
pursuant to Section 2.04 to any of that Stockholder's Related Persons who agree
in writing to be bound by the provisions of Section 11.01 and this Section
11.02. The certificates evidencing the Apple Common Stock delivered to each
Stockholder pursuant to Section 2.05 will bear a legend substantially in the
form set forth below and containing such other information as Apple may deem
necessary or appropriate:
EXCEPT PURSUANT TO THE TERMS OF THE AGREEMENT AND PLAN OF REORGANIZATION
AMONG THE ISSUER, THE HOLDER OF THIS CERTIFICATE AND THE OTHER PARTIES
THERETO, THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
VOLUNTARILY SOLD, ASSIGNED, EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED,
DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF, AND THE ISSUER SHALL
NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED VOLUNTARY SALE,
ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION,
APPOINTMENT
13
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OR OTHER DISPOSITION OF ANY OF THOSE SHARES, DURING THE TWO-YEAR PERIOD
ENDING ON __________ [DATE THAT IS THE SECOND ANNIVERSARY OF THE IPO
CLOSING DATE] (THE "RESTRICTED PERIOD") (OR IF THE TWO YEAR "HOLDING"
PERIOD FOR RESTRICTED SECURITIES UNDER RULE 144 UNDER THE SECURITIES ACT
OF 1933 IS REDUCED BY THE SECURITIES AND EXCHANGE COMMISSION, THE
RESTRICTED PERIOD WILL BE CORRESPONDINGLY REDUCED). ON THE WRITTEN
REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE
THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER
AGENT) AFTER THE DATE SPECIFIED ABOVE.
(b) Each Stockholder, severally and not jointly with any other
Person, (i) acknowledges that the shares of Apple Common Stock to be delivered
to that Stockholder pursuant to Section 2.04 have not been and, except pursuant
to the Registration Rights Agreement, if applicable, will not be registered
under the Securities Act and therefore may not be resold by that Stockholder
without compliance with the Securities Act and (ii) covenants that none of the
shares of Apple Common Stock issued to that Stockholder pursuant to Section 2.04
will be offered, sold, assigned, pledged, hypothecated, transferred or otherwise
disposed of except after full compliance with all the applicable provisions of
the Securities Act and the rules and regulations of the SEC and applicable state
securities laws and regulations. All certificates evidencing shares of Apple
Common Stock issued pursuant to Section 2.04 will bear the following legend in
addition to the legend prescribed by Section 11.02(a):
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF
THE HOLDER HEREOF COMPLIES WITH THAT LAW AND OTHER APPLICABLE SECURITIES
LAWS.
In addition, certificates evidencing shares of Apple Common Stock issued
pursuant to Section 2.04 to each Stockholder will bear any legend required by
the securities or blue sky laws of the state in which that Stockholder resides.
Section 11.03 BROKERS AND AGENTS. Except as disclosed in the
Private Placement Memorandum or in Section 11.03 of the Disclosure Statement,
the Stockholders jointly and severally represent and warrant to Apple that the
Company has not directly or indirectly employed or become obligated to pay any
broker or similar agent in connection with the transactions contemplated hereby,
and agree, without regard to the Threshold Amount limitations set forth in
Article IX, to indemnify Apple against all Damage Claims arising out of claims
for any and all fees and commissions of brokers or similar agents employed or
promised payment by the Company.
Section 11.04 ASSIGNMENT; NO THIRD PARTY BENEFICIARIES. This
Agreement and the rights of the parties hereunder may not be assigned (except by
operation of law) and shall be binding on and inure to the benefit of the
parties hereto, the successors of Apple, and the heirs and legal representatives
of the Stockholders (and, in the case of any trust, the successor
14
<PAGE>
trustees of that trust). Neither this Agreement nor any other Transaction
Document is intended, or shall be construed, deemed or interpreted, to confer on
any Person not a party hereto or thereto any rights or remedies hereunder or
thereunder, except as provided in Section 6.05(b) or 11.14, in Article IX or as
otherwise provided expressly herein or therein.
Section 11.05 ENTIRE AGREEMENT; AMENDMENT; WAIVERS. This
Agreement and the documents delivered pursuant hereto constitute the entire
agreement and understanding among the Stockholders, the Company and Apple and
supersede all prior agreements and understandings, both written and oral,
relating to the subject matter of this Agreement. This Agreement may be amended,
modified or supplemented, and any right hereunder may be waived, if, but only
if, that amendment, modification, supplement or waiver is in writing and signed
by the Required Stockholders, the Company and Apple; provided, however, that no
such amendment, modification, supplement or waiver will be effective unless it
is signed by each Stockholder affected thereby to the extent that it (a) changes
the several nature of that Stockholder's representations and warranties (to the
extent they are not already joint and several as provided in Sections 4.01 and
11.03), (b) reduces the amount, or changes the components, of the Merger
Consideration that Stockholder is entitled to receive pursuant to Section 2.04,
as adjusted pursuant to Section 2.05(f), (c) waives the consummation of the IPO
as a condition to consummation of the Merger or (d) amends or waives this
sentence. The waiver of any of the terms and conditions hereof shall not be
construed or interpreted as, or deemed to be, a waiver of any other term or
condition hereof.
Section 11.06 COUNTERPARTS. This Agreement may be executed in
multiple counterparts, each of which will be an original, but all of which
together will constitute one and the same instrument.
Section 11.07 EXPENSES. Whether or not the transactions
contemplated hereby are consummated, (a) Apple will pay the fees, expenses and
disbursements of Apple and their Representatives which are incurred in
connection with the subject matter of this Agreement and any amendments thereto,
including all costs and expenses incurred in the performance of and compliance
with all conditions to be performed by Apple under this Agreement, including the
costs of preparing the Registration Statement, and (b) the Stockholders will pay
from personal funds, and not from funds of the Company or any Company
Subsidiary, all sales, use, transfer and other similar taxes and fees
(collectively, "Transfer Taxes") incurred in connection with the transactions
contemplated hereby, and the fees, expenses and disbursements of Counsel for the
Company and the Stockholders incurred in connection with the subject matter of
this Agreement and the Registration Statement on or before the IPO Closing Date;
provided, however, if the Company or the Required Stockholders terminate this
Agreement otherwise than as permitted by Article XII, the Company will, no later
than 10 Houston, Texas business days after Apple makes a written request
therefor, reimburse Apple in the amount equal to the aggregate fees, costs and
other expenses invoiced to Apple by Arthur Andersen LLP in connection with its
audit of the Company's financial statements at December 31, 1996 and for the
12-month period then ended; provided further, however, that a Stockholder's
estate shall not be required to reimburse Apple for such fees, costs and
expenses in the event such termination follows the death of the Stockholder. The
Stockholders will file all necessary documentation and Returns with respect to
all Transfer Taxes. In addition, each Stockholder acknowledges that he, and not
the Company
15
<PAGE>
or Apple or the Surviving Corporation, will pay all Taxes due upon receipt of
the consideration payable to that Stockholder pursuant to Article II.
Section 11.08 NOTICES. All notices required or permitted
hereunder shall be in writing, and shall be deemed to be delivered and received
(a) 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
(b) if delivered by mail (whether actually received or not), at the close of
business on the third Houston, Texas 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):
(i) if to Apple, addressed to it at:
Apple Orthodontix, Inc.
One West Loop South Suite 100
Houston, Texas 77027
Attn.: Robert J. Syverson, President
with copies (which shall not constitute notice for purposes of
this Agreement) to:
Jackson & Walker, L.L.P.
1100 Louisiana, Suite 4200
Houston, Texas 77002
Attn: Richard S. Roth, Esq.;
(ii) if to the Stockholders, addressed to them at their
addresses set forth in Section 2.04 of the Disclosure Statement;
and
(iii) if to the Company, addressed to it at:
==========================
--------------------------
Attn:_____________________
with copies (which shall not constitute notice for purposes of
this Agreement) to:
===========================
---------------------------
Attn:______________________
Section 11.09 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
16
<PAGE>
OF THE STATE OF TEXAS WITHOUT REGARD TO THE CONFLICTS OF LAW PROVISIONS THEREOF.
Section 11.10 EXERCISE OF RIGHTS AND REMEDIES. Except as
otherwise provided herein, no delay or omission in the exercise of any right,
power or remedy accruing to any party hereto as a result of any breach or
default hereunder by any other party hereto shall impair any such right, power
or remedy, nor shall it be construed, deemed or interpreted as a waiver of or
acquiescence in any such breach or default, or of any similar breach or default
occurring later; nor shall any waiver of any single breach or default be
construed, deemed or interpreted as a waiver of any other breach or default
hereunder occurring before or after that waiver.
Section 11.11 TIME. Time is of the essence in the performance of
this Agreement in all respects.
Section 11.12 REFORMATION AND SEVERABILITY. If any provision of
this Agreement is invalid, illegal or unenforceable, that provision shall, to
the extent possible, be modified in such manner as to be valid, legal and
enforceable but so as to most nearly retain the intent of the parties hereto as
expressed herein, and if such a modification is not possible, that provision
shall be severed from this Agreement, and in either case the validity, legality
and enforceability of the remaining provisions of this Agreement shall not in
any way be affected or impaired thereby.
Section 11.13 REMEDIES CUMULATIVE. No right, remedy or election
given by any term of this Agreement shall be deemed exclusive, but each shall be
cumulative with all other rights, remedies and elections available at law or in
equity.
Section 11.14 RESPECTING THE IPO. Each of the Company and the
Stockholders acknowledges and agrees that: (a) no firm commitment, binding
agreement or promise or other assurance of any kind, whether express or implied,
oral or written, exists at the date hereof that the Registration Statement will
become effective or that the IPO will occur at a particular price or within a
particular range of prices or occur at all; (b) neither Apple or any of its
Representatives nor any prospective underwriters in the IPO will have any
liability to the Company, the Stockholders or any of their respective Affiliates
or associates for any failure of (i) the Registration Statement to become
effective (provided, however, that Apple will use its reasonable best efforts to
cause the Registration Statement to become effective prior to December 31, 1997)
or (ii) the IPO to occur at a particular price or within a particular range of
prices or to occur at all; and (c) the decision of Stockholders to enter into
this Agreement, or to vote in favor of or consent to the Merger, has been or
will be made independent of, and without reliance on, any statements, opinions
or other communications of, or due diligence investigations that have been or
will be made or performed by, any prospective underwriter relative to Apple or
the IPO. The Underwriter shall have no obligation to any of the Company and the
Stockholders or with respect to any disclosure contained in the Registration
Statement.
ARTICLE XII.
TERMINATION
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Section 12.01 TERMINATION OF THIS AGREEMENT. (a) This Agreement
may be terminated at any time prior to the Closing solely:
(i) by the mutual written consent of Apple and the
Company;
(ii) by the Stockholders or the Company, on the one hand, or
by Apple, on the other hand, if the transactions contemplated by this
Agreement to take place at the Closing shall not have been consummated
by December 31, 1997, unless the failure of such transactions to be
consummated results from the willful failure of the party (or in the
case of the Stockholders and the Company, any of them) seeking to
terminate this Agreement to perform or adhere to any agreement required
hereby to be performed or adhered to by it prior to or at the Closing or
thereafter on the IPO Closing Date;
(iii) by the Stockholders or the Company, on the one hand, or
by Apple, on the other hand, if a material breach or default shall be
made by the other party (or in the case of the Stockholders and the
Company, any of them) in the observance or in the due and timely
performance of any of the covenants, agreements or conditions contained
herein; or
(iv) by Apple if it is entitled to do so as provided in
Section 6.08;
(b) This Agreement may be terminated after the Closing solely:
(i) by Apple or the Company if the Underwriting
Agreement is terminated pursuant to its terms after the Closing and
prior to the consummation of the IPO; or
(ii) automatically and without action on the part of any
party hereto if the IPO is not consummated within 15 New York City
business days after the date of the Closing.
(c) If this Agreement is terminated pursuant to this Section
12.01, the Merger will be deemed for all purposes to have been abandoned and of
no force or effect. If this Agreement is terminated pursuant to this Section
12.01 after the Certificate of Merger has been filed with the Secretary of State
of the State of _______________, but before the IPO has been consummated, Apple
will take all actions that Counsel for the Company and the Stockholders advises
Apple are required by the applicable laws of the State of _______________ in
order to rescind the Merger.
Section 12.02 LIABILITIES IN EVENT OF TERMINATION. If this
Agreement is terminated pursuant to Section 12.01, there shall be no liability
or obligation on the part of any party hereto except (a) as provided in Section
11.07 and (b) to the extent that such liability is based on the breach by that
party of any of its representations, warranties or covenants set forth in this
Agreement.
18
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[signatures appear on the following page]
19
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
APPLE ORTHODONTIX, INC.
By:
Printed Name:
Title:
, P.C.
By:
Printed Name:
Title:
STOCKHOLDERS:
Printed Name:
Printed Name:
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<PAGE>
ADDENDUM 1
to the
Agreement and Plan of Reorganization
dated as of February __, 1997
by and among
Apple Orthodontix, Inc.,
and
the Stockholders named therein
A. Words and terms used in this Addendum which are defined in the
captioned Agreement to which this is an Addendum are used herein as therein
defined.
B. The Founding Companies are:
[TO BE PROVIDED ON OR PRIOR TO THE MARCH 1, 1997]
21
EXHIBIT 2.2
Annex 1
APPLE ORTHODONTIX, INC.
UNIFORM PROVISIONS
FOR THE
ACQUISITION
OF
FOUNDING COMPANIES
WORDS AND TERMS USED IN THESE UNIFORM PROVISIONS WHICH
ARE DEFINED IN THE AGREEMENT AND PLAN OF REORGANIZATION
AMONG APPLE ORTHODONTIX, INC.,__________________ ,_____
____________________________ AND THE STOCKHOLDERS NAMED
THEREIN (CALLED THEREIN AND HEREIN "THIS AGREEMENT") TO
WHICH THESE UNIFORM PROVISIONS ARE ATTACHED AS ANNEX 1
ARE USED HEREIN AS DEFINED THEREIN.
<PAGE>
TABLE OF CONTENTS
ARTICLE I ADDITIONAL DEFINITIONS.......................................... 1
Section 1.02 Additional Defined Terms............................. 1
Section 1.03 Other Definitional Provisions........................12
Section 1.04 Captions.............................................13
ARTICLE III REPRESENTATIONS AND WARRANTIES OF EACH
STOCKHOLDER........................................................13
Section 3.02 Ownership and Status of Company Capital Stock........13
Section 3.03 Power of the Stockholder; Approval of the Merger.....13
Section 3.04 No Conflicts or Litigation...........................14
Section 3.05 No Brokers...........................................14
Section 3.06 Preemptive and Other Rights; Waiver..................14
Section 3.07 Control of Related Businesses........................14
Section 3.08 Organization and Good Standing; Qualification........15
Section 3.09 [Intentionally Left Blank]...........................15
Section 3.10 Corporate Records. .................................15
Section 3.11 Authorization and Validity. ........................15
Section 3.12 No Violation. ......................................15
Section 3.13 No Business, Agreements, Assets or Liabilities. ....16
Section 3.14 Compliance with Laws. ..............................16
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE STOCKHOLDERS............................................16
Section 4.02 Qualification........................................16
Section 4.03 Authorization; Enforceability; Absence of
Conflicts Required Consents..........................16
Section 4.04 Charter Documents and Records; No Violation..........17
Section 4.05 No Defaults..........................................18
Section 4.06 Company Subsidiaries.................................18
Section 4.07 Capital Stock of the Company and the Company
Subsidiaries.........................................18
Section 4.08 Transactions in Capital Stock........................19
Section 4.09 No Bonus Shares......................................19
Section 4.10 Predecessor Status; Etc..............................19
Section 4.11 Related Party Agreements.............................19
Section 4.12 Litigation...........................................19
Section 4.13 Financial Statements; Disclosure.....................19
Section 4.14 Compliance With Laws.................................20
Section 4.15 Certain Environmental Matters........................20
Section 4.16 Liabilities and Obligations..........................21
Section 4.17 Receivables..........................................21
Section 4.18 Owned and Leased Real Properties.....................22
Section 4.19 Owned and Leased Property, Plant and Equipment.......22
Section 4.20 Proprietary Rights...................................23
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Section 4.21 Title to Other Properties............................23
Section 4.22 Commitments..........................................23
Section 4.23 Capital Expenditures.................................25
Section 4.24 Inventories..........................................25
Section 4.25 Insurance............................................26
Section 4.26 Employee Matters.....................................26
Section 4.27 Compliance with ERISA, Etc...........................28
Section 4.28 Taxes................................................31
Section 4.29 Government Contracts.................................32
Section 4.30 Absence of Changes...................................32
Section 4.31 Bank Relations; Powers of Attorney...................33
Section 4.32 Relations With Governments, Etc......................34
Section 4.33 Reliance on Representatives..........................34
ARTICLE V REPRESENTATIONS AND WARRANTIES OF APPLE.........................34
Section 5.02 Organization; Power..................................34
Section 5.03 Authorization; Enforceability; Absence of
Conflicts; Required Consents........................ 34
Section 5.04 Charter Documents....................................35
Section 5.05 Capital Stock of Apple...............................35
Section 5.06 Subsidiaries.........................................36
Section 5.07 Liabilities..........................................36
Section 5.08 Compliance With Laws; No Litigation..................36
Section 5.09 No Brokers...........................................36
Section 5.10 Private Placement Memorandum.........................36
ARTICLE VI COVENANTS EXTENDING TO THE EFFECTIVE TIME.......................36
Section 6.02 Access and Cooperation; Due Diligence................36
Section 6.03 Conduct of Business Pending Closing..................37
Section 6.04 Prohibited Activities................................39
Section 6.06 Formation of Orthodontic Entity......................40
Section 6.07 Notification of Certain Matters......................40
Section 6.08 Supplemental Information.............................40
Section 6.09 Cooperation in Connection With the IPO...............41
Section 6.10 Additional Financial Statements and Other
Information..........................................41
Section 6.11 Termination or Transfer of Plans.....................42
Section 6.12 Disposition of Unwanted Assets.......................42
Section 6.13 HSR Act Matters......................................42
Section 6.14 Retirement of Debt...................................42
ARTICLE VIITHE CLOSING AND CONDITIONS TO CLOSING AND
CONSUMMATION ...................................................42
Section 7.02 Conditions to the Obligations of Each Party..........42
Section 7.03 Conditions to the Obligations of the Company
and The Stockholders................................ 44
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Section 7.04 Conditions to the Obligations of Apple...............45
ARTICLE VIII COVENANTS FOLLOWING THE EFFECTIVE TIME..........................47
Section 8.02 Disclosure...........................................47
Section 8.03 Preparation and Filing of Tax Returns................47
Section 8.04 Directors............................................47
Section 8.05 Removal of Guaranties................................48
Section 8.06 Access...............................................48
Section 8.07 Licenses and Permits.................................48
Section 8.08 Orthodontist Employment Agreement....................48
Section 8.09 Continuity of Business...............................48
ARTICLE IX INDEMNIFICATION.................................................48
Section 9.02 Survival of Representations and Warranties...........48
Section 9.03 Indemnification of Apple Indemnified Parties.........49
Section 9.04 Indemnification of Stockholder Indemnified Parties...50
Section 9.05 Conditions of Indemnification........................51
Section 9.06 Remedies Not Exclusive...............................53
Section 9.07 Limitations on Indemnification.......................53
ARTICLE XI GENERAL PROVISIONS..............................................53
Section 11.15 Treatment of Confidential Information................53
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<PAGE>
THE UNIFORM PROVISIONS
ARTICLE I
ADDITIONAL DEFINITIONS
Section 1.02 ADDITIONAL DEFINED TERMS. These provisions constitute
the Uniform Provisions of the Agreement and Plan of Reorganization by and among
Apple, the Company and the Stockholders and, although in a separate document,
are part of and are to be included in the Agreement and Plan of Reorganization.
As used in this Agreement, the following terms have the meanings assigned to
them below:
"Acquisition Proposal" has the meaning specified in Section 6.05.
"Affiliate" means, as to any specified Person, any other Person that,
directly or indirectly through one or more intermediaries or otherwise,
controls, is controlled by or is under common control with the specified Person.
As used in this definition, "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of a Person (whether through ownership of Capital Stock of that Person,
by contract or otherwise).
"Apple Common Stock" means the common stock, par value $.01 per
share, of Apple.
"Apple Indemnified Party" means Apple and its Affiliates and each of
their respective officers, directors, employees, agents, financial advisors and
counsel; provided, however, that no Person who indemnifies Apple Indemnified
Parties in this Agreement in his capacity as a Stockholder will be an Apple
Indemnified Party for purposes of this Agreement, notwithstanding that the
Person is an Apple Indemnified Party for purposes of one or more of the Other
Agreements.
"Apple Indemnified Loss" has the meaning specified in Section 9.03.
"Capital Lease" means a lease of (or other agreement conveying the
right to use) real or personal property that is required to be classified and
accounted for as a capital lease under GAAP as in effect on the date of this
Agreement.
"Capital Stock" means, with respect to: (a) any corporation, any
share, or any depositary receipt or other certificate representing any share, of
an equity ownership interest in that corporation; and (b) any other Entity, any
share, membership or other percentage interest, unit of participation or other
equivalent (however designated) of an equity interest in that Entity.
"Cash Compensation" means, as applied to any employee, nonemployee
director or officer of, or any natural person who performs consulting or other
independent contractor services for, the Company or any Company Subsidiary, the
wages, salaries, bonuses (discretionary and formula), fees and other cash
compensation paid or payable by the Company and each Company Subsidiary to that
employee or other natural person.
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"CERCLA" means the Comprehensive Environmental Response,
Conservation, and Liability Act of 1980.
"Certificate of Merger" means: (a) the certificate of merger
respecting the Merger which contains the information required by the DGCL to
effect the Merger; and (b) if the Company's Organization State is not Delaware,
the articles or certificate of merger respecting the Merger which contains the
information required by the laws of the Company's Organization State to effect
the Merger.
"Charter Documents" means, with respect to any Entity at any time, in
each case as amended, modified and supplemented at that time, the articles or
certificate of formation, incorporation, organization or association (or the
equivalent organizational documents) of that Entity, (b) the bylaws or limited
liability company agreement or regulations (or the equivalent governing
documents) of that Entity and (c) each document setting forth the designation,
amount and relative rights, limitations and preferences of any class or series
of that Entity's Capital Stock or of any rights in respect of that Entity's
Capital Stock.
"Claim Notice" has the meaning specified in Section 9.05.
"Closing" has the meaning specified in Section 7.01.
"COBRA" means the Comprehensive Omnibus Budget Reconciliation Act of 1984.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company Commitment" has the meaning specified in Section 4.22.
"Company ERISA Benefit Plan" has the meaning specified in Section 4.26.
"Company ERISA Pension Plan" has the meaning specified in Section 4.26.
"Company Subsidiary" means at any time any Entity that is a Subsidiary of
the Company at that time.
"Confidential Information" means, with respect to any Person, all
trade secrets and other confidential, nonpublic and/or proprietary information
of that Person, including information derived from reports, investigations,
research, work in progress, codes, marketing and sales programs, capital
expenditure projects, cost summaries, pricing formulae, contract analyses,
financial information, projections, confidential filings with any Governmental
Authority and all other confidential, nonpublic concepts, methods of doing
business, ideas, materials or information prepared or performed for, by or on
behalf of that Person.
"Current Balance Sheet" has the meaning specified in Section 1.01.
"Current Balance Sheet Date" has the meaning specified in Section 1.01.
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"Current Date" means any day during the 20-day period ending on the
date of the Closing.
"Damage" to any specified Person means any cost, damage (including
any consequential, exemplary, punitive or treble damage) or expense (including
reasonable fees and actual disbursements by attorneys, consultants, experts or
other Representatives and Litigation costs) to, any fine of or penalty on or any
liability (including loss of earnings or profits) of any other nature of that
Person.
"Damage Claim" means, as asserted (a) against any specified Person,
any claim, demand or Litigation made or pending against that Person for Damages
to any other Person, or (b) by the specified Person, any claim or demand of the
specified Person against any other Person for Damages to the specified Person.
"DGCL" means the General Corporation Law of the State of Delaware.
"Derivative Securities" of a specified Entity means any Capital Stock
or debt security or other Indebtedness of the specified Entity or any other
Person which is convertible into or exchangeable for, or any option, warrant or
other right to acquire, (a) any unissued Capital Stock of the specified Entity
or (b) any Capital Stock of the specified Entity which has been issued and is
being held by the Entity directly or indirectly as treasury Capital Stock.
"Effective Time" has the meaning specified in Section 2.02.
"Election Period" has the meaning specified in Section 9.05.
"Employee Policies and Procedures" means at any time all employee
manuals and all material policies, procedures and work-related rules that apply
at that time to any employee, nonemployee director or officer of, or any other
natural person performing consulting or other independent contractor services
for, the Company or any Company Subsidiary.
"Employment Agreement" means at any time any (a) agreement to which
the Company or any Company Subsidiary is a party which then relates to the
direct or indirect employment or engagement, or arises from the past employment
or engagement, of any natural person by the Company or any Company Subsidiary,
whether as an employee, a nonemployee officer or director, a consultant or other
independent contractor, a sales representative or a distributor of any kind,
including any employee leasing or service agreement and any noncompetition
agreement, and (b) agreement between the Company or any Company Subsidiary and
any Person which arises from the sale of a business by that Person to the
Company or any Company Subsidiary and limits that Person's competition with the
Company or any Company Subsidiary.
"Entity" means any sole proprietorship, corporation, professional
association or corporation, partnership of any kind having a separate legal
status, limited liability company, business trust, unincorporated organization
or association, mutual company, joint stock company or joint venture.
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"Environmental Laws" means any and all Governmental Requirements
relating to the environment or worker health or safety, including ambient air,
surface water, land surface or subsurface strata, or to emissions, discharges,
releases or threatened releases of pollutants, contaminants, chemicals or
industrial, toxic or hazardous substances or wastes (including Solid Wastes,
Hazardous Wastes or Hazardous Substances) or noxious noise or odor into the
environment, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, recycling, removal, transport or handling of
pollutants, contaminants, chemicals or industrial, toxic or hazardous substances
or wastes (including petroleum, petroleum distillates, asbestos or
asbestos-containing material, polychlorinated biphenyls, chlorofluorocarbons
(including chlorofluorocarbon-12) or hydrochlorofluorocarbons).
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"ERISA Affiliate" means, with respect to any specified Person at any
time, any other Person, including an Affiliate of the specified Person, that is,
or at any time within six years of that time was, a member of any ERISA Group of
which the specified Person is or was a member at the same time.
"ERISA Affiliate Pension Plan" has the meaning specified in Section
4.26.
"ERISA Employee Benefit Plan" means any "employee benefit plan" as
defined in Section 3(3) of ERISA and includes any ERISA Pension Benefit Plan.
"ERISA Group" means any "group of organizations" within the meaning
of Section 414(b), (c), (m) or (o) of the Code or any "controlled group" as
defined in Section 4001(a)(14) of ERISA.
"ERISA Pension Benefit Plan" means any "employee pension benefit
plan," as defined in Section 3(2) of ERISA, including any plan that is covered
by Title IV of ERISA or subject to the minimum funding standards under Section
412 of the Code (excluding any Multiemployer Plan).
"Exchange Act" means the Securities Exchange Act of 1934.
"Final Prospectus" means (i) the prospectus included in the
Registration Statement at the time it becomes effective, except that if the
prospectus first furnished to the Underwriter after the Registration Statement
becomes effective for use in connection with the IPO differs from the prospectus
included in the Registration Statement at the time it becomes effective (whether
or not that prospectus so furnished is required to be filed with the SEC
pursuant to Securities Act Rule 424(b)), the prospectus so furnished is the
"Final Prospectus" or (ii) any other document or means of communication which
the SEC may substitute by rule making authority for a final prospectus.
"Financial Statements" means the [Initial Financial Statements] and
the other financial statements of the Company and the Company Subsidiaries, if
any, delivered to Apple pursuant to Section 6.10 prior to the Effective Time.
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"GAAP" means generally accepted accounting principles and practices
in the United States as in effect from time to time which (i) have been
concurred in by Arthur Andersen LLP and (ii) have been or are applied on a basis
consistent (except for changes concurred in by Arthur Andersen LLP) with the
most recent audited Financial Statements delivered to Apple prior to the
Effective Time.
"General Release" means the general release of the Company and the
Company Subsidiaries to be executed at or before and delivered to Apple and the
Company at the Closing, effective as of the Effective Time, by each Stockholder
in the form of Exhibit 4.01(d) with the blanks appropriately filled.
"Governmental Approval" means at any time any authorization, consent,
approval, permit, franchise, certificate, license, implementing order or
exemption of, or registration or filing with, any Governmental Authority,
including any certification or licensing of a natural person to engage in a
profession or trade or a specific regulated activity, at that time.
"Governmental Authority" means (a) any national, state, county,
municipal or other government, domestic or foreign, or any agency, board,
bureau, commission, court, department or other instrumentality of any such
government, or (b) any Person having the authority under any applicable
Governmental Requirement to assess and collect Taxes for its own account.
"Governmental Requirement" means at any time (a) any law, statute,
code, ordinance, order, rule, regulation, judgment, decree, injunction, writ,
edict, award, authorization or other requirement of any Governmental Authority
in effect at that time or (b) any obligation included in any certificate,
certification, franchise, permit or license issued by any Governmental Authority
or resulting from binding arbitration, including any requirement under common
law, at that time.
"Guaranty" means, for any specified Person, without duplication, any
liability, contingent or otherwise, of that Person guaranteeing or otherwise
becoming liable for any obligation of any other Person (the "primary obligor")
in any manner, whether directly or indirectly, and including any liability of
the specified Person, direct or indirect, (a) to purchase or pay (or advance or
supply funds for the purchase or payment of) that obligation or to purchase (or
to advance or supply funds for the purchase of) any security for the payment of
that obligation, (b) to purchase property, securities or services for the
purpose of assuring the owner of that obligation of its payment or (c) to
maintain working capital, equity capital or other financial statement condition
or liquidity of the primary obligor so as to enable the primary obligor to pay
that obligation; provided, that the term "Guaranty" does not include
endorsements for collection or deposit in the ordinary course of the endorser's
business.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976.
"Immediate Family Member" of a Stockholder means at any time: (a) if
that Stockholder is a natural person, any child or grandchild (by blood or legal
adoption) or spouse of that Stockholder at that time, or any child of that
spouse; and (b) if that Stockholder is an Entity whose ultimate beneficial owner
is a natural person, or a natural person and his spouse, any
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child or grandchild (by blood or legal adoption) or spouse at that time (if not
then an ultimate beneficial owner of that Entity), or any child of that spouse,
of the ultimate beneficial owner or owners.
"Indebtedness" of any Person means, without duplication, (a) any
liability of that Person (i) for borrowed money or arising out of any extension
of credit to or for the account of that Person (including reimbursement or
payment obligations with respect to surety bonds, letters of credit, banker's
acceptances and similar instruments), for the deferred purchase price of
property or services or arising under conditional sale or other title retention
agreements, other than trade payables arising in the ordinary course of
business, (ii) evidenced by notes, bonds, debentures or similar instruments,
(iii) in respect of Capital Leases or (iv) in respect of interest rate
protection agreements, (b) any liability secured by any Lien upon any property
or assets of that Person (or upon any revenues, income or profits of that Person
therefrom), whether or not that Person has assumed that liability or otherwise
become liable for the payment thereof or (c) any liability of others of the type
described in the preceding clause (a) or (b) in respect of which that Person has
incurred, assumed or acquired a liability by means of a Guaranty.
"Indemnified Party" has the meaning specified in Section 9.05.
"Indemnifying Party" has the meaning specified in Section 9.05.
"Indemnity Notice" has the meaning specified in Section 9.05.
"Information" means written information, including (a) data,
certificates, reports and statements (excluding Financial Statements) and (b)
summaries of unwritten agreements, arrangements, contracts, plans, policies,
programs or practices or of unwritten amendments or modifications of,
supplements to or waivers under any of the foregoing documents.
"IPO" means the first time after January 31, 1997 a registration
statement filed under the Securities Act and respecting a primary offering by
Apple of shares of Apple Common Stock (other than a registration statement
respecting shares being offered pursuant to a Company ERISA Benefit Plan or any
Other Compensation Plan) is declared effective under the Securities Act and the
shares registered by that registration statement are issued and sold by Apple
(otherwise than pursuant to the exercise by the Underwriter of any
over-allotment option).
"IPO Closing Date" means the date on which Apple first receives
payment for the shares of Apple Common Stock it sells to the Underwriter in the
IPO.
"IPO Price" means the price per share of Apple Common Stock which is
set forth as the "price to public" on the cover page of the Final Prospectus.
"IPO Pricing Date" means the date, if any, on which Apple and the
Underwriter agree in the Underwriting Agreement to the price per share of Common
Stock at which the Underwriter, subject to the terms and conditions of the
Underwriting Agreement, will purchase newly issued shares of Apple Common Stock
from Apple on the IPO Closing Date.
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"IRS" means the Internal Revenue Service.
"Lien" means, with respect to any property or asset of any Person (or
any revenues, income or profits of that Person therefrom) (in each case whether
the same is consensual or nonconsensual or arises by contract, operation of law,
legal process or otherwise), (a) any mortgage, lien, security interest, pledge,
attachment, levy or other charge or encumbrance of any kind thereupon or in
respect thereof or (b) any other arrangement under which the same is
transferred, sequestered or otherwise identified with the intention of
subjecting the same to, or making the same available for, the payment or
performance of any liability in priority to the payment of the ordinary,
unsecured creditors of that Person, including any "adverse claim" (as defined in
Section 8-302(b) of each applicable Uniform Commercial Code) in the case of any
Capital Stock. For purposes of this Agreement, a Person shall be deemed to own
subject to a Lien any asset that it has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, Capital
Lease or other title retention agreement relating to that asset.
"Litigation" means any action, case, proceeding, claim, grievance,
suit or investigation or other proceeding conducted by or pending before any
Governmental Authority or any arbitration proceeding.
"Material" means, as applied to any Entity, material to the business,
operations, property or assets, liabilities, financial condition or results of
operations of that Entity and its Subsidiaries considered as a whole.
"Material Adverse Effect" means, with respect to the consequences of
any fact or circumstance (including the occurrence or non-occurrence of any
event) to the Company and the Company Subsidiaries considered as a whole (or
after the Effective Time the Surviving Corporation and the Company Subsidiaries
considered as a whole), that such fact or circumstance has caused, is causing or
will cause, directly, indirectly or consequentially, singly or in the aggregate
with other facts and circumstances, any Damages in excess of the Threshold
Amount.
"Material Agreement" of an Entity means any contract or agreement (a)
to which that Entity or any of its Subsidiaries is a party, or by which that
Entity or any of its Subsidiaries is bound or to which any property or assets of
that Entity or any of its Subsidiaries is subject and (b) which is Material to
that Entity.
"Minimum Cash Amount" has the meaning specified in Section 7.02.
"Moody's" means Moody's Investors Service, Inc.
"Multiemployer Plan" means a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA, Section 414(f) of the Code or Section 3(37) of
ERISA.
"Organization State" means, as applied to (a) any corporation, its
state or other jurisdiction of incorporation, (b) any limited liability company
or limited partnership, the state
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or other jurisdiction under whose laws it is organized and existing in that
legal form, and (c) any other Entity, the state or other jurisdiction whose laws
govern that Entity's internal affairs.
"Orthodontic Treatment Agreement" means any agreement or contract
whereby, for a fee, a Person undertakes, for a specified fee, to provide
orthodontic services to a patient.
"Orthodontics" means providing services related to the movement and
rearrangement of teeth.
"Other Agreements" has the meaning specified in the Preliminary
Statement in this Agreement.
"Other Compensation Plan" means any compensation arrangement, plan,
policy, practice or program established, maintained or sponsored by the Company
or any Company Subsidiary, or to which the Company or any Company Subsidiary
contributes, on behalf of any of its employees, nonemployee directors or
officers or other natural persons performing consulting or other independent
contractor services for the Company or any Company Subsidiary, (a) including all
such arrangements, plans, policies, practices or programs providing for
severance pay, deferred compensation, incentive, bonus or performance awards or
the actual or phantom ownership of any Capital Stock or Derivative Securities of
the Company or any Company Subsidiary, but (b) excluding all Company ERISA
Pension Plans and Employment Agreements.
"Other Financing Sources" has the meaning specified in Section 7.02.
"Other Transaction Documents" means the Other Agreements and the
other written agreements, documents, instruments and certificates at any time
executed pursuant to or in connection with the Other Agreements (other than the
Transaction Documents and the Underwriting Agreement), all as amended, modified
or supplemented from time to time.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Permitted Investments" means at the time of purchase or other
acquisition by the Company or any Company Subsidiary (a) obligations issued or
guaranteed by the United States of America with a remaining maturity not
exceeding one year, (b) commercial paper with maturities of not more than 270
days and a published rating of not less than A-1 by S&P or P-1 by Moody's and
(c) certificates of deposit and bankers' acceptances having maturities of not
more than one year of any commercial bank or trust company if (A) that bank or
trust company has a combined capital and surplus of at least $500,000,000 and
(B) its unsecured long-term debt obligations, or those of a holding company of
which it is a subsidiary, are rated not less than A- by S&P or A3 by Moody's.
"Permitted Liens" means, as applied to the property or assets of any
Person (or any revenues, income or profits of that Person therefrom): (a) Liens
for Taxes if the same are not at the time due and delinquent; (b) Liens incurred
in the ordinary course of that Person's business in connection with worker
compensation, unemployment insurance and other social security legislation
(other than pursuant to ERISA or Section 412(n) of the Code); (c) easements,
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rights-of-way, reservations, restrictions and other similar encumbrances
incurred in the ordinary course of that Person's business or existing on
property and not materially interfering with the ordinary conduct of that
Person's business or the use of that property; (d) defects or irregularities in
that Person's title to its real properties which do not materially (i) diminish
the value of the surface estate or (ii) interfere with the ordinary conduct of
that Person's business or the use of any of such properties; (e) any interest or
title of a lessor of assets being leased by any Person pursuant to any Capital
Lease disclosed in Section 4.19 of the Disclosure Statement or any lease that,
pursuant to GAAP, would be accounted for as an operating lease; and (f) Liens
securing purchase money Indebtedness disclosed in Section 4.16 of the Disclosure
Statement so long as such Liens do not attach to any property or assets other
than the properties or assets purchased with the proceeds of such Indebtedness.
"Person" means any natural person, Entity, estate, trust, union or
employee organization or Governmental Authority or, for the purpose of the
definition of "ERISA Affiliate," any trade or business.
"Plan" has the meaning specified in Section 4.27.
"Private Placement Memorandum" means the Apple Private Placement
Memorandum dated as of January 28, 1997 relating to the offer of Apple Common
Stock in connection with the Merger.
"Professional Codes" means any and all Governmental Requirements
relating to the licensing or other regulation of the business of providing
orthodontic care to patients.
"Prohibited Transaction" means any transaction that is prohibited
under Section 4975 of the Code or Section 406 of ERISA and not exempt under
Section 4975 of the Code or Section 408 of ERISA.
"Property, Plant and Equipment" means at any time any property that
then would be included and classified as property, plant and equipment on a
consolidated balance sheet prepared in accordance with GAAP of the Company and
the Company Subsidiaries.
"Proprietary Rights" means (a) patents, applications for patents and
patent rights, (b) in each case, whether registered, unregistered or under
pending registration, trademark rights, trade names, trade name rights,
corporate names, business names, trade styles or dress, service marks and logos
and other trade designations and copyrights and (c), in the case of the Company
or any Company Subsidiary, all agreements relating to the technology, know-how
or processes used in any business of the Company or any Company Subsidiary.
"Qualified Plans" has the meaning specified in Section 4.27.
"Registration Rights Agreement" means the registration rights
agreement to be executed and delivered at the Closing by Apple and the
Stockholders electing to be parties thereto in the form of Exhibit 7.03(b)(iv),
with the blanks appropriately filled.
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"Registration Statement" means the registration statement, including
(a) each preliminary prospectus included therein prior to the date on which that
registration statement is declared effective under the Securities Act (including
any prospectus filed with the SEC pursuant to Securities Act Rule 424(b)), (b)
the Final Prospectus and (c) any amendments thereof and all supplements and
exhibits thereto, filed by Apple with the SEC to register shares of Apple Common
Stock under the Securities Act for public offering and sale in the IPO.
"Returns" means the returns, reports or statements (including any
information returns) any Governmental Requirement requires to be filed for
purposes of any Tax.
"Related Party Agreement" means any contract or other agreement,
written or oral, (a) to which the Company or any Company Subsidiary is a party
or is bound or by which any property of the Company or any Company Subsidiary is
bound or may be subject and (b) (i) to which any Stockholder or any of that
Stockholder's Related Persons or Affiliates also is a party, (ii) of which any
Stockholder or any of that Stockholder's Related Persons or Affiliates is a
beneficiary or (iii) as to which any transaction contemplated thereby properly
would be characterized (without regard to the amount involved) as a related
party transaction for purposes of applying the disclosure requirements of GAAP
or the SEC applicable to the Registration Statement.
"Related Person" of a Stockholder means: (a) if that Stockholder is a
natural person, (i) any Immediate Family Member of that Stockholder, (ii) any
Estate of that Stockholder or any Immediate Family Member of that Stockholder,
(iii) the trustee of any inter vivos or testamentary trust of which all the
beneficiaries are Related Persons of that Stockholder and (iv) any Entity the
entire equity interest in which is owned by any one or more of that Stockholder
and Related Persons of that Stockholder; and (b) if that Stockholder is an
Entity, Estate or trust, (i) any Person who owns an equity interest in that
Stockholder on the date hereof, (ii) any Person who would be a Related Person
under clause (a) of this definition of a natural person who is an ultimate
beneficial owner of that Stockholder or (iii) any other Entity the entire equity
interest in which is owned by any one or more of that Stockholder and Related
Persons of that Stockholder. As used in this definition, "Estate" means, as to
any natural person who has died or been adjudicated mentally incompetent by a
court of competent jurisdiction, (i) that person's estate or (ii) the
administrator, conservator, executor, guardian or representative of that estate.
"Representatives" means, with respect to any Person, the directors,
officers, employees, Affiliates, accountants (including independent certified
public accountants), advisors, attorneys, consultants or other agents of that
Person, or any other representatives of that Person or of any of those
directors, officers, employees, Affiliates, accountants (including independent
certified public accountants), advisors, attorneys, consultants or other agents.
"Reportable Event" means, with respect to any Company ERISA Pension
Plan, (a) the occurrence of any of the events set forth in Section 4043(b) or
(c) (other than a Reportable Event as to which the provision of 30 days' notice
to the PBGC is waived under applicable regulations), 4062(e) or 4063(a) of ERISA
with respect to that plan, (b) any event requiring the Company or any ERISA
Affiliate to provide security to that plan under Section 401(a)(29) of
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the Code or (c) any failure to make a payment required by Section 412(m) of the
Code with respect to that plan.
"RCRA" means the Resource Conservation and Recovery Act of 1976.
"Restricted Payment" means, with respect to any Entity at any time,
any of the following effected by that Entity: (a) any declaration or payment of
any dividend or other distribution, direct or indirect, on account of any
Capital Stock of that Entity or any Affiliate of that Entity or (b) any direct
or indirect redemption, retirement, purchase or other acquisition for value of,
or any direct or indirect purchase, payment or sinking fund or similar deposit
for the redemption, retirement, purchase or other acquisition for value of, or
to obtain the surrender of, any then outstanding Capital Stock of that Entity or
any Affiliate of that Entity or any then outstanding warrants, options or other
rights to acquire or subscribe for or purchase unissued or treasury Capital
Stock of that Entity or any Affiliate of that Entity.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933.
"Security Agreement" has the meaning set forth in the Service
Agreement.
"Solid Wastes, Hazardous Wastes or Hazardous Substances" have the
meanings ascribed to those terms in CERCLA, RCRA or any other Environmental Law
applicable to the business or operations of the Company or any Company
Subsidiary which imparts a broader meaning to any of those terms than does
CERCLA or RCRA.
"S&P" means Standard and Poor's Rating Group.
"Stockholder Indemnified Party" means (a) each Stockholder and each
of that Stockholder's Affiliates (other than the Company or, following the
Effective Time, the Surviving Corporation or Apple or any of its Subsidiaries,
if the Stockholder is an Affiliate of Apple), agents and counsel and (b) prior
to the Effective Time, the Company and each of its officers, directors,
employees, agents and counsel who are not Stockholder Indemnified Parties within
the meaning of clause (a) of this definition.
"Stockholder Indemnified Loss" has the meaning specified in Section
9.04.
"Subsidiary" of any specified Person at any time, means any entity a
majority of the Capital Stock of which is at that time owned or controlled,
directly or indirectly, by the specified Person.
"Supplemental Information" has the meaning specified in Section 6.08.
"Tax" or "Taxes" means all net or gross income, gross receipts, net
proceeds, sales, use, ad valorem, value added, franchise, bank shares,
withholding, payroll, employment, excise, property, deed, stamp, alternative or
add-on minimum, environmental or other taxes,
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assessments, duties, fees, levies or other governmental charges or assessments
of any nature whatever imposed by any Governmental Requirement, whether disputed
or not, together with any interest, penalties, additions to tax or additional
amounts with respect thereto.
"Taxing Authority" means any Governmental Authority having or
purporting to exercise jurisdiction with respect to any Tax.
"Termination Event" means, with respect to any Company ERISA Pension
Plan, (a) any Reportable Event with respect to that plan which is likely to
result in the termination of that plan, (b) the termination of, or the filing of
a notice of intent to terminate, that plan or the treatment of any amendment to
that plan as a termination under Section 4041(c) of ERISA or (c) the institution
of proceedings to terminate, or the appointment of a trustee to administer, that
plan under Section 4042 of ERISA.
"Third Party Claim" has the meaning specified in Section 9.05.
"Transaction Document" means this Agreement, the Certificates of
Merger, the General Releases, the Registration Rights Agreement, the Service
Agreement, the Security Agreement and the other written agreements, documents,
instruments and certificates executed pursuant to or in connection with this
Agreement (other than the Other Transaction Documents and the Underwriting
Agreement), including those specified in Article VII to be delivered at or
before the Closing, all as amended, modified or supplemented from time to time.
"Underwriter" means collectively (a) the investment banking firms
that prospectively may enter into the Underwriting Agreement and (b) from and
after the IPO Pricing Date, the investment banking firms parties to the
Underwriting Agreement.
"Underwriting Agreement" has the meaning specified in Section 7.02.
"Welfare Plan" means an "employee welfare benefit plan" as defined in
Section 3(1) of ERISA.
"Wholly Owned Subsidiary" means any corporation or other Entity all
of whose outstanding Capital Stock on a fully diluted basis is owned and
controlled, directly or indirectly through another Wholly Owned Subsidiary, by
the Company.
Section 1.03 OTHER DEFINITIONAL PROVISIONS. (a) Except as otherwise
specified herein, all references herein to any Governmental Requirement defined
or referred to herein, including the Code, CERCLA, ERISA, the Exchange Act, RCRA
and the Securities Act, shall be deemed references to that Governmental
Requirement or any successor Governmental Requirement, as the same may have been
amended or supplemented from time to time, and any rules or regulations
promulgated thereunder.
(b) When used in this Agreement, the words "herein," "hereof" and
"hereunder" and words of similar import shall refer to this Agreement as a whole
and not to any provision of this Agreement, and the words "Article," "Section,"
"Addendum," "Annex" and "Exhibit" refer to
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Articles and Sections of, and Annexes, Addenda and Exhibits to, this Agreement
unless otherwise specified.
(c) Whenever the context so requires, the singular number includes
the plural and vice versa, and a reference to one gender includes the other
gender and the neuter.
(d) The word "including" (and, with correlative meaning, the word
"include") means including, without limiting the generality of any description
preceding such word, and the words "shall" and "will" are used interchangeably
and have the same meaning.
Section 1.04 CAPTIONS. Captions to Articles, Sections and subsections
of, and Addenda, Annexes and Exhibits to, this Agreement or any other
Transaction Document are included for convenience of reference only, and such
captions shall not constitute a part of this Agreement or any other Transaction
Document for any other purpose or in any way affect the meaning or construction
of any provision of this Agreement or any other Transaction Document.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF EACH STOCKHOLDER
Section 3.02 OWNERSHIP AND STATUS OF COMPANY CAPITAL STOCK. The
Stockholder is the record and beneficial owner (or, if the Stockholder is a
trust or the estate of a deceased natural person, the legal owner) of the number
of shares of Capital Stock of the Company set forth, by each class, and by each
series in each class, thereof, opposite the Stockholder's name in Section 3.02
of the Disclosure Statement, free and clear of all Liens, except for the Liens
accurately set forth in Section 3.02 of the Disclosure Statement, all of which
will be released at or before the Effective Time.
Section 3.03 POWER OF THE STOCKHOLDER; APPROVAL OF THE MERGER. (a)
The Stockholder has the full power, legal capacity and authority to execute and
deliver this Agreement and each other Transaction Document to which the
Stockholder is a party and to perform the Stockholder's obligations in this
Agreement and in all other Transaction Documents to which the Stockholder is a
party. This Agreement constitutes, and each such other Transaction Document,
when executed in the Stockholder's individual capacity and delivered by the
Stockholder, will constitute, the legal, valid and binding obligation of the
Stockholder, enforceable against the Stockholder in accordance with its terms,
except as that enforceability may be (i) limited by any applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally and (ii) subject to general principles of equity
(regardless of whether that enforceability is considered in a proceeding in
equity or at law). If the Stockholder is an Entity, the Stockholder has
obtained, in accordance with all applicable Governmental Requirements and its
Charter Documents, all approvals and the taking of all actions necessary for the
authorization, execution, delivery and performance by the Stockholder of this
Agreement and the other Transaction Documents to which the Stockholder is a
party. If the Stockholder is acting otherwise than in his individual capacity
(whether as an executor or a guardian or in any other fiduciary or
representative capacity), all actions on the part of the Stockholder and all
other Persons (including any court) necessary for
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the authorization, execution, delivery and performance by the Stockholder of
this Agreement and the other Transaction Documents to which the Stockholder is a
party have been duly taken.
(b) The Stockholder, acting in each capacity in which he is entitled,
by reason of the Company's Charter Documents or the Governmental Requirements of
the Company's Organization State or for any other reason, to vote to approve or
disapprove the consummation of the Merger, has voted all the shares of Company
Capital Stock owned by him and entitled to a vote or votes on that matter, in
any one or more of the manners prescribed or permitted by the Company's Charter
Documents or the Governmental Requirements of the Company's Organization State,
whichever are controlling, to approve this Agreement and the consummation of the
Merger and the other transactions contemplated hereby.
Section 3.04 NO CONFLICTS OR LITIGATION. The execution, delivery and
performance in accordance with their respective terms by the Stockholder of this
Agreement and the other Transaction Documents to which the Stockholder is a
party do not and will not (a) violate or conflict with any Governmental
Requirement, (b) breach or constitute a default under any agreement or
instrument to which the Stockholder is a party or by which the Stockholder or
any of the shares of Company Capital Stock owned by Stockholder is bound, (c)
result in the creation or imposition of, or afford any Person the right to
obtain, any Lien upon any of the shares of Company Capital Stock owned by the
Stockholder (or upon any revenues, income or profits of the Stockholder
therefrom) or (d) if the Stockholder is an Entity, violate the Stockholder's
Charter Documents. No Litigation is pending or, to the knowledge of the
Stockholder, threatened to which the Stockholder is or may become a party which
(a) questions or involves the validity or enforceability of any of the
Stockholder's obligations under any Transaction Document or (b) seeks (or
reasonably may be expected to seek) (i) to prevent or delay the consummation by
the Stockholder of the transactions contemplated by this Agreement to be
consummated by the Stockholder or (ii) damages in connection with any
consummation by the Stockholder of the transactions contemplated by this
Agreement.
Section 3.05 NO BROKERS. Except as disclosed in the Private Placement
Memorandum or in Section 11.03 of the Disclosure Statement, the Stockholder has
not, directly or indirectly, in connection with this Agreement or the
transactions contemplated hereby (a) employed any broker, finder or agent (other
than a Purchaser Representative) or (b) agreed to pay or incurred any obligation
to pay any broker's or finder's fee, any sales commission or any similar form of
compensation.
Section 3.06 PREEMPTIVE AND OTHER RIGHTS; WAIVER. Except for the
right of the Stockholder to receive shares of Apple Common Stock as a result of
the Merger or to acquire Apple Common Stock pursuant to any written option
granted by Apple to the Stockholder, the Stockholder either (a) does not own or
otherwise have any statutory or contractual preemptive or other right of any
kind (including any right of first offer or refusal) to acquire any shares of
Company Capital Stock or Apple Common Stock or (b) hereby irrevocably waives
each right of that type the Stockholder does own or otherwise has.
Section 3.07 CONTROL OF RELATED BUSINESSES. Except as accurately set
forth in Section 3.07 of the Disclosure Statement, the Stockholder is not, alone
or with one or more other
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Persons, the controlling Affiliate of any Entity, business or trade (other than
the Company and the Company Subsidiaries, if the Stockholder is an Affiliate of
the Company) that (a) is engaged in any line of business which is the same as or
similar to any line of business in which the Company or any Company Subsidiary
is engaged or (b) is, or has within the three-year period ending on the date of
this Agreement, engaged in any transaction with the Company or any Company
Subsidiary, except for transactions in the ordinary course of business of the
Company or that Company Subsidiary.
Section 3.08 ORGANIZATION AND GOOD STANDING; QUALIFICATION. The
Orthodontic Entity is, or will be no later than the IPO Pricing Date, a
professional corporation or association duly organized, validly existing and in
good standing under the laws of its Organization State, with all requisite
corporate power and authority to carry on the business in which it intends to
engage, to own the properties it intends to own, and to execute and deliver the
Service Agreement, the Security Agreement, the Stockholder Employment Agreement
and consummate the transactions and perform the services contemplated thereby.
The Orthodontic Entity is, or will be no later than the IPO Pricing Date, duly
qualified and licensed to do business and is in good standing in all
jurisdictions where the nature of its intended business makes such qualification
necessary, which jurisdictions are listed in Section 3.08 of the Disclosure
Statement.
Section 3.09 [INTENTIONALLY LEFT BLANK].
Section 3.10 CORPORATE RECORDS. The copies of the Charter Documents,
and all amendments thereto, of the Orthodontic Entity that have been, or will
have been by the IPO Pricing Date, delivered or made available to Apple are
true, correct and complete copies thereof, as in effect on the IPO Pricing Date.
The minute books of the Orthodontic Entity, copies of which have been, or will
have been by the IPO Pricing Date, delivered or made available to Apple, contain
accurate minutes of all meetings of, and accurate consents to all actions taken
without meetings by, the Board of Directors (and any committees thereof) and the
stockholders of the Orthodontic Entity since its formation.
Section 3.11 AUTHORIZATION AND VALIDITY. The execution, delivery and
performance by the Orthodontic Entity of the Service Agreement, the Security
Agreement, the Stockholder Employment Agreement and the other agreements
contemplated thereby, and the consummation of the transactions and provisions of
services contemplated thereby, have been, or will have been by the IPO Pricing
Date, duly authorized by the Orthodontic Entity. The Service Agreement, the
Security Agreement, the Stockholder Employment Agreement and each other
agreement contemplated thereby will be as of the IPO Pricing Date duly executed
and delivered by the Orthodontic Entity and will constitute legal, valid and
binding obligations of the Orthodontic Entity enforceable against the
Orthodontic Entity in accordance with their respective terms, except as may be
limited by applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally or the availability of equitable remedies.
Section 3.12 NO VIOLATION. Neither the execution, delivery or
performance of the Service Agreement, the Security Agreement, the Stockholder
Employment Agreement or the other agreements contemplated thereby nor the
consummation of the transactions or provision of services contemplated thereby
will (a) conflict with, or result in a violation or breach of the
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terms, conditions or provisions of, or constitute a default under, the Charter
Documents of the Orthodontic Entity, or (b) to the actual knowledge of the
Stockholders, violate or conflict with any Governmental Requirement.
Section 3.13 NO BUSINESS, AGREEMENTS, ASSETS OR LIABILITIES. The
Orthodontic Entity has not commenced business since its incorporation. Other
than its Charter Documents, and as of the IPO Pricing Date, the Service
Agreement, the Security Agreement, the Stockholder Employment Agreement, the
Plans and the other contracts and agreements assigned to the Orthodontic Entity
pursuant to Section 6.12, the Orthodontic Entity is not a party to or subject to
any agreement, indenture or other instrument. The Orthodontic Entity does not
own any assets (tangible or intangible) other than the consideration received
upon the issuance of shares of its capital stock and the assets transferred
pursuant to Section 6.12, and the Orthodontic Entity does not have any
liabilities, accrued, contingent or otherwise (known or unknown and asserted or
unasserted).
Section 3.14 COMPLIANCE WITH LAWS. The Orthodontic Entity has
complied with all applicable laws, regulations and licensing requirements and
has filed with the proper authorities all necessary statements and reports,
except where failure to so comply or file would not, individually or in the
aggregate, have a material adverse effect on the business, operations or
financial condition of the Orthodontic Entity.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF
THE COMPANY AND THE STOCKHOLDERS
Section 4.02 QUALIFICATION. Section 4.02 of the Disclosure Statement
accurately lists all the jurisdictions in which each of the Company and the
Company Subsidiaries is authorized or qualified to own or lease and to operate
its properties or to carry on its business as now conducted, and neither the
Company nor any Company Subsidiary owns, leases or operates properties or
carries on its business in any jurisdiction not listed in that Section which is
Material to the Company.
Section 4.03 AUTHORIZATION; ENFORCEABILITY; ABSENCE OF CONFLICTS;
REQUIRED CONSENTS. (a) The execution, delivery and performance by the Company of
this Agreement and each other Transaction Document to which it is a party, and
the effectuation of the Merger and the other transactions contemplated hereby
and thereby, are within its corporate or other power under its Charter Documents
and the applicable Governmental Requirements of its Organization State and have
been duly authorized by all proceedings, including actions permitted to be taken
in lieu of proceedings, required under its Charter Documents and those
Governmental Requirements.
(b)This Agreement has been, and each of the other Transaction
Documents to which the Company is a party, when executed and delivered to Apple
(or, in the case of the
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Certificates of Merger, the applicable Governmental Authorities) will have been,
duly executed and delivered by the Company and is, or when so executed and
delivered will be, the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except as that
enforceability may be (i) limited by any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and (ii) subject to general principles of equity
(regardless of whether that enforceability is considered in a proceeding in
equity or at law).
(c) Except as set forth in Section 4.03 of the Disclosure Statement,
the execution, delivery and performance in accordance with their respective
terms by the Company of the Transaction Documents to which it is a party have
not and will not (i) violate, breach or constitute a default under (A) the
Charter Documents of any of the Company and the Company Subsidiaries, (B) any
Governmental Requirement applicable to any of the Company and the Company
Subsidiaries or (C) any Material Agreement of the Company, (ii) result in the
acceleration or mandatory prepayment of any Indebtedness, or any Guaranty not
constituting Indebtedness, of any of the Company and the Company Subsidiaries or
afford any holder of any of that Indebtedness, or any beneficiary of any of
those Guaranties, the right to require any of the Company and the Company
Subsidiaries to redeem, purchase or otherwise acquire, reacquire or repay any of
that Indebtedness, or to perform any of those Guaranties, (iii) cause or result
in the imposition of, or afford any Person the right to obtain, any Lien upon
any property or assets of any of the Company and the Company Subsidiaries (or
upon revenues, income or profits of any of the Company and the Company
Subsidiaries therefrom) or (iv) result in the revocation, cancellation,
suspension or material modification, in any single case or in the aggregate, of
any Governmental Approval possessed by any of the Company and the Company
Subsidiaries at the date hereof and necessary for the ownership or lease or the
operation of its properties or the carrying on of its business as now conducted,
including any necessary Governmental Approval under each applicable
Environmental Law and Professional Code.
(d) Except (i) for the filing of the Certificates of Merger with the
applicable Governmental Authorities, (ii) filings of the Registration Statement
under the Securities Act and the SEC order declaring the Registration Statement
effective under the Securities Act and (iii) as may be required by the HSR Act
or the applicable state securities or blue sky laws, no Governmental Approvals
are required to be obtained, and no reports or notices to or filings with any
Governmental Authority are required to be made, by any of the Company and the
Company Subsidiaries for the execution, delivery or performance by the Company
of the Transaction Documents to which it is a party, the enforcement against the
Company of its obligations thereunder or the effectuation of the Merger and the
other transactions contemplated thereby.
Section 4.04 CHARTER DOCUMENTS AND RECORDS; NO VIOLATION. The Company
has caused true, complete and correct copies of the Charter Documents, each as
in effect on the date hereof, and the minute books and similar corporate or
other Entity records of each of the Company and the Company Subsidiaries to be
delivered or otherwise made available to Apple. No breach or violation of any
Charter Document of any of the Company and the Company Subsidiaries has occurred
and is continuing.
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Section 4.05 NO DEFAULTS. No condition or state of facts exists, or,
with the giving of notice or the lapse of time or both, would exist, which (a)
entitles any holder of any outstanding Indebtedness, or any Guaranty not
constituting Indebtedness, of any of the Company and the Company Subsidiaries,
or a representative of that holder, to accelerate the maturity, or require a
mandatory prepayment, of that Indebtedness or Guaranty, or affords that holder
or its representative, or any beneficiary of that Guaranty, the right to require
any of the Company and the Company Subsidiaries to redeem, purchase or otherwise
acquire, reacquire or repay any of that Indebtedness, or to perform that
Guaranty in whole or in part, (b) entitles any Person to obtain any Lien (other
than a Permitted Lien) upon any properties or assets of any of the Company and
the Company Subsidiaries (or upon revenues, income or profits of any of the
Company and the Company Subsidiaries therefrom) or (c) constitutes a violation
or breach of, or a default under, any Material Agreement of the Company by any
of the Company and the Company Subsidiaries.
Section 4.06 COMPANY SUBSIDIARIES. Section 4.06 of the Disclosure
Statement either (a) accurately sets forth the form of organization, legal name,
each assumed name and Organization State of each Company Subsidiary or (b)
correctly states no Entity is a Company Subsidiary. Except as accurately
disclosed in Section 4.06 of the Disclosure Statement, each Company Subsidiary
is a Wholly Owned Subsidiary. In the case of any Company Subsidiary that is not
a Wholly Owned Subsidiary, Section 4.06 of the Disclosure Statement accurately
sets forth, by each class and each series within each class, the number of
outstanding shares of Capital Stock of the Company Subsidiary, (a) the Company's
aggregate direct and indirect ownership of those shares and (b) the name and
address of record and percentage ownership of those shares of each holder of
record thereof other than the Company or a Company Subsidiary. No Lien exists on
any outstanding share of Capital Stock of any Company Subsidiary which is owned
directly or indirectly by the Company other than (a) the Liens, if any,
described in Section 4.06 of the Disclosure Statement, all of which will be
released at or before the Effective Time, and (b) Permitted Liens. Except as
accurately set forth in Section 4.06 of the Disclosure Statement, the Company
does not own, of record or beneficially, directly or indirectly through any
Person, and does not control, directly or indirectly through any Person or
otherwise, any Capital Stock or Derivative Securities of any Entity other than a
Company Subsidiary.
Section 4.07 CAPITAL STOCK OF THE COMPANY AND THE COMPANY
SUBSIDIARIES. All the issued and outstanding shares of Capital Stock of each of
the Company and the Company Subsidiaries (a) have been duly authorized and
validly issued in accordance with the applicable Governmental Requirements of
their issuer's Organization State and Charter Documents and (b) are fully paid
and nonassessable. Neither the Company nor any Company Subsidiary has issued or
sold any shares of its outstanding Capital Stock in breach or violation of (a)
any applicable statutory or contractual preemptive rights, or any other rights
of any kind (including any rights of first offer or refusal), of any Person or
(b) the terms of any of its Derivative Securities which then were outstanding.
No Person has, otherwise than solely by reason of that Person's right, if any,
to vote shares of the Capital Stock of the Company or any Company Subsidiary it
holds (to the extent those shares afford the holder thereof any voting rights)
any right to vote on any matter with the holders of Capital Stock of the Company
or any Company Subsidiary.
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Section 4.08 TRANSACTIONS IN CAPITAL STOCK. Except as accurately set
forth in Section 4.08 of the Disclosure Statement: (a) the Company has no
obligation (contingent or otherwise) to purchase, redeem or otherwise acquire or
reacquire any of its equity securities or any interests therein or to pay any
dividend or make any distribution in respect thereof; and (b) no transaction has
been effected, and no action in contemplation of the transactions described in
this Agreement has been taken, respecting the equity ownership of either the
Company or any Company Subsidiary.
Section 4.09 NO BONUS SHARES. Except as accurately set forth in
Section 4.09 of the Disclosure Statement, no outstanding share of Capital Stock
of the Company was issued for less than the fair market value thereof at the
time of issuance or was issued in exchange for any consideration other than
cash.
Section 4.10 PREDECESSOR STATUS; ETC. Section 4.10 of the Disclosure
Statement accurately lists all the legal and assumed names of all predecessor
companies for the past five years of the Company, including the names of any
Entities from which the Company previously acquired material assets. Except as
accurately disclosed in Section 4.10 of the Disclosure Statement, the Company
has not been a Subsidiary or division of another corporation or a part of an
acquisition that later was rescinded.
Section 4.11 RELATED PARTY AGREEMENTS. Except as set forth in Section
4.11 of the Disclosure Statement, each Related Party Agreement in effect on the
date hereof will have been terminated as of the IPO Closing Date, and no Related
Party Agreement will exist then or thereafter to and including the Effective
Time.
Section 4.12 LITIGATION. Except as accurately disclosed in Section
4.12 of the Disclosure Statement, no Litigation is pending or, to the knowledge
of the Company or any Stockholder, threatened to which the Company or any
Company Subsidiary is or may become a party.
Section 4.13 FINANCIAL STATEMENTS; DISCLOSURE. (a) FINANCIAL
STATEMENTS. (i) The Financial Statements (including in each case the related
schedules and notes) delivered to Apple present fairly, in all material
respects, the consolidated financial position of the Company and the Company
Subsidiaries at the respective dates of the balance sheets included therein and
the consolidated results of their operations and their consolidated cash flows
and stockholders' or other owners' equity for the respective periods set forth
therein and have been prepared in accordance with GAAP. As of the date of any
balance sheet included in those Financial Statements, neither the Company nor
any Company Subsidiary then had any outstanding Indebtedness to any Person or
any liabilities of any kind (including contingent obligations, tax assessments
or unusual forward or long-term commitments), or any unrealized or anticipated
loss, which in the aggregate then were Material to the Company and required to
be reflected in those Financial Statements or in the notes related thereto in
accordance with GAAP which were not so reflected.
(ii) Since the Current Balance Sheet Date, no change has occurred in
the business, operations, properties or assets, liabilities, condition
(financial or other) or results of operations
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of the Company or any Company Subsidiary that could reasonably be expected,
either alone or together with all other such changes, to have a Material Adverse
Effect on the Company.
(iii) All financial budgets and projections that have been or are
hereafter from time to time prepared by the Company or any of its
Representatives and made available prior to the Effective Time to Apple pursuant
to or in connection with this Agreement, any other Transaction Document or the
transactions contemplated hereby or thereby have been and will be prepared and
furnished to Apple in good faith and were and will be based on facts and
assumptions that are believed by the management of the Company to be reasonable
in light of the then current and foreseeable business conditions of the Company
and the Company Subsidiaries and represented and will represent that
management's good faith estimate of the consolidated projected financial
performance of the Company and the Company Subsidiaries based on the information
available to the Responsible Officer at the time so furnished.
Section 4.14 COMPLIANCE WITH LAWS. (a) Except as accurately disclosed
in Section 4.14 of the Disclosure Statement: (i) each of the Company and the
Company Subsidiaries possesses, if required by the applicable Governmental
Requirement, Governmental Approvals required for the conduct of its business;
and (ii) each of the Company and the Company Subsidiaries and, to their
knowledge their employees are, in compliance in all material respects with the
terms and conditions of all Governmental Approvals necessary for the ownership
or lease and the operation of its properties (including all the facilities and
sites it owns or holds under any lease) and the carrying on of its business as
now conducted. The Company has provided Apple with an accurate, complete written
list of all the Governmental Approvals so possessed. To the knowledge of the
Company, all the Governmental Approvals so listed are valid, and, except as
accurately disclosed in Section 4.14 of the Disclosure Statement, neither the
Company nor any Company Subsidiary has received, nor to the knowledge of any
Stockholder has any employee of either received, any notice from any
Governmental Authority of its intention to cancel, terminate or not renew any of
those Governmental Approvals.
(b) Except as accurately disclosed in Section 4.14 of the Disclosure
Statement, each of the Company and the Company Subsidiaries: (i) to the
knowledge of the Company, has been and continues to be in compliance with all
Governmental Requirements applicable to it or any of its presently or previously
owned or operated properties (including all the facilities and sites now or
previously owned or held by it under any lease), businesses or operations,
including all applicable Governmental Requirements under ERISA, Environmental
Laws and Professional Codes; and (ii)(A) neither the Company nor any Company
Subsidiary has received, nor to the knowledge of the Company has any employee of
either received, any notice from any Governmental Authority which asserts, or
raises the possibility of assertion of, any noncompliance with any of those
Governmental Requirements and, to the knowledge of each of the Company, the
Company Subsidiaries and the Stockholders, (B) no condition or state of facts
exists which would provide a valid basis for any such assertion.
Section 4.15 CERTAIN ENVIRONMENTAL MATTERS. Except as accurately
disclosed in Section 4.15 of the Disclosure Statement: (a) to the knowledge of
the Company, the Company and each Company Subsidiary have complied, and remain
in compliance, to the knowledge of the Company, with the provisions of all
Environmental Laws applicable to any of them or any
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of their respective presently owned or operated facilities, sites or other
properties, businesses and operations and which relate to the reporting by the
Company and each Company Subsidiary of all sites presently owned or operated by
any of them where Solid Wastes, Hazardous Wastes or Hazardous Substances have
been treated, stored, disposed of or otherwise handled; (b) no release (as
defined in those Environmental Laws) at, from, in or on any site owned or
operated by the Company or any Company Subsidiary has occurred which, if all
relevant facts were known to the relevant Governmental Authorities, reasonably
could be expected to require remediation to avoid deed record notices,
restrictions, liabilities or other consequences that would not be applicable if
that release had not occurred; (c) neither the Company nor any Company
Subsidiary (or any agent or contractor of either) has transported or arranged
for the transportation of any Solid Wastes, Hazardous Wastes or Hazardous
Substances to, or disposed or arranged for the disposition of any Solid Wastes,
Hazardous Wastes or Hazardous Substances at, any off-site location that could
lead to any claim against the Company, any Company Subsidiary or Apple, as a
potentially responsible party or otherwise, for any clean-up costs, remedial
work, damage to natural resources, personal injury or property damage, including
any claim under CERCLA; and (d) no storage tanks exist on or under any of the
properties owned or operated by the Company or any Company Subsidiary from which
any Solid Wastes, Hazardous Wastes or Hazardous Substances have been released
into the surrounding environment. The Company has provided Apple with copies (or
if not available, accurate written summaries) of all environmental
investigations, studies, audits, reviews and other analyses conducted by or on
behalf, or which otherwise are in the possession, of the Company or any Company
Subsidiary respecting any facility, site or other property presently owned or
operated by the Company and each Company Subsidiary.
Section 4.16 LIABILITIES AND OBLIGATIONS. Section 4.16 of the
Disclosure Statement accurately lists all present liabilities, of every kind,
character and description and whether accrued, absolute, fixed, contingent or
otherwise, of each of the Company and the Company Subsidiaries which (a) (i)
exceed or reasonably could be expected to exceed $1,000 and (ii) (A) had been
incurred prior to the Current Balance Sheet Date, but are not reflected on the
Current Balance Sheet, or (B) were incurred after the Current Balance Sheet
otherwise than in the ordinary course of business, and consistent with the past
practice, of that Entity. That Section also accurately lists and describes, for
each of the Company and the Company Subsidiaries: (a) each of its outstanding
secured and unsecured Guaranties not constituting its Indebtedness and, for each
of those Guaranties, whether any Stockholder or Related Person or Affiliate of
any Stockholder is a Person whose obligation is covered by that Guaranty, and
(b) for each of the items listed under clause (a) of this sentence, (i) if that
item is secured by any property or asset of the Company or any Company
Subsidiary, the nature of that security, and (ii) if that item is covered in
whole or in part by a Guaranty of any Stockholder or any Related Person or
Affiliate of any Stockholder, the name of the guarantor.
Section 4.17 RECEIVABLES. Except as accurately set forth in Section
4.17 of the Disclosure Statement; all the accounts and notes or other advances
receivable of the Company and the Company Subsidiaries reflected on the Current
Balance Sheet were collected, or are, in the good faith belief of the Company's
management, collectible, in the respective amounts so reflected, net of the
reserves, if any, reflected in the Current Balance Sheet.
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Section 4.18 OWNED AND LEASED REAL PROPERTIES. (a) Section 4.18 of
the Disclosure Statement accurately lists and correctly describes in all
material respects: (i) all real properties owned by any of the Company and the
Company Subsidiaries and, for each of those properties, the address thereof, the
type and square footage of each structure located thereon and the use thereof in
the business of the Company and the Company Subsidiaries; (ii) all real
properties of which any of the Company and the Company Subsidiaries is the
lessee and, for each of those properties, the address thereof, the type and
square footage of each structure located thereon the Company or a Company
Subsidiary is leasing and the expiration date of its lease and the use thereof
in the business of the Company and the Company Subsidiaries; and (iii) in the
case of each real property listed as being owned, whether it was previously
owned, and in the case of each real property listed as being leased, whether it
is presently owned, by any Stockholder or any of his Related Persons or
Affiliates (other than the Company and the Company Subsidiaries, if the
Stockholder is an Affiliate of the Company).
(b) The Company has provided Apple with true, complete and correct
copies of all title reports and insurance policies owned or in the possession of
any of the Company and the Company Subsidiaries and relating to any of the real
properties listed as being owned in Section 4.18 of the Disclosure Statement.
Except as accurately set forth in that Section or those reports and policies,
and except for Permitted Liens, the Company or a Company Subsidiary owns in fee,
and has good, valid and marketable title to, free and clear of all Liens, each
property listed in that Section as being owned.
(c) The Company has provided Apple with true, correct and complete
copies of all leases under which the Company or a Company Subsidiary is leasing
each of the properties listed in Section 4.18 of the Disclosure Statement as
being leased and, except as accurately set forth in Section 4.18 of the
Disclosure Statement, (i) each of those leases is, to the knowledge of the
Company, valid and binding on the lessor party thereto, and (ii) the lessee
party thereto has not sublet any of the leased space to any Person other than
the Company or a Company Subsidiary.
(d) The fixed assets of each of the Company and the Company
Subsidiaries are affixed only to one or more of the real properties listed in
Section 4.18 of the Disclosure Statement and, except as accurately set forth in
that Section, are well-maintained and adequate for the purposes for which they
presently are being used or held for use, ordinary wear and tear excepted.
(e) The Company has accurately disclosed in Section 4.18 of the
Disclosure Statement in all material respects all plans or projects involving
the opening of new operations, the expansion of any existing operations or the
acquisition of any real property or existing business, with respect to which
management of the Company or any Company Subsidiary has made any expenditure in
the two-year period prior to the date of the Agreement in excess of $1,000, or
which if pursued by the Company or any Company Subsidiary would require
additional capital expenditures in excess of $1,000.
Section 4.19 OWNED AND LEASED PROPERTY, PLANT AND EQUIPMENT. (a) The
Company has provided Apple with a list accurate and complete in all material
respects of the Property, Plant and Equipment owned and leased by any of the
Company and the Company Subsidiaries, which list states, in the case of each of
those properties listed as being owned, whether it was
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previously owned, and in the case of each of those properties listed as being
leased, whether it is presently owned, by any Stockholder or any of his Related
Persons or Affiliates (other than the Company and the Company Subsidiaries, if
the Stockholder is an Affiliate of the Company).
(b) Except as accurately set forth in Section 4.19 of the Disclosure
Statement and except for Permitted Liens, the Company or a Company Subsidiary
has good, valid and marketable title to, free and clear of all Liens, the
property owned by it.
(c) The Company has provided Apple with true, correct and complete
copies of all leases under which the Company or a Company Subsidiary is leasing
each of the properties listed in Section 4.21 of the Disclosure Statement as
being leased and all leases referred to in Section 4.19 and, except as
accurately set forth in Section 4.19 of the Disclosure Statement, (i) each of
those leases is, to the knowledge of the Company, valid and binding on the
lessor party thereto, and (ii) the lessee party thereto has not sublet any of
the leased property to any Person other than the Company or a Company
Subsidiary.
(d) Except as accurately set forth in Section 4.19 of the Disclosure
Statement, all the Property, Plant and Equipment are in good working order and
condition, ordinary wear and tear excepted, and adequate for the purposes for
which they presently are being used or held for use.
Section 4.20 PROPRIETARY RIGHTS. Except as accurately set forth in
Section 4.20 of the Disclosure Statement, each of the Company and the Company
Subsidiaries owns or has the legal right to use all Proprietary Rights that are
necessary to the conduct of its business as now conducted, in each case free of
any claims or infringements known to the Company or any Stockholder. Section
4.20 of the Disclosure Statement accurately (a) lists these Proprietary Rights
and (b) indicates those owned by the Company or any Company Subsidiary and, for
those not listed as so owned, the agreement or other arrangement pursuant to
which they are possessed. Except as accurately set forth in that Section, (a) no
consent of any Person will be required for the use of any of these Proprietary
Rights by Apple or any Subsidiary of Apple following the Effective Time and (b)
no governmental registration of any of these Proprietary Rights has lapsed or
expired or been canceled, abandoned, opposed or the subject of any reexamination
request.
Section 4.21 TITLE TO OTHER PROPERTIES. In each case, free and clear
of all Liens except for Permitted Liens and as accurately set forth in Section
4.21 of the Disclosure Statement, each of the Company and the Company
Subsidiaries has good and valid title to, or holds under a lease valid and
binding on the lessor party thereto, all its tangible personal properties and
assets (other than Property, Plant and Equipment) that individually is or in the
aggregate are Material to the Company.
Section 4.22 COMMITMENTS. (a) Except as accurately set forth in
Section 4.22(a) of the Disclosure Statement, the Company has provided Apple with
a complete, accurate list of each of the following (each a "Company Commitment")
to which any of the Company and the Company Subsidiaries is a party or by which
any of its properties is bound and which presently remains executory in whole or
in any part:
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(i) each partnership, joint venture or cost-sharing
agreement;
(ii) each guaranty or suretyship, indemnification or
contribution agreement or performance bond;
(iii) each instrument, agreement or other
obligation evidencing or relating to
Indebtedness of any of the Company and
the Company Subsidiaries or to money
lent or to be lent to another Person;
(iv) each contract to purchase or sell real property;
(v) each agreement with dealers or sales or commission
agents, public relations or advertising agencies,
accountants or attorneys (other than in connection
with this Agreement and the transactions contemplated
hereby) involving total payments within any 12-month
period in excess of $5,000 and which is not terminable
without penalty and on no more than 30 days' prior
notice;
(vi) each Related Party Agreement involving
total payments within any 12-month
period in excess of $1,000 and which
is not terminable without penalty on
no more than 30 days' prior notice;
(vii) each agreement for the acquisition or
provision of services, supplies,
equipment, inventory, fixtures or
other property involving more than
$1,000 in the aggregate;
(viii) each contract containing any noncompetition agreement,
covenant or undertaking;
(ix) each agreement providing for the purchase from a
supplier of all or substantially all the requirements
of the Company or any Company Subsidiary of a
particular product or service; or
(x) each other agreement or commitment not made in the
ordinary course of business or that is Material to the
Company.
True, correct and complete copies of all written Company Commitments,
and true, correct and complete written descriptions of all oral Company
Commitments, have heretofore been delivered or made available to Apple. Except
as accurately set forth in Section 4.22(a) of the Disclosure Statement: (i)
there are no existing or asserted defaults, events of default or events,
occurrences, acts or omissions that, with the giving of notice or lapse of time
or both,
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would constitute defaults or events of default under any Company Commitment
Material to the Company by any of the Company and the Company Subsidiaries or,
to the knowledge of the Company, any other party thereto; and (ii) no penalties
have been incurred, nor are amendments pending, with respect to the Company
Commitments Material to the Company. The Company Commitments are in full force
and effect and are valid and enforceable obligations of the Company or the
Company Subsidiaries parties thereto and, to the knowledge of the Company, the
other parties thereto in accordance with their respective terms, and no
defenses, off-sets or counterclaims have been asserted or, to the knowledge of
the Company, may be made by any party thereto (other than by the Company or a
Company Subsidiary), nor has the Company or a Company Subsidiary, as the case
may be, waived any rights thereunder, except as accurately described in Section
4.22(a) of the Disclosure Statement.
(b) Except as accurately disclosed in Section 4.22(b) of the
Disclosure Statement or contemplated hereby or by any other Transaction Document
to which the Company or any Company Subsidiary or Stockholder is a party: (i)
neither the Company nor any Company Subsidiary or Stockholder has received
notice of any plan or intention of any other party to any Company Commitment to
exercise any right to cancel or terminate any Company Commitment, and neither
the Company nor any Company Subsidiary or Stockholder knows of any condition or
state of facts which would justify the exercise of such a right; and (ii)
neither the Company nor any Company Subsidiary or Stockholder currently
contemplates, or has reason to believe any other Person currently contemplates,
any amendment or change to any Company Commitment.
Section 4.23 CAPITAL EXPENDITURES. Section 4.23 of the Disclosure
Statement accurately sets forth the total amount of capital expenditures
currently budgeted to be incurred by the Company and the Company Subsidiaries
during the balance of the Company's current fiscal year. Except as accurately
set forth in that Section, to the knowledge of the Company and the Stockholders,
no condition or state of facts exists which will cause the total capital
expenditures of the Company and the Company Subsidiaries which will be required
to replace worn-out Property, Plant and Equipment in any of the Company's five
fiscal years following that current fiscal year to exceed by a material amount
the amount budgeted for capital expenditures of that type by the Company and the
Company Subsidiaries for that current fiscal year in order to maintain the types
and levels of patients and services the Company and the Company Subsidiaries
presently provide.
Section 4.24 INVENTORIES. Except as accurately set forth in Section
4.24 of the Disclosure Statement: (a) all inventories, net of reserves
determined in accordance with GAAP, of each of the Company and the Company
Subsidiaries which are classified as such on the Current Balance Sheet are, to
the knowledge of the Company, merchantable and salable or usable in the ordinary
course of business of the Company and the Company Subsidiaries; (b) the
inventories reflected in the Financial Statements, as at the Current Balance
Sheet Date, (i) were reasonable in relation to the then existing circumstances
of the Company and the Company Subsidiaries on a consolidated basis and
classified as current assets in accordance with GAAP, (ii) were consistent with
their past practices and (iii) fairly reflected the average inventory levels
maintained during the 12-month periods ended on that date; and (c) neither the
Company nor any Company Subsidiary depends on any single vendor for its
inventories the loss of which
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could have a Material Adverse Effect on the Company or ever has sustained a
difficulty Material to the Company in obtaining its inventories.
Section 4.25 INSURANCE. Except as accurately set forth in Section
4.25 of the Disclosure Statement: (a) the Company has provided Apple with: (i) a
list accurate as of the Current Balance Sheet Date of all insurance policies
then carried by each of the Company and the Company Subsidiaries; (ii) an
accurate list of all insurance loss runs and worker's compensation claims
received for the most recently ended three policy years; and (iii) true,
complete and correct copies of all insurance policies carried by each of the
Company and the Company Subsidiaries which are in effect, all of which (A) have
been issued by insurers of recognized responsibility and (B) currently are, and
will remain without interruption through the IPO Closing Date, in full force and
effect; (b) no insurance carried by the Company or any Company Subsidiary has
been canceled by the insurer during the past five years, and neither the Company
nor any Company Subsidiary has ever been denied coverage; and (c) neither the
Company nor any Company Subsidiary or Stockholder has received any notice or
other communication from any issuer of any such insurance policy of any material
increase in any deductibles, retained amounts or the premiums payable
thereunder, and, to the knowledge of the Company and the Stockholders, no such
increase in deductibles, retainages or premiums is threatened.
Section 4.26 EMPLOYEE MATTERS. (a) CASH COMPENSATION. The Company has
provided Apple with an accurate, complete written list of the names, titles and
rates of annual Cash Compensation, at the Current Balance Sheet Date and at the
date hereof (and the portions thereof attributable to salary or the equivalent,
fixed bonuses, discretionary bonuses and other Cash Compensation, respectively)
of all key employees (including all employees who are officers or directors),
nonemployee officers, nonemployee directors and key consultants and independent
contractors of each of the Company and the Company Subsidiaries.
(b) EMPLOYMENT AGREEMENTS. Section 4.26(b) of the Disclosure
Statement accurately lists all Employment Agreements remaining executory in
whole or in part on the date hereof, and the Company has provided Apple with
true, complete and correct copies of all those Employment Agreements. Neither
the Company nor any Company Subsidiary is a party to any oral Employment
Agreement.
(c) OTHER COMPENSATION PLANS. Section 4.26(c) of the Disclosure
Statement accurately lists all Other Compensation Plans either remaining
executory at the date hereof or to become effective after the date hereof. The
Company has provided Apple with a true, correct and complete copy of each of
those Other Compensation Plans that is in writing and an accurate description of
each of those Other Compensation Plans that is not written. Except as accurately
set forth in Section 4.26(c) of the Disclosure Statement, each of the Other
Compensation Plans, including each that is a Welfare Plan, may be unilaterally
amended or terminated by the Company or any Company Subsidiary without liability
to any of them, except as to benefits accrued thereunder prior to that amendment
or termination.
(d) ERISA BENEFIT PLANS. Section 4.26(d) of the Disclosure
Statement accurately (i) lists each ERISA Pension Benefit Plan (A)(1) the
funding requirements of which
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(under Section 301 of ERISA or Section 412 of the Code) are, or at any time
during the six-year period ending on the date hereof were, in whole or in part,
the responsibility of the Company or any Company Subsidiary or (2) respecting
which the Company or any Company Subsidiary is, or at any time during that
period was, a "contributing sponsor" or an "employer" as defined in Sections
4001(a)(13) and 3(5), respectively, of ERISA (each plan described in this clause
(A) being a "Company ERISA Pension Plan"), (B) each other ERISA Pension Benefit
Plan respecting which an ERISA Affiliate is, or at any time during that period
was, such a "contributing sponsor" or "employer" (each plan described in this
clause (B) being an "ERISA Affiliate Pension Plan") and (C) each other ERISA
Employee Benefit Plan that is being, or at any time during that period was,
sponsored, maintained or contributed to by the Company or any Company Subsidiary
(each plan described in this clause (C) and each Company ERISA Pension Plan
being a "Company ERISA Benefit Plan"), (ii) states the termination date of each
Company ERISA Benefit Plan and ERISA Affiliate Pension Plan that has been
terminated and (iii) identifies for each ERISA Affiliate Pension Plan the
relevant ERISA Affiliates. The Company has provided Apple with (i) true,
complete and correct copies of (A) each Company ERISA Benefit Plan and ERISA
Affiliate Pension Plan, (B) each trust agreement related thereto and (C) all
amendments to those plans and trust agreements. Except as accurately set forth
in Section 4.26(d) of the Disclosure Statement, (i) neither the Company nor any
Company Subsidiary is, or at any time during the six-year period ended on the
date hereof was, a member of any ERISA Group that currently includes, or
included when the Company or a Company Subsidiary was a member, among its
members any Person other than the Company and the Company Subsidiaries and (ii)
no Person is an ERISA Affiliate of the Company or any Company Subsidiary (other
than the Company or any Company Subsidiary in the case of any other Company
Subsidiary or any Company Subsidiary in the case of the Company, if the Company
and the Company Subsidiaries comprise an ERISA Group).
(e) EMPLOYEE POLICIES AND PROCEDURES. Section 4.26(e) of the
Disclosure Statement accurately lists all Employee Policies and Procedures. The
Company has provided Apple with a copy of all written Employee Policies and
Procedures and a written description of all material unwritten Employee Policies
and Procedures.
(f) UNWRITTEN AMENDMENTS. Except as accurately described in Section
4.26(f) of the Disclosure Statement, no material unwritten amendments have been
made, whether by oral communication, pattern of conduct or otherwise, with
respect to any of the Employment Agreements, Other Compensation Plans or
Employee Policies and Procedures.
(g) LABOR COMPLIANCE. To the knowledge of the Company, each of the
Company and the Company Subsidiaries has been and is in compliance with all
applicable Governmental Requirements respecting employment and employment
practices, terms and conditions of employment and wages and hours, and neither
the Company nor any Company Subsidiary is liable for any arrears of wages or
penalties for failure to comply with any of the foregoing. Neither the Company
nor any Company Subsidiary has engaged in any unfair labor practice or
discriminated on the basis of race, color, religion, sex, national origin, age,
disability or handicap in its employment conditions or practices. Except as
accurately set forth in Section 4.26(g) of the Disclosure Statement, there are
no (i) unfair labor practice charges or complaints or racial, color, religious,
sex, national origin, age, disability or handicap discrimination charges
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<PAGE>
or complaints pending or, to the knowledge of the Company, threatened against
the Company or any of the Company Subsidiaries before any Governmental Authority
(nor, to the knowledge of the Company, does any valid basis therefor exist) or
(ii) existing or, to the knowledge of the Company, threatened labor strikes,
disputes, grievances, controversies or other labor troubles affecting the
Company or any of the Company Subsidiaries (nor, to the knowledge of the
Company, does any valid basis therefor exist).
(h) UNIONS. Neither the Company nor any Company Subsidiary or ERISA
Affiliate has ever been a party to any agreement with any union, labor
organization or collective bargaining unit. No employees of the Company and the
Company Subsidiaries are represented by any union, labor organization or
collective bargaining unit. Except as accurately set forth in Section 4.26(h) of
the Disclosure Statement, to the knowledge of the Company, none of the employees
of the Company and the Company Subsidiaries has threatened to organize or join a
union, labor organization or collective bargaining unit.
(i) NO ALIENS. All employees of each of the Company and the Company
Subsidiaries are citizens of, or are authorized in accordance with federal
immigration laws to be employed in, the United States.
(j) CHANGE OF CONTROL BENEFITS. Except as accurately set forth in
Section 4.26(j) of the Disclosure Statement, neither the Company nor any of the
Company Subsidiaries is a party to any agreement, or has established any policy,
practice or program, requiring it to make a payment or provide any other form of
compensation or benefit or vesting rights to any person performing services for
the Company or any of the Company Subsidiaries which would not be payable or
provided in the absence of this Agreement or the consummation of the
transactions contemplated by this Agreement, including any parachute payment
under Section 280G of the Code.
(k) RETIREES. Neither the Company nor any of the Company Subsidiaries
has any obligation or commitment to provide medical, dental or life insurance
benefits to or on behalf of any of its employees who may retire or any of its
former employees who have retired except as may be required pursuant to the
continuation of coverage provisions of Section 4980B of the Code and the
applicable parallel provisions of ERISA.
Section 4.27 COMPLIANCE WITH ERISA, ETC. (a) COMPLIANCE. Each of the
Company ERISA Benefit Plans and Other Compensation Plans (each, a "Plan") (i) is
in substantial compliance with all applicable provisions of ERISA, as well as
with all other applicable Governmental Requirements, and (ii) has been
administered, operated and managed in accordance with its governing documents.
(b) QUALIFICATION. All Plans that are intended to qualify under
Section 401(a) of the Code (the "Qualified Plans") are so qualified and have
been determined by the IRS to be so qualified (or application for determination
letters have been timely submitted to the IRS). The Company has provided Apple
with true, complete and correct copies of the current plan determination
letters, most recent actuarial valuation reports, if any, most recent Form 5500,
or, as applicable, Form 5500-C/R, filed with respect to each such Qualified Plan
and most
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recent trustee or custodian report. To the extent that any Qualified Plans have
not been amended to comply with applicable Governmental Requirements, the
remedial amendment period permitting retroactive amendment of these Qualified
Plans has not expired and will not expire within 120 days after the Effective
Time. All reports and other documents required to be filed with any governmental
agency or distributed to plan participants or beneficiaries (including annual
reports, summary annual reports, actuarial reports, PBGC-1 Forms, audits or
Returns) have been timely filed or distributed.
(c) NO PROHIBITED TRANSACTIONS, ETC. None of the Stockholders, any
Plan or the Company or any Company Subsidiary has engaged in any Prohibited
Transaction. No Plan has incurred an accumulated funding deficiency, as defined
in Section 412(a) of the Code and Section 302(a) of ERISA, and no circumstances
exist pursuant to which the Company or any Company Subsidiary could have any
direct or indirect liability whatsoever (including being subject to any
statutory Lien to secure payment of any such liability), to the PBGC under Title
IV of ERISA or to the IRS for any excise tax or penalty with respect to any Plan
now or hereafter maintained or contributed to by the Company or any of its ERISA
Affiliates. Further:
(i) there have been no terminations,
partial terminations or
discontinuances of contributions to
any Qualified Plan without a
determination by the IRS that such
action does not adversely affect the
tax-qualified status of that plan;
(ii) no Termination Event has occurred;
(iii) no Reportable Event has occurred with respect to any
Plan which was not properly reported;
(iv) the valuation of assets of any Qualified Plan, as of
the Effective Time, shall equal or exceed the
actuarial present value of all "benefit liabilities"
(within the meaning of Section 40001(a)(16) of ERISA)
under that plan in accordance with the assumptions
contained in the Regulations of the PBGC governing the
funding of terminated defined benefit plans;
(v) with respect to Plans qualifying as "group health
plans" under Section 4980B of the Code or Section
607(l) or 609 of ERISA and related regulations
(relating to the benefit continuation rights imposed
by "COBRA" or qualified medical child support orders),
the Company, each Company Subsidiary and the
Stockholders have complied (and at the Effective Time
will have complied) in all material respects with all
reporting, disclosure, notice, election and other
benefit continuation and coverage requirements imposed
thereunder as and when applicable to those plans, and
neither the Company nor any Company
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Subsidiary has incurred (or will
incur) any direct or indirect
liability or is (or will be) subject
to any loss, assessment, excise tax
penalty or other sanction, arising on
account of or in respect of any direct
or indirect failure by the Company,
any Company Subsidiary or any
Stockholder, at any time prior to the
Effective Time, to comply with any
such federal or state benefit
continuation or coverage requirement,
which is capable of being assessed or
asserted before or after the Effective
Time directly or indirectly against
the Company, any Company Subsidiary,
any Stockholder, the Surviving
Corporation or Apple with respect to
any of those group health plans;
(vi) the Financial Statements as of the
Current Balance Sheet Date reflect the
approximate total unfunded (or
uninsured) pension, medical and other
benefit liability for all Plans
determined in accordance with
accounting principles and actuarial
assumptions consistently applied in
the ongoing administration of the
Plans; and
(vii) neither the Company nor any Company Subsidiary has
incurred liability under Section 4062 of ERISA.
(d) MULTIEMPLOYER PLANS. Except as set forth in Section 4.27(d) of
the Disclosure Statement, neither the Company nor any Company Subsidiary, and no
ERISA Affiliate of any of them, is, or at any time during the six-year period
ended on the date hereof was, obligated to contribute to a Multiemployer Plan.
Neither the Company nor any Company Subsidiary, and no ERISA Affiliate of any of
them, has made a complete or partial withdrawal from a Multiemployer Plan so as
to incur withdrawal liability as defined in Section 4201 of ERISA.
(e) CLAIMS AND LITIGATION. Except as accurately set forth in Section
4.27(e) of the Disclosure Statement, no Litigation or claims (other than routine
claims for benefits) are pending or, to the knowledge of the Company, threatened
against, or with respect to, any of the Plans or with respect to any fiduciary,
administrator or sponsor thereof (in their capacities as such), or any
party-in-interest thereof.
(f) EXCISE TAXES, DAMAGES AND PENALTIES. No act, omission or
transaction has occurred which would result in the imposition on the Company or
any Company Subsidiary of (i) breach of fiduciary duty liability damages under
Section 409 of ERISA, (ii) a civil penalty assessed pursuant to subsection (c),
(i) or (l) of Section 502 of ERISA or (iii) any excise tax under applicable
provisions of the Code with respect to any Plan.
(g) VEBA WELFARE TRUST. Any trust funding a Plan, which is intended
to be exempt from federal income taxation pursuant to Section 501(c)(9) of the
Code, satisfies the requirements of that section and has received a favorable
exemption letter from the IRS
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regarding that exempt status and has not, since receipt of the most recent
favorable exemption letter, been amended or operated in a way that would
adversely affect that exempt status. The value of assets of each trust described
in this Section 4.27(g) equals or exceeds the value of benefit liabilities of
such trust (or related Plan) determined in accordance with actuarial assumptions
consistently applied in the ongoing administration of such trust (or related
plan).
Section 4.28 TAXES. (a) Each of the following representations and
warranties in this Section 4.28 is qualified to the extent set forth in Section
4.28 of the Disclosure Statement.
(b) All Returns required to be filed with respect to any Tax for
which any of the Company and the Company Subsidiaries is liable have been duly
and timely (taking into account applicable extensions) filed with the
appropriate Taxing Authority, all such Returns were correct and complete in all
material respects, all Taxes that have become due from the Company and any
Company Subsidiaries have been paid, each Tax payable by the Company or a
Company Subsidiary by assessment has been timely paid in the amount assessed and
adequate reserves have been established on the consolidated books of the Company
and the Company Subsidiaries for all Taxes for which any of the Company and the
Company Subsidiaries is liable, but the payment of which is not yet due. Neither
the Company nor any Company Subsidiary is, or ever has been, liable for any Tax
payable by reason of the income or property of a Person other than the Company
or a Company Subsidiary. Each of the Company and the Company Subsidiaries has
timely filed true, correct and complete declarations of estimated Tax in each
jurisdiction in which any such declaration is required to be filed by it. No
Liens for Taxes exist upon the assets of the Company or any Company Subsidiary
except Liens for Taxes which are not yet due. Neither the Company nor any
Company Subsidiary is, or ever has been, subject to Tax in any jurisdiction
outside of the United States. No Litigation with respect to any Tax for which
the Company or any Company Subsidiary is asserted to be liable is pending or, to
the knowledge of the Company or any Stockholder, threatened and no basis which
the Company or any Stockholder believes to be valid exists on which any claim
for any such Tax can be asserted against the Company or any Company Subsidiary.
There are no requests for rulings or determinations in respect of any Taxes
pending between the Company or any Company Subsidiary and any Taxing Authority.
No extension of any period during which any Tax may be assessed or collected and
for which the Company or any Company Subsidiary is or may be liable has been
granted to any Taxing Authority. Neither the Company nor any Company Subsidiary
is or has been a party to any tax allocation or sharing agreement. All amounts
required to be withheld by any of the Company and the Company Subsidiaries and
paid to governmental agencies for income, social security, unemployment
insurance, sales, excise, use and other Taxes have been collected or withheld
and paid to the proper Taxing Authority. The Company and each Company Subsidiary
have made all deposits required by law to be made with respect to employees'
withholding and other employment taxes.
(c) Neither the Company, any Company Subsidiary nor any Stockholder
is a "foreign person," as that term is referred to in Section 1445(f)(3) of the
Code.
(d) Neither the Company, nor any Company Subsidiary, has filed a
consent pursuant to Section 341(f) of the Code or any comparable provision of
any other Tax statute, nor has agreed to have Section 341(f)(2) of the Code or
any comparable provision of any other
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Tax statute apply to any disposition of an asset. Neither the Company, nor any
Company Subsidiary, has made, is obligated to make or is a party to any
agreement that could require it to make any payment that is not, or would not
be, deductible under Section 280G of the Code. No asset of the Company or of any
Company Subsidiary is subject to any provision of applicable law which
eliminates or reduces the allowance for depreciation or amortization in respect
of that asset below the allowance generally available to an asset of its type.
No accounting method changes of the Company or of any Company Subsidiary exist
or are proposed or threatened which could give rise to an adjustment under
Section 481 of the Code.
Section 4.29 GOVERNMENT CONTRACTS. Except as accurately set forth in
Section 4.29 of the Disclosure Statement, neither the Company nor any Company
Subsidiary is a party to any governmental contract subject to price
redetermination or renegotiation.
Section 4.30 ABSENCE OF CHANGES. Since the Current Balance Sheet
Date, except as accurately set forth in Section 4.30 of the Disclosure
Statement, none of the following has occurred with respect to the Company or any
Company Subsidiary:
(a) any circumstance, condition, event or state of facts (either
singly or in the aggregate), other than conditions generally affecting the
business of providing orthodontic care to patients, which has caused, is causing
or will cause a Material Adverse Effect on the Company;
(b) any change in its authorized Capital Stock or in any of its
outstanding Capital Stock or Derivative Securities;
(c) any Restricted Payment, except any declaration or payment of
dividends by any Company Subsidiary solely to the Company;
(d) any increase in, or any commitment or promise to increase, the
rates of Cash Compensation as of the date hereof, or the amounts or other
benefits paid or payable under any Company ERISA Pension Plan or Other
Compensation Plan, except for ordinary and customary bonuses and salary
increases for employees (other than the Stockholders or their Immediate Family
Members) at the times and in the amounts consistent with its past practice;
(e) any work interruptions, labor grievances or claims filed, or any
similar event or condition of any character, that will have a Material Adverse
Effect on the Surviving Corporation following the Effective Time;
(f) any distribution, sale or transfer of, or any Company Commitment
to distribute, sell or transfer, any of its assets or properties of any kind
which singly is or in the aggregate are Material to the Company, other than
distributions, sales or transfers in the ordinary course of its business and
consistent with its past practices to Persons other than the Stockholders and
their Immediate Family Members and Affiliates;
(g) any cancellation, or agreement to cancel, any Indebtedness,
obligation or other liability owing to it, including any Indebtedness,
obligation or other liability of any Stockholder
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or any Related Person or Affiliate thereof, provided that it may negotiate and
adjust bills in the course of good faith disputes with customers in a manner
consistent with past practice, if all those adjustments are included in the
Supplemental Information provided Apple pursuant to Section 6.08;
(h) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of its assets, property or
rights or requiring consent of any Person to the transfer and assignment of any
such assets, property or rights;
(i) any purchase or acquisition of, or agreement, plan or arrangement
to purchase or acquire, any property, rights or assets outside of the ordinary
course of its business consistent with its past practices;
(j) any waiver of any of its rights or claims that singly is or in
the aggregate are Material to the Company;
(k) any transaction by it outside the ordinary course of its business
or not consistent with its past practices;
(l) any incurrence by it of any Indebtedness or any Guaranty not
constituting its Indebtedness, or any Company Commitment to incur any
Indebtedness or any such Guaranty;
(m) any investment in the Capital Stock, Derivative Securities or
Indebtedness of any Person other than a Permitted Investment;
(n) except in accordance with the Company's consolidated capital
expenditure budget for the Company's current fiscal year, any capital
expenditure or series of related capital expenditures by the Company and the
Company Subsidiaries collectively in excess of $5,000, or commitments by the
Company and the Company Subsidiaries to make capital expenditures totaling in
excess of $5,000; or
(o) any cancellation or termination of a Material Agreement of the
Company.
Section 4.31 BANK RELATIONS; POWERS OF ATTORNEY. The Company has
provided Apple with an accurate, complete written statement setting forth:
(a) the name of each financial institution in which the Company or
any Company Subsidiary has borrowing or investment arrangements, deposit or
checking accounts or safe deposit boxes;
(b) the types of those arrangements and accounts, including, as
applicable, names in which accounts or boxes are held, the account or box
numbers and the name of each Person authorized to draw thereon or have access
thereto; and
(c) the name of each Person holding a general or special power of
attorney from the Company or any Company Subsidiary and a description of the
terms of each such power.
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Section 4.32 RELATIONS WITH GOVERNMENTS, ETC. Neither the Company nor
any Company Subsidiary has made, offered or agreed to offer anything of value to
any governmental official, political party or candidate for government office
which would cause the Company or any Company Subsidiary to be in violation of
the Foreign Corrupt Practices Act of 1977 or any Governmental Requirement to a
similar effect.
Section 4.33 RELIANCE ON REPRESENTATIVES. The Company and the
Stockholders are solely relying on their own Representatives (including their
own legal counsel and accountant) as to legal, tax and related matters
concerning the transaction contemplated by this Agreement and are in no way
relying on Apple or Apple's Representatives (including Apple's legal counsel and
accountant) as to such legal, tax and related matters. Further, the Company and
the Stockholders acknowledge that neither Apple nor Apple's Representatives have
made any representations regarding the tax treatment of the transactions
contemplated by this Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF APPLE
Section 5.02 ORGANIZATION; POWER. Apple is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and Apple has all requisite corporate power and authority under the
laws of its Organization State and its Charter Documents to own or lease and to
operate its properties presently and following the Effective Time and to carry
on its business as now conducted and as proposed to be conducted following the
Effective Time. Apple has not engaged in any operations since its organization
other than in connection with their formation and capitalization and the
transactions contemplated by this Agreement and the Other Agreements.
Section 5.03 AUTHORIZATION; ENFORCEABILITY; ABSENCE OF CONFLICTS;
REQUIRED CONSENTS. (a) The execution, delivery and performance by Apple of this
Agreement and each other Transaction Document to which it is a party, and the
effectuation of the Merger and the other transactions contemplated hereby and
thereby, are within its corporate power under its Charter Documents and the
applicable Governmental Requirements of its Organization State and have been
duly authorized by all proceedings, including actions permitted to be taken in
lieu of proceedings, required under its Charter Documents and the applicable
Governmental Requirements of its Organization State.
(b) This Agreement has been, and each of the other Transaction
Documents to which Apple is a party, when executed and delivered to the other
parties thereto (or, in the case of the Certificates of Merger, the applicable
Governmental Authorities), will have been, duly executed and delivered by it and
is, or when so executed and delivered will be, its legal, valid and binding
obligation, enforceable against it in accordance with its terms, except as that
enforceability may be (i) limited by any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and (ii) subject to general principles of equity
(regardless of whether that enforceability is considered in a proceeding in
equity or at law).
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(c) The execution, delivery and performance in accordance with their
respective terms by Apple of the Transaction Documents to which it is a party
have not and will not (i) violate, breach or constitute a default under (A) the
Charter Documents of Apple, (B) any Governmental Requirement applicable to Apple
or (C) any Material Agreement of Apple, (ii) result in the acceleration or
mandatory prepayment of any Indebtedness, or any Guaranty not constituting
Indebtedness, of Apple or afford any holder of any of that Indebtedness, or any
beneficiary of any of those Guaranties, the right to require Apple to redeem,
purchase or otherwise acquire, reacquire or repay any of that Indebtedness, or
to perform any of those Guaranties, (iii) cause or result in the imposition of,
or afford any Person the right to obtain, any Lien upon any property or assets
of Apple (or upon any revenues, income or profits of either Apple therefrom) or
(iv) result in the revocation, cancellation, suspension or material
modification, in any single case or in the aggregate, of any Governmental
Approval possessed by Apple at the date hereof and necessary for the ownership
or lease and the operation of its properties or the carrying on of its business
as now conducted, including any necessary Governmental Approval under each
applicable Environmental Law and Professional Code.
(d) Except for (i) the filing of the Certificates of Merger with the
applicable Governmental Authorities, (ii) filings of the Registration Statement
under the Securities Act and the SEC order declaring the Registration Statement
effective under the Securities Act and (iii) as may be required by the HSR Act
or the applicable state securities or blue sky laws, no Governmental Approvals
are required to be obtained, and no reports or notices to or filings with any
Governmental Authority are required to be made, by Apple for the execution,
delivery or performance by Apple of the Transaction Documents to which it is a
party, the enforcement against Apple of its obligations thereunder or the
effectuation of the Merger and the other transactions contemplated thereby.
Section 5.04 CHARTER DOCUMENTS. Apple has delivered to the Company
true, complete and correct copies of the Charter Documents of Apple. No breach
or violation of any Charter Document of Apple has occurred and is continuing.
Section 5.05 CAPITAL STOCK OF APPLE. (a) Immediately prior to the
Effective Time, (i) the authorized Capital Stock of Apple will be comprised of
(A) 50,000,000 shares of Apple Common Stock and (B) 10,000,000 shares of
preferred stock, $.01 par value per share, (ii) before giving effect to the
Merger and the merger or other acquisition transactions contemplated by the
Other Agreements, (A) the number of shares of Apple Common Stock then issued and
outstanding will be as set forth in the Registration Statement when it becomes
effective under the Securities Act, (B) no shares of the Apple preferred stock
then will be issued or outstanding and (C) Apple will have reserved for issuance
pursuant to Other Compensation Plans or the exercise of Derivative Securities
the number of shares of Apple Common Stock set forth in the Registration
Statement when it becomes effective under the Securities Act.
(b) All shares of Apple Common Stock outstanding immediately prior to
the Effective Time, and all shares of Apple Common Stock to be issued pursuant
to Section 2.04, when issued, (i) will have been duly authorized and validly
issued in accordance with the DGCL and Apple's Charter Documents and (ii) will
be fully paid and nonassessable. None of the shares of Apple Common Stock to be
issued pursuant to Section 2.04 will, when issued, have
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been issued in breach or violation of (i) any applicable statutory or
contractual preemptive rights, or any other rights of any kind (including any
rights of first offer or refusal), of any Person or (ii) the terms of any of its
Derivative Securities then outstanding.
Section 5.06 SUBSIDIARIES. Immediately prior to the IPO Closing Date,
(a) Apple will have no Subsidiaries and (b) Apple will not own, of record or
beneficially, directly or indirectly through any Person or otherwise (except
pursuant hereto or to the Other Agreements), any Capital Stock or Derivative
Securities of any Entity.
Section 5.07 LIABILITIES. Except as disclosed in the Private
Placement Memorandum, Apple has no material liabilities of any kind other than
those incurred in connection with this Agreement and the Other Agreements and
the transactions contemplated hereby and thereby, including the IPO.
Section 5.08 COMPLIANCE WITH LAWS; NO LITIGATION. Apple is in
compliance with all Governmental Requirements applicable to it, and no
Litigation is pending or, to the knowledge of Apple, threatened to which Apple
is or may become a party which (a) questions or involves the validity or
enforceability of any obligation of Apple under any Transaction Document, (b)
seeks (or reasonably may be expected to seek) (i) to prevent or delay
consummation by Apple of the transactions contemplated by this Agreement to be
consummated by Apple, as the case may be, or (ii) damages from Apple in
connection with any such consummation.
Section 5.09 NO BROKERS. Except as disclosed in the Private Placement
Memorandum, Apple has not, directly or indirectly, in connection with this
Agreement or the transactions contemplated hereby (a) employed any broker,
finder or agent or (b) agreed to pay or incurred any obligation to pay any
broker's or finder's fee, any sales commission or any similar form of
compensation.
Section 5.10 PRIVATE PLACEMENT MEMORANDUM. At the date hereof, the
Private Placement Memorandum (other than the historical financial statements,
including the notes thereto, of the Founding Companies (other than the Company)
and the historical information contained therein respecting the Company and the
Stockholders, to which this Section 5.10 does not apply) does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements contained therein not materially misleading in
the light of the circumstances under which those statements are made.
ARTICLE VI
COVENANTS EXTENDING TO THE EFFECTIVE TIME
Section 6.02 ACCESS AND COOPERATION; DUE DILIGENCE. (a) From the date
hereof and until the IPO Closing Date, the Company will (i) afford to the
Representatives of Apple reasonable access to all the key employees, sites,
properties, books and records of each of the Company and the Company
Subsidiaries, (ii) provide Apple with such additional financial and operating
data and other information relating to the business and properties of each of
the
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Company and the Company Subsidiaries as Apple or any Other Founding Company may
from time to time reasonably request and (iii) cooperate with Apple and each
Other Founding Company and their respective Representatives in the preparation
of any documents or other material which may be required in connection with any
Transaction Documents or any Other Transaction Documents. Each Stockholder and
the Company will treat all Confidential Information obtained by them in
connection with the negotiation and performance of this Agreement or the due
diligence investigations conducted with respect to Apple as confidential in
accordance with the provisions of Section 11.01.
(b) Each of the Company and the Stockholders will use its best
efforts to secure, as soon as practicable after the date hereof, all approvals
or consents of third Persons as may be necessary to consummate the transactions
contemplated hereby.
(c) From the date hereof and until the IPO Closing Date, Apple will
(i) afford to the Representatives of the Company and the Stockholders access to
all sites, properties, books and records of Apple, (ii) provide the Company with
such additional financial and operating data and other information relating to
the business and properties of Apple as the Company or any Stockholder may from
time to time reasonably request and (iii) cooperate with the Company and the
Stockholders and their respective Representatives in the preparation of any
documents or other material which may be required in connection with any
Transaction Documents.
(d) If this Agreement is terminated pursuant to Section 12.1, Apple
promptly will return all written Confidential Information of the Company it then
possesses to the Company.
Section 6.03 CONDUCT OF BUSINESS PENDING CLOSING. From the date
hereof and until the Effective Time, the Company will, and will cause each
Company Subsidiary to, except as and only to the extent set forth in Section
6.03 of the Disclosure Statement:
(a) carry on its businesses in substantially the same manner as it
has heretofore and not introduce any material new method of management,
operation or accounting;
(b) maintain its properties and facilities, including those held
under leases, in as good working order and condition as at present, ordinary
wear and tear excepted;
(c) perform all its obligations under agreements relating to or
affecting its assets, properties and other rights;
(d) keep in full force and effect without interruption all its
present insurance policies or other comparable insurance coverage;
(e) use reasonable commercial efforts to (i) maintain and preserve
its business organization intact, (ii) retain its present employees and (iii)
maintain its relationships with suppliers, customers, patients and others having
business relations with it;
(f) comply with all applicable Governmental Requirements; and
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(g) except as required or expressly permitted by this Agreement,
maintain the instruments and agreements governing its outstanding Indebtedness
and leases on their present terms and not enter into new or amended Indebtedness
or lease instruments or agreements involving amounts over $1,000 in any case or
$5,000 in the aggregate, without the prior written consent of Apple (which
consent will not be unreasonably withheld).
Section 6.04 PROHIBITED ACTIVITIES. From the date hereof and until
the Effective Time, without the prior written consent of Apple or unless as
required or expressly permitted by this Agreement, the Company will not, and
will not permit any Company Subsidiary to:
(a) make any change in its Charter Documents;
(b) issue any of its Capital Stock or issue or otherwise create any
of its Derivative Securities;
(c) make any Restricted Payment (other than as provided in Section
6.04 of the Disclosure Statement);
(d) make any investments (other than Permitted Investments) in the
Capital Stock, Derivative Securities or Indebtedness of any Person;
(e) enter into any contract or commitment or incur or agree to incur
any liability or make any capital expenditures in a single transaction or a
series of related transactions involving an aggregate amount of more than $1,000
otherwise than in the ordinary course of its business and consistent with its
past practice;
(f) increase or commit or promise to increase the Cash Compensation
payable or to become payable to any officer, director, stockholder, employee or
agent, consultant or independent contractor of any of the Company and the
Company Subsidiaries or make any discretionary bonus or management fee payment
to any such Person, except bonuses or salary increases to employees (other than
the Stockholders or their Immediate Family Members) at the times and in the
amounts consistent with its past practice;
(g) create, assume or permit to be created or imposed any Liens
(other than Permitted Liens) upon any of its assets or properties, whether now
owned or hereafter acquired, except for purchase money Liens incurred in
connection with the acquisition of equipment with an aggregate cost not in
excess of $1,000 and necessary or desirable for the conduct of the business of
any of the Company and the Company Subsidiaries;
(h) (i) adopt, establish, amend or terminate any ERISA Employee
Benefit Plan, or any Other Compensation Plan or Employee Policies and Procedures
or (ii) take any discretionary action, or omit to take any contractually
required action, if that action or omission could either (A) deplete the assets
of any ERISA Employee Benefit Plan or any Other Compensation Plan or (B)
increase the liabilities or obligations under any such plan;
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(i) sell, assign, lease or otherwise transfer or dispose of any of
its owned or leased property or equipment otherwise than in the ordinary course
of its business and consistent with its past practice;
(j) negotiate for the acquisition of any business or the start-up of
any new business;
(k) merge, consolidate or effect a share exchange with, or agree to
merge, consolidate or effect a share exchange with any other Entity;
(l) waive any of its material rights or claims, provided that it may
negotiate and adjust bills in the course of good faith disputes with customers
in a manner consistent with past practice, but such adjustments will not be
deemed to be included in Section 4.17 of the Disclosure Statement unless
specifically listed in the Supplemental Information;
(m) commit a material breach of or amend or terminate any Material
Agreement of the Company or any of its Governmental Approvals; or
(n) enter into any other transaction (i) outside the ordinary course
of its business and consistent with its past practice or (ii) prohibited hereby.
Section 6.05 NO SHOP; RELEASE OF DIRECTORS. (a) Each of the Company
and the Stockholders agrees that, from the date hereof and until the first to
occur of the Effective Time or the termination of this Agreement in accordance
with Article XII, neither the Company nor any Stockholder, nor any of their
respective officers and directors shall, and the Company and each Stockholder
will direct and use their best efforts to cause each of their respective
Representatives not to, initiate, solicit or encourage, directly or indirectly,
any inquiries or the making or implementation of any proposal or offer
(including any proposal or offer to the Stockholders) with respect to a merger,
acquisition, consolidation or similar transaction involving, or any purchase of
all or any significant portion of the assets or any equity securities of, the
Company (any such proposal or offer being an "Acquisition Proposal") or engage
in any activities, discussions or negotiations concerning, or provide any
Confidential Information respecting, the Company, any Other Founding Company or
Apple to, or have any discussions with, any Person relating to an Acquisition
Proposal or otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal. The Company and each Stockholder will: (i) immediately
cease and cause to be terminated any existing activities, discussions or
negotiations with any Persons conducted heretofore with respect to any of the
foregoing, and each will take the steps necessary to inform the Persons referred
to in the first sentence of this Section 6.05(a) of the obligations undertaken
in this Section 6.05(a); and (ii) notify Apple immediately if any such inquiries
or proposals are received by, any such information is requested from or any such
discussions or negotiations are sought to be initiated or continued with the
Company or any Stockholder.
(b) Each of the Company and the Stockholders hereby (i) waives every
right, if any, the Governmental Requirements of the Company's Organization State
afford the Company or Stockholders to require the Company's directors (or their
equivalents if the Company is not
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a corporation), in the exercise of their fiduciary duties in their capacity as
such, to engage in any of the activities prohibited by this Section 6.05 and
(ii) releases each such person from any and all liability he might otherwise
have to the Company or any Stockholders but for this release.
Section 6.06 FORMATION OF ORTHODONTIC ENTITY. The Stockholders shall
duly form, organize and incorporate the Orthodontic Entity in its Organization
State, and the Articles of Association and Bylaws of the Orthodontic Entity
shall be in form and substance reasonably satisfactory to Apple. The
Stockholders shall not permit the Orthodontic Entity to commence business until
the IPO Pricing Date.
Section 6.07 NOTIFICATION OF CERTAIN MATTERS. The Stockholders and
the Company shall give prompt notice to Apple of (a) the existence or occurrence
of each condition or state of facts which will or reasonably could be expected
to cause any representation or warranty of the Company or any Stockholder
contained herein to be untrue or incorrect in any material respect at or prior
to the Closing or on the IPO Closing Date and (b) any material failure of any
Stockholder or the Company to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by that Person hereunder, provided
that no such notice shall be required until Apple shall give notice to the
Company and the Stockholders of the date scheduled for the Closing with respect
to the occurrence in the ordinary course of business and consistent with past
practice of the Company or any Company Subsidiary, as the case may be, of any
condition or state of facts which would cause any Sections of the Disclosure
Statement to be incorrect. Apple shall give prompt notice to the Company of (a)
the existence or occurrence of each condition or state of facts which will or
reasonably could be expected to cause any representation or warranty of Apple
contained herein to be untrue or inaccurate at or prior to the Closing or on the
IPO Closing Date and (b) any material failure of Apple to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder. The delivery of any notice pursuant to this Section 6.07 shall not be
deemed to (a) modify the representations or warranties herein of the party
delivering that notice, or any other party, which modification may be made only
pursuant to Section 6.08, (b) modify the conditions set forth in Article VII or
(c) limit or otherwise affect the remedies available hereunder to the party
receiving that notice.
Section 6.08 SUPPLEMENTAL INFORMATION. Each of the Company and the
Stockholders agrees that, with respect to the representations and warranties of
that party contained in this Agreement, that party will have the continuing
obligation (except to the extent otherwise provided in Section 6.07) until the
Closing to provide Apple promptly with such additional supplemental Information
(collectively, the "Supplemental Information"), in the form of (a) amendments to
then existing Sections of the Disclosure Statement or (b) additional Sections of
the Disclosure Statement, as would be necessary, in the light of the
circumstances, conditions, events and states of facts then known to the Company
or any Stockholder, to make each of those representations and warranties true
and correct as of the Closing and on the IPO Closing Date. For purposes only of
determining whether the conditions to the obligations of Apple which are
specified in Sections 7.04(a)(ii)(A) and 7.04(b)(ii) have been satisfied, and
not for any purpose under Article IX, the Disclosure Statement as of the Closing
and on the IPO Closing Date shall be deemed to be the Disclosure Statement as of
the date hereof as amended or supplemented by the Supplemental Information
provided to Apple prior to the Closing pursuant to this Section
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6.08; provided, however, that if the Supplemental Information so provided
discloses the existence of circumstances, conditions, events or states of facts
which, in any combination thereof, (a) have had a Material Adverse Effect on the
Company which was not reflected in the determination of the Transaction Value
or, in the sole judgment of Apple (which shall be conclusive for purposes of
this Section 6.08 and Article XII, but not for any purpose of Article IX), (b)
are having or will have a Material Adverse Effect on the Company or the
Surviving Corporation, as the case may be, Apple will be entitled either (i) to
terminate this Agreement pursuant to Section 12.01(d) or (ii) to treat as Apple
Indemnified Losses for all purposes of Article IX (which treatment will not
prejudice the right of any Stockholder under Article IX to contest Damage Claims
made by Apple in respect of those Apple Indemnified Losses) all Damages to the
Company or the Surviving Corporation which are attributable to the
circumstances, conditions, events and states of facts first disclosed herein
after the date hereof in the Supplemental Information. Apple will provide the
Company with copies of the Registration Statement, including all pre-effective
amendments thereto, promptly after the filing thereof with the SEC under the
Securities Act.
Section 6.09 COOPERATION IN CONNECTION WITH THE IPO. The Company and
the Stockholders will (a) provide Apple and the Underwriter with all the
Information concerning the Company or any of the Stockholders which is
reasonably requested by Apple and the Underwriter from time to time in
connection with effecting the IPO and (b) cooperate with Apple and the
Underwriter and their respective Representatives in the preparation and
amendment of the Registration Statement (including the Financial Statements) and
in responding to the comments of the SEC staff, if any, with respect thereto.
The Company and each Stockholder agree promptly to (a) advise Apple if, at any
time during the period in which a prospectus relating to the IPO is required to
be delivered under the Securities Act, any information contained in the then
current Registration Statement prospectus concerning the Company or the
Stockholders becomes incorrect or incomplete in any material respect and (b)
provide Apple with the information needed to correct or complete that
information.
Section 6.10 ADDITIONAL FINANCIAL STATEMENTS AND OTHER INFORMATION.
The Company will furnish to Apple:
(a) as soon as available and in any event within 30 days after the
end of each of the Company's fiscal quarters which ends prior to the IPO Pricing
Date, an unaudited consolidated balance sheet of the Company and the Company
Subsidiaries as of the end of that fiscal quarter and the related consolidated
statements of income or operations, cash flows and stockholders' or other
owners' equity for that fiscal quarter and for the period of the Company's
fiscal year ended with that quarter, in each case (i) setting forth in
comparative form the figures for the corresponding portion of the Company's
previous fiscal year and (ii) prepared in accordance with GAAP applied on basis
consistent (A) throughout the periods indicated (excepting footnotes) and (B)
with the basis on which the Initial Financial Statements including the Current
Balance Sheet were prepared;
(b) if requested by Apple in connection with any amendment of the
Registration Statement and promptly following any such request, such summary
consolidated operating or other financial information of the Company and the
Company Subsidiaries as of the end of either
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the first or second fiscal month in any of the Company's fiscal quarters as
Apple may request: and
(c) to the extent not provided at the time of execution and delivery
of this Agreement, on or prior to March 1, 1997 the information concerning the
Company and the Stockholders contemplated by the Agreement to be set forth in
the Disclosure Statement.
Section 6.11 TERMINATION OR TRANSFER OF PLANS. If requested by Apple,
the Company will, or will cause the applicable Company Subsidiary to, if
permitted by all applicable Governmental Requirements to do so, terminate each
Plan identified in Section 4.26(c) or (d) of the Disclosure Statement as a "Plan
To Be Terminated" (or in the case of Company ERISA Benefit Plans, or Company
ERISA Pension Plans, remove such Plans from the Company and transfer sponsorship
of such Plans to the Orthodontic Entity) prior to the Effective Time.
Section 6.12 DISPOSITION OF UNWANTED ASSETS. At or prior to the
Closing, the Company will make all arrangements and take all such actions as are
necessary and satisfactory to Apple to convey to the Orthodontic Entity, prior
to the Effective Time, each asset of it or of one or more of the Company
Subsidiaries that by law cannot be acquired by Apple because it relates to the
practice of dentistry, which assets are listed in Section 6.12 of the Disclosure
Statement, and each other asset listed in Section 6.12 of the Disclosure
Statement.
Section 6.13 HSR ACT MATTERS. If Apple shall determine that filings
pursuant to and under the HSR Act are necessary or appropriate in connection
with the effectuation of the Merger or the consummation of the acquisitions
contemplated by the Other Agreements, and advises the Company in writing of that
determination, the Company promptly will compile and file under the HSR Act such
information respecting it as the HSR Act requires of an Entity to be acquired,
and the expiration or termination of the applicable waiting period and any
extension thereof under the HSR Act shall be deemed a condition precedent set
forth in Section 7.02(b).
Section 6.14 RETIREMENT OF DEBT. The Company shall repay all of its
outstanding Indebtedness on or prior to the IPO Closing Date.
ARTICLE VII
THE CLOSING AND CONDITIONS TO CLOSING AND CONSUMMATION
Section 7.02 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY. (a) The
obligation of each party hereto to take the actions contemplated to be taken by
that party at the Closing is subject to the satisfaction of each of the
following conditions on or before the date of the Closing:
(i) NO LITIGATION. Except as set forth in Section
7.02 of the Disclosure Statement, no Litigation
shall be pending on the date of the Closing to
restrain, prohibit or otherwise interfere with,
or to obtain material damages or other relief
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from Apple or the Surviving Corporation in
connection with, the consummation of the Merger
or the IPO;
(ii) GOVERNMENTAL APPROVALS. All Governmental
Approvals (other than the acceptance for filing
of the Certificates of Merger) required to be
obtained by any of the Company and Apple in
connection with the consummation of the Merger
and the IPO shall have been obtained; and
(iii) THE REGISTRATION STATEMENT. (A) The
Registration Statement, as amended to cover the
offering, issuance and sale by Apple of such
number of shares of Apple Common Stock at the
IPO Price (which need not be set forth in the
Registration Statement when it becomes
effective under the Securities Act) as shall
yield aggregate cash proceeds to Apple from
that sale (net of the Underwriter's discount or
commissions) in at least the amount (the
"Minimum Cash Amount") that is sufficient, when
added to the funds, if any, available from
other sources (if any, and as set forth in the
Registration Statement when it becomes
effective under the Securities Act) (the "Other
Financing Sources") to enable Apple to pay or
otherwise deliver on the IPO Closing Date (1)
the total cash portion of the Merger
Consideration then to be delivered pursuant to
Section 2.04, (2) the total cash portion of the
Merger or other acquisition consideration then
to be delivered pursuant to the Other
Agreements as a result of the consummation of
the Merger or other acquisition transactions
contemplated thereby and (3) the total amount
of Indebtedness of the Founding Companies and
Apple which the Registration Statement
discloses at the time it becomes effective
under the Securities Act will be repaid on the
IPO Closing Date with proceeds received by
Apple from the IPO and the Other Financing
Sources, shall have been declared effective
under the Securities Act by the SEC; (B) no
stop order suspending the effectiveness of the
Registration Statement shall have been issued
by the SEC, and the SEC shall not have
initiated or threatened to initiate Litigation
for that purpose; and (C) the Underwriter shall
have agreed in writing (the "Underwriting
Agreement," which term includes the related
pricing agreement, if any) to purchase from
Apple on a firm commitment basis for resale to
the public initially at the IPO Price, subject
to the conditions set forth in the Underwriting
Agreement, such number of shares of Apple
Common Stock covered by the
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Registration Statement as, when multiplied by
the price per share of Apple Common Stock to be
paid by the Underwriter to Apple pursuant to
the Underwriting Agreement, shall equal at
least the Minimum Cash Amount.
(b) The obligation of each party hereto with respect to the actions
to be taken on the IPO Closing Date is subject to the satisfaction on that date
of each of the following conditions:
(i) NO LITIGATION. Except as disclosed in Section
7.02 of the Disclosure Statement, no Litigation
shall be pending on the IPO Closing Date to
restrain, prohibit or otherwise interfere with,
or to obtain material damages or other relief
from Apple or the Surviving Corporation in
connection with, the consummation of the Merger
or the IPO;
(ii) GOVERNMENTAL APPROVALS. All Governmental
Approvals required to be obtained by the
Company and Apple in connection with the
consummation of the Merger and the IPO shall
have been obtained;
(iii) RECEIPT OF CERTAIN CERTIFICATES. Each
Stockholder or his Representative shall receive
the certificates that such party is entitled to
receive on the IPO Closing Date; and
(iv) CLOSING OF THE IPO. Apple shall have issued and
sold shares of Apple Common Stock to the
Underwriter in accordance with the Underwriting
Agreement for initial resale at the IPO Price
and received payment therefor in an amount at
least equal to the amount by which (A) the
Minimum Cash Amount exceeds (B) the aggregate
amount of funds actually received on the IPO
Closing Date, if any, from any one or more of
the Other Financing Sources.
Section 7.03 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND THE
STOCKHOLDERS. The obligations of the Company and each Stockholder with respect
to actions to be taken by them at or before the Closing and the actions to be
taken on the IPO Closing Date are subject to the satisfaction, or the written
waiver by the Company on behalf of itself and each Stockholder pursuant to
Section 11.05 on or before the date of the Closing of, in addition to the
conditions specified in Section 7.02(a) or 7.02(b), as applicable, (i) all the
conditions set forth in Section 7.01(b), if any, and (ii) all the following
conditions:
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(a) REPRESENTATIONS AND WARRANTIES. All the representations and
warranties of Apple in Article V shall be true and correct as of the Closing as
though made at that time;
(b) DELIVERY OF DOCUMENTS. Apple shall have delivered to the Company,
with copies for each Stockholder:
(i) an Apple officer's certificate respecting the
representations and warranties of Apple in
Article V and compliance with the covenants of
Apple in Article VI and in the form thereof
attached as an exhibit to the Closing Memorandum;
(ii) opinions dated the IPO Closing Date and addressed
to the Company and the Stockholders from Counsel
for Apple substantially in the forms thereof
attached as exhibits to the Closing Memorandum;
(iii) a certificate of the secretary or any assistant
secretary of Apple in the form thereof attached
as an exhibit to the Closing Memorandum and
respecting, and to which is attached, (A) the
Charter Documents of Apple (certified by the
Secretary of State of the State of Delaware in
the case of the certificates of incorporation
included therein); (B) the resolutions of the
board of directors of Apple respecting the
Transaction Documents and the transactions
contemplated thereby; (C) a certificate
respecting the incumbency and true signatures of
the Apple officers who execute the Transaction
Documents on behalf of Apple; (D) a specimen
certificate evidencing shares of Apple Common
Stock; (E) the prospectus included in the
Registration Statement when it became effective;
and (F) a facsimile copy of the Underwriting
Agreement as executed and delivered by Apple and
the Underwriter;
(iv) the Registration Rights Agreement duly executed
and delivered by Apple; and
(v) a certificate, dated as of a Current Date, duly
issued by the Secretary of State of the State of
Delaware, showing Apple to be in good standing
and authorized to do business in that State.
Section 7.04 CONDITIONS TO THE OBLIGATIONS OF APPLE. (a) The
obligations of Apple with respect to actions to be taken by it at or before the
Closing are subject to the satisfaction on or before the date of the Closing of,
in addition to the conditions specified in Section 7.02 (a), (i) all the
conditions set forth in Section 7.01(c), if any, and (ii) all the following
conditions:
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(A) REPRESENTATIONS AND WARRANTIES. All the
representations and warranties of the Stockholders and the Company in Articles
III and IV shall be true and correct as of the Closing as though made at that
time;
(B) DELIVERY OF DOCUMENTS. The Stockholders and the
Company shall have delivered to Apple:
(1) a Company officer's certificate, signed by a
Responsible Officer, respecting the
representations and warranties of the
Stockholders and the Company in Articles III and
IV and compliance with the covenants of the
Stockholders and the Company in Article VI and in
the form thereof attached as an exhibit to the
Closing Memorandum;
(2) opinions dated the IPO Closing Date and addressed
to Apple and Counsel for Apple from Counsel for
the Company and the Stockholders substantially in
the form thereof attached as exhibits to the
Closing Memorandum;
(3) a certificate of the secretary or any assistant
secretary of the Company in the form thereof
(without attachments thereto) attached as an
exhibit to the Closing Memorandum and respecting,
and to which is attached, (a) the Charter
Documents of the Company; (b) the resolutions of
the board of directors of the Company respecting
the Transaction Documents and the transactions
contemplated thereby; and (c) a certificate
respecting the incumbency and true signatures of
the Responsible Officers who execute the
Transaction Documents on behalf of the Company;
(4) from each Stockholder, a General Release duly
executed and delivered by that Stockholder;
(5) from each Stockholder, an executed certificate to
the effect that no withholding is required under
Section 1445 of the Code, in the form of Exhibit
7.04(a)(ii)(B)(5), with the blanks appropriately
filled; and
(6) for each of the Company and the Company
Subsidiaries, a certificate, dated as of a
Current Date, duly issued by the appropriate
Governmental Authorities in its Organization
State and, unless waived by Apple, in each other
jurisdiction listed for it in Section 4.02 of the
Disclosure Statement, showing it to be in good
standing and authorized to do business in its
Organization State and those other jurisdictions
and that all state franchise and/or income tax
returns and taxes due by it in its Organization
State and
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those other jurisdictions for all periods prior
to the Closing have been filed and paid.
(C) DUE DILIGENCE. Apple's due diligence investigation
of the Company shall have been completed to the satisfaction of Apple in its
sole discretion.
(b) The obligations of Apple with respect to the actions to be taken
on the IPO Closing Date are subject to the satisfaction on that date of (i) all
the conditions set forth in Section 7.01(d), if any, and (ii) the condition that
all the representations and warranties of the Stockholders and the Company in
Articles III and IV shall be true and correct as of the IPO Closing Date as
though made on that date.
ARTICLE VIII
COVENANTS FOLLOWING THE EFFECTIVE TIME
Section 8.02 DISCLOSURE. If, subsequent to the IPO Pricing Date and
prior to the 25th day after the date of the Final Prospectus, any Stockholder
becomes aware of any fact or circumstance which would change (or, if after the
Effective Time, would have changed) a representation or warranty of the Company
or any Stockholder in this Agreement or would affect any document delivered
pursuant hereto in any material respect, that Stockholder will promptly give
notice of that fact or circumstance to Apple.
Section 8.03 PREPARATION AND FILING OF TAX RETURNS. Each party hereto
will, and will cause its Affiliates to, provide to each of the other parties
hereto such cooperation and information as any of them reasonably may request in
filing any Return, amended Return or claim for refund, determining a liability
for Taxes or a right to refund of Taxes or in conducting any audit or other
proceeding in respect of Taxes. This cooperation and information shall include
providing copies of all relevant portions of the relevant Returns, together with
such accompanying schedules and work papers, documents relating to rulings or
other determinations by Taxing Authorities and records concerning the ownership
and Tax bases of property as are relevant which a party possesses. Each party
will make its employees, if any, reasonably available on a mutually convenient
basis at its cost to provide an explanation of any documents or information so
provided. Subject to the preceding sentence, each party required by law to file
Returns shall bear all costs attributable to the preparation and filing of those
Returns; provided that if Apple is required to file a Return covering a period
described in Code Section 1362(e)(l)(A) (an S short year), such costs shall be
reimbursed by the Stockholders.
Section 8.04 DIRECTORS. Apple will use its best efforts to cause each
of the persons, if any, who are named in the Final Prospectus as persons who
will become members of the board of directors of Apple following the Effective
Time to be appointed to that board when that prospectus so provides.
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Section 8.05 REMOVAL OF GUARANTIES. At or within 60 days following
the Effective Time, Apple will cause the Stockholder Guaranties listed in
Section 8.05 of the Disclosure Statement to be terminated.
Section 8.06 ACCESS. The Company and the Stockholders shall, at
reasonable times during normal business hours and on reasonable notice, permit
Apple and its authorized representatives reasonable access to, and make
available for inspection, all of the assets and records of the Orthodontic
Entity, and permit Apple and its authorized representatives to inspect and, at
Apple's sole cost and expense, make copies of all documents, records (other than
patient medical records) and information with respect to the affairs of the
Orthodontic Entity as Apple and its representatives may request.
Section 8.07 LICENSES AND PERMITS. The Company and the Stockholders
shall use their best efforts to obtain all licenses, permits, approvals or other
authorizations required under any law, statute, rule, regulation or ordinance,
or otherwise necessary or desirable to provide the services of the Orthodontic
Entity, the stockholders of the Orthodontic Entity and the Orthodontic Entity
Professional Employees (as defined in the Service Agreement) contemplated by the
Service Agreement, the Orthodontic Entity Professional Employment Agreements (as
defined in the Service Agreement), and to conduct the intended business of the
Orthodontic Entity.
Section 8.08 ORTHODONTIST EMPLOYMENT AGREEMENT. The Company and the
Stockholders shall use their best efforts to cause, at or immediately prior to
Closing, each orthodontist (i) to terminate his or her employment agreement, if
any, with the applicable Company by mutual consent without any liability
therefor on the part of any Company and (ii) to enter into a Orthodontic Entity
Professional Employment Agreement with the Orthodontic Entity.
Section 8.09 CONTINUITY OF BUSINESS. Apple (directly or through its
direct and indirect subsidiaries) will continue at least one significant
historic business line of the Company or use at least a significant portion of
the Company's historic business assets in a business, in each case within the
meaning of Treasury regulation Section 1.368-1(d).
ARTICLE IX
INDEMNIFICATION
Section 9.02 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All the
provisions of this Agreement will survive the Closing and the Effective Time
indefinitely notwithstanding any investigation at any time made by or on behalf
of any party hereto or the provision of any Supplemental Information pursuant to
Section 6.08, provided that the representations and warranties set forth in
Articles IV, V and VI and in any certificate delivered in connection herewith
with respect to any of those representations and warranties will terminate and
expire on December 31, 1999, except as follows: (a) the representations and
warranties of the Stockholders which relate expressly or by necessary
implication to Taxes, ERISA or other
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employment or labor matters or the Governmental Requirements referred to in
clause (iii) of Section 9.03(a) will survive until ninety (90) days after the
expiration of the applicable statutes of limitations (including all periods of
extension and tolling); (b) the representations and warranties of the
Stockholders which relate expressly or by necessary implication to the
environment or Environmental Laws will survive for a period of three years from
the Effective Time; and (c) the representations and warranties of the Company
will terminate and expire at the Effective Time. After a representation and
warranty has terminated and expired, no indemnification will or may be sought
pursuant to this Article IX on the basis of that representation and warranty by
any Person who would have been entitled pursuant to this Article IX to
indemnification on the basis of that representation and warranty prior to its
termination and expiration, provided that, in the case of each representation
and warranty that will terminate and expire as provided in this Section 9.02, no
claim presented in writing for indemnification pursuant to this Article IX on
the basis of that representation and warranty prior to its termination and
expiration will be affected in any way by that termination and expiration.
Section 9.03 INDEMNIFICATION OF APPLE INDEMNIFIED PARTIES. (a)
Subject to the applicable provisions of Sections 9.02 and 9.07, the Stockholders
covenant and agree that they, jointly and severally, will indemnify each Apple
Indemnified Party against, and hold each Apple Indemnified Party harmless from
and in respect of, all Damage Claims that arise from, are based on or relate or
otherwise are attributable to (i) any breach of the representations and
warranties of the Stockholders or the Company set forth herein (other than in
Article III) or in certificates delivered in connection herewith (other than in
respect of certificates relating only to the representations and warranties in
Article III), (ii) any nonfulfillment of any covenant or agreement on the part
of the Stockholders or the Company under this Agreement, (iii) all Taxes of the
Company or any Company Subsidiary that arise or result from the consummation of
the transactions contemplated by this Agreement or any agreement ancillary
hereto (including, without limitation, sales, use and other transfer Taxes and
income Taxes), (iv) all Taxes of the Company and any Company Subsidiary for any
taxable period that ends on or before the IPO Closing Date (or for any taxable
period that begins before and ends after the IPO Closing Date to the extent
allocable to the portion of such period prior to the IPO Closing Date), to the
extent such Taxes are not properly reflected in a reserve for Tax liability
(rather than any reserve for deferred Taxes) shown on the face of the Current
Balance Sheet as adjusted for the passage of time through the IPO Closing Date
in accordance with GAAP and the Company's most recent custom and practice, (v)
all costs and expenses of the Company and any Company Subsidiary (including,
without limitation, attorneys' and accountants' fees) incurred in connection
with the negotiation, preparation and consummation of the transactions
contemplated by this Agreement or any agreement ancillary hereto, (vi) any
liability under the Securities Act, the Exchange Act or other applicable
Governmental Requirement which arises out of or is based on (A) any untrue
statement or alleged untrue statement of a material fact relating to the Company
and the Company Subsidiaries, or any of them, which is (1) provided to Apple or
its counsel by the Company or the Stockholders and (2) contained in the Private
Placement Memorandum, any preliminary prospectus relating to the IPO, the
Registration Statement or any prospectus forming a part thereof, or any
amendment thereof or supplement thereto, or (B) any omission or alleged omission
to state therein a material fact relating to the Company and the Company
Subsidiaries, or any of them, required to be stated therein or necessary to make
the statements therein not misleading, and not provided to Apple or its counsel
by the Company or the Stockholders or
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(vii) the litigation described in Section 4.12 of the Disclosure Statement (each
such Damage Claim and each Damage Claim described in Section 9.03(b) being an
"Apple Indemnified Loss"); provided, however, that no Stockholder shall be
obligated to indemnify any Apple Indemnified Party against any Apple Indemnified
Loss to the extent that such untrue statement (or alleged untrue statement) was
made in, or such omission (or alleged omission) occurred in, any preliminary
prospectus and the Stockholder timely provided, in writing, corrected or the
necessary additional information to Apple and its counsel for inclusion in the
Final Prospectus. For purposes of subclause (iv) above, the portion of any Tax
for a taxable period that begins before and ends after the IPO Closing Date that
is allocable to the portion of such period that ends on the IPO Closing Date
shall be determined by apportioning the Tax for the entire Taxable period among
such portions based upon the number of days in each such portion, except that in
the case of Taxes based upon or related to income or receipts, such portion
shall be the amount of Tax that would have been due if such Taxable period ended
on the IPO Closing Date.
(b) Each Stockholder, severally and not jointly with any other
Person, covenants and agrees that he will indemnify each Apple Indemnified Party
against, and hold each Apple Indemnified Party harmless from and in respect of,
all Damage Claims that arise from, are based on or relate or otherwise are
attributable to (i) any breach of the representations and warranties of that
Stockholder solely as to that Stockholder set forth in Article III or in
certificates delivered by that Stockholder and relating to those representations
and warranties, (ii) any nonfulfillment of any several, and not joint and
several, agreement on the part of that Stockholder under this Agreement or (iii)
any liability under the Securities Act, the Exchange Act or other applicable
Governmental Requirement which arises out of or is based on (A) any untrue
statement or alleged untrue statement of a material fact relating solely to that
Stockholder which is (1) provided to Apple or its counsel by that Stockholder
and (2) contained in the Private Placement Memorandum, any preliminary
prospectus relating to the IPO, the Registration Statement or any prospectus
forming a part thereof, or any amendment thereof or supplement thereto, or (B)
any omission or alleged omission to state therein a material fact relating
solely to that Stockholder required to be stated therein or necessary to make
the statements therein not misleading, and not provided to Apple or its counsel
by that Stockholder; provided, however, that no Stockholder shall be obligated
to indemnify any Apple Indemnified Party against any Apple Indemnified Loss to
the extent that such untrue statement (or alleged untrue statement) was made in,
or such omission (or alleged omission) occurred in, any preliminary prospectus
and the Stockholder timely provided, in writing, corrected or the necessary
additional information to Apple and its counsel for inclusion in the Final
Prospectus.
Section 9.04 INDEMNIFICATION OF STOCKHOLDER INDEMNIFIED PARTIES.
Apple covenants and agrees that it will indemnify each Stockholder Indemnified
Party against, and hold each Stockholder Indemnified Party harmless from and in
respect of, all Damage Claims (that arise from, are based on or relate or
otherwise are attributable to (i) any breach by Apple of its representations and
warranties set forth herein or in their certificates delivered to the Company or
the Stockholders in connection herewith, (ii) any nonfulfillment of any covenant
or agreement on the part of Apple under this Agreement, or (iii) any liability
under the Securities Act, the Exchange Act or other applicable Governmental
Requirement which arises out of or is based on (A) any untrue statement or
alleged untrue statement of a material fact relating to Apple or any of the
Other Founding Companies contained in the Private Placement Memorandum, any
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preliminary prospectus relating to the IPO, the Registration Statement or any
prospectus forming a part thereof, or any amendment thereof or supplement
thereto, or (B) any omission or alleged omission to state therein a material
fact relating to Apple or any of the Other Founding Companies, or any of them,
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made (each
such Damage Claim being a "Stockholder Indemnified Loss").
Section 9.05 CONDITIONS OF INDEMNIFICATION. (a) All claims for
indemnification under this Agreement shall be asserted and resolved as follows
in this Section 9.05.
(b) A party claiming indemnification under this Agreement (an
"Indemnified Party") shall promptly (i) notify the party from whom
indemnification is sought (the "Indemnifying Party") of any third-party claim or
claims asserted against the Indemnified Party ("Third Party Claim") that could
give rise to a right of indemnification under this Agreement and (ii) transmit
to the Indemnifying Party a written notice ("Claim Notice") describing in
reasonable detail the nature of the Third Party Claim, a copy of all papers
served with respect to that claim (if any), an estimate of the amount of damages
attributable to the Third Party Claim to the extent feasible (which estimate
shall not be conclusive of the final amount of such claim) and the basis for the
Indemnified Party's request for indemnification under this Agreement. Except as
set forth in Section 9.02, the failure to promptly deliver a Claim Notice shall
not relieve the Indemnifying Party of its obligations to the Indemnified Party
with respect to the related Third Party Claim except to the extent that the
resulting delay is materially prejudicial to the defense of that claim. Within
15 days after receipt of any Claim Notice (the "Election Period"), the
Indemnifying Party shall notify the Indemnified Party (i) whether the
Indemnifying Party disputes its potential liability to the Indemnified Party
under this Article IX with respect to that Third Party Claim and (ii) if the
Indemnifying Party does not dispute its potential liability to the Indemnified
Party with respect to that Third Party Claim, whether the Indemnifying Party
desires, at the sole cost and expense of the Indemnifying Party, to defend the
Indemnified Party against that Third Party Claim.
(c) If the Indemnifying Party does not dispute its potential
liability to the Indemnified Party and notifies the Indemnified Party within the
Election Period that the Indemnifying Party elects to assume the defense of the
Third Party Claim, then the Indemnifying Party shall have the right to defend,
at its sole cost and expense, that Third Party Claim by all appropriate
proceedings, which proceedings shall be prosecuted diligently by the
Indemnifying Party to a final conclusion or settled at the discretion of the
Indemnifying Party in accordance with this Section 9.05(c) and the Indemnified
Party will furnish the Indemnifying Party with all information in its possession
with respect to that Third Party Claim and otherwise cooperate with the
Indemnifying Party in the defense of that Third Party Claim; provided, however,
that the Indemnifying Party shall not enter into any settlement with respect to
any Third Party Claim that purports to limit the activities of, or otherwise
restrict in any way, any Indemnified Party or any Affiliate of any Indemnified
Party without the prior consent of that Indemnified Party (which consent may be
withheld in the sole discretion of that Indemnified Party). The Indemnified
Party is hereby authorized, at the sole cost and expense of the Indemnifying
Party, to file, during the Election Period, any motion, answer or other
pleadings that the Indemnified Party shall deem necessary or appropriate to
protect its interests or those of the Indemnifying Party.
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The Indemnified Party may participate in, but not control, any defense or
settlement of any Third Party Claim controlled by the Indemnifying Party
pursuant to this Section 9.05(c) and will bear its own costs and expenses with
respect to that participation; provided, however, that if the named parties to
any such action (including any impleaded parties) include both the Indemnifying
Party and the Indemnified Party, and the Indemnified Party has been advised by
counsel that there may be one or more legal defenses available to it which are
different from or additional to those available to the Indemnifying Party, then
the Indemnified Party may employ separate counsel at the expense of the
Indemnifying Party, and, on its written notification of that employment, the
Indemnifying Party shall not have the right to assume or continue the defense of
such action on behalf of the Indemnified Party.
(d) If the Indemnifying Party (i) within the Election Period (A)
disputes its potential liability to the Indemnified Party under this Article IX,
(B) elects not to defend the Indemnified Party pursuant to Section 9.05(c) or
(C) fails to notify the Indemnified Party that the Indemnifying Party elects to
defend the Indemnified Party pursuant to Section 9.05(c) or (ii) elects to
defend the Indemnified Party pursuant to Section 9.05(c) but fails diligently
and promptly to prosecute or settle the Third Party Claim, then the Indemnified
Party shall have the right to defend, at the sole cost and expense of the
Indemnifying Party (if the Indemnified Party is entitled to indemnification
hereunder), the Third Party Claim by all appropriate proceedings, which
proceedings shall be promptly and vigorously prosecuted by the Indemnified Party
to a final conclusion or settled. The Indemnified Party shall have full control
of such defense and proceedings. Notwithstanding the foregoing, if the
Indemnifying Party has delivered a written notice to the Indemnified Party to
the effect that the Indemnifying Party disputes its potential liability to the
Indemnified Party under this Article IX and if such dispute is resolved in favor
of the Indemnifying Party, the Indemnifying Party shall not be required to bear
the costs and expenses of the Indemnified Party's defense pursuant to this
Section 9.05 or of the Indemnifying Party's participation therein at the
Indemnified Party's request, and the Indemnified Party shall reimburse the
Indemnifying Party in full for all reasonable costs and expenses of such
litigation. The Indemnifying Party may participate in, but not control, any
defense or settlement controlled by the Indemnified Party pursuant to this
Section 9.05(d), and the Indemnifying Party shall bear its own costs and
expenses with respect to such participation.
(e) In the event any Indemnified Party should have a claim against
any Indemnifying Party hereunder that does not involve a Third Party Claim, the
Indemnified Party shall transmit to the Indemnifying Party a written notice (the
"Indemnity Notice") describing in reasonable detail the nature of the claim, an
estimate of the amount of Damages attributable to that claim to the extent
feasible (which estimate shall not be conclusive of the final amount of such
claim) and the basis of the Indemnified Party's request for indemnification
under this Agreement. If the Indemnifying Party does not notify the Indemnified
Party within 15 days from its receipt of the Indemnity Notice that the
Indemnifying Party disputes such claim, the claim specified by the Indemnified
Party in the Indemnity Notice shall be deemed a liability of the Indemnifying
Party hereunder. If the Indemnifying Party has timely disputed such claim, as
provided above, such dispute shall be resolved by proceedings in an appropriate
court of competent jurisdiction if the parties do not reach a settlement of such
dispute within 30 days after notice of a dispute is given.
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(f) Payments of all amounts owing by an Indemnifying Party pursuant
to this Article IX relating to a Third Party Claim shall be made within 30 days
after the latest of (i) the settlement of that Third Party Claim, (ii) the
expiration of the period for appeal of a final adjudication of that Third Party
Claim or (iii) the expiration of the period for appeal of a final adjudication
of the Indemnifying Party's liability to the Indemnified Party under this
Agreement. Payments of all amounts owing by an Indemnifying Party pursuant to
Section 9.05(e) shall be made within 30 days after the later of (i) the
expiration of the 30-day Indemnity Notice period or (ii) the expiration of the
period for appeal of a final adjudication of the Indemnifying Party's liability
to the Indemnified Party under this Agreement.
Section 9.06 REMEDIES NOT EXCLUSIVE. The remedies provided in this
Agreement shall not be exclusive of any other rights or remedies available to
one party against the other, either at law or in equity.
Section 9.07 LIMITATIONS ON INDEMNIFICATION. (a) Notwithstanding the
provisions of Section 9.03(a), neither the Company nor any of the Stockholders
shall be required to indemnify or hold harmless any of the Apple Indemnified
Parties on account of any Apple Indemnified Loss under Section 9.03(a) unless
the liability of the Company and the Stockholders in respect of that Apple
Indemnified Loss, when aggregated with the liability of the Company and the
Stockholders in respect of all Apple Indemnified Losses under Section 9.03(a),
exceeds, and only to the extent the aggregate amount of all those Apple
Indemnified Losses does exceed, the Threshold Amount. In no event shall (i) the
aggregate joint and several liability of the Company and the Stockholders under
this Agreement, including Section 9.03(a), exceed the Transaction Value or (ii)
the aggregate liability of each Stockholder under this Agreement, including
Sections 9.03(a) and 9.03(b), exceed that Stockholder's Pro Rata Share of the
Transaction Value. For purposes of determining the amount of Apple Indemnified
Losses, no effect will be given to any resulting Tax benefit to any Apple
Indemnified Party.
(b) Notwithstanding the provisions of Section 9.04, Apple shall not
be required to indemnify or hold harmless any of the Stockholder Indemnified
Parties on account of any Stockholder Indemnified Loss unless the liability of
Apple in respect of that Stockholder Indemnified Loss, when aggregated with the
liability of Apple in respect of all Stockholder Indemnified Losses, exceeds,
and only to the extent the aggregate amount of all those Stockholder Indemnified
Losses does exceed, the Threshold Amount. In no event shall Apple be liable
under this Agreement, including Section 9.04, for any amount in excess of the
Transaction Value. For purposes of determining the amount of Stockholder
Indemnified Losses, no effect will be given to any resulting Tax benefit to any
Stockholder Indemnified Party.
ARTICLE XI
GENERAL PROVISIONS
Section 11.15 TREATMENT OF CONFIDENTIAL INFORMATION. (a) Each of the
Company and the Stockholders, severally and not jointly with any other Person,
acknowledges that it has or may have had in the past, currently has and in the
future may have access to Confidential
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Information of the Company and the Company Subsidiaries, the Other Founding
Companies and their Subsidiaries and Apple and its Subsidiaries. Each of the
Company and the Stockholders, severally and not jointly with any other Person,
agrees that it will keep confidential all such Confidential Information
furnished to it and, except with the specific prior written consent of Apple
will not disclose such Confidential Information to any Person except (a)
Representatives of Apple, (b) its own Representatives, provided that these
Representatives (other than counsel) agree to the confidentiality provisions of
this Section 11.15; and provided, further, that Confidential Information shall
not include (i) such information which becomes known to the public generally
through no fault of any Stockholder, (ii) information required to be disclosed
by law or the order of any governmental authority under color of law, provided,
that prior to disclosing any information pursuant to this clause (ii), each
Stockholder shall, if possible, give prior written notice thereof to Apple and
provide Apple with the opportunity to contest such disclosure, or (iii) the
disclosing party reasonably believes that such disclosure is required in
connection with the defense of a lawsuit against the disclosing party. In the
event of a breach or threatened breach by any Stockholder of the provisions of
this Section 11.15 with respect to any Confidential Information, Apple shall be
entitled to an injunction restraining such Stockholder from disclosing, in whole
or in part, that Confidential Information. Nothing herein shall be construed as
prohibiting Apple from pursuing any other available remedy for such breach or
threatened breach, including the recovery of damages.
(b) Because of the difficulty of measuring economic losses as a
result of the breach of the foregoing covenants in Section 11.15(a), and because
of the immediate and irreparable damage that would be caused to Apple for which
it would have no other adequate remedy, each of the Company and the Stockholders
agrees that Apple may enforce the provisions of Section 11.15(a) by injunctions
and restraining orders against each of them who breaches any of those
provisions.
(c) The obligations of Apple set forth in Section 6.02(d) are
incorporated in this Section 11.15 by this reference.
(d) The obligations of the parties under this Section 11.15 shall
survive the termination of this Agreement.
54
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), is entered into on February
__, 1997 by and between APPLE ORTHODONTIX, INC., a Delaware corporation (the
"Company") and JOHN G. VONDRAK, D. D. S. (the "Employee").
R E C I T A L S:
In entering into this Agreement, the Company desires to provide the
Employee with substantial incentives to serve the Company as a senior ex cutive
performing at the highest levels of leadership and stewardship, without
distraction or concern over minimum compensation, benefits or tenure, to develop
and implement the Company's initial development plan and thereafter assist in
managing the Company's future growth and development and maximizing the returns
to the Company's stockholders.
NOW, THEREFORE, in consideration of the foregoing and the mutual
provisions contained herein, and for other good and valuable consideration, the
pa ties hereto agree with each other as follows:
1. CERTAIN DEFINITIONS
A. CERTAIN DEFINITIONS. As used herein, the following terms have
the meanings assigned to them below:
"ACQUIRING PERSON" means any Person who or which, together
with all Affiliates and Associates of such Person, is or are
the Beneficial Owner of twenty-five percent (25%) or more of
the shares of Common Stock then outstanding, but does not
include any Exempt Person; provided, however, that a Person
shall not be or become an Acquiring Person if such Person,
together with its Affiliates and Associates, shall become the
Beneficial Owner of twenty-five percent (25%) or more of the
shares of Common Stock then outstanding solely as a result of
a reduction in the number of shares of Common Stock
outstanding due to the repurchase of Common Stock by the
Company, unless and until such time as such Person or any
Affiliate or Associate of such Person shall purchase or
otherwise become the Beneficial Owner of additional shares of
Common Stock constituting one percent (1%) or more of the then
outstanding shares of Common Stock or any other Person (or
Persons) who is (or collectively are) the Beneficial Owner of
shares of Common Stock constituting one percent (1%) or more
of the then outstanding shares of Common Stock shall become an
Affiliate or Associate of such Person, unless, in either such
case, such Person, together with all Affiliates and Associates
of such Person, is not then the Beneficial Owner of
twenty-five percent (25%) or more of the shares of Common
Stock then outstanding.
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"AFFILIATE" has the meaning ascribed to that term in Exchange
Act Rule 12b-2.
"ANNUAL CASH COMPENSATION" of the Employee for any calendar
year means the sum of the salary and bonus earned by the
Employee during that calendar year, including all amounts
deferred at the election of the Employee pursuant to a
Compensation Plan intended to qualify as a plan under Section
401(k) of the Code or otherwise. If salary or bonus is paid in
whole or in part in property other than cash (such as Common
Stock) the amount so paid shall be the fair market value
thereof on the date of payment.
"AVERAGE ANNUAL CASH COMPENSATION" of the Employee means, as
of the Separation Effective Date, the average of (a) the
Annual Cash Compensation earned by the Employee in each of the
two (2) calendar years next preceding that date or, if fewer
than two (2) calendar years have occurred prior to that date
and since the Effective Date, (b) the average of the Annual
Cash Compensation in any calendar year restated on an
annualized basis.
"BASE SALARY" means the guaranteed minimum annual salary
payable by the Company to the Employee pursuant to Section
4(A).
"BENEFICIAL OWNER" is as defined in Exchange Act Rule 13d-3.
"CAUSE" to permit the Company to terminate the Employee's
Employment pursuant to the terms hereof means: (a) the
Employee's final conviction of a felony crime that involved
moral turpitude or that enriched the Employee at the expense
of the Company; (b) the Employee's deliberate, intentional or
highly reckless continuing failure to perform his duties and
responsibilities hereunder; or (c) beginning the period of
time after the Company has reported negative net revenues in
its reports to the Securities and Exchange Commission for six
(6) consecutive fiscal quarters.
"CHANGE OF CONTROL" means the occurrence of any of the
following events that occurs after the IPO Closing Date: (a)
any Person becomes an Acquiring Person; (b) at any time the
then Continuing Directors cease to constitute a majority of
the members of the Board; (c) a merger of the Company with or
into, or a sale by the Company of its properties and
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assets substantially as an entirety to, another Person occurs
and, immediately after that occurrence, any Person, other than
an Exempt Person, together with all Affiliates, shall be the
Beneficial Owner of twenty-five percent (25%) or more of the
total voting power of the then outstanding Voting Shares of
the Person surviving that transaction (in the case or a merger
or consolidation) or the Person acquiring those properties and
assets substantially as an entirety.
"CHANGE OF CONTROL PAYMENT" means at any time the amount equal
to three (3) times the Employee's highest Base Salary during
the term of this Agreement.
"CODE" means the Internal Revenue Code of 1986.
"COMMON STOCK" means the common stock of the Company.
"COMPANY" means (a) APPLE ORTHODONTIX, INC., a Delaware
corporation, and (b) any Person that assumes the obligations
of "the Company" hereunder, by operation of law, pursuant to
Section 9(D)(iii) or otherwise.
"COMPENSATION PLAN" means any compensation arrangement, plan,
policy, practice or program established, maintained or
sponsored by the Company or any subsidiary of the Company, or
to which the Company or any subsidiary of the Company
contributes, on behalf of any Executive Officer or any member
of the family of any Executive Officer, (a) including (I) any
"employee pension benefit plan" (as defined in Section 3(2) of
ERISA) or other "employee benefit plan" (as defined in Section
3(3) of ERISA), (ii) any other retirement and savings plan,
including any supplemental benefit arrangement relating to any
plan intended to be qualified under Section 401(a) of the Code
or whose benefits are limited by the Code or ERISA, (iii) any
"employee welfare plan" (as defined in Section 3(1) of ERISA),
(iv) any arrangement, plan, policy, practice or program
providing for severance pay, deferred compensation or
insurance benefit, (v) any plan which provides for incentive,
bonus or other performance-based awards of cash, stock , stock
appreciation rights or other restricted stock option plan, not
otherwise included in this definition, and (vi) any
arrangement, plan, policy, practice or program (A) authorizing
and providing for the payment or reimbursement of expenses
attributable to first-class air travel and first-class hotel
occupancy while on
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travel or (B) providing for the payment of business luncheon
and country club dues, long-distance charges, mobile phone
monthly air time or other recurring monthly charges or any
other fringe benefit, allowance or accommodation of
employment, but (b) excluding any compensation arrangement,
plan, policy, practice or program to the extent it provides
for annual base salary.
"COMPENSATION COMMITTEE" means the committee of the Board to
which the Board has delegated duties respecting the
compensation of Executive Officers and the administration of
Incentive Plans, if any, intended to qualify for the Exchange
Act Rule 16b-3 exemption.
"CONFIDENTIAL INFORMATION" means, with respect to the Company
or any subsidiary of the Company, all trade secrets and other
confidential, nonpublic and/or proprietary information of that
Person, including information derived from reports,
investigations, research, work in progress, codes, marketing
and sale programs, customer lists, records of customer service
requirements, capital expenditure projects, cost summaries,
pricing formulae, contract analyses, financial information,
projections, confidential filings with any governmental
authority and all other confidential, nonpublic concepts,
methods of doing business, ideas, materials or information
prepared or performed for, by or on behalf of that Person.
"CPI" means for any period the Consumer Price Index for All
Urban Consumers--All Items Index for Houston, Texas (or any
substantially similar index published for the same area), as
published by the United States Department of Labor, Bureau of
Labor Statistics (or its successor) for that period.
"CONTINUING DIRECTOR" means at any time any individual who
then (a) is a member of the Board and was a member of the
Board as of the IPO Closing Date or whose nomination for his
first election, or that first election, to the Board following
that date was recommended or approved by a majority of the
then Continuing Directors (acting separately or as a part of
any action taken by the Board or any committee thereof) and
(b) is not an Acquiring Person, an Affiliate or Associate of
an Acquiring Person or a nominee or representative of an
Acquiring Person or of any such Affiliate or Associate.
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"DISABILITY" of the Employee means the Employee has been
determined, as a result of a physical or mental illness or
personal injury he has incurred (including illness or injury
resulting from any substance abuse), by a Qualified Physician,
to be unable to perform, at the time of that determination
and, in all reasonable medical likelihood, indefinitely
thereafter, the normal duties then most recently assigned,
under and in accordance with the terms hereof, to the Employee
during the term hereof; provided that, the determination
whether the Employee has incurred a Disability shall be made
by the Company by it causing the selection of three (3)
Qualified Physicians, the majority determination of which
shall be binding on the Company (a) one (1) of whom shall be
selected by the Employee, (b) one (1) of whom shall be
selected by the Company and (c) the remaining one (1) of whom
shall be selected by the Qualified Physicians selected by the
Employee and the Company pursuant to clauses (a) and (b) of
this proviso and the fees and expenses of whom will be shared
and paid in equal amounts by the Employee and the Company, if:
(1)(A) the Company has reasonably withheld its consent to the
Qualified Physician, if any, selected by the Employee or (B)
the Employee has reasonably withheld his consent to the
Qualified Physician, if any, selected by the Company and (2)
the Qualified Physicians selected by the Employee and the
Company disagree as to whether the Employee has incurred a
Disability. For purposes of this definition, if the Employee
is unable by reason of illness or injury to give an informed
consent to the performance of the treatment of that illness or
injury, a Qualified Physician selected by any Person who is
authorized by applicable law to give that consent will be
deemed to have been selected by the Employee.
"EFFECTIVE DATE" means the date that the Registration
Statement on Form S-1, relating to an unwritten initial public
offering of the Company's Common Stock (the "IPO"), is filed
initially with the Securities and Exchange Commission.
"ERISA" means the Employee Retirement Income Security Act of
1974.
"EMPLOYMENT" means the salaried employment of the Employee by
the Company or at the direction of the Company hereunder.
"EXCHANGE ACT" means the Securities Exchange Act of 1934.
"EXECUTIVE OFFICER" means any of the chairman of the board,
the
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chief executive officer, the chief operating officer, the
chief financial officer, the president, any executive or
senior vice president or the general counsel of the Company.
"EXEMPT PERSON" means (a) (1) the Company, any subsidiary of
the Company, any employee benefit plan of the Company or of
any subsidiary of the Company and (2) any Person organized,
appointed or established by the Company for or pursuant to the
terms of any such plan or for the purpose of funding any such
plan or funding other employee benefits for employees of the
Company or subsidiary of the Company and (b) the Employee, any
Affiliate of the Employee or any group (as that term is used
in Exchange Act Rule 13d-5(b)) of which the Employee or any
Affiliate of the Employee is a member. "IPO" means the first
time a registration statement filed under the Securities Act
and respecting an underwritten primary offering by the Company
of shares of Common Stock is declared effective under that act
and the shares registered by that registration statement are
issued and sold by the Company (otherwise than pursuant to the
exercise of any over-allotment option).
"IPO CLOSING DATE" means the date on which the Company first
receives payment for the shares of Common Stock it sells in
the IPO.
"NONTERMINATING PARTY" means the Employee or the Company, as
the case may be, to which the Terminating Party delivers a
Notice of Termination.
"NOTICE OF TERMINATION" to or from the Employee means a
written notice that: (a) to the extent applicable, sets forth
in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Employee's Employment,
and if the Termination Date is other than the date of receipt
of the notice, (b) sets forth that Termination Date.
"OUTSIDE DIRECTOR" means at any time a member of the Board at
that time who is not then an employee of the Company or any
subsidiary of the Company.
"PERSON" means any natural person, sole proprietorship,
corporation, partnership of any kind having a separate legal
status, limited liability
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company, business trust, unincorporated organization or
association, mutual company, joint stock company, joint
venture, estate, trust, union or employee organization or
governmental authority.
"QUALIFIED PHYSICIAN" means, in the case of any determination
whether the Employee has sustained a Disability, a physician
(a) holding an M.D. degree from a medical school located in
the United States and having a national reputation in the
United States as a leading medical school, (b) specializing
and board-certified in the treatment of the injury or illness
that has or may have caused that Disability, (c) duly licensed
to practice that specialty and (d) having admission privileges
to one or more private hospitals located in the Texas Medical
Center in Houston, Texas or in a hospital of comparable
reputation in the state in which the Employee then is
domiciled.
"REQUIRED BOARD MAJORITY" means at any time a majority of the
members of the Board at that time which includes at least a
majority of the Outside Directors at that time.
"RETIREMENT" of the Employee means the Employee terminates his
Employment on or after the date he has attained age 65.
"SECURITIES ACT" means the Securities Act of 1933.
"SEPARATION EFFECTIVE DATE" means the date the Nonterminating
Party receives the Terminating Party's Notice of Termination
(a) if the Company elects pursuant hereto to terminate the
Employee's Employment other than for Cause or (b) if the
Employee elects pursuant hereto to terminate his Employment
pursuant to the terms and conditions hereof, or by reason of
Disability.
"SEPARATION PERIOD" means the period of time which begins on
the Separation Effective Date and ends on the first to occur
of (a) the third (3rd) anniversary of that Separation
Effective Date.
"TERMINATING PARTY" means the Employee or the Company, as the
case may be, who or which terminates the Employee's Employment
by means of a Notice of Termination.
"TERMINATION DATE" means: (a) if the Employee's Employment is
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terminated by reason of the Employee's death or Retirement,
the date of that death or Retirement; (b) if the Employee's
Employment is terminated by reason of the Employee's giving a
Notice of Termination following a Change of Control pursuant
to Section 5(B)(i)(b), the first date on which the Company
pays to the Employee in full the amounts owed to the Employee
pursuant to Section 5(B)(iii); (c) if the Employee's
Employment is terminated by the Employee giving a written
notice of breach of contract which is not cured within thirty
(30) days, or 180 days written Notice Termination pursuant to
the terms hereof, and other than for Disability; (d) the date
the Employee receives the Company's Notice of Termination.
"VOTING SHARES" means: (a) in the case of any corporation,
stock of that corporation of the class or classes having
general voting power under ordinary circumstances to elect a
majority of that corporation's board of directors; and (b) in
the case of any other entity, equity interests of the class or
classes having general voting power under ordinary
circumstances equivalent to the Voting Shares of the
Corporation.
2. EMPLOYMENT
A. Subject to the terms and conditions hereof, as of the
Effective Date, the Company will employ the Employee as its
Chief Executive Officer (CEO) and the Employee will serve in
the Company's employ in that position. The Employee shall
perform such duties, and have such powers, authority,
functions, duties and responsibilities for the Company and
corporations affiliated with the Company as are commensurate
and consistent with employment as the Company's Chief
Executive Officer. The Employee also shall have such
additional powers, authority, functions, duties and
responsibilities as may be assigned to him by the Board;
provided that, without the Employee's written consent, such
additional powers, authority, functions, duties and
responsibilities shall not be inconsistent or interfere with,
or detract from, those herein vested in, or otherwise then
being performed for the Company by the Employee.
B. The Employee shall not, at any time during his Employment,
engage in any other activities unless those activities do not
interfere materially with the Employee's duties and
responsibilities for the Company at that time, except that the
Employee shall be entitled, subject to the provisions of
Section 7, (a) to continue with such activities as the
Employee has carried
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on prior to the Effective Date, including making and managing
his personal investments and participating in other business
or civic activities and (b) to serve on corporate or other
business, civic or charitable boards or committees and trade
association or similar boards or committees. The Company shall
not assign Employee duties inconsistent in any material
respect with the Employee's position as set forth above, or
otherwise diminish the Employee's position, duties or
responsibilities.
C. Pursuant to the terms and conditions of a Consulting Contract
dated __, 1996, between the Employee and the Company, the
Employee and the Company hereby agree to and ratify the
above-referenced Consulting Contract, and the Employee shall
serve as a consultant pursuant to that agreement from the date
hereof until the Effective Date.
3. TERM OF EMPLOYMENT. Subject to the provisions of Section 5, the term of
the Employee's Employment shall be for a continually renewing term of three (3)
years commencing on the Effective Date and renewing each day thereafter for an
additional day without any further action by either the Company or the Employee,
it being the intention of the parties that there shall be continuously a
remaining term of three (3) years' duration of the Employee's Employment until
an event has occurred as described in, or one of the parties shall have made an
appropriate election pursuant to, the provisions of Section 5. When the
Termination Date shall have occurred and the Company shall have paid to the
Employee all the applicable amounts Section 5 provides the Company shall pay as
a result of the termination of the Employee's Employment, including all amounts
accruing during the Separation Period, if any, this Agreement will terminate and
have no further force or effect, except that Sections 4(C), 8, 9, 10 and 11
shall survive that termination indefinitely and Section 7 shall survive for the
period of time provided for therein.
4. COMPENSATION
A. BASE SALARY. A Base Salary shall be payable to the Employee by
he Company as a guaranteed minimum annual amount hereunder for
each calendar year during the period from the Effective Date
to the the Termination Date, subject to the rights of the
Employee during the Separation Period. That Base Salary shall
be payable in the intervals consistent with the Company's
normal payroll schedules (but in no event less infrequently
than semi-monthly), shall be payable initially at the annual
rate of $180,000 and shall be increased (but not decreased or
adjusted other than as provided in Section 5) as follows:
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(i) on the first and each subsequent anniversary of the
Effective Date, by the same percentage increase (if any) in
the CPI for the twelve (12) month period immediately preceding
such anniversary;
(ii) on the first and each subsequent anniversary of the
Effective Date, by such additional amount as shall be
determined in the sole discretion of the Compensation
Committee, but only in such form and to such extent as the
Compensation Committee may from time to time approve, as
evidenced by the written minutes or records of the
Compensation Committee and its written notices of such
determinations or approvals to the Employee; and
(iii) if the Employee relocates from a state without a
personal income tax at the time of his relocation to a state
having a personal income tax, or if the Employee resides in a
state without a personal income tax on the date hereof which
subsequently adopts a personal income tax, then, in either
case, the Base Salary in effect at the time of such relocation
or adoption, as applicable, shall immediately be increased by
the amount equal to the Base Salary immediately prior to this
increase multiplied by seventy percent (70%) of the highest
personal income tax rate of such state; for example, if the
Employee relocates from a state without a personal income tax
to a state having a personal income tax and the highest rate
of that tax is six percent (6%) when the Base Salary is
$200,000, then the Base Salary will be increased by $8,400
(computed at 70% x 6% x $200,000); provided, however, that the
obligation of the Company to pay the Base Salary earned by the
Employee for his service in the period beginning on the
Effective Date and ending on the date that is the first to
occur of (a) the IPO Closing Date, (b) the Termination Date or
(c) such other date as the Board in its sole discretion may
determine shall be deferred to the last day of that period in
such amounts as the Board in its sole discretion may from time
to time determine, on which day the Company shall pay in full
to the Employee, without interest, the aggregate earned but
unpaid amount of the Base Salary for that period. Effective as
of the Separation Effective Date, the Base Salary theretofore
in effect shall be adjusted as provided in Section 5(E).
B. OTHER COMPENSATION.
(i) The Employee shall be entitled to participate in all
Compensation Plans from time to time in effect during the term
hereof, regardless of
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whether the Employee is an Executive Officer. All awards to
the Employee under all Incentive Plans shall take into account
the Employee's positions with and duties and responsibilities
to the Company and its subsidiaries. The Company hereby
convenants and agrees to establish a health, life and
disability insurance program and a policy for reimbursement of
country club dues and related business expense reimbursements
as of the Effective Date, or to be effective as of the
Effective Date, and to establish a retirement plan and
incentive compensation plan that is effective as of the end of
the first calendar year after the IPO Effective Date.
(ii) The Company shall grant to the Employee 395.50 shares of
it's pre-IPO common stock, subject to a subscription agreement
to establish the private placement exemption for private
placement purposes.
(iii) Employer shall be responsible for the Employee's
reasonable moving expenses regarding his families' household
furnishings and goods to the city of the Corporation's
headquarters.
C. TAX INDEMNITY. Should any of the payments of Base Salary,
other incentive or supplemental compensation, benefits,
allowances, awards, payments, reimbursements or other
perquisites, or any other payment in the nature of
compensation, singly, in any combination or in the aggregate,
that are provided for hereunder to be paid to or for the
benefit of the Employee be determined or alleged to be subject
to an excise or similar purpose tax pursuant to Section 4999
of the Code, or any successor or other comparable federal,
state or local tax law by reason of being a "parachute
payment" (within the meaning of Section 280G of the Code), the
Company shall pay to the Employee such additional compensation
as is necessary (after taking into account all federal, state
and local taxes payable by the Employee as a result of the
receipt of such additional compensation) to place the Employee
in the same after-tax position (including federal, state and
local taxes) he would have been in had no such excise or
similar purpose tax (or interest or penalties thereon) been
paid or incurred. The Company hereby agrees to pay such
additional compensation within the earlier to occur of (i)
five (5) business days after the Employee notifies the Company
that the Employee intends to file a tax return taking the
position that such excise or similar purpose tax is due and
payable in reliance on a written opinion of the Employee's tax
counsel (such tax counsel to be chosen solely by the Employee)
that it is more
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likely than not that such excise tax is due and payable or
(ii) twenty-four (24) hours of any notice of or action by the
Company that it intends to take the position that such excise
tax is due and payable. The costs of obtaining the tax counsel
opinion referred to in clause (i) of the preceding sentence
shall be borne by the Company, and as long as such tax counsel
was chosen by the Employee in good faith, the conclusions
reached in such opinion shall not be challenged or disputed by
the Company. If the Employee intends to make any payment with
respect to any such excise or similar purpose tax as a result
of an adjustment to the Employee's tax liability by any
federal, state or local tax authority, the Company will pay
such additional compensation by delivering its cashier's check
payable in such amount to the Employee within five (5)
business days after the Employee notifies the Company of his
intention to make such payment. Without limiting the
obligation of the Company hereunder, the Employee agrees, in
the event the Employee makes any payment pursuant to the
preceding sentence, to negotiate with the Company in good
faith with respect to procedures reasonably requested by the
Company which would afford the Company the ability to contest
the imposition of such excise or similar purpose tax;
provided, however, that the Employee will not be required to
afford the Company any right to contest the applicability of
any such excise or similar purpose tax to the extent that the
Employee reasonably determines (based upon the opinion of his
tax counsel) that such contest is inconsistent with the
overall tax interests of the Employee.
5. TERMINATION, SEPARATION PERIOD, DISABILITY AND DEATH
A. TERMINATION OF EMPLOYMENT BY THE COMPANY.
(i) The Company shall be entitled, if acting at the direction
of the Required Board Majority, to terminate the Employee's
Employment (a) at any time for Cause or (b) subject to the
payments obligations of the Separation Period, at any time
without Cause. The Company's termination of the Employee's
Employment hereunder will be effective on the date the Company
delivers a Notice of Termination for Cause to the Employee
pursuant hereto. Subject to the payment provisions applicable
to the Separation Period, the Employee shall be required to
vacate the premises of the Company, with all of the Employee's
personal property no later than five (5) business days after
the Notice of Termination.
(ii) If the Company terminates the Employee's Employment for
Cause,
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the Company promptly thereafter, and in any event within five
(5) business days thereafter, shall pay the Employee his Base
Salary to and including the the end of the calendar month of
the Termination Date and the amount of all compensation
previously deferred by the Employee (together with any accrued
interest or earnings thereon), in each case to the extent not
theretofore paid, and, when that payment is made, the Company
shall, notwithstanding Section 3, have no further or other
obligations hereunder to the Employee.
(iii) If the Company otherwise terminates the Employee's
Employment, the respective rights and obligations of the
Company and the Employee during the Separation Period will be
as set forth in Section 5(E).
B. TERMINATION OF EMPLOYMENT BY THE EMPLOYEE.
(i) The Employee shall be entitled to terminate his
Employment, other than for Disability, at any time after one
hundred eighty (180) days after a Notice of Termination, (b)
by reason of a Change of Control at any time within three
hundred sixty-five (365) days after that Change of Control
occurs, or (c) at any time after thirty (30) days after
receipt of a Notice of Termination for material breach of any
provision of this Agreement, and the Company has not cured
that breach during the thirty (30) day period. The Employee's
termination of his Employment by reason of a Change of Control
will be effective on the first date on which the Change of
Control Payment shall have been paid in full to the Employee.
The Employee's termination of his Employment pursuant to (a)
and (b) above shall be effective on the Termination Date,
subject to the payment obligations of the Company during the
Separation Period.
(ii) If the Employee terminates his Employment by reason of a
Change of Control, the Company shall pay to the Employee in a
cash lump sum within five (5) business days after the date the
Company receives the Employee's Notice of Termination by
reason of that Change of Control the amount equal to the sum
of (a) the portion of the Base Salary to and including the
Termination Date which has not yet been paid, (b) all
compensation previously deferred by the Employee (together
with any accrued interest and earnings thereon), (c) any
accrued but unpaid vacation pay and (d) the Change of Control
Payment.
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(iii) If the Employee terminates his Employment, other than
for Disability, the Company shall pay to the Employee, in a
cash lump sum within five (5) business days after the
Termination Date, the amount equal to the sum of (a) the
portion of the Base Salary to and including the Termination
Date which has not yet been paid, (b) all compensation
previously deferred by the Employee (together with any accrued
interest and earnings thereon) which has not yet been paid,
(c) any accrued but unpaid vacation pay and (d) the amount
equal to fifty percent (50%) of the Base Salary being paid for
the calendar year in which the Company receives the Employee's
Notice of Termination, and other than for Disability.
C. TERMINATION BY REASON OF DISABILITY. If the Employee incurs
any Disability during the term hereof, either the Employee or
the Company may terminate the Employee's Employment effective
on the third (3rd) anniversary of the date the Nonterminating
Party receives a Notice of Termination from the Terminating
Party pursuant to this Section 5(C). If the Employee's
Employment is terminated by reason of the Employee's
Disability, the respective rights and obligations of the
Company and the Employee during the Separation Period will be
as set forth in Section 5(E).
D. TERMINATION OF EMPLOYMENT BY DEATH. The Employee's Employment
shall terminate during the term hereof automatically at the
time of his death. If the Employee's Employment is terminated
by reason of the Employee's death, the Company shall pay to
the Person the Employee has designated in a written notice
delivered to the Company as his beneficiary entitled to such
payment, if any, or to the Employee's estate, as applicable,
in a cash lump sum within thirty (30) days after the
Termination Date, the amount equal to the sum of (i) the
portion of the Base Salary through the end of the month in
which the Termination Date occurs which has not yet been paid,
(ii) all compensation previously deferred by the Employee
(together with any accrued interest or earnings thereon) which
has not yet been paid, (iii) any accrued but unpaid vacation
pay and (iv) (a) the product of the Base Salary being paid for
the calendar year of death multiplied by three (3).
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E. EMPLOYEE'S PAYMENT RIGHTS DURING THE SEPARATION PERIOD.
(i) The Company shall pay the Employee a Base Salary, in the
intervals consistent with the Company's normal payroll
schedules (but in no event less frequently than semi-monthly)
from the Separation Effective Date to and including the third
anniversiary thereof in the amounts determined from time to
time as follows: the Base Salary payable by the Company to the
Employee shall be as follows:
(a) if the Separation Effective Date occurs as a result
of the receipt by the Nonterminating Party of a Notice
of Termination other than for Cause, the amount equal to
the Average Annual Cash Compensation of the Employee
determined as of the Separation Effective Date; and (b)
if the Separation Effective Date occurs as a result of
the receipt by the Nonterminating Party of a Notice of
Termination for Disability pursuant to Section 5(C), the
amount equal to the amount by which (1) seventy-five
percent (75%) of the Average Annual Cash Compensation of
the Employee determined as of the Part-time Employment
Effective Date exceeds (2) the aggregate amount of
periodic payments the Employee receives during the
thirty-six (36) months beginning on that date under
Compensation Plans then in effect and providing for the
payment to the Employee solely as a result or on account
of disability; and
(b) on the first and each subsequent anniversary of the
Separation Date, the Base Salary payable pursuant to
this Section 5(E) shall be increased (but not decreased)
by the same percentage increase (if any) in the CPI for
the twelve (12) month period immediately preceding that
anniversary.
(ii) (a) The Employee shall continue to participate in all
Compensation Plans from time to time in effect during the
Separation Period, provided, however, that: (1) the Employee
shall not be entitled to receive any new award or grant under
any incentive plan, and any such new award or grant shall be
at the sole discretion of the Compensation Committee or the
Board, as applicable, with respect to that incentive plan; and
(2) if (A) the terms of any such plan preclude the Employee's
continued
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participation therein or (B) his continued participation in
any such plan would or reasonably could be expected to
disqualify that plan under the Code, the Employee shall not be
entitled to participate in that plan, but the Company instead
shall provide the Employee with the after-tax equivalent of
the benefits that would have been provided to the Employee
were a participant in that plan.
(b) For purposes of determining eligibility (including years
of service) for retirement benefits payable under any
Compensation Plan, the Employee shall be deemed to have
retired at the Termination Date.
(iii) Subject to the provisions of Section 7, the Employee
shall not be prevented from accepting other employment or
engaging in (and devoting substantially all his time to) other
business activities and shall not be required to perform any
regular duties for the Company, and the Employee may seek or
accept additional employment with any other Person. If the
Employee, at his discretion, shall accept any such additional
employment or engage in any such other business activity there
shall be no offset, reduction or effect upon any rights,
benefits or payments to which the Employee is entitled
pursuant to this Agreement. Furthermore, the Employee shall
have no obligation to account for, remit, rebate or pay over
to the Company any compensation or other amounts earned or
derived in connection with such additional employment or
business activity.
The Employee shall, however, make himself generally
available for special projects or to consult with the Company
and its employees at such times and at such places as may be
reasonably requested by the Company and which shall be
reasonably satisfactory to the Employee and consistent with
the Employee's regular duties and responsibilities in the
course of his then new occupation or other employment, if any.
(iv) Unless and until the Employee shall have sustained a
Disability, the Company shall continue to provide the Employee
with either the same or, at the Company's election, at a
different location within thirty-five (35) miles of the
Employee's principal residence, in any case reasonably
acceptable to the Employee, alternate but comparable office
space, furnishings, facilities, reserved parking, supplies,
services, equipment, secretarial and administrative assistance
that are in each case at least
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<PAGE>
commensurate with the size and quality of that which were
provided to the Employee during the calendar year immediately
preceding the Separation Effective Date pursuant to Section
6(C), but in no event less than are being furnished or
provided on the date hereof. The Company and Employee may
mutually agree upon an equivalent monthly cash allowance in
lieu of the Employee being provided all or any part of these
items. (v) The Employee shall remain entitled to the benefits
of Section 4(C).
F. RETURN OF PROPERTY. On termination of the Employee's
Employment, however brought about, the Employee (or his
representatives) shall promptly deliver and return to the
Company all the Company's property that is in the possession
or under the control of the Employee.
G. STOCK OPTIONS. Notwithstanding any provision of this Agreement
to the contrary: (i) except in the case of a termination of
the Employee's Employment for Cause, all stock options
previously granted to the Employee under incentive plans that
have not been exercised and are outstanding as of the time
immediately prior to the Termination Date shall,
notwithstanding any contrary provision of any applicable
incentive plan, remain outstanding (and continue to become
exercisable pursuant to their respective terms) until
exercised or the expiration of their term, whichever is
earlier; and (ii) in the case of a termination of the
Employee's Employment for Cause, all stock options previously
granted to the Employee under incentive plans that have not
been exercised and are outstanding as of the time immediately
prior to the Termination Date shall, notwithstanding any
contrary provision of any applicable incentive plan, remain
outstanding and continue to be exercisable until exercised or
the date that is ten (10) days after the Termination Date,
whichever is earlier. No stock option previously granted to
the Employee under any incentive plan shall, notwithstanding
any contrary provision of that incentive plan, expire or fail
to become exercisable or, if exercisable, cease to be
exercisable by reason of the occurrence of the Employee's
Separation Effective Date.
6. OTHER EMPLOYEE IGHTS
A. PAID VACATION; HOLIDAYS. The Employee shall be entitled to not
less than four (4) weeks of annual vacation and all legal
holidays during which times his applicable compensation shall
be paid in full. Further, it
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is understood by the Employee that all paid vacation days
shall be taken by or on December 31 of the calender year. Any
and all vacation days which were not taken by said date, shall
be paid to the Employee on the second pay period of the
following January.
B. BUSINESS EXPENSES. The Employee is authorized to incur, and
will be entitled to receive prompt reimbursement for, all
reasonable expenses incurred by the Employee in performing his
duties and carrying out his responsibilities hereunder,
including business meal, entertainment and travel expenses,
provided that the Employee complies with the applicable
policies, practices and procedures of the Company relating to
the submission of expense reports, receipts or similar
documentation of those expenses. The Company shall either pay
directly or promptly reimburse the Employee for such expenses
not more than twenty (20) days after the submission to the
Company by the Employee from time to time of an itemized
accounting of such expenditures for which direct payment or
reimbursement is sought. Unpaid reimbursements after such
twenty (20) day period shall accrue interest in accordance
with Section 9(K).
C. SUPPORT. During the term hereof, the Employee shall be
provided by the Company with office space, furnishings, and
facilities, reserved parking, secretarial and administrative
assistance, supplies and other support equipment (including a
computer, facsimile machine and photocopier). .
7. COVENANT NOT TO COMPETE
A. The Employee recognizes that in each of the highly competitive
businesses in which the Company is engaged, personal contact
is of primary importance in securing new orthodontic practices
and in retaining the accounts and goodwill of present
practices and protecting the business of the Company. The
Employee, therefore, agrees that during the term of Employment
and for a period of one (1) year after the Termination Date,
Employee will not, within fifty (50) miles of the corporate
headquarters: (i) accept employment or render service to any
Person that is engaged in a business directly competitive with
the business then engaged in by the Company or (ii) enter into
or take part in or lend Employee's name, counsel or assistance
to any business, either as proprietor, principal, investor,
partner, director, officer, employee, consultant, advisor,
agent,
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independent contractor, or in any other capacity whatsoever,
for any purpose that would be competitive with the business of
the Company.
B. If the provisions of this Section 7 are violated in any
material respect, the Company shall be entitled, upon
application to any court of proper jurisdiction, to a
temporary restraining order or preliminary injunction (without
the necessity of posting any bond with respect thereto) to
restrain and enjoin the Employee from that violation. If the
provisions of this Section 7 should ever be deemed to exceed
the time, geographic or occupational limitations permitted by
the applicable law, the Employee and the Company agree that
such provisions shall be and are hereby reformed to the
maximum time, geographic or occupational limitations permitted
by the applicable law.
8. CONFIDENTIAL INFORMATION
A. The Employee acknowledges that the Employee has had and will
continue to have access to various Confidential Information.
The Employee agrees, therefore, that Emp oyee will not at any
time, either while employed by the Company or afterwards,
knowingly make any independent use of, or knowingly disclose
to any other person (except as authorized by the Company) any
Confidential Information. Confidential Information shall not
include (i) information that becomes known to the public
generally through no fault of the Employee, (ii) information
required to be disclosed by law or legal process or the order
of any governmental authority under color of law, provided,
that prior to disclosing any information pursuant to this
clause (ii), the Employee shall, if possible, give prior
written notice thereof to the Company and provide the Company
with the opportunity to contest such disclosure, or (iii) the
Employee reasonably believes that such disclosure is required
in connection with the defense of a lawsuit against the
Employee. In the event of a breach or threatened breach by the
Employee of the provisions of this Section 8(A) with respect
to any Confidential Information, the Company shall be entitled
to a temporary restraining order and a preliminary and
permanent injunction (without the necessity of posting any
bond in connection therewith) restraining the Employee from
disclosing, in whole or in part, that Confidential
Information. Nothing herein shall be construed as prohibiting
the Company from pursuing any other available remedy for that
breach or threatened breach, including the recovery of
damages.
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<PAGE>
B. The Employee shall disclose promptly to the Company any and
all conceptions and ideas for inventions, improvements, and
valuable discoveries, whether patentable or not, which are
conceived or made by the Employee solely or jointly with any
other Person or Persons during the term of Employment and
which pertain primarily to the material business activities of
the Company, and the Employee hereby assigns and agrees to
assign all his interests therein to the Company or to its
nominee; whenever requested to do so by the Company, the
Employee shall execute any and all applications, assignments
or other instruments which the Company shall deem necessary to
apply for and obtain Letters of Patent of the United States or
any foreign country or to otherwise protect the Company's
interest therein. These obligations shall (i) continue beyond
the Termination Date with respect to inventions, improvements,
and valuable discoveries, whether patentable or not,
conceived, made or acquired by the Employee during the term of
Employment and (ii) be binding upon the Employee's assigns,
executors, administrators and other legal representatives.
9. GENERAL PROVISIONS
A. SEVERABILITY. If any one or more of the provisions of this
Agreement shall, for any reason, be held or found by final
judgment of a court of competent jurisdiction to be invalid,
illegal or unenforceable in any respect, (i) such invalidity,
illegality or unenforceability shall not affect any other
provisions of this Agreement, (ii) this Agreement shall be
construed as if such invalid, illegal or unenforceable
provision had never been contained herein (except that this
clause (ii) shall not prohibit any modification allowed under
Section 7(B)), and (iii) if the effect of a holding or finding
that any such provision is invalid, illegal or unenforceable
is to modify to the Employee's detriment, reduce or eliminate
any compensation, reimbursement, payment, allowance or other
benefit to the Employee intended by the Company and Employee
in entering into this Agreement, the Company shall, within
thirty (30) days after the date of such finding or holding,
negotiate and expeditiously enter into an agreement with the
Employee which contains alternative provisions (reasonably
acceptable to the Employee) that will restore to the Employee
(to the extent lawfully permissible) substantially the same
economic, substantive and income tax benefits and legal rights
the Employee would have enjoyed had such provision been upheld
as legal, valid and enforceable.
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<PAGE>
B. NONEXCLUSIVITY OF RIGHTS. Nothing herein shall prevent or
limit the Employee's continuing or future participation in any
Compensation Plan or, subject to Section 9(N), limit or
otherwise affect such rights as the Employee may have under
any other contract or agreement with the Company. Vested
benefits and other amounts to which the Employee is or becomes
entitled to receive under any Compensation Plan on or after
the Termination Date shall be payable in accordance with that
Compensation Plan, except as expressly modified hereby.
C. FULL SETTLEMENT. The Company's obligations to make the
payments provided for in, and otherwise to perform its
undertakings in, this Agreement shall not be affected by any
right of set-off, counterclaim, recoupment, defense or other
action, claim or right the Company may have against the
Employee or others. In no event shall the Employee be
obligated to seek other employment or take any other action by
way of mitigation of the amounts payable to the Employee under
any provision hereof, and those amounts shall not be reduced,
regardless of whether the Employee obtains other employment or
becomes self-employed.
D. SUCCESSORS.
(i) This Agreement is personal to the Employee and, without
the prior written consent of the Company, is not assignable by
the Employee otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit and be
enforceable by the Employee's legal representatives acting in
their capacities as such pursuant to applicable law.
(ii) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns. If
the Employee is not an Executive Officer, but is an officer of
a subsidiary of the Company, the Company shall be entitled to
assign all its obligations hereunder to that subsidiary and
treat the Employee as an employee of that subsidiary for all
purposes, but the Company shall remain liable for the full,
timely performance of all the obligations so assigned as if
the assignment had not been made.
(iii) The Company shall require any successor (direct or
indirect and whether by purchase, merger, consolidation, share
exchange or otherwise) to the business, properties and assets
of the Company substantially as an
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entirety expressly to assume and agree to perform this
Agreement in the same manner and to the same extent the
Company would have been required to perform it had no such
succession taken place.
E. AMENDMENTS; WAIVERS. This Agreement may not be amended or
modified except by a written agreement executed and delivered
by the parties hereto or their respective successors or legal
representatives acting in their capacities as such pursuant to
applicable law.
F. NOTICES. All notices and other communications under this
Agreement shall be in writing and shall be given by hand
delivery or by registered or certified mail, return receipt
requested, postage prepaid, addressed to the appropriate
Person at the address of such Person set forth below (or at
such other address as such Person may designate by written
notice to each other party in accordance herewith):
(a) if to the Employee, addressed as follows:
John G. Vondrak
2345 Bering #206
Houston, TX 77057 and
(b) if to the Company, addressed as follows:
APPLE ORTHODONTIX, INC.
One West Loop South, Suite 100
Houston, Texas 77027
Attn: Corporate Secretary
G. NO WAIVER. The failure of the Company or the Employee to
insist on strict compliance with any provision of, or to
assert any righ under, this agreement (including the right of
the Employee to terminate his Employment for Good Reason or by
reason of a Change of Control pursuant to Section 5(B)(i))
shall not be deemed a waiver of that provision or of any other
provision of or right under this Agreement.
H. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS,
WITHOUT REFERENCE TO ANY PRINCIPLES OF CONFLICTS OF LAWS.
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<PAGE>
I. JURISDICTION AND VENUE. The Company irrevocably consents with
respect to any action, suit or other legal proceeding
pertaining directly to this Agreement or to the interpretation
or enforcement of any of the Employee's rights hereunder to
service of process in the State of Texas and hereby waives any
right to contest or oppose receipt of such service of process.
The Company irrevocably (i) agrees that any such action, suit
or other legal proceeding may be brought in the courts of such
state or in the courts of the United States sitting in such
state, (ii) consents to the jurisdiction of each such court in
any such action, suit or other legal proceeding, and (iii)
waives any objection it may have to the laying of venue of any
such action, suit or other legal proceeding in any of such
courts.
J. HEADINGS. The headings of Sections and subsections hereof are
included solely for convenience of reference and shall not
control the meaning or interpretation of any of the provisions
of this Agreement.
K. INTEREST. If any amounts required to be paid or reimbursed to
the Employee hereunder are not so paid or reimbursed at the
times provided herein (including amounts required to be paid
by the Company pursuant to Sections 6 and 10, those amounts
shall accrue interest compounded daily at the annual
percentage rate which is three percentage points (3%) above
the interest rate announced by Texas Commerce Bank National
Association, Houston, Texas (or its successor), from time to
time, as its Base Rate (or prime lending rate), from the date
those amounts were required to have been paid or reimbursed to
the Employee until those amounts are finally and fully paid or
reimbursed; provided, however, that in no event shall the
amount of interest contracted for, charged or received
hereunder exceed the maximum non-usurious amount of interest
allowed by applicable law.
L. PUBLICITY. The Company agrees with the Employee that, except
to the extent required by law or legal process (including the
Exchange Act and the Securities Act), it will not make or
publish, without the prior written consent of the Employee,
any written or oral statement concerning the terms of the
Employee's employment relationship with the Company and will
not, if a Notice of Termination is given by either the Company
or the Employee for any reason, publish or cause to be
published any statement concerning the Employee, including his
work-related performance or the reasons or basis for the
giving of that Notice of Termination.
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<PAGE>
M. TAX WITHHOLDING. Notwithstanding any other provision hereof,
the Company may withhold from amounts payable hereunder all
Federal, state, local and foreign taxes that are required to
be withheld by applicable laws or regulations.
N. ENTIRE AGREEMENT. Except for the Consulting Contract ratified
hereby and the agreements related to the IPO, including the
Plan and Agreement of Merger, the Company and the Employee (i)
acknowledge that this Agreement supersedes all prior written
and oral agreements between them with respect to the
employment of the Employee by the Company.
10. INTENDED BENEFITS TO EMPLOYEE; PAYMENT OF EXPENSES; RESOLUTION OF
DISPUTES
A. INTENDED BENEFITS; PAYMENT OF EXPENSES. In entering into this
Agreement the Company intends that the Employee receive
without reduction or delay all the intended benefits of this
Agreement and that those benefits, and the terms and
conditions hereof, be construed in a manner most favorable to
the Employee; the Company, therefore, agrees that it will
strive expeditiously and in good faith to construe and resolve
in the Employee's favor and to his benefit any ambiguities or
uncertainties that may be created by the express language
hereof. If, however, at any time during the term hereof or
afterwards: (i) there should exist a dispute or conflict
between the Employee and the Company or another Person as to
the validity, interpretation or application of any term or
condition hereof, or as to the Employee's entitlement to any
benefit intended to be bestowed hereby, which is not resolved
to the satisfaction of the Employee, (ii) the Employee must
(a) defend the validity of this Agreement, (b) contest any
determination by the Company concerning the amounts payable
(or reimbursable) by the Company to the Employee, or (c)
determine in any tax year of the Employee the tax consequences
to the Employee of any amounts payable (or reimbursable) under
Section 4(c) or 4(B)(iii), or (iii) the Employee must prepare
responses to an Internal Revenue Service ("IRS") audit of, or
otherwise defend, his personal income tax return for any year
the subject of any such audit, or an adverse determination,
administrative proceedings or civil litigation arising
therefrom that is occasioned by or related to an audit by the
IRS of the Company's income tax returns, then the Company
hereby unconditionally agrees: (a) on written demand of the
Company by the Employee, to
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<PAGE>
provide sums sufficient to advance and pay on a current basis
(either by paying directly or by reimbursing the Employee) not
less than thirty (30) days after a written request therefor is
submitted by the Employee, the Employee's out of pocket costs
and expenses (including attorney's fees, expenses of
investigation, travel, lodging, copying, delivery services and
disbursements for the fees and expenses of experts, etc.)
incurred by the Employee in connection with any such matter;
(b) the Employee shall be entitled, upon application to any
court of competent jurisdiction, to the entry of a mandatory
injunction without the necessity of posting any bond with
respect thereto which compels the Company to pay or advance
such costs and expenses on a current basis; and (c) the
company's obligations under this Section 10(A) will not be
affected if the Employee is not the prevailing party in the
final resolution of any such matter.
11. INDEMNIFICATION
Pursuant to the express terms and conditions of the Certificate of Incorporation
and Bylaws of the Company, the Company hereby ratify and confirm and enter into
an express separate contract to provide that the Employee shall be held harmless
from monetary damages and be fully indemnified by the Company to the maximum
extent permitted by the law of Delaware, the state of the Company's
incorporation, and the law of the state of incorporation of any subsidiary of
the Company of which the Employee is a director or an officer or employee, as
the same may be in effect from time to time.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the day and year indicated above.
APPLE ORTHODONTIX, INC.
By: /s/ WILLIAM W. SHERRILL
William W. Sherrill,
Chairman of Compensation Committee
EMPLOYEE
By: /s/ JOHN G. VONDRAK, D.D.S.
John G. Vondrak, D.D.S.
Employee's Permanent Address:
2345 Bering #206
Houston, TX 77057
25
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), is entered into on December
9, 1996, by and between APPLE ORTHODONTIX, INC., a Delaware corporation (the
"Company") and ROBERT J. SYVERSON (the "Employee").
R E C I T A L S:
In entering into this Agreement, the Company desires to provide the
Employee with substantial incentives to serve the Company as a senior executive
performing at the highest levels of leadership and stewardship, without
distraction or concern over minimum compensation, benefits or tenure, to develop
and implement the Company's initial development plan and thereafter assist in
managing the Company's future growth and development and maximizing the returns
to the Company's stockholders. Further, the Employee understands and agrees that
prior to the Effective Date, he shall work on behalf of Apple as a full-time
consultant.
NOW, THEREFORE, in consideration of the foregoing and the mutual
provisions contained herein, and for other good and valuable consideration, the
parties hereto agree with each other as follows:
1. CERTAIN DEFINITIONS
A. CERTAIN DEFINITIONS. As used herein, the following terms have
the meanings assigned to them below:
"ACQUIRING PERSON" means any Person who or which, together
with all Affiliates and Associates of such Person, is or are
the Beneficial Owner of twenty-five percent (25%) or more of
the shares of Common Stock then outstanding, but does not
include any Exempt Person; provided, however, that a Person
shall not be or become an Acquiring Person if such Person,
together with its Affiliates and Associates, shall become the
Beneficial Owner of twenty-five percent (25%) or more of the
shares of Common Stock then outstanding solely as a result of
a reduction in the number of shares of Common Stock
outstanding due to the repurchase of Common Stock by the
Company, unless and until such time as such Person or any
Affiliate or Associate of such Person shall purchase or
otherwise become the Beneficial Owner of additional shares of
Common Stock constituting one percent (1%) or more of the then
outstanding shares of Common Stock or any other Person (or
Persons) who is (or collectively are) the Beneficial Owner of
shares of Common Stock constituting one percent (1%) or more
of the then outstanding shares of Common Stock shall become an
Affiliate or Associate of such Person, unless, in either such
case, such Person, together with all Affiliates and
<PAGE>
Associates of such Person, is not then the Beneficial Owner of
twenty-five percent (25%) or more of the shares of Common
Stock then outstanding.
"ACTIVE STATUS" means the Employee's Employment status from
the Effective Date to and including the first to occur of (a)
the Part-time Employment Effective Date or (b) the Termination
Date.
"AFFILIATE" has the meaning ascribed to that term in Exchange
Act Rule 12b-2.
"ANNUAL CASH COMPENSATION" of the Employee for any
Compensation Year means the sum of the salary and bonus earned
by the Employee during that Compensation Year, including all
amounts deferred at the election of the Employee pursuant to a
Compensation Plan intended to qualify as a plan under Section
401(k) of the Code or otherwise. If salary or bonus is paid in
whole or in part in property other than cash (such as Common
Stock) the amount so paid shall be the fair market value
thereof on the date of payment.
"ASSOCIATE" means, with reference to any Person, (a) any
corporation, firm, partnership, association, unincorporated
organization or other entity (other than the Company or a
subsidiary of the Company) of which that Person is an officer
or general partner (or officer or general partner of a general
partner) or is, directly or indirectly, the Beneficial Owner
of 10% or more of any class of its equity securities, (b) any
trust or other estate in which that Person has a substantial
beneficial interest or for or of which that Person serves as
trustee or in a similar fiduciary capacity and (C) any
relative or spouse of that Person, or any relative of that
spouse, who has the same home as that Person.
"AVERAGE ANNUAL CASH COMPENSATION" of the Employee
means, as of the Part-time Employment Effective Date, the
average of (a) the Annual Cash Compensation earned by the
Employee in each of the two (2) Compensation Years next
preceding that date or, if less than two (2) Compensation
Years have occurred prior to that date and since the Effective
Date, (b) the Annual Cash Compensation in each whole
Compensation Year, if any, and, restated on an annualized
basis, the Annual Cash Compensation in each partial
Compensation Year (up to a maximum of two (2) partial
Compensation Years) next preceding the Part-time Employment
Effective Date.
"BASE SALARY" means: (a) prior to the Part-time Employment
Effective Date, the guaranteed minimum annual salary payable
by the Company to the Employee pursuant to Section 4(A); and
(b) on and after
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the Part-time Employment Effective Date, the guaranteed
minimum annual salary payable by the Company to the Employee
pursuant to Section 5(E).
A specified Person is deemed the "BENEFICIAL OWNER" of, and is
deemed to "beneficially own," any securities:
(a) of which that Person or any of that Person's
Affiliates or Associates, directly or indirectly, is the
"beneficial owner" (as determined pursuant to Exchange Act
Rule 13d-3) or otherwise has the right to vote or dispose of,
including pursuant to any agreement, arrangement or
understanding (whether or not in writing); provided, however,
that a Person shall not be deemed the "Beneficial Owner" of,
or to "beneficially own," any security under this subparagraph
(a) as a result of an agreement, arrangement or understanding
to vote that security if that agreement, arrangement or
understanding: (1) arises solely from a revocable proxy or
consent given in response to a public (that is, not including
a solicitation exempted by Exchange Act Rule 14a-2(b)(2))
proxy or consent solicitation made pursuant to, and in
accordance with, the applicable provisions of the Exchange
Act; and (2) is not then reportable by such Person on Exchange
Act Schedule 13D (or any comparable or successor report);
(b) which that Person or any of that Person's Affiliates
or Associates, directly or indirectly, has the right or
obligation to acquire (whether that right or obligation is
exercisable or effective immediately or only after the passage
of time or the occurrence of an event) pursuant to any
agreement, arrangement or understanding (whether or not in
writing) or on the exercise of conversion rights, exchange
rights, other rights, warrants or options, or otherwise;
provided, however, that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own," securities
tendered pursuant to a tender or exchange offer made by that
Person or any of that Person's Affiliates or Associates until
those tendered securities are accepted for purchase or
exchange; or
(c) which are beneficially owned, directly or
indirectly, by (1) any other Person (or any Affiliate or
Associate thereof) with which the specified Person or any of
the specified Person's Affiliates or Associates has any
agreement, arrangement or understanding (whether or not in
writing) for the purpose of acquiring, holding, voting (except
pursuant to a revocable proxy or consent as described in the
proviso to subparagraph (a) of this definition) or disposing
of any voting securities of the Company or (2) any group (as
that term is used in Exchange Act Rule 13d-5(b)) of which that
specified Person is a member; provided, however, that nothing
in this definition shall cause a Person engaged in business as
an underwriter of securities to be the "Beneficial Owner" of,
or to
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<PAGE>
"beneficially own," any securities acquired through such
Person's participation in good faith in a firm commitment
underwriting until the expiration of forty (40) days after the
date of that acquisition. For purposes of this Agreement,
"voting" a security shall include voting, granting a proxy,
acting by consent, making a request or demand relating to
corporate action (including, without limitation, calling a
stockholder meeting) or otherwise giving an authorization
(within the meaning of Section 14(a) of the Exchange Act) in
respect of such security. "BOARD" means the entire Board of
Directors of the Company.
"BUSINESS REASON" for the Company's termination of the
Employee's Employment means any lawful reason other than
Cause.
"CAUSE" for the Company's termination of the Employee's
Employment means: (a) the Employee's final conviction of a
felony crime that enriched the Employee at the expense of the
Company; or (b) the Employee's deliberate and intentional
continuing failure to substantially perform his duties and
responsibilities hereunder (except by reason of the Employee's
incapacity due to physical or mental illness or injury) for a
period of forty-five (45) days after the Required Board
Majority has delivered to the Employee a written demand for
substantial performance hereunder which specifically
identifies the bases for the Required Board Majority's
determination that the Employee has not substantially
performed his duties and responsibilities hereunder (such
period being the "Grace Period"); provided, that for purposes
of this clause (b), the Company shall not have Cause to
terminate the Employee's Employment unless (1) at a meeting of
the Board called and held following the Grace Period in the
city in which the Company's principal executive offices are
located of which the Employee was given not less than ten (10)
days' prior written notice and at which the Employee was
afforded the opportunity to be represented by counsel, appear
and be heard, the Required Board Majority shall adopt a
written resolution which (A) sets forth the Required Board
Majority's determination that the failure of the Employee to
substantially perform his duties and responsibilities
hereunder has (except by reason of his incapacity due to
physical or mental illness or injury) continued past the Grace
Period and (B) specifically identifies the bases for that
determination and (2) the Company, at the written direction of
the Required Board Majority, shall deliver to the Employee a
Notice of Termination for Cause to which a copy of that
resolution, certified as being true and correct by the
secretary or any assistant secretary of the Company, is
attached. Cause of the type referred to in clause (a) of the
preceding sentence is a "Type I Cause," while Cause of the
type referred to in clause (b) of the preceding sentence is a
"Type II Cause." For purposes of determining whether a Type II
Cause has occurred, no act or failure to act on the part of
the Employee shall be considered "deliberate
4
<PAGE>
and intentional" unless it is taken or omitted to be taken by
the Employee in bad faith or without a reasonable belief that
the Employee's act or omission was in the best interests of
the Company.
"CHANGE OF CONTROL" means the occurrence of any of the
following events that occurs after the IPO Closing Date: (a)
any Person becomes an Acquiring Person; (b) at any time the
then Continuing Directors cease to constitute a majority of
the members of the Board; (C) a merger of the Company with or
into, or a sale by the Company of its properties and assets
substantially as an entirety to, another Person occurs and,
immediately after that occurrence, any Person, other than an
Exempt Person, together with all Affiliates and Associates of
such Person, shall be the Beneficial Owner of twenty-five
percent (25%) or more of the total voting power of the then
outstanding Voting Shares of the Person surviving that
transaction (in the case or a merger or consolidation) or the
Person acquiring those properties and assets substantially as
an entirety.
"CHANGE OF CONTROL PAYMENT" means at any time the amount equal
to three (3) times the Employee's then highest Base Salary
during the term of this Agreement.
"CODE" means the Internal Revenue Code of 1986.
"COMMON STOCK" means the common stock of the Company.
"COMPANY" means (a) APPLE ORTHODONTIX, INC., a Delaware
corporation, and (b) any Person that assumes the obligations
of "the Company" hereunder, by operation of law, pursuant to
Section (D)(iii) or otherwise.
"COMPENSATION PLAN" means any compensation arrangement, plan,
policy, practice or program established, maintained or
sponsored by the Company or any subsidiary of the Company, or
to which the Company or any subsidiary of the Company
contributes, on behalf of any Executive Officer or any member
of the family of any Executive Officer, (a) including (I) any
"employee pension benefit plan" (as defined in Section 3(2) of
ERISA) or other "employee benefit plan" (as defined in Section
3(3) of ERISA), (ii) any other retirement and savings plan,
including any supplemental benefit arrangement relating to any
plan intended to be qualified under Section 401(a) of the Code
or whose benefits are limited by the Code or ERISA, (iii) any
"employee welfare plan" (as defined in Section 3(1) of ERISA),
(iv) any arrangement, plan, policy, practice or program
providing for severance pay, deferred compensation or
insurance benefit, (v) any Incentive Plan and (vi) any
arrangement, plan, policy, practice or program (A) authorizing
and providing for the payment or
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<PAGE>
reimbursement of expenses attributable to first-class air
travel and first-class hotel occupancy while on travel or (B)
providing for the payment of business luncheon and country
club dues, long-distance charges, mobile phone monthly air
time or other recurring monthly charges or any other fringe
benefit, allowance or accommodation of employment, but (b)
excluding any compensation arrangement, plan, policy, practice
or program to the extent it provides for annual base salary.
"COMPENSATION COMMITTEE" means the committee of the Board to
which the Board has delegated duties respecting the
compensation of Executive Officers and the administration of
Incentive Plans, if any, intended to qualify for the Exchange
Act Rule 16b-3 exemption.
"COMPENSATION YEAR" means any calendar year.
"CONFIDENTIAL INFORMATION" means, with respect to the Company
or any subsidiary of the Company, all trade secrets and other
confidential, nonpublic and/or proprietary information of that
Person, including information derived from reports,
investigations, research, work in progress, codes, marketing
and sale programs, customer lists, records of customer service
requirements, capital expenditure projects, cost summaries,
pricing formulae, contract analyses, financial information,
projections, confidential filings with any governmental
authority and all other confidential, nonpublic concepts,
methods of doing business, ideas, materials or information
prepared or performed for, by or on behalf of that Person.
"CPI" means for any period the Consumer Price Index for All
Urban Consumers--All Items Index for Houston, Texas (or any
substantially similar index published for the same area), as
published by the United States Department of Labor, Bureau of
Labor Statistics (or its successor) for that period.
"CONTINUING DIRECTOR" means at any time any individual who
then (a) is a member of the Board and was a member of the
Board as of the IPO Closing Date or whose nomination for his
first election, or that first election, to the Board following
that date was recommended or approved by a majority of the
then Continuing Directors (acting separately or as a part of
any action taken by the Board or any committee thereof) and
(b) is not an Acquiring Person, an Affiliate or Associate of
an Acquiring Person or a nominee or representative of an
Acquiring Person or of any such Affiliate or Associate.
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<PAGE>
"DISABILITY" of the Employee means the Employee has been
determined (which determination shall be final and binding on
all persons, absent manifest error), as a result of a physical
or mental illness or personal injury he has incurred
(including illness or injury resulting from any substance
abuse), by a Qualified Physician (who may be the doctor
treating or otherwise acting as the Employee's doctor in
connection with the illness or injury in question) selected by
the Employee with the consent of the Company, or by the
Company with the consent of the Employee (which consent shall
not be unreasonably withheld in either case), to be unable to
perform, at the time of that determination and, in all
reasonable medical likelihood, indefinitely thereafter, the
normal duties then most recently assigned, under and in
accordance with the terms hereof, to the Employee while on
Active Status; provided that, the determination whether the
Employee has incurred a Disability shall be made by a majority
of three (3) Qualified Physicians, (a) one (1) of whom shall
be selected by the Employee, (b) one (1) of whom shall be
selected by the Company and (C) the remaining one (1) of whom
shall be selected by the Qualified Physicians selected by the
Employee and the Company pursuant to clauses (a) and (b) of
this proviso and the fees and expenses of whom will be shared
and paid in equal amounts by the Employee and the Company, if:
(1)(A) the Company has reasonably withheld its consent to the
Qualified Physician, if any, selected by the Employee or (B)
the Employee has reasonably withheld his consent to the
Qualified Physician, if any, selected by the Company and (2)
the Qualified Physicians selected by the Employee and the
Company disagree as to whether the Employee has incurred a
Disability. For purposes of this definition, if the Employee
is unable by reason of illness or injury to give an informed
consent to the performance of the treatment of that illness or
injury, a Qualified Physician selected by any Person who is
authorized by applicable law to give that consent will be
deemed to have been selected by the Employee.
"EFFECTIVE DATE" means the date that the Registration
Statement on Form S-1, relating to an unwritten initial public
offering of the Company's Common Stock (the "IPO"), is filed
initially with the Securities and Exchange Commission.
"ERISA" means the Employee Retirement Income Security Act of
1974.
"EMPLOYMENT" means the salaried employment of the Employee by
the Company or a subsidiary of the Company hereunder.
"EXCHANGE ACT" means the Securities Exchange Act of 1934.
"EXECUTIVE OFFICER" means any of the chairman of the board,
the chief executive officer, the chief operating officer, the
chief financial
7
<PAGE>
officer, the president, any executive or senior vice president
or the general counsel of the Company.
"EXEMPT PERSON" means (a) (1) the Company, any subsidiary of
the Company, any employee benefit plan of the Company or of
any subsidiary of the Company and (2) any Person organized,
appointed or established by the Company for or pursuant to the
terms of any such plan or for the purpose of funding any such
plan or funding other employee benefits for employees of the
Company or any subsidiary of the Company and (b) the Employee,
any Affiliate or Associate of the Employee or any group (as
that term is used in Exchange Act Rule 13d-5(b)) of which the
Employee or any Affiliate or Associate of the Employee is a
member.
"GOOD REASON" for the Employee's termination of his Employment
means: (a) any violation hereof in any material respect by the
Company; (b) either (1) a failure of the Company to continue
in effect any Compensation Plan in which the Employee was
participating or (2) the taking of any action by the Company
which would adversely affect the Employee's participation in
or materially reduce the Employee's Benefits under, any such
Compensation Plan, unless (A) in the case of either subclause
(1) or (2) of this clause, there is substituted a comparable
Compensation Plan that is at least economically equivalent, in
terms of the benefit offered to the Employee, to the
Compensation Plan being ended or in which the Employee's
participation is being adversely affected or the Employee's
benefits are being materially reduced or (B) in the case of
that subclause (1), the failure, or in the case of that
subclause (2), the taking of action, adversely affects
Executive Officers generally; or (C) the assignment to the
Employee of duties inconsistent in any material respect with
the Employee's then current positions (including status,
offices, titles and reporting requirements), authority, duties
or responsibilities or any other action by the Company which
results in a material diminution in those positions,
authority, duties or responsibilities.
"INCENTIVE PLAN" means any compensation arrangement, plan,
policy, practice or program established, maintained or
sponsored by the Company or any subsidiary of the Company, or
to which the Company or any subsidiary of the Company
contributes, on behalf of any Executive Officer and which
provides for incentive, bonus or other performance-based
awards of cash, securities or the phantom equivalent of
securities, including any stock option, stock appreciation
right and restricted stock plan, but excluding any plan
intended to qualify as a plan under any one or more of
Sections 401(a), 401(k) or 423 of the Code.
"IPO" means the first time a registration statement filed
under the Securities Act and respecting an underwritten
primary offering by the
8
<PAGE>
Company of shares of Common Stock is declared effective under
that act and the shares registered by that registration
statement are issued and sold by the Company (otherwise than
pursuant to the exercise of any over-allotment option).
"IPO CLOSING DATE" means the date on which the Company first
receives payment for the shares of Common Stock it sells in
the IPO.
"NONTERMINATING PARTY" means the Employee or the Company, as
the case may be, to which the Terminating Party delivers a
Notice of Termination.
"NOTICE OF TERMINATION" to or from the Employee means a
written notice that: (a) to the extent applicable, sets forth
in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Employee's Employment,
and if the Termination Date is other than the date of receipt
of the notice, (b) sets forth that Termination Date.
"OUTSIDE DIRECTOR" means at any time a member of the Board at
that time who is not then an employee of the Company or any
subsidiary of the Company.
"PART-TIME EMPLOYMENT EFFECTIVE DATE" means, (a) if the
Company elects pursuant to any applicable provision hereof to
terminate the Employee's Employment other than for Cause or
(b) if the Employee elects pursuant to the applicable
provision hereof to terminate his Employment for Good Reason
or by reason of his Disability, the date the Nonterminating
Party receives the Terminating Party's Notice of Termination.
"PART-TIME EMPLOYMENT PERIOD" means the period of time which
begins on the Part-time Employment Effective Date and ends on
the first to occur of (a) the third (3rd) anniversary of that
Part-time Employment Effective Date, (b) the termination by
the Company of the Employee's Employment for Type I Cause or
(C) the death or Retirement of the Employee.
"PERSON" means any natural person, sole proprietorship,
corporation, partnership of any kind having a separate legal
status, limited liability company, business trust,
unincorporated organization or association, mutual company,
joint stock company, joint venture, estate, trust, union or
employee organization or governmental authority.
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<PAGE>
"QUALIFIED PHYSICIAN" means, in the case of any determination
whether the Employee has sustained a Disability, a physician
(a) holding an M.D. degree from a medical school located in
the United States and having a national reputation in the
United States as a leading medical school, (b) specializing
and board-certified in the treatment of the injury or illness
that has or may have caused that Disability, (C) licensed to
practice that specialty in the State of Texas or the state in
which the Employee then is domiciled and (d) having admission
privileges to one or more private hospitals located in the
Texas Medical Center in Houston, Texas or in a hospital of
comparable reputation in the state in which the Employee then
is domiciled.
"REQUIRED BOARD MAJORITY" means at any time a majority of the
members of the Board at that time which includes at least a
majority of the Outside Directors at that time.
"RETIREMENT" of the Employee means the Employee terminates his
Employment on or after the date he has attained age 65.
"SECURITIES ACT" means the Securities Act of 1933.
"TERMINATING PARTY" means the Employee or the Company, as the
case may be, who or which terminates the Employee's Employment
by means of a Notice of Termination.
"TERMINATION DATE" means: (a) if the Employee's Employment is
terminated by reason of the Employee's death or Retirement,
the date of that death or Retirement; (b) if the Employee's
Employment is terminated by reason of the Employee's giving a
Notice of Termination following a Change of Control pursuant
to Section 5(B)(I)(b), the first date on which the Company
pays to the Employee in full the amounts owed to the Employee
pursuant to Section 5(B)(iii); (C) if the Employee's
Employment is terminated by reason of the Employee's giving a
Notice of Termination without Good Reason and other than for
Disability pursuant to Section 5(B)(I)(c), the elapse of the
thirtieth (30th) day after the Company receives that notice;
(d) if the Employee's Employment is terminated by the Company
at any time for Type I Cause or, prior to the Part-time
Employment Effective Date, at any time for Type II Cause, the
date the Employee receives the Company's Notice of Termination
for Cause; and (e) if the Employee's Employment is terminated
for any other reason, at the expiration of the Part-time
Employment Period.
"TYPE I CAUSE" means Cause of the type referred to in clause
(a) of the definition of Cause herein.
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<PAGE>
"TYPE II CAUSE" means Cause of the type referred to in clause
(b) of the definition of Cause herein.
"VOTING SHARES" means: (a) in the case of any corporation,
stock of that corporation of the class or classes having
general voting power under ordinary circumstances to elect a
majority of that corporation's board of directors; and (b) in
the case of any other entity, equity interests of the class or
classes having general voting power under ordinary
circumstances equivalent to the Voting Shares of a
corporation.
B. OTHER DEFINITIONAL PROVISIONS.
(i) Except as otherwise specified herein, all references
herein to any statute defined or referred to herein, including
the Code, ERISA and the Exchange Act, shall be deemed
references to that statute or any successor statute, as the
same may have been or may be amended or supplemented from time
to time, and any rules or regulations promulgated thereunder.
(ii) When used in this Agreement, the words "herein," "hereof"
and "hereunder" and words of similar import shall refer to
this Agreement as a whole and not to any provision of this
Agreement, and the word "Section" refers to a Section of this
Agreement unless otherwise specified.
(iii) Whenever the context so requires, the singular number
includes the plural and vice versa, and a reference to one
gender includes each other gender and the neuter.
(iv) The word "including" (and, with correlative meaning, the
word "include") means including, without limiting the
generality of any description preceding such word, and the
words "shall" and "will" are used interchangeably and have the
same meaning.
2. EMPLOYMENT
A. On the terms and subject to the conditions hereinafter set
forth, and beginning as of the Effective Date, the Company
will employ the Employee as its President and the Employee
will serve in the Company's employ in that position. The
Employee shall perform such duties, and have such powers,
authority, functions, duties and responsibilities for the
Company and corporations affiliated with the Company as are
commensurate and consistent with his employment as the
Company's President. The Employee also shall have such
additional powers, authority, functions, duties and
responsibilities as may be assigned to him by the Board;
provided that, without the Employee's written consent, such
additional powers, authority, functions, duties and
responsibilities shall not
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<PAGE>
be inconsistent or interfere with, or detract from, those
herein vested in, or otherwise then being performed for the
Company by the Employee.
B. The Employee shall not, at any time during his Employment,
engage in any other activities unless those activities do not
interfere materially with the Employee's duties and
responsibilities for the Company at that time, except that the
Employee shall be entitled, subject to the provisions of
Section 7, (a) to continue with such activities as the
Employee has carried on prior to the Effective Date, including
making and managing his personal investments and participating
in other business or civic activities and (b) to serve on
corporate or other business, civic or charitable boards or
committees and trade association or similar boards or
committees.
3. TERM OF EMPLOYMENT. Subject to the provisions of Section 5, the term of
the Employee's Employment shall be for a continually renewing term of three (3)
years commencing on the Effective Date and renewing each day thereafter for an
additional day without any further action by either the Company or the Employee,
it being the intention of the parties that there shall be continuously a
remaining term of three (3) years' duration of the Employee's Employment until
an event has occurred as described in, or one of the parties shall have made an
appropriate election pursuant to, the provisions of Section 5. When the
Termination Date shall have occurred and the Company shall have paid to the
Employee all the applicable amounts Section 5 provides the Company shall pay as
a result of the termination of the Employee's Employment, including all amounts
accruing during the Part-time Employment Period, if any, this Agreement will
terminate and have no further force or effect, except that Sections 4(C), 8, 9,
10 and 11 shall survive that termination indefinitely and Section 7 shall
survive for the period of time provided for therein.
4. COMPENSATION
A. BASE SALARY. A Base Salary shall be payable to the Employee by
the Company as a guaranteed minimum annual amount hereunder
for each Compensation Year during the period from the
Effective Date to the first to occur of the Part-time
Employment Effective Date or the Termination Date. That Base
Salary shall be payable in the intervals consistent with the
Company's normal payroll schedules (but in no event less
infrequently than semi-monthly), shall be payable initially at
the annual rate of $150,000 and shall be increased (but not
decreased or adjusted other than as provided in Section 5) as
follows:
(i) on the first and each subsequent anniversary of the
Effective Date, by the same percentage increase (if any) in
the CPI for the twelve (12) month period immediately preceding
such anniversary;
(ii) on the first and each subsequent anniversary of the
Effective Date, by such additional amount as shall be
determined in the sole discretion of
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<PAGE>
the Compensation Committee, but only in such form and to such
extent as the Compensation Committee may from time to time
approve, as evidenced by the written minutes or records of the
Compensation Committee and its written notices of such
determinations or approvals to the Employee; and
(iii) if the Employee relocates from a state without a
personal income tax at the time of his relocation to a state
having a personal income tax, or if the Employee resides in a
state without a personal income tax on the date hereof which
subsequently adopts a personal income tax, then, in either
case, the Base Salary in effect at the time of such relocation
or adoption, as applicable, shall immediately be increased by
the amount equal to the Base Salary immediately prior to this
increase multiplied by seventy percent (70%) of the highest
personal income tax rate of such state; for example, if the
Employee relocates from a state without a personal income tax
to a state having a personal income tax and the highest rate
of that tax is six percent (6%) when the Base Salary is
$200,000, then the Base Salary will be increased by $8,400
(computed at 70% x 6% x $200,000); provided, however, that the
obligation of the Company to pay the Base Salary earned by the
Employee for his service in the period beginning on the
Effective Date and ending on the date that is the first to
occur of (a) the IPO Closing Date, (b) the Termination Date or
(C) such other date as the Board in its sole discretion may
determine shall be deferred to the last day of that period in
such amounts as the Board in its sole discretion may from time
to time determine, on which day the Company shall pay in full
to the Employee, without interest, the aggregate earned but
unpaid amount of the Base Salary for that period. Effective as
of the Part-time Employment Effective Date, the Base Salary
theretofore in effect shall be adjusted as provided in Section
5(E).
B. OTHER COMPENSATION.
(I) The Employee shall be entitled to participate in all
Compensation Plans from time to time in effect while he
remains on Active Status, regardless of whether the Employee
is an Executive Officer. All awards to the Employee under all
Incentive Plans shall take into account the Employee's
positions with and duties and responsibilities to the Company
and its subsidiaries.
(ii) The Company shall grant to the Employee 40 shares of
it's pre- IPO common stock subject to a subscription
agreement.
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<PAGE>
C. TAX INDEMNITY. Should any of the payments of Base Salary,
other incentive or supplemental compensation, benefits,
allowances, awards, payments, reimbursements or other
perquisites, or any other payment in the nature of
compensation, singly, in any combination or in the aggregate,
that are provided for hereunder to be paid to or for the
benefit of the Employee be determined or alleged to be subject
to an excise or similar purpose tax pursuant to Section 4999
of the Code, or any successor or other comparable federal,
state or local tax law by reason of being a "parachute
payment" (within the meaning of Section 280G of the Code), the
Company shall pay to the Employee such additional compensation
as is necessary (after taking into account all federal, state
and local taxes payable by the Employee as a result of the
receipt of such additional compensation) to place the Employee
in the same after-tax position (including federal, state and
local taxes) he would have been in had no such excise or
similar purpose tax (or interest or penalties thereon) been
paid or incurred. The Company hereby agrees to pay such
additional compensation within the earlier to occur of (I)
five (5) business days after the Employee notifies the Company
that the Employee intends to file a tax return taking the
position that such excise or similar purpose tax is due and
payable in reliance on a written opinion of the Employee's tax
counsel (such tax counsel to be chosen solely by the Employee)
that it is more likely than not that such excise tax is due
and payable or (ii) twenty-four (24) hours of any notice of or
action by the Company that it intends to take the position
that such excise tax is due and payable. The costs of
obtaining the tax counsel opinion referred to in clause (I) of
the preceding sentence shall be borne by the Company, and as
long as such tax counsel was chosen by the Employee in good
faith, the conclusions reached in such opinion shall not be
challenged or disputed by the Company. If the Employee intends
to make any payment with respect to any such excise or similar
purpose tax as a result of an adjustment to the Employee's tax
liability by any federal, state or local tax authority, the
Company will pay such additional compensation by delivering
its cashier's check payable in such amount to the Employee
within five (5) business days after the Employee notifies the
Company of his intention to make such payment. Without
limiting the obligation of the Company hereunder, the Employee
agrees, in the event the Employee makes any payment pursuant
to the preceding sentence, to negotiate with the Company in
good faith with respect to procedures reasonably requested by
the Company which would afford the Company the ability to
contest the imposition of such excise or similar purpose tax;
provided, however, that the Employee will not be required to
afford the Company any right to contest the applicability of
any such excise or similar purpose tax to the extent that the
Employee reasonably determines (based upon the opinion of his
tax counsel) that such contest is inconsistent with the
overall tax interests of the Employee.
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<PAGE>
5. TERMINATION, PART-TIME EMPLOYMENT PERIOD, DISABILITY AND
DEATH
A. TERMINATION OF EMPLOYMENT BY THE COMPANY.
(i) The Company shall be entitled, if acting at the direction
of the Required Board Majority, to terminate the Employee's
Employment (a) at any time for Type I Cause or (b) at any time
prior to the Part-time Employment Effective Date for Type II
Cause or for any Business Reason. If the Employee is neither a
member of the Board nor an Executive Officer, the Company
shall be entitled, if acting at the direction of the chief
executive officer of the Company, to terminate the Employee's
Employment at any time prior to the Part-time Employment Date
for any Business Reason. The Company's termination of the
Employee's Employment for Cause will be effective on the date
the Company delivers a Notice of Termination for Cause to the
Employee pursuant to this Section 5(A)(I)(together, in the
case of a termination for Type II Cause, with the certified
resolution referred to in clause (b) of the definition herein
of Cause), while the Company's termination of the Employee's
Employment for a Business Reason will be effective on the
third (3rd) anniversary of the date the Company delivers a
Notice of Termination for a Business Reason to the Employee
pursuant to this Section 5(A)(I).
(ii) If the Company terminates the Employee's Employment for
Cause, the Company promptly thereafter, and in any event
within five (5) business days thereafter, shall pay the
Employee his Base Salary to and including the Termination Date
and the amount of all compensation previously deferred by the
Employee (together with any accrued interest or earnings
thereon), in each case to the extent not theretofore paid,
and, when that payment is made, the Company shall,
notwithstanding Section 3, have no further or other
obligations hereunder to the Employee.
(iii) If the Company terminates the Employee's Employment for
a Business Reason, the respective rights and obligations of
the Company and the Employee during the Part-time Employment
Period will be as set forth in Section 5(E).
B. TERMINATION OF EMPLOYMENT BY THE EMPLOYEE.
(i) The Employee shall be entitled to terminate his Employment
(a) for a Good Reason at any time within one hundred eighty
(180) days after the facts or circumstances constituting that
Good Reason first exist and are known to the Employee, (b) by
reason of a Change of Control at any time within three hundred
sixty-five (365) days after that Change of Control
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<PAGE>
occurs (provided, however, that the Employee shall not be
entitled to terminate his Employment by reason of that Change
of Control if it occurs (1) during the thirty (30) day period
following the Company's receipt of the Employee's Notice of
Termination without Good Reason and other than for Disability
pursuant to this Section 5(B)(I), (2) after (A) the receipt by
the Nonterminating Party of the Terminating Party's Notice of
Termination pursuant to Section 5 (C) or (B) the Employee's
receipt of the Company's Notice of Termination for a Business
Reason (other than in connection with that Change of Control)
pursuant to Section 5(A) or (3) more than three hundred
sixty-five (365) days after the Company's receipt of the
Employee's Notice of Termination for Good Reason pursuant to
this Section 5(B)(I)) or (C) without Good Reason and other
than for Disability at any time. The Employee's termination of
his Employment for Good Reason will be effective on the third
(3rd) anniversary of the date the Employee delivers a Notice
of Termination for Good Reason to the Company pursuant to this
Section 5(B)(I). The Employee's termination of his Employment
by reason of a Change of Control will be effective on the
first date on which the Change of Control Payment shall have
been paid in full to the Employee. The Employee's termination
of his Employment without Good Reason and other than for
Disability will be effective on the thirtieth (30th) day
following the Employee's delivery of a Notice of Termination
without Good Reason and other than for Disability pursuant to
this Section 5(B)(I).
(ii) If the Employee terminates his Employment for Good
Reason, the respective rights and obligations of the Company
and the Employee during the Part-time Employment Period will
be as set forth in Section 5(E).
(iii) If the Employee terminates his Employment by reason of a
Change of Control, the Company shall pay to the Employee in a
cash lump sum within five (5) business days after the date the
Company receives the Employee's Notice of Termination by
reason of that Change of Control the amount equal to the sum
of (a) the portion of the Base Salary to and including the
Termination Date which has not yet been paid, (b) all
compensation previously deferred by the Employee (together
with any accrued interest and earnings thereon), (C) any
accrued but unpaid vacation pay and (d) the Change of Control
Payment.
(iv) If the Employee terminates his Employment without Good
Reason and other than for Disability, the Company shall pay to
the Employee, in a cash lump sum within five (5) business days
after the Termination Date, the amount equal to the sum of (a)
the portion of the Base Salary to and including the
Termination Date which has not yet been paid, (b) all
compensation previously deferred by the Employee (together
with any accrued interest and earnings thereon) which has not
yet been paid, (C) any
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accrued but unpaid vacation pay and (d) the amount equal to
fifty percent (50%) of the Base Salary being paid for the
Compensation Year in which the Company receives the Employee's
Notice of Termination without Good Reason and other than for
Disability; provided, however, that if the Employee terminates
his Employment without Good Reason and other than for
Disability within six (6) months of the theretofore scheduled
final day of the Part-time Employment Period, the amount
payable pursuant to clause (d) of this sentence shall be the
amount determined pursuant to that clause multiplied by a
fraction the numerator of which is the number of days from and
excluding the date the Company receives the Notice of
Termination to and including that final day and the
denominator of which is one hundred eighty-two (182). For
purposes of this Section 5(B)(iv), if the anniversary of the
Effective Date in the Compensation Year in which the Company
receives the Notice of Termination without Good Reason and
other than for Disability has not occurred on or prior to the
date of that receipt, the Base Salary for that Compensation
Year will be calculated on the assumption that no increase in
the amount thereof would be made effective as of that
anniversary pursuant to Section 4(A) or 5(E)(I), as
applicable.
C. TERMINATION BY REASON OF DISABILITY. If the Employee incurs
any Disability while on Active Status, either the Employee or
the Company may terminate the Employee's Employment effective
on the third (3rd) anniversary of the date the Nonterminating
Party receives a Notice of Termination from the Terminating
Party pursuant to this Section 5(C). If the Employee's
Employment is terminated by reason of the Employee's
Disability, the respective rights and obligations of the
Company and the Employee during the Part-time Employment
Period will be as set forth in Section 5(E).
D. TERMINATION OF EMPLOYMENT BY DEATH. The Employee's
Employment shall terminate automatically at the time of his
death. If the Employee's Employment is terminated by reason of
the Employee's death, the Company shall pay to the Person the
Employee has designated in a written notice delivered to the
Company as his beneficiary entitled to such payment, if any,
or to the Employee's estate, as applicable, in a cash lump sum
within thirty (30) days after the Termination Date, the amount
equal to the sum of (I) the portion of the Base Salary through
the end of the month in which the Termination Date occurs
which has not yet been paid, (ii) all compensation previously
deferred by the Employee (together with any accrued interest
or earnings thereon) which has not yet been paid, (iii) any
accrued but unpaid vacation pay (if the Employee dies while on
Active Status) and (iv) (a) if the Employee dies while on
Active Status, the product of (1) the Base Salary being paid
for the Compensation Year in which he dies multiplied by (2)
three (3) or (b) if the Employee dies
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during the Part-time Employment Period, the product of (1)
one-twelfth (1/12th) of the Base Salary being paid for the
Compensation Year in which the Employee dies multiplied by (2)
the number of whole and partial calendar months in the period
beginning with the first calendar month after the calendar
month in which he dies and ending with the last calendar month
in which the Termination Date would have occurred if the
Employee's Employment were to have continued to the end of the
Part-time Employment Period. For purposes of this Section
5(D), if the anniversary of the Effective Date in the
Compensation Year in which the Employee dies has not occurred
on or before the Termination Date, the Base Salary for that
Compensation Year will be calculated on the assumption that no
increase in the amount thereof would be made effective as of
that anniversary pursuant to Section 4(A) or 5(E)(I), as
applicable.
E. EMPLOYEE'S RIGHTS DURING THE PART-TIME EMPLOYMENT
PERIOD.
(i) The Company shall pay the Employee a Base Salary, in the
intervals consistent with the Company's normal payroll
schedules (but in no event less frequently than semi-monthly)
from the Part-time Employment Effective Date to and including
the Termination Date in the amounts determined from time to
time as follows: Effective as of the Part-time Employment
Effective Date, the Base Salary payable by the Company to the
Employee for the period from and including that date to and
excluding the third (3rd) anniversary of that date shall be as
follows:
(a) if the Part-time Employment Effective Date occurs as
a result of the receipt by the Nonterminating Party of a
Notice of Termination for a Business Reason pursuant to
Section 5(A) or a Notice of Termination for Good Reason
pursuant to Section 5(B)(I), the amount equal to the
Average Annual Cash Compensation of the Employee
determined as of the Part-time Employment Effective
Date; and (b) if the Part-time Employment Effective Date
occurs as a result of the receipt by the Nonterminating
Party of a Notice of Termination for Disability pursuant
to Section 5(C), the amount equal to the amount by which
(1) seventy-five percent (75%) of the Average Annual
Cash Compensation of the Employee determined as of the
Part-time Employment Effective Date exceeds (2) the
aggregate amount of periodic payments the Employee
receives during the twelve (12) months beginning on that
date under Compensation Plans then in effect and
providing for the payment to the Employee solely as a
result or on account of disability; and
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(b) on the first and each subsequent anniversary of the
Part-time Employment Effective Date, the Base Salary
payable pursuant to this Section 5(E) shall be increased
(but not decreased) by the same percentage increase (if
any) in the CPI for the twelve (12) month period
immediately preceding that anniversary.
(ii) (a) The Employee shall continue to participate in all
Compensation Plans from time to time in effect during
the Part-time Employment Period, provided, however,
that: (1) the Employee shall not be entitled to receive
any new award or grant under any Incentive Plan, and any
such new award or grant shall be at the sole discretion
of the Compensation Committee or the Board, as
applicable, with respect to that Incentive Plan; and (2)
if (A) the terms of any such plan preclude the
Employee's continued participation therein or (B) his
continued participation in any such plan would or
reasonably could be expected to disqualify that plan
under the Code, the Employee shall not be entitled to
participate in that plan, but the Company instead shall
provide the Employee with the after-tax equivalent of
the benefits that would have been provided to the
Employee were he a participant in that plan.
(b) For purposes of determining eligibility (including
years of service) for retirement benefits payable under
any Compensation Plan, the Employee shall be deemed to
have retired at the Termination Date.
(iii) Subject to the provisions of Section 7, the Employee
shall not be (A) prevented from accepting other employment or
engaging in (and devoting substantially all his time to) other
business activities or (B) required to perform any regular
duties for the Company (except to provide such services
consistent with the Employee's educational background,
experience and prior positions with the Company as may be
acceptable to the Employee) or to seek or accept additional
employment with any other Person. If the Employee, at his
discretion, shall accept any such additional employment or
engage in any such other business activity there shall be no
offset, reduction or effect upon any rights, benefits or
payments to which the Employee is entitled pursuant to this
Agreement. Furthermore, the Employee shall have no obligation
to account for, remit, rebate or pay over to the Company any
compensation or other amounts earned or derived in connection
with such additional employment or business activity.
The Employee shall, however, make himself generally
available for special projects or to consult with the Company
and its employees at such
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times and at such places as may be reasonably requested by the
Company and which shall be reasonably satisfactory to the
Employee and consistent with the Employee's regular duties and
responsibilities in the course of his then new occupation or
other employment, if any.
(iv) Unless and until the Employee shall have sustained a
Disability, the Company shall continue to provide the Employee
with either the same or, at the Company's election, at a
different location within thirty-five (35) miles of the
Employee's principal residence, in any case reasonably
acceptable to the Employee, alternate but comparable office
space, furnishings, facilities, reserved parking, supplies,
services, equipment, secretarial and administrative assistance
that are in each case at least commensurate with the size and
quality of that which were provided to the Employee during the
Compensation Year immediately preceding the Part-time
Employment Effective Date pursuant to Section 6(C), but in no
event less than are being furnished or provided on the date
hereof. The Company and Employee may mutually agree upon an
equivalent monthly cash allowance in lieu of the Employee
being provided all or any part of these items.
(v) The Employee shall remain entitled to the benefits of
Section 4(C).
F. RETURN OF PROPERTY. On termination of the Employee's
Employment, however brought about, the Employee (or his
representatives) shall promptly deliver and return to the
Company all the Company's property that is in the possession
or under the control of the Employee.
G. STOCK OPTIONS. Notwithstanding any provision of this Agreement
to the contrary: (I) except in the case of a termination of
the Employee's Employment for Cause, all stock options
previously granted to the Employee under Incentive Plans that
have not been exercised and are outstanding as of the time
immediately prior to the Termination Date shall,
notwithstanding any contrary provision of any applicable
Incentive Plan, remain outstanding (and continue to become
exercisable pursuant to their respective terms) until
exercised or the expiration of their term, whichever is
earlier; and (ii) in the case of a termination of the
Employee's Employment for Cause, all stock options previously
granted to the Employee under Incentive Plans that have not
been exercised and are outstanding as of the time immediately
prior to the Termination Date shall, notwithstanding any
contrary provision of any applicable Incentive Plan, remain
outstanding and continue to be exercisable until exercised or
the date that is ten (10) days after the Termination Date,
whichever is earlier. No stock option previously granted to
the Employee under any Incentive Plan shall, notwithstanding
any contrary provision of that
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<PAGE>
Incentive Plan, expire or fail to become exercisable or, if
exercisable, cease to be exercisable by reason of either (I)
the occurrence of the Employee's Part-time Employment
Effective Date or (ii) the Employee's service during the
Employee's Part-time Employment Period being less than
full-time.
6. OTHER EMPLOYEE RIGHTS
A. PAID VACATION; HOLIDAYS. The Employee shall be entitled to not
less than four (4) weeks of annual vacation and all legal
holidays during which times his applicable compensation shall
be paid in full.
B. BUSINESS EXPENSES. The Employee is authorized to incur, and
will be entitled to receive prompt reimbursement for, all
reasonable expenses incurred by the Employee in performing his
duties and carrying out his responsibilities hereunder,
including business meal, entertainment and travel expenses,
provided that the Employee complies with the applicable
policies, practices and procedures of the Company relating to
the submission of expense reports, receipts or similar
documentation of those expenses. The Company shall either pay
directly or promptly reimburse the Employee for such expenses
not more than twenty (20) days after the submission to the
Company by the Employee from time to time of an itemized
accounting of such expenditures for which direct payment or
reimbursement is sought. Unpaid reimbursements after such
twenty (20) day period shall accrue interest in accordance
with Section 9(K).
C. SUPPORT. While on Active Status, the Employee shall be
provided by the Company with office space, furnishings, and
facilities, reserved parking, secretarial and administrative
assistance, supplies and other support equipment (including a
computer, facsimile machine and photocopier). .
7. COVENANT NOT TO COMPETE
A. The Employee recognizes that in each of the highly competitive
businesses in which the Company is engaged, personal contact
is of primary importance in securing new orthodontic practices
and in retaining the accounts and goodwill of present
practices and protecting the business of the Company. The
Employee, therefore, agrees that during the term of his
Employment and for a period of one (1) year after the
Termination Date, he will not, within fifty (50) miles of the
geographic location in which the he has devoted substantial
attention at such location to the material business interests
of the Company: (i) accept employment or render service to any
Person that is engaged in a business directly
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<PAGE>
competitive with the business then engaged in by the Company
or (ii) enter into or take part in or lend his name, counsel
or assistance to any business, either as proprietor,
principal, investor, partner, director, officer, employee,
consultant, advisor, agent, independent contractor, or in any
other capacity whatsoever, for any purpose that would be
competitive with the business of the Company.
B. If the provisions of this Section 7 are violated in any
material respect, the Company shall be entitled, upon
application to any court of proper jurisdiction, to a
temporary restraining order or preliminary injunction (without
the necessity of posting any bond with respect thereto) to
restrain and enjoin the Employee from that violation. If the
provisions of this Section 7 should ever be deemed to exceed
the time, geographic or occupational limitations permitted by
the applicable law, the Employee and the Company agree that
such provisions shall be and are hereby reformed to the
maximum time, geographic or occupational limitations permitted
by the applicable law.
8. CONFIDENTIAL INFORMATION
A. The Employee acknowledges that he has had and will continue to
have access to various Confidential Information. The Employee
agrees, therefore, that he will not at any time, either while
employed by the Company or afterwards, knowingly make any
independent use of, or knowingly disclose to any other person
(except as authorized by the Company) any Confidential
Information. Confidential Information shall not include (i)
information that becomes known to the public generally through
no fault of the Employee, (ii) information required to be
disclosed by law or legal process or the order of any
governmental authority under color of law, provided, that
prior to disclosing any information pursuant to this clause
(ii), the Employee shall, if possible, give prior written
notice thereof to the Company and provide the Company with the
opportunity to contest such disclosure, or (iii) the Employee
reasonably believes that such disclosure is required in
connection with the defense of a lawsuit against the Employee.
In the event of a breach or threatened breach by the Employee
of the provisions of this Section 8(A) with respect to any
Confidential Information, the Company shall be entitled to a
temporary restraining order and a preliminary and permanent
injunction (without the necessity of posting any bond in
connection therewith) restraining the Employee from
disclosing, in whole or in part, that Confidential
Information. Nothing herein shall be construed as prohibiting
the Company from pursuing any other available remedy for that
breach or threatened breach, including the recovery of
damages.
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<PAGE>
B. The Employee shall disclose promptly to the Company any and
all conceptions and ideas for inventions, improvements, and
valuable discoveries, whether patentable or not, which are
conceived or made by the Employee solely or jointly with any
other Person or Persons during the period of his Employment
and which pertain primarily to the material business
activities of the Company, and the Employee hereby assigns and
agrees to assign all his interests therein to the Company or
to its nominee; whenever requested to do so by the Company,
the Employee shall execute any and all applications,
assignments or other instruments which the Company shall deem
necessary to apply for and obtain Letters of Patent of the
United States or any foreign country or to otherwise protect
the Company's interest therein. These obligations shall (I)
continue beyond the Termination Date with respect to
inventions, improvements, and valuable discoveries, whether
patentable or not, conceived, made or acquired by the Employee
during the period of his Employment and (ii) be binding upon
the Employee's assigns, executors, administrators and other
legal representatives.
9. GENERAL PROVISIONS
A. SEVERABILITY. If any one or more of the provisions of this
Agreement shall, for any reason, be held or found by final
judgment of a court of competent jurisdiction to be invalid,
illegal or unenforceable in any respect, (i) such invalidity,
illegality or unenforceability shall not affect any other
provisions of this Agreement, (ii) this Agreement shall be
construed as if such invalid, illegal or unenforceable
provision had never been contained herein (except that this
clause (ii) shall not prohibit any modification allowed under
Section 7(B)), and (iii) if the effect of a holding or finding
that any such provision is invalid, illegal or unenforceable
is to modify to the Employee's detriment, reduce or eliminate
any compensation, reimbursement, payment, allowance or other
benefit to the Employee intended by the Company and Employee
in entering into this Agreement, the Company shall, within
thirty (30) days after the date of such finding or holding,
negotiate and expeditiously enter into an agreement with the
Employee which contains alternative provisions (reasonably
acceptable to the Employee) that will restore to the Employee
(to the extent lawfully permissible) substantially the same
economic, substantive and income tax benefits and legal rights
the Employee would have enjoyed had such provision been upheld
as legal, valid and enforceable.
B. NONEXCLUSIVITY OF RIGHTS. Nothing herein shall prevent or
limit the Employee's continuing or future participation in any
Compensation Plan or, subject to Section 9(N), limit or
otherwise affect such rights as the Employee may have under
any other contract or agreement with the
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<PAGE>
Company. Vested benefits and other amounts to which the
Employee is or becomes entitled to receive under any
Compensation Plan on or after the Termination Date shall be
payable in accordance with that Compensation Plan, except as
expressly modified hereby.
C. FULL SETTLEMENT. The Company's obligations to make the
payments provided for in, and otherwise to perform its
undertakings in, this Agreement shall not be affected by any
right of set-off, counterclaim, recoupment, defense or other
action, claim or right the Company may have against the
Employee or others. In no event shall the Employee be
obligated to seek other employment or take any other action by
way of mitigation of the amounts payable to the Employee under
any provision hereof, and those amounts shall not be reduced,
regardless of whether the Employee obtains other employment or
becomes self-employed.
D. SUCCESSORS.
(i) This Agreement is personal to the Employee and, without
the prior written consent of the Company, is not assignable by
the Employee otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit and be
enforceable by the Employee's legal representatives acting in
their capacities as such pursuant to applicable law.
(ii) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns. If
the Employee is not an Executive Officer, but is an officer of
a subsidiary of the Company, the Company shall be entitled to
assign all its obligations hereunder to that subsidiary and
treat the Employee as an employee of that subsidiary for all
purposes, but the Company shall remain liable for the full,
timely performance of all the obligations so assigned as if
the assignment had not been made.
(iii) The Company shall require any successor (direct or
indirect and whether by purchase, merger, consolidation, share
exchange or otherwise) to the business, properties and assets
of the Company substantially as an entirety expressly to
assume and agree to perform this Agreement in the same manner
and to the same extent the Company would have been required to
perform it had no such succession taken place.
E. AMENDMENTS; WAIVERS. This Agreement may not be amended or
modified except by a written agreement executed and delivered
by the parties hereto or their respective successors or legal
representatives acting in their capacities as such pursuant to
applicable law.
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<PAGE>
F. NOTICES. All notices and other communications under this
Agreement shall be in writing and shall be given by hand
delivery or by registered or certified mail, return receipt
requested, postage prepaid, addressed to the appropriate
Person at the address of such Person set forth below (or at
such other address as such Person may designate by written
notice to each other party in accordance herewith):
(a) if to the Employee, addressed as follows:
Robert J. Syverson
432 E. Ave.
Coronado, California 92178 and
(b) if to the Company, addressed as follows:
APPLE ORTHODONTIX, INC.
One West Loop South, Suite 100
Houston, Texas 77027
Attn: Corporate Secretary
G. NO WAIVER. The failure of the Company or the Employee to
insist on strict compliance with any provision of, or to
assert any right under, this Agreement (including the right of
the Employee to terminate his Employment for Good Reason or by
reason of a Change of Control pursuant to Section 5(B)(i))
shall not be deemed a waiver of that provision or of any other
provision of or right under this Agreement.
H. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF TEXAS, WITHOUT REFERENCE TO ANY
PRINCIPLES OF CONFLICTS OF LAWS.
I. JURISDICTION AND VENUE. The Company irrevocably consents with
respect to any action, suit or other legal proceeding
pertaining directly to this Agreement or to the interpretation
or enforcement of any of the Employee's rights hereunder to
service of process in the State of Texas and hereby waives any
right to contest or oppose receipt of such service of process.
The Company irrevocably (i) agrees that any such action, suit
or other legal proceeding may be brought in the courts of such
state or in the courts of the United States sitting in such
state, (ii) consents to the jurisdiction of each such court in
any such action, suit or other legal proceeding, and (iii)
waives any objection it may have to the laying of
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venue of any such action, suit or other legal proceeding in
any of such courts.
J. HEADINGS. The headings of Sections and subsections hereof are
included solely for convenience of reference and shall not
control the meaning or interpretation of any of the provisions
of this Agreement.
K. INTEREST. If any amounts required to be paid or reimbursed to
the Employee hereunder are not so paid or reimbursed at the
times provided herein (including amounts required to be paid
by the Company pursuant to Sections 6 and 10, those amounts
shall accrue interest compounded daily at the annual
percentage rate which is three percentage points (3%) above
the interest rate announced by Texas Commerce Bank National
Association, Houston, Texas (or its successor), from time to
time, as its Base Rate (or prime lending rate), from the date
those amounts were required to have been paid or reimbursed to
the Employee until those amounts are finally and fully paid or
reimbursed; provided, however, that in no event shall the
amount of interest contracted for, charged or received
hereunder exceed the maximum non-usurious amount of interest
allowed by applicable law.
L. PUBLICITY. The Company agrees with the Employee that, except
to the extent required by law or legal process (including the
Exchange Act and the Securities Act), it will not make or
publish, without the prior written consent of the Employee,
any written or oral statement concerning the terms of the
Employee's employment relationship with the Company and will
not, if a Notice of Termination is given by either the Company
or the Employee for any reason, publish or cause to be
published any statement concerning the Employee, including his
work-related performance or the reasons or basis for the
giving of that Notice of Termination.
M. TAX WITHHOLDING. Notwithstanding any other provision hereof,
the Company may withhold from amounts payable hereunder all
Federal, state, local and foreign taxes that are required to
be withheld by applicable laws or regulations.
N. ENTIRE AGREEMENT. The Company and the Employee (i) acknowledge
that this Agreement supersedes all prior written and oral
agreements between them with respect to the employment of the
Employee by the Company.
10. INTENDED BENEFITS TO EMPLOYEE; PAYMENT OF EXPENSES;
RESOLUTION OF DISPUTES
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A. INTENDED BENEFITS; PAYMENT OF EXPENSES. In entering into this
Agreement the Company intends that the Employee receive
without reduction or delay all the intended benefits of this
Agreement and that those benefits, and the terms and
conditions hereof, be construed in a manner most favorable to
the Employee; the Company, therefore, agrees that it will
strive expeditiously and in good faith to construe and resolve
in the Employee's favor and to his benefit any ambiguities or
uncertainties that may be created by the express language
hereof. If, however, at any time during the term hereof or
afterwards: (i) there should exist a dispute or conflict
between the Employee and the Company or another Person as to
the validity, interpretation or application of any term or
condition hereof, or as to the Employee's entitlement to any
benefit intended to be bestowed hereby, which is not resolved
to the satisfaction of the Employee, (ii) the Employee must
(a) defend the validity of this Agreement, (b) contest any
determination by the Company concerning the amounts payable
(or reimbursable) by the Company to the Employee, or (c)
determine in any tax year of the Employee the tax consequences
to the Employee of any amounts payable (or reimbursable) under
Section 4(c) or 4(B)(iii), or (iii) the Employee must prepare
responses to an Internal Revenue Service ("IRS") audit of, or
otherwise defend, his personal income tax return for any year
the subject of any such audit, or an adverse determination,
administrative proceedings or civil litigation arising
therefrom that is occasioned by or related to an audit by the
IRS of the Company's income tax returns, then the Company
hereby unconditionally agrees: (a) on written demand of the
Company by the Employee, to provide sums sufficient to advance
and pay on a current basis (either by paying directly or by
reimbursing the Employee) not less than thirty (30) days after
a written request therefor is submitted by the Employee, the
Employee's out of pocket costs and expenses (including
attorney's fees, expenses of investigation, travel, lodging,
copying, delivery services and disbursements for the fees and
expenses of experts, etc.) incurred by the Employee in
connection with any such matter; (b) the Employee shall be
entitled, upon application to any court of competent
jurisdiction, to the entry of a mandatory injunction without
the necessity of posting any bond with respect thereto which
compels the Company to pay or advance such costs and expenses
on a current basis; and (c) the company's obligations under
this Section 10(A) will not be affected if the Employee is not
the prevailing party in the final resolution of any such
matter.
B. RESOLUTION OF DISPUTES. If a dispute of any type referred to
in Section 10(A) arises between the Company and the Employee
and they fail to resolve that dispute by direct negotiation,
the Company and the Employee agree that the next step taken to
resolve that dispute, prior to either party initiating any
litigation to resolve that dispute (not including any
litigation that may be required to enforce the Employee's
rights to the
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payment or advancement of expenses and legal fees on a current
basis pursuant to Section 10(A)) shall be to submit the
dispute to an agreed Alternative Dispute Resolution ("ADR")
process, to which process the parties shall strive diligently
in good faith to agree within ten (10) business days after
either party has given written notice to the other party that
it is unable to concur in the other party's final proposed
negotiated resolution of the dispute. If the Company and the
Employee are unable to agree in writing to an acceptable ADR
process within that ten (10) business day period, then the
parties shall submit to a mandatory ADR process by making
joint application to the then Chief United States Federal
District Judge in the Southern District of Texas for the
selection of an ADR process for the parties. The parties shall
diligently in good faith participate in the ADR process chosen
by that judge. If the parties are unable to resolve their
dispute after diligent good faith participation in the ADR
process, then either party shall be free to initiate such
litigation as that party deems appropriate under the
circumstances. Under no circumstances shall the Employee be
obligated to pay for the cost of any ADR process or to pay or
reimburse the Company for any attorneys' fees, costs or other
expenses incurred by the Company in connection with any
process undertaken by the Employee to resolve disputes under
this Agreement. As used in this Section 10, the term
"Employee" includes, if the Employee has died or become
incompetent as a matter of applicable law, the Employee's
legal representative acting in his capacity as such under
applicable law.
11. INDEMNIFICATION
The Employee shall be indemnified by the Company to the maximum extent
permitted by the law of Delaware, the state of the Company's incorporation, and
the law of the state of incorporation of any subsidiary of the Company of which
the Employee is a director or an officer or employee, as the same may be in
effect from time to time.
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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the day and year indicated above.
APPLE ORTHODONTIX, INC.
By: /s/ JOHN G. VONDRAK
John G. Vondrak,
Chief Executive Officer
EMPLOYEE
By: /s/ ROBERT J. SYVERSON
Robert J. Syverson
Employee's Permanent Address:
432 E. Ave.
Coronado, California 92178
29
EMPLOYMENT AGREEMENT EXHIBIT 10.4
THIS EMPLOYMENT AGREEMENT (this "Agreement"), is entered into on December
9, 1996, by and between APPLE ORTHODONTIX, INC., a Delaware corporation (the
"Company") and MICHAEL W. HARLAN (the "Employee").
RECITALS:
In entering into this Agreement, the Company desires to provide the
Employee with substantial incentives to serve the Company as a senior executive
performing at the highest levels of leadership and stewardship, without
distraction or concern over minimum compensation, benefits or tenure, to develop
and implement the Company's initial development plan and thereafter assist in
managing the Company's future growth and development and maximizing the returns
to the Company's stockholders. Further, the Employee understands and agrees that
prior to the Effective Date, he shall work on behalf of Apple as a full-time
consultant subject to certain completions or duties regarding his prior
employment with U. S. A. Waste Services, Inc.
NOW, THEREFORE, in consideration of the foregoing and the mutual
provisions contained herein, and for other good and valuable consideration, the
parties hereto agree with each other as follows:
1. CERTAIN DEFINITIONS
A. CERTAIN DEFINITIONS. As used herein, the following terms have
the meanings assigned to them below:
"ACQUIRING PERSON" means any Person who or which, together
with all Affiliates and Associates of such Person, is or are
the Beneficial Owner of twenty-five percent (25%) or more of
the shares of Common Stock then outstanding, but does not
include any Exempt Person; provided, however, that a Person
shall not be or become an Acquiring Person if such Person,
together with its Affiliates and Associates, shall become the
Beneficial Owner of twenty-five percent (25%) or more of the
shares of Common Stock then outstanding solely as a result of
a reduction in the number of shares of Common Stock
outstanding due to the repurchase of Common Stock by the
Company, unless and until such time as such Person or any
Affiliate or Associate of such Person shall purchase or
otherwise become the Beneficial Owner of additional shares of
Common Stock constituting one percent (1%) or more of the then
outstanding shares of Common Stock or any other Person (or
Persons) who is (or collectively are) the Beneficial Owner of
shares of Common Stock constituting one percent (1%) or more
of the then outstanding shares of Common Stock shall become an
Affiliate or Associate of such Person,
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unless, in either such case, such Person, together with all
Affiliates and Associates of such Person, is not then the
Beneficial Owner of twenty-five percent (25%) or more of the
shares of Common Stock then outstanding.
"ACTIVE STATUS" means the Employee's Employment status from
the Effective Date to and including the first to occur of (a)
the Part-time Employment Effective Date or (b) the Termination
Date.
"AFFILIATE" has the meaning ascribed to that term in Exchange
Act Rule 12b-2.
"ANNUAL CASH COMPENSATION" of the Employee for any
Compensation Year means the sum of the salary and bonus earned
by the Employee during that Compensation Year, including all
amounts deferred at the election of the Employee pursuant to a
Compensation Plan intended to qualify as a plan under Section
401(k) of the Code or otherwise. If salary or bonus is paid in
whole or in part in property other than cash (such as Common
Stock) the amount so paid shall be the fair market value
thereof on the date of payment.
"ASSOCIATE" means, with reference to any Person, (a) any
corporation, firm, partnership, association, unincorporated
organization or other entity (other than the Company or a
subsidiary of the Company) of which that Person is an officer
or general partner (or officer or general partner of a general
partner) or is, directly or indirectly, the Beneficial Owner
of 10% or more of any class of its equity securities, (b) any
trust or other estate in which that Person has a substantial
beneficial interest or for or of which that Person serves as
trustee or in a similar fiduciary capacity and (c) any
relative or spouse of that Person, or any relative of that
spouse, who has the same home as that Person.
"AVERAGE ANNUAL CASH COMPENSATION" of the Employee
means, as of the Part-time Employment Effective Date, the
average of (a) the Annual Cash Compensation earned by the
Employee in each of the two (2) Compensation Years next
preceding that date or, if less than two (2) Compensation
Years have occurred prior to that date and since the Effective
Date, (b) the Annual Cash Compensation in each whole
Compensation Year, if any, and, restated on an annualized
basis, the Annual Cash Compensation in each partial
Compensation Year (up to a maximum of two (2) partial
Compensation Years) next preceding the Part-time Employment
Effective Date.
"BASE SALARY" means: (a) prior to the Part-time Employment
Effective Date, the guaranteed minimum annual salary payable
by the Company to the Employee pursuant to Section 4(A); and
(b) on and after
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the Part-time Employment Effective Date, the guaranteed
minimum annual salary payable by the Company to the Employee
pursuant to Section 5(E).
A specified Person is deemed the "BENEFICIAL OWNER" of, and is
deemed to "beneficially own," any securities:
(a) of which that Person or any of that Person's
Affiliates or Associates, directly or indirectly, is the
"beneficial owner" (as determined pursuant to Exchange Act
Rule 13d-3) or otherwise has the right to vote or dispose of,
including pursuant to any agreement, arrangement or
understanding (whether or not in writing); provided, however,
that a Person shall not be deemed the "Beneficial Owner" of,
or to "beneficially own," any security under this subparagraph
(a) as a result of an agreement, arrangement or understanding
to vote that security if that agreement, arrangement or
understanding: (1) arises solely from a revocable proxy or
consent given in response to a public (that is, not including
a solicitation exempted by Exchange Act Rule 14a-2(b)(2))
proxy or consent solicitation made pursuant to, and in
accordance with, the applicable provisions of the Exchange
Act; and (2) is not then reportable by such Person on Exchange
Act Schedule 13D (or any comparable or successor report);
(b) which that Person or any of that Person's Affiliates
or Associates, directly or indirectly, has the right or
obligation to acquire (whether that right or obligation is
exercisable or effective immediately or only after the passage
of time or the occurrence of an event) pursuant to any
agreement, arrangement or understanding (whether or not in
writing) or on the exercise of conversion rights, exchange
rights, other rights, warrants or options, or otherwise;
provided, however, that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own," securities
tendered pursuant to a tender or exchange offer made by that
Person or any of that Person's Affiliates or Associates until
those tendered securities are accepted for purchase or
exchange; or
(c) which are beneficially owned, directly or
indirectly, by (1) any other Person (or any Affiliate or
Associate thereof) with which the specified Person or any of
the specified Person's Affiliates or Associates has any
agreement, arrangement or understanding (whether or not in
writing) for the purpose of acquiring, holding, voting (except
pursuant to a revocable proxy or consent as described in the
proviso to subparagraph (a) of this definition) or disposing
of any voting securities of the Company or (2) any group (as
that term is used in Exchange Act Rule 13d-5(b)) of which that
specified Person is a member; provided, however, that nothing
in this definition shall cause a Person engaged in business as
an underwriter of securities to be the "Beneficial Owner" of,
or to
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"beneficially own," any securities acquired through such
Person's participation in good faith in a firm commitment
underwriting until the expiration of forty (40) days after the
date of that acquisition. For purposes of this Agreement,
"voting" a security shall include voting, granting a proxy,
acting by consent, making a request or demand relating to
corporate action (including, without limitation, calling a
stockholder meeting) or otherwise giving an authorization
(within the meaning of Section 14(a) of the Exchange Act) in
respect of such security. "BOARD" means the entire Board of
Directors of the Company.
"BUSINESS REASON" for the Company's termination of the
Employee's Employment means any lawful reason other than
Cause.
"CAUSE" for the Company's termination of the Employee's
Employment means: (a) the Employee's final conviction of a
felony crime that enriched the Employee at the expense of the
Company; or (b) the Employee's deliberate and intentional
continuing failure to substantially perform his duties and
responsibilities hereunder (except by reason of the Employee's
incapacity due to physical or mental illness or injury) for a
period of forty-five (45) days after the Required Board
Majority has delivered to the Employee a written demand for
substantial performance hereunder which specifically
identifies the bases for the Required Board Majority's
determination that the Employee has not substantially
performed his duties and responsibilities hereunder (such
period being the "Grace Period"); provided, that for purposes
of this clause (b), the Company shall not have Cause to
terminate the Employee's Employment unless (1) at a meeting of
the Board called and held following the Grace Period in the
city in which the Company's principal executive offices are
located of which the Employee was given not less than ten (10)
days' prior written notice and at which the Employee was
afforded the opportunity to be represented by counsel, appear
and be heard, the Required Board Majority shall adopt a
written resolution which (A) sets forth the Required Board
Majority's determination that the failure of the Employee to
substantially perform his duties and responsibilities
hereunder has (except by reason of his incapacity due to
physical or mental illness or injury) continued past the Grace
Period and (B) specifically identifies the bases for that
determination and (2) the Company, at the written direction of
the Required Board Majority, shall deliver to the Employee a
Notice of Termination for Cause to which a copy of that
resolution, certified as being true and correct by the
secretary or any assistant secretary of the Company, is
attached. Cause of the type referred to in clause (a) of the
preceding sentence is a "Type I Cause," while Cause of the
type referred to in clause (b) of the preceding sentence is a
"Type II Cause." For purposes of determining whether a Type II
Cause has occurred, no act or failure to act on the part of
the Employee shall be considered "deliberate
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and intentional" unless it is taken or omitted to be taken by
the Employee in bad faith or without a reasonable belief that
the Employee's act or omission was in the best interests of
the Company.
"CHANGE OF CONTROL" means the occurrence of any of the
following events that occurs after the IPO Closing Date: (a)
any Person becomes an Acquiring Person; (b) at any time the
then Continuing Directors cease to constitute a majority of
the members of the Board; (c) a merger of the Company with or
into, or a sale by the Company of its properties and assets
substantially as an entirety to, another Person occurs and,
immediately after that occurrence, any Person, other than an
Exempt Person, together with all Affiliates and Associates of
such Person, shall be the Beneficial Owner of twenty-five
percent (25%) or more of the total voting power of the then
outstanding Voting Shares of the Person surviving that
transaction (in the case or a merger or consolidation) or the
Person acquiring those properties and assets substantially as
an entirety.
"CHANGE OF CONTROL PAYMENT" means at any time the amount equal
to three (3) times the Employee's then highest Base Salary
during the term of this Agreement.
"CODE" means the Internal Revenue Code of 1986.
"COMMON STOCK" means the common stock of the Company.
"COMPANY" means (a) APPLE ORTHODONTIX, INC., a Delaware
corporation, and (b) any Person that assumes the obligations
of "the Company" hereunder, by operation of law, pursuant to
Section (D)(iii) or otherwise.
"COMPENSATION PLAN" means any compensation arrangement, plan,
policy, practice or program established, maintained or
sponsored by the Company or any subsidiary of the Company, or
to which the Company or any subsidiary of the Company
contributes, on behalf of any Executive Officer or any member
of the family of any Executive Officer, (a) including (i) any
"employee pension benefit plan" (as defined in Section 3(2) of
ERISA) or other "employee benefit plan" (as defined in Section
3(3) of ERISA), (ii) any other retirement and savings plan,
including any supplemental benefit arrangement relating to any
plan intended to be qualified under Section 401(a) of the Code
or whose benefits are limited by the Code or ERISA, (iii) any
"employee welfare plan" (as defined in Section 3(1) of ERISA),
(iv) any arrangement, plan, policy, practice or program
providing for severance pay, deferred compensation or
insurance benefit, (v) any Incentive Plan and (vi) any
arrangement, plan, policy, practice or program (A) authorizing
and providing for the payment or
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reimbursement of expenses attributable to first-class air
travel and first-class hotel occupancy while on travel or (B)
providing for the payment of business luncheon and country
club dues, long-distance charges, mobile phone monthly air
time or other recurring monthly charges or any other fringe
benefit, allowance or accommodation of employment, but (b)
excluding any compensation arrangement, plan, policy, practice
or program to the extent it provides for annual base salary.
"COMPENSATION COMMITTEE" means the committee of the Board to
which the Board has delegated duties respecting the
compensation of Executive Officers and the administration of
Incentive Plans, if any, intended to qualify for the Exchange
Act Rule 16b-3 exemption.
"COMPENSATION YEAR" means any calendar year.
"CONFIDENTIAL INFORMATION" means, with respect to the Company
or any subsidiary of the Company, all trade secrets and other
confidential, nonpublic and/or proprietary information of that
Person, including information derived from reports,
investigations, research, work in progress, codes, marketing
and sale programs, customer lists, records of customer service
requirements, capital expenditure projects, cost summaries,
pricing formulae, contract analyses, financial information,
projections, confidential filings with any governmental
authority and all other confidential, nonpublic concepts,
methods of doing business, ideas, materials or information
prepared or performed for, by or on behalf of that Person.
"CPI" means for any period the Consumer Price Index for All
Urban Consumers--All Items Index for Houston, Texas (or any
substantially similar index published for the same area), as
published by the United States Department of Labor, Bureau of
Labor Statistics (or its successor) for that period.
"CONTINUING DIRECTOR" means at any time any individual who
then (a) is a member of the Board and was a member of the
Board as of the IPO Closing Date or whose nomination for his
first election, or that first election, to the Board following
that date was recommended or approved by a majority of the
then Continuing Directors (acting separately or as a part of
any action taken by the Board or any committee thereof) and
(b) is not an Acquiring Person, an Affiliate or Associate of
an Acquiring Person or a nominee or representative of an
Acquiring Person or of any such Affiliate or Associate.
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"DISABILITY" of the Employee means the Employee has been
determined (which determination shall be final and binding on
all persons, absent manifest error), as a result of a physical
or mental illness or personal injury he has incurred
(including illness or injury resulting from any substance
abuse), by a Qualified Physician (who may be the doctor
treating or otherwise acting as the Employee's doctor in
connection with the illness or injury in question) selected by
the Employee with the consent of the Company, or by the
Company with the consent of the Employee (which consent shall
not be unreasonably withheld in either case), to be unable to
perform, at the time of that determination and, in all
reasonable medical likelihood, indefinitely thereafter, the
normal duties then most recently assigned, under and in
accordance with the terms hereof, to the Employee while on
Active Status; provided that, the determination whether the
Employee has incurred a Disability shall be made by a majority
of three (3) Qualified Physicians, (a) one (1) of whom shall
be selected by the Employee, (b) one (1) of whom shall be
selected by the Company and (c) the remaining one (1) of whom
shall be selected by the Qualified Physicians selected by the
Employee and the Company pursuant to clauses (a) and (b) of
this proviso and the fees and expenses of whom will be shared
and paid in equal amounts by the Employee and the Company, if:
(1)(A) the Company has reasonably withheld its consent to the
Qualified Physician, if any, selected by the Employee or (B)
the Employee has reasonably withheld his consent to the
Qualified Physician, if any, selected by the Company and (2)
the Qualified Physicians selected by the Employee and the
Company disagree as to whether the Employee has incurred a
Disability. For purposes of this definition, if the Employee
is unable by reason of illness or injury to give an informed
consent to the performance of the treatment of that illness or
injury, a Qualified Physician selected by any Person who is
authorized by applicable law to give that consent will be
deemed to have been selected by the Employee.
"EFFECTIVE DATE" means the date that the Registration
Statement on Form S-1, relating to an unwritten initial public
offering of the Company's Common Stock (the "IPO"), is filed
initially with the Securities and Exchange Commission.
"ERISA" means the Employee Retirement Income Security Act of
1974.
"EMPLOYMENT" means the salaried employment of the Employee by
the Company or a subsidiary of the Company hereunder.
"EXCHANGE ACT" means the Securities Exchange Act of 1934.
"EXECUTIVE OFFICER" means any of the chairman of the board,
the chief executive officer, the chief operating officer, the
chief financial
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officer, the president, any executive or senior vice president
or the general counsel of the Company.
"EXEMPT PERSON" means (a) (1) the Company, any subsidiary of
the Company, any employee benefit plan of the Company or of
any subsidiary of the Company and (2) any Person organized,
appointed or established by the Company for or pursuant to the
terms of any such plan or for the purpose of funding any such
plan or funding other employee benefits for employees of the
Company or any subsidiary of the Company and (b) the Employee,
any Affiliate or Associate of the Employee or any group (as
that term is used in Exchange Act Rule 13d-5(b)) of which the
Employee or any Affiliate or Associate of the Employee is a
member.
"GOOD REASON" for the Employee's termination of his Employment
means: (a) any violation hereof in any material respect by the
Company; (b) either (1) a failure of the Company to continue
in effect any Compensation Plan in which the Employee was
participating or (2) the taking of any action by the Company
which would adversely affect the Employee's participation in
or materially reduce the Employee's Benefits under, any such
Compensation Plan, unless (A) in the case of either subclause
(1) or (2) of this clause, there is substituted a comparable
Compensation Plan that is at least economically equivalent, in
terms of the benefit offered to the Employee, to the
Compensation Plan being ended or in which the Employee's
participation is being adversely affected or the Employee's
benefits are being materially reduced or (B) in the case of
that subclause (1), the failure, or in the case of that
subclause (2), the taking of action, adversely affects
Executive Officers generally; or (c) the assignment to the
Employee of duties inconsistent in any material respect with
the Employee's then current positions (including status,
offices, titles and reporting requirements), authority, duties
or responsibilities or any other action by the Company which
results in a material diminution in those positions,
authority, duties or responsibilities.
"INCENTIVE PLAN" means any compensation arrangement, plan,
policy, practice or program established, maintained or
sponsored by the Company or any subsidiary of the Company, or
to which the Company or any subsidiary of the Company
contributes, on behalf of any Executive Officer and which
provides for incentive, bonus or other performance-based
awards of cash, securities or the phantom equivalent of
securities, including any stock option, stock appreciation
right and restricted stock plan, but excluding any plan
intended to qualify as a plan under any one or more of
Sections 401(a), 401(k) or 423 of the Code.
"IPO" means the first time a registration statement filed
under the Securities Act and respecting an underwritten
primary offering by the
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Company of shares of Common Stock is declared effective under
that act and the shares registered by that registration
statement are issued and sold by the Company (otherwise than
pursuant to the exercise of any over-allotment option).
"IPO CLOSING DATE" means the date on which the Company first
receives payment for the shares of Common Stock it sells in
the IPO.
"NONTERMINATING PARTY" means the Employee or the Company, as
the case may be, to which the Terminating Party delivers a
Notice of Termination.
"NOTICE OF TERMINATION" to or from the Employee means a
written notice that: (a) to the extent applicable, sets forth
in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Employee's Employment,
and if the Termination Date is other than the date of receipt
of the notice, (b) sets forth that Termination Date.
"OUTSIDE DIRECTOR" means at any time a member of the Board at
that time who is not then an employee of the Company or any
subsidiary of the Company.
"PART-TIME EMPLOYMENT EFFECTIVE DATE" means, (a) if the
Company elects pursuant to any applicable provision hereof to
terminate the Employee's Employment other than for Cause or
(b) if the Employee elects pursuant to the applicable
provision hereof to terminate his Employment for Good Reason
or by reason of his Disability, the date the Nonterminating
Party receives the Terminating Party's Notice of Termination.
"PART-TIME EMPLOYMENT PERIOD" means the period of time which
begins on the Part-time Employment Effective Date and ends on
the first to occur of (a) the third (3rd) anniversary of that
Part-time Employment Effective Date, (b) the termination by
the Company of the Employee's Employment for Type I Cause or
(c) the death or Retirement of the Employee.
"PERSON" means any natural person, sole proprietorship,
corporation, partnership of any kind having a separate legal
status, limited liability company, business trust,
unincorporated organization or association, mutual company,
joint stock company, joint venture, estate, trust, union or
employee organization or governmental authority.
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"QUALIFIED PHYSICIAN" means, in the case of any determination
whether the Employee has sustained a Disability, a physician
(a) holding an M.D. degree from a medical school located in
the United States and having a national reputation in the
United States as a leading medical school, (b) specializing
and board-certified in the treatment of the injury or illness
that has or may have caused that Disability, (c) licensed to
practice that specialty in the State of Texas or the state in
which the Employee then is domiciled and (d) having admission
privileges to one or more private hospitals located in the
Texas Medical Center in Houston, Texas or in a hospital of
comparable reputation in the state in which the Employee then
is domiciled.
"REQUIRED BOARD MAJORITY" means at any time a majority of the
members of the Board at that time which includes at least a
majority of the Outside Directors at that time.
"RETIREMENT" of the Employee means the Employee terminates his
Employment on or after the date he has attained age 65.
"SECURITIES ACT" means the Securities Act of 1933.
"TERMINATING PARTY" means the Employee or the Company, as the
case may be, who or which terminates the Employee's Employment
by means of a Notice of Termination.
"TERMINATION DATE" means: (a) if the Employee's Employment is
terminated by reason of the Employee's death or Retirement,
the date of that death or Retirement; (b) if the Employee's
Employment is terminated by reason of the Employee's giving a
Notice of Termination following a Change of Control pursuant
to Section 5(B)(i)(b), the first date on which the Company
pays to the Employee in full the amounts owed to the Employee
pursuant to Section 5(B)(iii); (c) if the Employee's
Employment is terminated by reason of the Employee's giving a
Notice of Termination without Good Reason and other than for
Disability pursuant to Section 5(B)(i)(c), the elapse of the
thirtieth (30th) day after the Company receives that notice;
(d) if the Employee's Employment is terminated by the Company
at any time for Type I Cause or, prior to the Part-time
Employment Effective Date, at any time for Type II Cause, the
date the Employee receives the Company's Notice of Termination
for Cause; and (e) if the Employee's Employment is terminated
for any other reason, at the expiration of the Part-time
Employment Period.
"TYPE I CAUSE" means Cause of the type referred to in clause
(a) of the definition of Cause herein.
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"TYPE II CAUSE" means Cause of the type referred to in clause
(b) of the definition of Cause herein.
"VOTING SHARES" means: (a) in the case of any corporation,
stock of that corporation of the class or classes having
general voting power under ordinary circumstances to elect a
majority of that corporation's board of directors; and (b) in
the case of any other entity, equity interests of the class or
classes having general voting power under ordinary
circumstances equivalent to the Voting Shares of a
corporation.
B. OTHER DEFINITIONAL PROVISIONS.
(i) Except as otherwise specified herein, all references
herein to any statute defined or referred to herein, including
the Code, ERISA and the Exchange Act, shall be deemed
references to that statute or any successor statute, as the
same may have been or may be amended or supplemented from time
to time, and any rules or regulations promulgated thereunder.
(ii) When used in this Agreement, the words "herein," "hereof"
and "hereunder" and words of similar import shall refer to
this Agreement as a whole and not to any provision of this
Agreement, and the word "Section" refers to a Section of this
Agreement unless otherwise specified.
(iii) Whenever the context so requires, the singular number
includes the plural and vice versa, and a reference to one
gender includes each other gender and the neuter.
(iv) The word "including" (and, with correlative meaning, the
word "include") means including, without limiting the
generality of any description preceding such word, and the
words "shall" and "will" are used interchangeably and have the
same meaning.
2. EMPLOYMENT
A. On the terms and subject to the conditions hereinafter set
forth, and beginning as of the Effective Date, the Company
will employ the Employee as its Chief Financial Officer (CFO)
and Vice-President the Employee will serve in the Company's
employ in that position. The Employee shall perform such
duties, and have such powers, authority, functions, duties and
responsibilities for the Company and corporations affiliated
with the Company as are commensurate and consistent with his
employment as the Company's Chief Financial Officer and
Vice-President. The Employee also shall have such additional
powers, authority, functions, duties and responsibilities as
may be assigned to him by the Board; provided that, without
the Employee's written consent, such
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additional powers, authority, functions, duties and
responsibilities shall not be inconsistent or interfere with,
or detract from, those herein vested in, or otherwise then
being performed for the Company by the Employee.
B. The Employee shall not, at any time during his Employment,
engage in any other activities unless those activities do not
interfere materially with the Employee's duties and
responsibilities for the Company at that time, except that the
Employee shall be entitled, subject to the provisions of
Section 7, (a) to continue with such activities as the
Employee has carried on prior to the Effective Date, including
making and managing his personal investments and participating
in other business or civic activities and (b) to serve on
corporate or other business, civic or charitable boards or
committees and trade association or similar boards or
committees.
3. TERM OF EMPLOYMENT. Subject to the provisions of Section 5, the term of
the Employee's Employment shall be for a continually renewing term of three (3)
years commencing on the Effective Date and renewing each day thereafter for an
additional day without any further action by either the Company or the Employee,
it being the intention of the parties that there shall be continuously a
remaining term of three (3) years' duration of the Employee's Employment until
an event has occurred as described in, or one of the parties shall have made an
appropriate election pursuant to, the provisions of Section 5. When the
Termination Date shall have occurred and the Company shall have paid to the
Employee all the applicable amounts Section 5 provides the Company shall pay as
a result of the termination of the Employee's Employment, including all amounts
accruing during the Part-time Employment Period, if any, this Agreement will
terminate and have no further force or effect, except that Sections 4(C), 8, 9,
10 and 11 shall survive that termination indefinitely and Section 7 shall
survive for the period of time provided for therein.
4. COMPENSATION
A. BASE SALARY. A Base Salary shall be payable to the Employee by
the Company as a guaranteed minimum annual amount hereunder
for each Compensation Year during the period from the
Effective Date to the first to occur of the Part-time
Employment Effective Date or the Termination Date. That Base
Salary shall be payable in the intervals consistent with the
Company's normal payroll schedules (but in no event less
infrequently than semi-monthly), shall be payable initially at
the annual rate of $130,000 and shall be increased (but not
decreased or adjusted other than as provided in Section 5) as
follows:
(i) on the first and each subsequent anniversary of the
Effective Date, by the same percentage increase (if any) in
the CPI for the twelve (12) month period immediately preceding
such anniversary;
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(ii) on the first and each subsequent anniversary of the
Effective Date, by such additional amount as shall be
determined in the sole discretion of the Compensation
Committee, but only in such form and to such extent as the
Compensation Committee may from time to time approve, as
evidenced by the written minutes or records of the
Compensation Committee and its written notices of such
determinations or approvals to the Employee; and
(iii) if the Employee relocates from a state without a
personal income tax at the time of his relocation to a state
having a personal income tax, or if the Employee resides in a
state without a personal income tax on the date hereof which
subsequently adopts a personal income tax, then, in either
case, the Base Salary in effect at the time of such relocation
or adoption, as applicable, shall immediately be increased by
the amount equal to the Base Salary immediately prior to this
increase multiplied by seventy percent (70%) of the highest
personal income tax rate of such state; for example, if the
Employee relocates from a state without a personal income tax
to a state having a personal income tax and the highest rate
of that tax is six percent (6%) when the Base Salary is
$200,000, then the Base Salary will be increased by $8,400
(computed at 70% x 6% x $200,000); provided, however, that the
obligation of the Company to pay the Base Salary earned by the
Employee for his service in the period beginning on the
Effective Date and ending on the date that is the first to
occur of (a) the IPO Closing Date, (b) the Termination Date or
(C) such other date as the Board in its sole discretion may
determine shall be deferred to the last day of that period in
such amounts as the Board in its sole discretion may from time
to time determine, on which day the Company shall pay in full
to the Employee, without interest, the aggregate earned but
unpaid amount of the Base Salary for that period. Effective as
of the Part-time Employment Effective Date, the Base Salary
theretofore in effect shall be adjusted as provided in Section
5(E).
B. OTHER COMPENSATION.
(i) The Employee shall be entitled to participate in all
Compensation Plans from time to time in effect while he
remains on Active Status, regardless of whether the Employee
is an Executive Officer. All awards to the Employee under all
Incentive Plans shall take into account the Employee's
positions with and duties and responsibilities to the Company
and its subsidiaries.
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(ii) The Company shall grant to the Employee 23.5 shares of
it's pre- IPO common stock subject to a subscription
agreement.
C. TAX INDEMNITY. Should any of the payments of Base Salary,
other incentive or supplemental compensation, benefits,
allowances, awards, payments, reimbursements or other
perquisites, or any other payment in the nature of
compensation, singly, in any combination or in the aggregate,
that are provided for hereunder to be paid to or for the
benefit of the Employee be determined or alleged to be subject
to an excise or similar purpose tax pursuant to Section 4999
of the Code, or any successor or other comparable federal,
state or local tax law by reason of being a "parachute
payment" (within the meaning of Section 280G of the Code), the
Company shall pay to the Employee such additional compensation
as is necessary (after taking into account all federal, state
and local taxes payable by the Employee as a result of the
receipt of such additional compensation) to place the Employee
in the same after-tax position (including federal, state and
local taxes) he would have been in had no such excise or
similar purpose tax (or interest or penalties thereon) been
paid or incurred. The Company hereby agrees to pay such
additional compensation within the earlier to occur of (i)
five (5) business days after the Employee notifies the Company
that the Employee intends to file a tax return taking the
position that such excise or similar purpose tax is due and
payable in reliance on a written opinion of the Employee's tax
counsel (such tax counsel to be chosen solely by the Employee)
that it is more likely than not that such excise tax is due
and payable or (ii) twenty-four (24) hours of any notice of or
action by the Company that it intends to take the position
that such excise tax is due and payable. The costs of
obtaining the tax counsel opinion referred to in clause (i) of
the preceding sentence shall be borne by the Company, and as
long as such tax counsel was chosen by the Employee in good
faith, the conclusions reached in such opinion shall not be
challenged or disputed by the Company. If the Employee intends
to make any payment with respect to any such excise or similar
purpose tax as a result of an adjustment to the Employee's tax
liability by any federal, state or local tax authority, the
Company will pay such additional compensation by delivering
its cashier's check payable in such amount to the Employee
within five (5) business days after the Employee notifies the
Company of his intention to make such payment. Without
limiting the obligation of the Company hereunder, the Employee
agrees, in the event the Employee makes any payment pursuant
to the preceding sentence, to negotiate with the Company in
good faith with respect to procedures reasonably requested by
the Company which would afford the Company the ability to
contest the imposition of such excise or similar purpose tax;
provided, however, that the Employee will not be required to
afford the Company any right to contest the applicability of
any such excise or similar purpose tax to the extent that the
Employee
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reasonably determines (based upon the opinion of his tax
counsel) that such contest is inconsistent with the overall
tax interests of the Employee.
5. TERMINATION, PART-TIME EMPLOYMENT PERIOD, DISABILITY AND
DEATH
A. TERMINATION OF EMPLOYMENT BY THE COMPANY.
(i) The Company shall be entitled, if acting at the direction
of the Required Board Majority, to terminate the Employee's
Employment (a) at any time for Type I Cause or (b) at any time
prior to the Part-time Employment Effective Date for Type II
Cause or for any Business Reason. If the Employee is neither a
member of the Board nor an Executive Officer, the Company
shall be entitled, if acting at the direction of the chief
executive officer of the Company, to terminate the Employee's
Employment at any time prior to the Part-time Employment Date
for any Business Reason. The Company's termination of the
Employee's Employment for Cause will be effective on the date
the Company delivers a Notice of Termination for Cause to the
Employee pursuant to this Section 5(A)(i)(together, in the
case of a termination for Type II Cause, with the certified
resolution referred to in clause (b) of the definition herein
of Cause), while the Company's termination of the Employee's
Employment for a Business Reason will be effective on the
third (3rd) anniversary of the date the Company delivers a
Notice of Termination for a Business Reason to the Employee
pursuant to this Section 5(A)(i).
(ii) If the Company terminates the Employee's Employment for
Cause, the Company promptly thereafter, and in any event
within five (5) business days thereafter, shall pay the
Employee his Base Salary to and including the Termination Date
and the amount of all compensation previously deferred by the
Employee (together with any accrued interest or earnings
thereon), in each case to the extent not theretofore paid,
and, when that payment is made, the Company shall,
notwithstanding Section 3, have no further or other
obligations hereunder to the Employee.
(iii) If the Company terminates the Employee's Employment for
a Business Reason, the respective rights and obligations of
the Company and the Employee during the Part-time Employment
Period will be as set forth in Section 5(E).
B. TERMINATION OF EMPLOYMENT BY THE EMPLOYEE.
(i) The Employee shall be entitled to terminate his Employment
(a) for a Good Reason at any time within one hundred eighty
(180) days after the
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facts or circumstances constituting that Good Reason first
exist and are known to the Employee, (b) by reason of a Change
of Control at any time within three hundred sixty-five (365)
days after that Change of Control occurs (provided, however,
that the Employee shall not be entitled to terminate his
Employment by reason of that Change of Control if it occurs
(1) during the thirty (30) day period following the Company's
receipt of the Employee's Notice of Termination without Good
Reason and other than for Disability pursuant to this Section
5(B)(i), (2) after (A) the receipt by the Nonterminating Party
of the Terminating Party's Notice of Termination pursuant to
Section 5 (c) or (B) the Employee's receipt of the Company's
Notice of Termination for a Business Reason (other than in
connection with that Change of Control) pursuant to Section
5(A) or (3) more than three hundred sixty-five (365) days
after the Company's receipt of the Employee's Notice of
Termination for Good Reason pursuant to this Section 5(B)(i))
or (c) without Good Reason and other than for Disability at
any time. The Employee's termination of his Employment for
Good Reason will be effective on the third (3rd) anniversary
of the date the Employee delivers a Notice of Termination for
Good Reason to the Company pursuant to this Section 5(B)(i).
The Employee's termination of his Employment by reason of a
Change of Control will be effective on the first date on which
the Change of Control Payment shall have been paid in full to
the Employee. The Employee's termination of his Employment
without Good Reason and other than for Disability will be
effective on the thirtieth (30th) day following the Employee's
delivery of a Notice of Termination without Good Reason and
other than for Disability pursuant to this Section 5(B)(i).
(ii) If the Employee terminates his Employment for Good
Reason, the respective rights and obligations of the Company
and the Employee during the Part-time Employment Period will
be as set forth in Section 5(E).
(iii) If the Employee terminates his Employment by reason of a
Change of Control, the Company shall pay to the Employee in a
cash lump sum within five (5) business days after the date the
Company receives the Employee's Notice of Termination by
reason of that Change of Control the amount equal to the sum
of (a) the portion of the Base Salary to and including the
Termination Date which has not yet been paid, (b) all
compensation previously deferred by the Employee (together
with any accrued interest and earnings thereon), (c) any
accrued but unpaid vacation pay and (d) the Change of Control
Payment.
(iv) If the Employee terminates his Employment without Good
Reason and other than for Disability, the Company shall pay to
the Employee, in a cash lump sum within five (5) business days
after the Termination Date, the amount equal to the sum of (a)
the portion of the Base Salary to and
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<PAGE>
including the Termination Date which has not yet been paid,
(b) all compensation previously deferred by the Employee
(together with any accrued interest and earnings thereon)
which has not yet been paid, (c) any accrued but unpaid
vacation pay and (d) the amount equal to fifty percent (50%)
of the Base Salary being paid for the Compensation Year in
which the Company receives the Employee's Notice of
Termination without Good Reason and other than for Disability;
provided, however, that if the Employee terminates his
Employment without Good Reason and other than for Disability
within six (6) months of the theretofore scheduled final day
of the Part-time Employment Period, the amount payable
pursuant to clause (d) of this sentence shall be the amount
determined pursuant to that clause multiplied by a fraction
the numerator of which is the number of days from and
excluding the date the Company receives the Notice of
Termination to and including that final day and the
denominator of which is one hundred eighty-two (182). For
purposes of this Section 5(B)(iv), if the anniversary of the
Effective Date in the Compensation Year in which the Company
receives the Notice of Termination without Good Reason and
other than for Disability has not occurred on or prior to the
date of that receipt, the Base Salary for that Compensation
Year will be calculated on the assumption that no increase in
the amount thereof would be made effective as of that
anniversary pursuant to Section 4(A) or 5(E)(i), as
applicable.
C. TERMINATION BY REASON OF DISABILITY. If the Employee incurs
any Disability while on Active Status, either the Employee or
the Company may terminate the Employee's Employment effective
on the third (3rd) anniversary of the date the Nonterminating
Party receives a Notice of Termination from the Terminating
Party pursuant to this Section 5(C). If the Employee's
Employment is terminated by reason of the Employee's
Disability, the respective rights and obligations of the
Company and the Employee during the Part-time Employment
Period will be as set forth in Section 5(E).
D. TERMINATION OF EMPLOYMENT BY DEATH. The Employee's Employment
shall terminate automatically at the time of his death. If the
Employee's Employment is terminated by reason of the
Employee's death, the Company shall pay to the Person the
Employee has designated in a written notice delivered to the
Company as his beneficiary entitled to such payment, if any,
or to the Employee's estate, as applicable, in a cash lump sum
within thirty (30) days after the Termination Date, the amount
equal to the sum of (i) the portion of the Base Salary through
the end of the month in which the Termination Date occurs
which has not yet been paid, (ii) all compensation previously
deferred by the Employee (together with any accrued interest
or earnings thereon) which has not yet been paid, (iii) any
accrued but unpaid vacation pay (if the Employee dies while
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<PAGE>
on Active Status) and (iv) (a) if the Employee dies while on
Active Status, the product of (1) the Base Salary being paid
for the Compensation Year in which he dies multiplied by (2)
three (3) or (b) if the Employee dies during the Part-time
Employment Period, the product of (1) one-twelfth (1/12th) of
the Base Salary being paid for the Compensation Year in which
the Employee dies multiplied by (2) the number of whole and
partial calendar months in the period beginning with the first
calendar month after the calendar month in which he dies and
ending with the last calendar month in which the Termination
Date would have occurred if the Employee's Employment were to
have continued to the end of the Part-time Employment Period.
For purposes of this Section 5(D), if the anniversary of the
Effective Date in the Compensation Year in which the Employee
dies has not occurred on or before the Termination Date, the
Base Salary for that Compensation Year will be calculated on
the assumption that no increase in the amount thereof would be
made effective as of that anniversary pursuant to Section 4(A)
or 5(E)(i), as applicable.
E. EMPLOYEE'S RIGHTS DURING THE PART-TIME EMPLOYMENT
PERIOD.
(i) The Company shall pay the Employee a Base Salary, in the
intervals consistent with the Company's normal payroll
schedules (but in no event less frequently than semi-monthly)
from the Part-time Employment Effective Date to and including
the Termination Date in the amounts determined from time to
time as follows: Effective as of the Part-time Employment
Effective Date, the Base Salary payable by the Company to the
Employee for the period from and including that date to and
excluding the third (3rd) anniversary of that date shall be as
follows:
(a) if the Part-time Employment Effective Date occurs as
a result of the receipt by the Nonterminating Party of a
Notice of Termination for a Business Reason pursuant to
Section 5(A) or a Notice of Termination for Good Reason
pursuant to Section 5(B)(i), the amount equal to the
Average Annual Cash Compensation of the Employee
determined as of the Part-time Employment Effective
Date; and (b) if the Part-time Employment Effective Date
occurs as a result of the receipt by the Nonterminating
Party of a Notice of Termination for Disability pursuant
to Section 5(C), the amount equal to the amount by which
(1) seventy-five percent (75%) of the Average Annual
Cash Compensation of the Employee determined as of the
Part-time Employment Effective Date exceeds (2) the
aggregate amount of periodic payments the Employee
receives during the twelve (12) months beginning on that
date under Compensation Plans then in
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effect and providing for the payment to the Employee
solely as a result or on account of disability; and
(b) on the first and each subsequent anniversary of the
Part-time Employment Effective Date, the Base Salary
payable pursuant to this Section 5(E) shall be increased
(but not decreased) by the same percentage increase (if
any) in the CPI for the twelve (12) month period
immediately preceding that anniversary.
(ii) (a) The Employee shall continue to participate in all
Compensation Plans from time to time in effect during
the Part-time Employment Period, provided, however,
that: (1) the Employee shall not be entitled to receive
any new award or grant under any Incentive Plan, and any
such new award or grant shall be at the sole discretion
of the Compensation Committee or the Board, as
applicable, with respect to that Incentive Plan; and (2)
if (A) the terms of any such plan preclude the
Employee's continued participation therein or (B) his
continued participation in any such plan would or
reasonably could be expected to disqualify that plan
under the Code, the Employee shall not be entitled to
participate in that plan, but the Company instead shall
provide the Employee with the after-tax equivalent of
the benefits that would have been provided to the
Employee were he a participant in that plan.
(b) For purposes of determining eligibility (including
years of service) for retirement benefits payable under
any Compensation Plan, the Employee shall be deemed to
have retired at the Termination Date.
(iii) Subject to the provisions of Section 7, the Employee
shall not be (A) prevented from accepting other employment or
engaging in (and devoting substantially all his time to) other
business activities or (B) required to perform any regular
duties for the Company (except to provide such services
consistent with the Employee's educational background,
experience and prior positions with the Company as may be
acceptable to the Employee) or to seek or accept additional
employment with any other Person. If the Employee, at his
discretion, shall accept any such additional employment or
engage in any such other business activity there shall be no
offset, reduction or effect upon any rights, benefits or
payments to which the Employee is entitled pursuant to this
Agreement. Furthermore, the Employee shall have no obligation
to account for, remit, rebate or pay over to the Company any
compensation or other amounts earned or derived in connection
with such additional employment or business activity.
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<PAGE>
The Employee shall, however, make himself generally
available for special projects or to consult with the Company
and its employees at such times and at such places as may be
reasonably requested by the Company and which shall be
reasonably satisfactory to the Employee and consistent with
the Employee's regular duties and responsibilities in the
course of his then new occupation or other employment, if any.
(iv) Unless and until the Employee shall have sustained a
Disability, the Company shall continue to provide the Employee
with either the same or, at the Company's election, at a
different location within thirty-five (35) miles of the
Employee's principal residence, in any case reasonably
acceptable to the Employee, alternate but comparable office
space, furnishings, facilities, reserved parking, supplies,
services, equipment, secretarial and administrative assistance
that are in each case at least commensurate with the size and
quality of that which were provided to the Employee during the
Compensation Year immediately preceding the Part-time
Employment Effective Date pursuant to Section 6(C), but in no
event less than are being furnished or provided on the date
hereof. The Company and Employee may mutually agree upon an
equivalent monthly cash allowance in lieu of the Employee
being provided all or any part of these items.
(v) The Employee shall remain entitled to the benefits of
Section 4(C).
F. RETURN OF PROPERTY. On termination of the Employee's
Employment, however brought about, the Employee (or his
representatives) shall promptly deliver and return to the
Company all the Company's property that is in the possession
or under the control of the Employee.
G. STOCK OPTIONS. Notwithstanding any provision of this Agreement
to the contrary: (i) except in the case of a termination of
the Employee's Employment for Cause, all stock options
previously granted to the Employee under Incentive Plans that
have not been exercised and are outstanding as of the time
immediately prior to the Termination Date shall,
notwithstanding any contrary provision of any applicable
Incentive Plan, remain outstanding (and continue to become
exercisable pursuant to their respective terms) until
exercised or the expiration of their term, whichever is
earlier; and (ii) in the case of a termination of the
Employee's Employment for Cause, all stock options previously
granted to the Employee under Incentive Plans that have not
been exercised and are outstanding as of the time immediately
prior to the Termination Date shall, notwithstanding any
contrary provision of any applicable Incentive Plan, remain
outstanding and continue to be exercisable until exercised or
the date that is ten (10) days after the Termination Date,
whichever is
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<PAGE>
earlier. No stock option previously granted to the Employee
under any Incentive Plan shall, notwithstanding any contrary
provision of that Incentive Plan, expire or fail to become
exercisable or, if exercisable, cease to be exercisable by
reason of either (i) the occurrence of the Employee's
Part-time Employment Effective Date or (ii) the Employee's
service during the Employee's Part-time Employment Period
being less than full-time.
6. OTHER EMPLOYEE RIGHTS
*** A. PAID VACATION; HOLIDAYS. The Employee shall be entitled to not
less than four (4) weeks of annual vacation and all legal
holidays during which times his applicable compensation shall
be paid in full.
B. BUSINESS EXPENSES. The Employee is authorized to incur, and
will be entitled to receive prompt reimbursement for, all
reasonable expenses incurred by the Employee in performing his
duties and carrying out his responsibilities hereunder,
including business meal, entertainment and travel expenses,
provided that the Employee complies with the applicable
policies, practices and procedures of the Company relating to
the submission of expense reports, receipts or similar
documentation of those expenses. The Company shall either pay
directly or promptly reimburse the Employee for such expenses
not more than twenty (20) days after the submission to the
Company by the Employee from time to time of an itemized
accounting of such expenditures for which direct payment or
reimbursement is sought. Unpaid reimbursements after such
twenty (20) day period shall accrue interest in accordance
with Section 9(K).
C. SUPPORT. While on Active Status, the Employee shall be
provided by the Company with office space, furnishings, and
facilities, reserved parking, secretarial and administrative
assistance, supplies and other support equipment (including a
computer, facsimile machine and photocopier). .
7. COVENANT NOT TO COMPETE
A. The Employee recognizes that in each of the highly competitive
businesses in which the Company is engaged, personal contact
is of primary importance in securing new orthodontic practices
and in retaining the accounts and goodwill of present
practices and protecting the business of the Company. The
Employee, therefore, agrees that during the term of his
Employment and for a period of one (1) year after the
Termination Date, he will not, within fifty (50) miles of the
geographic location in which the he has devoted substantial
attention at such location to the
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material business interests of the Company: (i) accept
employment or render service to any Person that is engaged in
a business directly competitive with the business then engaged
in by the Company or (ii) enter into or take part in or lend
his name, counsel or assistance to any business, either as
proprietor, principal, investor, partner, director, officer,
employee, consultant, advisor, agent, independent contractor,
or in any other capacity whatsoever, for any purpose that
would be competitive with the business of the Company.
B. If the provisions of this Section 7 are violated in any
material respect, the Company shall be entitled, upon
application to any court of proper jurisdiction, to a
temporary restraining order or preliminary injunction (without
the necessity of posting any bond with respect thereto) to
restrain and enjoin the Employee from that violation. If the
provisions of this Section 7 should ever be deemed to exceed
the time, geographic or occupational limitations permitted by
the applicable law, the Employee and the Company agree that
such provisions shall be and are hereby reformed to the
maximum time, geographic or occupational limitations permitted
by the applicable law.
8. CONFIDENTIAL INFORMATION
A. The Employee acknowledges that he has had and will continue to
have access to various Confidential Information. The Employee
agrees, therefore, that he will not at any time, either while
employed by the Company or afterwards, knowingly make any
independent use of, or knowingly disclose to any other person
(except as authorized by the Company) any Confidential
Information. Confidential Information shall not include (i)
information that becomes known to the public generally through
no fault of the Employee, (ii) information required to be
disclosed by law or legal process or the order of any
governmental authority under color of law, provided, that
prior to disclosing any information pursuant to this clause
(ii), the Employee shall, if possible, give prior written
notice thereof to the Company and provide the Company with the
opportunity to contest such disclosure, or (iii) the Employee
reasonably believes that such disclosure is required in
connection with the defense of a lawsuit against the Employee.
In the event of a breach or threatened breach by the Employee
of the provisions of this Section 8(A) with respect to any
Confidential Information, the Company shall be entitled to a
temporary restraining order and a preliminary and permanent
injunction (without the necessity of posting any bond in
connection therewith) restraining the Employee from
disclosing, in whole or in part, that Confidential
Information. Nothing herein shall be construed as prohibiting
the Company from pursuing any other available remedy for that
breach or threatened breach, including the recovery of
damages.
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B. The Employee shall disclose promptly to the Company any and
all conceptions and ideas for inventions, improvements, and
valuable discoveries, whether patentable or not, which are
conceived or made by the Employee solely or jointly with any
other Person or Persons during the period of his Employment
and which pertain primarily to the material business
activities of the Company, and the Employee hereby assigns and
agrees to assign all his interests therein to the Company or
to its nominee; whenever requested to do so by the Company,
the Employee shall execute any and all applications,
assignments or other instruments which the Company shall deem
necessary to apply for and obtain Letters of Patent of the
United States or any foreign country or to otherwise protect
the Company's interest therein. These obligations shall (i)
continue beyond the Termination Date with respect to
inventions, improvements, and valuable discoveries, whether
patentable or not, conceived, made or acquired by the Employee
during the period of his Employment and (ii) be binding upon
the Employee's assigns, executors, administrators and other
legal representatives.
9. GENERAL PROVISIONS
A. SEVERABILITY. If any one or more of the provisions of this
Agreement shall, for any reason, be held or found by final
judgment of a court of competent jurisdiction to be invalid,
illegal or unenforceable in any respect, (i) such invalidity,
illegality or unenforceability shall not affect any other
provisions of this Agreement, (ii) this Agreement shall be
construed as if such invalid, illegal or unenforceable
provision had never been contained herein (except that this
clause (ii) shall not prohibit any modification allowed under
Section 7(B)), and (iii) if the effect of a holding or finding
that any such provision is invalid, illegal or unenforceable
is to modify to the Employee's detriment, reduce or eliminate
any compensation, reimbursement, payment, allowance or other
benefit to the Employee intended by the Company and Employee
in entering into this Agreement, the Company shall, within
thirty (30) days after the date of such finding or holding,
negotiate and expeditiously enter into an agreement with the
Employee which contains alternative provisions (reasonably
acceptable to the Employee) that will restore to the Employee
(to the extent lawfully permissible) substantially the same
economic, substantive and income tax benefits and legal rights
the Employee would have enjoyed had such provision been upheld
as legal, valid and enforceable.
B. NONEXCLUSIVITY OF RIGHTS. Nothing herein shall prevent or
limit the Employee's continuing or future participation in any
Compensation Plan or, subject to Section 9(N), limit or
otherwise affect such rights as the Employee may have under
any other contract or agreement with the
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<PAGE>
Company. Vested benefits and other amounts to which the
Employee is or becomes entitled to receive under any
Compensation Plan on or after the Termination Date shall be
payable in accordance with that Compensation Plan, except as
expressly modified hereby.
C. FULL SETTLEMENT. The Company's obligations to make the
payments provided for in, and otherwise to perform its
undertakings in, this Agreement shall not be affected by any
right of set-off, counterclaim, recoupment, defense or other
action, claim or right the Company may have against the
Employee or others. In no event shall the Employee be
obligated to seek other employment or take any other action by
way of mitigation of the amounts payable to the Employee under
any provision hereof, and those amounts shall not be reduced,
regardless of whether the Employee obtains other employment or
becomes self-employed.
D. SUCCESSORS.
(i) This Agreement is personal to the Employee and, without
the prior written consent of the Company, is not assignable by
the Employee otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit and be
enforceable by the Employee's legal representatives acting in
their capacities as such pursuant to applicable law.
(ii) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns. If
the Employee is not an Executive Officer, but is an officer of
a subsidiary of the Company, the Company shall be entitled to
assign all its obligations hereunder to that subsidiary and
treat the Employee as an employee of that subsidiary for all
purposes, but the Company shall remain liable for the full,
timely performance of all the obligations so assigned as if
the assignment had not been made.
(iii) The Company shall require any successor (direct or
indirect and whether by purchase, merger, consolidation, share
exchange or otherwise) to the business, properties and assets
of the Company substantially as an entirety expressly to
assume and agree to perform this Agreement in the same manner
and to the same extent the Company would have been required to
perform it had no such succession taken place.
E. AMENDMENTS; WAIVERS. This Agreement may not be amended or
modified except by a written agreement executed and delivered
by the parties hereto or their respective successors or legal
representatives acting in their capacities as such pursuant to
applicable law.
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F. NOTICES. All notices and other communications under this
Agreement shall be in writing and shall be given by hand
delivery or by registered or certified mail, return receipt
requested, postage prepaid, addressed to the appropriate
Person at the address of such Person set forth below (or at
such other address as such Person may designate by written
notice to each other party in accordance herewith):
(a) if to the Employee, addressed as follows:
MICHAEL W. HARLAN
12111 Pinerock
Houston, Texas 77024; and
(b) if to the Company, addressed as follows:
APPLE ORTHODONTIX, INC.
One West Loop South, Suite 100
Houston, Texas 77027
Attn: Corporate Secretary
G. NO WAIVER. The failure of the Company or the Employee to
insist on strict compliance with any provision of, or to
assert any right under, this Agreement (including the right of
the Employee to terminate his Employment for Good Reason or by
reason of a Change of Control pursuant to Section 5(B) (i))
shall not be deemed a waiver of that provision or of any other
provision of or right under this Agreement.
H. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF TEXAS, WITHOUT REFERENCE TO ANY
PRINCIPLES OF CONFLICTS OF LAWS.
I. JURISDICTION AND VENUE. The Company irrevocably consents with
respect to any action, suit or other legal proceeding
pertaining directly to this Agreement or to the interpretation
or enforcement of any of the Employee's rights hereunder to
service of process in the State of Texas and hereby waives any
right to contest or oppose receipt of such service of process.
The Company irrevocably (i) agrees that any such action, suit
or other legal proceeding may be brought in the courts of such
state or in the courts of the United States sitting in such
state, (ii) consents to the jurisdiction of each such court in
any such action, suit or other legal proceeding, and (iii)
waives any objection it may have to the laying of
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venue of any such action, suit or other legal proceeding in
any of such courts.
J. HEADINGS. The headings of Sections and subsections hereof are
included solely for convenience of reference and shall not
control the meaning or interpretation of any of the provisions
of this Agreement.
K. INTEREST. If any amounts required to be paid or reimbursed to
the Employee hereunder are not so paid or reimbursed at the
times provided herein (including amounts required to be paid
by the Company pursuant to Sections 6 and 10, those amounts
shall accrue interest compounded daily at the annual
percentage rate which is three percentage points (3%) above
the interest rate announced by Texas Commerce Bank National
Association, Houston, Texas (or its successor), from time to
time, as its Base Rate (or prime lending rate), from the date
those amounts were required to have been paid or reimbursed to
the Employee until those amounts are finally and fully paid or
reimbursed; provided, however, that in no event shall the
amount of interest contracted for, charged or received
hereunder exceed the maximum non-usurious amount of interest
allowed by applicable law.
L. PUBLICITY. The Company agrees with the Employee that, except
to the extent required by law or legal process (including the
Exchange Act and the Securities Act), it will not make or
publish, without the prior written consent of the Employee,
any written or oral statement concerning the terms of the
Employee's employment relationship with the Company and will
not, if a Notice of Termination is given by either the Company
or the Employee for any reason, publish or cause to be
published any statement concerning the Employee, including his
work-related performance or the reasons or basis for the
giving of that Notice of Termination.
M. TAX WITHHOLDING. Notwithstanding any other provision hereof,
the Company may withhold from amounts payable hereunder all
Federal, state, local and foreign taxes that are required to
be withheld by applicable laws or regulations.
N. ENTIRE AGREEMENT. The Company and the Employee (i) acknowledge
that this Agreement supersedes all prior written and oral
agreements between them with respect to the employment of the
Employee by the Company.
10. INTENDED BENEFITS TO EMPLOYEE; PAYMENT OF EXPENSES;
RESOLUTION OF DISPUTES
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A. INTENDED BENEFITS; PAYMENT OF EXPENSES. In entering into this
Agreement the Company intends that the Employee receive
without reduction or delay all the intended benefits of this
Agreement and that those benefits, and the terms and
conditions hereof, be construed in a manner most favorable to
the Employee; the Company, therefore, agrees that it will
strive expeditiously and in good faith to construe and resolve
in the Employee's favor and to his benefit any ambiguities or
uncertainties that may be created by the express language
hereof. If, however, at any time during the term hereof or
afterwards: (i) there should exist a dispute or conflict
between the Employee and the Company or another Person as to
the validity, interpretation or application of any term or
condition hereof, or as to the Employee's entitlement to any
benefit intended to be bestowed hereby, which is not resolved
to the satisfaction of the Employee, (ii) the Employee must
(a) defend the validity of this Agreement, (b) contest any
determination by the Company concerning the amounts payable
(or reimbursable) by the Company to the Employee, or (C)
determine in any tax year of the Employee the tax consequences
to the Employee of any amounts payable (or reimbursable) under
Section 4(C)or 4(B)(iii), or (iii) the Employee must prepare
responses to an Internal Revenue Service ("IRS") audit of, or
otherwise defend, his personal income tax return for any year
the subject of any such audit, or an adverse determination,
administrative proceedings or civil litigation arising
therefrom that is occasioned by or related to an audit by the
IRS of the Company's income tax returns, then the Company
hereby unconditionally agrees: (a) on written demand of the
Company by the Employee, to provide sums sufficient to advance
and pay on a current basis (either by paying directly or by
reimbursing the Employee) not less than thirty (30) days after
a written request therefor is submitted by the Employee, the
Employee's out of pocket costs and expenses (including
attorney's fees, expenses of investigation, travel, lodging,
copying, delivery services and disbursements for the fees and
expenses of experts, etc.) incurred by the Employee in
connection with any such matter; (b) the Employee shall be
entitled, upon application to any court of competent
jurisdiction, to the entry of a mandatory injunction without
the necessity of posting any bond with respect thereto which
compels the Company to pay or advance such costs and expenses
on a current basis; and(C)the company's obligations under this
Section 10(A) will not be affected if the Employee is not the
prevailing party in the final resolution of any such matter.
B. RESOLUTION OF DISPUTES. If a dispute of any type referred to
in Section 10(A) arises between the Company and the Employee
and they fail to resolve that dispute by direct negotiation,
the Company and the Employee agree that the next step taken to
resolve that dispute, prior to either party initiating any
litigation to resolve that dispute (not including any
litigation that may be required to enforce the Employee's
rights to the
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payment or advancement of expenses and legal fees on a current
basis pursuant to Section 10(A)) shall be to submit the
dispute to an agreed Alternative Dispute Resolution ("ADR")
process, to which process the parties shall strive diligently
in good faith to agree within ten (10) business days after
either party has given written notice to the other party that
it is unable to concur in the other party's final proposed
negotiated resolution of the dispute. If the Company and the
Employee are unable to agree in writing to an acceptable ADR
process within that ten (10) business day period, then the
parties shall submit to a mandatory ADR process by making
joint application to the then Chief United States Federal
District Judge in the Southern District of Texas for the
selection of an ADR process for the parties. The parties shall
diligently in good faith participate in the ADR process chosen
by that judge. If the parties are unable to resolve their
dispute after diligent good faith participation in the ADR
process, then either party shall be free to initiate such
litigation as that party deems appropriate under the
circumstances. Under no circumstances shall the Employee be
obligated to pay for the cost of any ADR process or to pay or
reimburse the Company for any attorneys' fees, costs or other
expenses incurred by the Company in connection with any
process undertaken by the Employee to resolve disputes under
this Agreement. As used in this Section 10, the term
"Employee" includes, if the Employee has died or become
incompetent as a matter of applicable law, the Employee's
legal representative acting in his capacity as such under
applicable law.
11. INDEMNIFICATION
The Employee shall be indemnified by the Company to the maximum
extent permitted by the law of Delaware, the state of the Company's
incorporation, and the law of the state of incorporation of any
subsidiary of the Company of which the Employee is a director or an
officer or employee, as the same may be in effect from time to time.
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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the day and year indicated above.
APPLE ORTHODONTIX, INC.
By:/s/ JOHN G. VONDRAK
John G. Vondrak
Chief Executive Officer
EMPLOYEE
By:/s/MICHAEL W. HARLAN
MICHAEL W. HARLAN
Employee's Permanent Address:
12111 Pinerock
Houston, Texas 77024
29
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), is entered into on February
__, 1997 by and between APPLE ORTHODONTIX, INC., a Delaware corporation (the
"Company") and W. DANIEL COOK (the "Employee").
R E C I T A L S:
In entering into this Agreement, the Company desires to provid the
Employee with substantial incentives to serve the Company as a senior executive
performing at the highest levels of leadership and stewardship, without
distraction or concern over minimum compensation, benefits or tenure, to develop
and implement the Company's initial development plan and thereafter assist in
managing the Company's future growth and development and maximizing the returns
to the Company's stockholders.
NOW, THEREFORE, in consideration of the foregoing and the mutual prov
sions contained herein, and for other good and valuable consideration, the
parties hereto agree with each other as follows:
1. CERTAIN DEFINITIONS
A. CERTAIN DEFINITIONS. As used herein, the following terms have
the meanings assigned to them below:
"ACQUIRING PERSON" means any Person who or which, together
with all Affiliates and Associates of such Person, is or are
the Beneficial Owner of twenty-five percent (25%) or more of
the shares of Common Stock then outstanding, but does not
include any Exempt Person; provided, however, that a Person
shall not be or become an Acquiring Person if such Person,
together with its Affiliates and Associates, shall become the
Beneficial Owner of twenty-five percent (25%) or more of the
shares of Common Stock then outstanding solely as a result of
a reduction in the number of shares of Common Stock
outstanding due to the repurchase of Common Stock by the
Company, unless and until such time as such Person or any
Affiliate or Associate of such Person shall purchase or
otherwise become the Beneficial Owner of additional shares of
Common Stock constituting one percent (1%) or more of the then
outstanding shares of Common Stock or any other Person (or
Persons) who is (or collectively are) the Beneficial Owner of
shares of Common Stock constituting one percent (1%) or more
of the then outstanding shares of Common Stock shall become an
Affiliate or Associate of such Person,
<PAGE>
unless, in either such case, such Person, together with all
Affiliates and Associates of such Person, is not then the
Beneficial Owner of twenty-five percent (25%) or more of the
shares of Common Stock then outstanding.
"AFFILIATE" has the meaning ascribed to that term in Exchange
Act Rule 12b-2.
"ANNUAL CASH COMPENSATION" of the Employee for any calendar
year means the sum of the salary and bonus earned by the
Employee during that calendar year, including all amounts
deferred at the election of the Employee pursuant to a
Compensation Plan intended to qualify as a plan under Section
401(k) of the Code or otherwise. If salary or bonus is paid in
whole or in part in property other than cash (such as Common
Stock) the amount so paid shall be the fair market value
thereof on the date of payment.
"AVERAGE ANNUAL CASH COMPENSATION" of the Employee means, as
of the Separation Effective Date, the average of (a) the
Annual Cash Compensation earned by the Employee in each of the
two (2) calendar years next preceding that date or, if fewer
than two (2) calendar years have occurred prior to that date
and since the Effective Date, (b) the average of the Annual
Cash Compensation in any calendar year restated on an
annualized basis.
"BASE SALARY" means the guaranteed minimum annual salary
payable by the Company to the Employee pursuant to Section
4(A).
"BENEFICIAL OWNER" is as defined in Exchange Act Rule 13d-3.
"CAUSE" to permit the Company to terminate the Employee's
Employment pursuant to the terms hereof means: (a) the
Employee's final conviction of a felony crime that involved
moral turpitude or that enriched the Employee at the expense
of the Company; (b) the Employee's deliberate, intentional or
highly reckless continuing failure to perform his duties and
responsibilities hereunder; or (c) beginning the period of
time after the Company has reported negative net revenues in
its reports to the Securities and Exchange Commission for six
(6) consecutive fiscal quarters.
"CHANGE OF CONTROL" means the occurrence of any of the
following events that occurs after the IPO Closing Date: (a)
any Person becomes an Acquiring Person; (b) at any time the
then Continuing Directors cease
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to constitute a majority of the members of the Board; (c) a
merger of the Company with or into, or a sale by the Company
of its properties and assets substantially as an entirety to,
another Person occurs and, immediately after that occurrence,
any Person, other than an Exempt Person, together with all
Affiliates, shall be the Beneficial Owner of twenty-five
percent (25%) or more of the total voting power of the then
outstanding Voting Shares of the Person surviving that
transaction (in the case or a merger or consolidation) or the
Person acquiring those properties and assets substantially as
an entirety.
"CHANGE OF CONTROL PAYMENT" means at any time the amount equal
to three (3) times the Employee's highest Base Salary during
the term of this Agreement.
"CODE" means the Internal Revenue Code of 1986.
"COMMON STOCK" means the common stock of the Company.
"COMPANY" means (a) APPLE ORTHODONTIX, INC., a Delaware
corporation, and (b) any Person that assumes the obligations
of "the Company" hereunder, by operation of law, pursuant to
Section 9(D)(iii) or otherwise.
"COMPENSATION PLAN" means any compensation arrangement, plan,
policy, practice or program established, maintained or
sponsored by the Company or any subsidiary of the Company, or
to which the Company or any subsidiary of the Company
contributes, on behalf of any Executive Officer or any member
of the family of any Executive Officer, (a) including (I) any
"employee pension benefit plan" (as defined in Section 3(2) of
ERISA) or other "employee benefit plan" (as defined in Section
3(3) of ERISA), (ii) any other retirement and savings plan,
including any supplemental benefit arrangement relating to any
plan intended to be qualified under Section 401(a) of the Code
or whose benefits are limited by the Code or ERISA, (iii) any
"employee welfare plan" (as defined in Section 3(1) of ERISA),
(iv) any arrangement, plan, policy, practice or program
providing for severance pay, deferred compensation or
insurance benefit, (v) any plan which provides for incentive,
bonus or other performance-based awards of cash, stock , stock
appreciation rights or other restricted stock option plan, not
otherwise included in this definition, and (vi) any
arrangement, plan, policy, practice or program (A)
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authorizing and providing for the payment or reimbursement of
expenses attributable to first-class air travel and
first-class hotel occupancy while on travel or (B) providing
for the payment of business luncheon and country club dues,
long-distance charges, mobile phone monthly air time or other
recurring monthly charges or any other fringe benefit,
allowance or accommodation of employment, but (b) excluding
any compensation arrangement, plan, policy, practice or
program to the extent it provides for annual base salary.
"COMPENSATION COMMITTEE" means the committee of the Board to
which the Board has delegated duties respecting the
compensation of Executive Officers and the administration of
Incentive Plans, if any, intended to qualify for the Exchange
Act Rule 16b-3 exemption.
"CONFIDENTIAL INFORMATION" means, with respect to the Company
or any subsidiary of the Company, all trade secrets and other
confidential, nonpublic and/or proprietary information of that
Person, including information derived from reports,
investigations, research, work in progress, codes, marketing
and sale programs, customer lists, records of customer service
requirements, capital expenditure projects, cost summaries,
pricing formulae, contract analyses, financial information,
projections, confidential filings with any governmental
authority and all other confidential, nonpublic concepts,
methods of doing business, ideas, materials or information
prepared or performed for, by or on behalf of that Person.
"CPI" means for any period the Consumer Price Index for All
Urban Consumers--All Items Index for Houston, Texas (or any
substantially similar index published for the same area), as
published by the United States Department of Labor, Bureau of
Labor Statistics (or its successor) for that period.
"CONTINUING DIRECTOR" means at any time any individual who
then (a) is a member of the Board and was a member of the
Board as of the IPO Closing Date or whose nomination for his
first election, or that first election, to the Board following
that date was recommended or approved by a majority of the
then Continuing Directors (acting separately or as a part of
any action taken by the Board or any committee thereof) and
(b) is not an Acquiring Person, an Affiliate or Associate of
an Acquiring Person or a nominee or representative of an
Acquiring Person or of any
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<PAGE>
such Affiliate or Associate.
"DISABILITY" of the Employee means the Employee has been
determined, as a result of a physical or mental illness or
personal injury he has incurred (including illness or injury
resulting from any substance abuse), by a Qualified Physician,
to be unable to perform, at the time of that determination
and, in all reasonable medical likelihood, indefinitely
thereafter, the normal duties then most recently assigned,
under and in accordance with the terms hereof, to the Employee
during the term hereof; provided that, the determination
whether the Employee has incurred a Disability shall be made
by the Company by it causing the selection of three (3)
Qualified Physicians, the majority determination of which
shall be binding on the Company (a) one (1) of whom shall be
selected by the Employee, (b) one (1) of whom shall be
selected by the Company and (c) the remaining one (1) of whom
shall be selected by the Qualified Physicians selected by the
Employee and the Company pursuant to clauses (a) and (b) of
this proviso and the fees and expenses of whom will be shared
and paid in equal amounts by the Employee and the Company, if:
(1)(A) the Company has reasonably withheld its consent to the
Qualified Physician, if any, selected by the Employee or (B)
the Employee has reasonably withheld his consent to the
Qualified Physician, if any, selected by the Company and (2)
the Qualified Physicians selected by the Employee and the
Company disagree as to whether the Employee has incurred a
Disability. For purposes of this definition, if the Employee
is unable by reason of illness or injury to give an informed
consent to the performance of the treatment of that illness or
injury, a Qualified Physician selected by any Person who is
authorized by applicable law to give that consent will be
deemed to have been selected by the Employee.
"EFFECTIVE DATE" means the date that the Registration
Statement on Form S-1, relating to an unwritten initial public
offering of the Company's Common Stock (the "IPO"), is filed
initially with the Securities and Exchange Commission.
"ERISA" means the Employee Retirement Income Security Act of
1974.
"EMPLOYMENT" means the salaried employment of the Employee by
the Company or at the direction of the Company hereunder.
"EXCHANGE ACT" means the Securities Exchange Act of 1934.
5
<PAGE>
"EXECUTIVE OFFICER" means any of the chairman of the board,
the chief executive officer, the chief operating officer, the
chief financial officer, the president, any executive or
senior vice president or the general counsel of the Company.
"EXEMPT PERSON" means (a) (1) the Company, any subsidiary of
the Company, any employee benefit plan of the Company or of
any subsidiary of the Company and (2) any Person organized,
appointed or established by the Company for or pursuant to the
terms of any such plan or for the purpose of funding any such
plan or funding other employee benefits for employees of the
Company or subsidiary of the Company and (b) the Employee, any
Affiliate of the Employee or any group (as that term is used
in Exchange Act Rule 13d-5(b)) of which the Employee or any
Affiliate of the Employee is a member. "IPO" means the first
time a registration statement filed under the Securities Act
and respecting an underwritten primary offering by the Company
of shares of Common Stock is declared effective under that act
and the shares registered by that registration statement are
issued and sold by the Company (otherwise than pursuant to the
exercise of any over-allotment option).
"IPO CLOSING DATE" means the date on which the Company first
receives payment for the shares of Common Stock it sells in
the IPO.
"NONTERMINATING PARTY" means the Employee or the Company, as
the case may be, to which the Terminating Party delivers a
Notice of Termination.
"NOTICE OF TERMINATION" to or from the Employee means a
written notice that: (a) to the extent applicable, sets forth
in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Employee's Employment,
and if the Termination Date is other than the date of receipt
of the notice, (b) sets forth that Termination Date.
"OUTSIDE DIRECTOR" means at any time a member of the Board at
that time who is not then an employee of the Company or any
subsidiary of the Company.
"PERSON" means any natural person, sole proprietorship,
corporation,
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partnership of any kind having a separate legal status,
limited liability company, business trust, unincorporated
organization or association, mutual company, joint stock
company, joint venture, estate, trust, union or employee
organization or governmental authority.
"QUALIFIED PHYSICIAN" means, in the case of any determination
whether the Employee has sustained a Disability, a physician
(a) holding an M.D. degree from a medical school located in
the United States and having a national reputation in the
United States as a leading medical school, (b) specializing
and board-certified in the treatment of the injury or illness
that has or may have caused that Disability, (c) duly licensed
to practice that specialty and (d) having admission privileges
to one or more private hospitals located in the Texas Medical
Center in Houston, Texas or in a hospital of comparable
reputation in the state in which the Employee then is
domiciled.
"REQUIRED BOARD MAJORITY" means at any time a majority of the
members of the Board at that time which includes at least a
majority of the Outside Directors at that time.
"RETIREMENT" of the Employee means the Employee terminates his
Employment on or after the date he has attained age 65.
"SECURITIES ACT" means the Securities Act of 1933.
"SEPARATION EFFECTIVE DATE" means the date the Nonterminating
Party receives the Terminating Party's Notice of Termination
(a) if the Company elects pursuant hereto to terminate the
Employee's Employment other than for Cause or (b) if the
Employee elects pursuant hereto to terminate his Employment
pursuant to the terms and conditions hereof, or by reason of
Disability.
"SEPARATION PERIOD" means the period of time which begins on
the Separation Effective Date and ends on the first to occur
of (a) the third (3rd) anniversary of that Separation
Effective Date.
"TERMINATING PARTY" means the Employee or the Company, as the
case may be, who or which terminates the Employee's Employment
by means of a Notice of Termination.
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"TERMINATION DATE" means: (a) if the Employee's Employment is
terminated by reason of the Employee's death or Retirement,
the date of that death or Retirement; (b) if the Employee's
Employment is terminated by reason of the Employee's giving a
Notice of Termination following a Change of Control pursuant
to Section 5(B)(i)(b), the first date on which the Company
pays to the Employee in full the amounts owed to the Employee
pursuant to Section 5(B)(iii); (c) if the Employee's
Employment is terminated by the Employee giving a written
notice of breach of contract which is not cured within thirty
(30) days, or 180 days written Notice Termination pursuant to
the terms hereof, and other than for Disability; (d) the date
the Employee receives the Company's Notice of Termination.
"VOTING SHARES" means: (a) in the case of any corporation,
stock of that corporation of the class or classes having
general voting power under ordinary circumstances to elect a
majority of that corporation's board of directors; and (b) in
the case of any other entity, equity interests of the class or
classes having general voting power under ordinary
circumstances equivalent to the Voting Shares of the
Corporation.
2. EMPLOYMENT
A. Subject to the terms and conditions hereof, as of the
Effective Date, the Company will employ the Employee as its
Chief Administrative Officer and the Employee will serve in
the Company's employ in that position. The Employee shall
perform such duties, and have such powers, authority,
functions, duties and responsibilities for the Company and
corporations affiliated with the Company as are commensurate
and consistent with employment as the Company's Chief
Administrative Officer. The Employee also shall have such
additional powers, authority, functions, duties and
responsibilities as may be assigned to him by the Board;
provided that, without the Employee's written consent, such
additional powers, authority, functions, duties and
responsibilities shall not be inconsistent or interfere with,
or detract from, those herein vested in, or otherwise then
being performed for the Company by the Employee.
B. The Employee shall not, at any time during his Employment,
engage in any other activities unless those activities do not
interfere materially with the Employee's duties and
responsibilities for the Company at that time, except that the
Employee shall be entitled, subject to the provisions of
Section 7, (a) to continue with such activities as the
Employee has carried
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<PAGE>
on prior to the Effective Date, including making and managing
his personal investments and participating in other business
or civic activities and (b) to serve on corporate or other
business, civic or charitable boards or committees and trade
association or similar boards or committees. The Company shall
not assign Employee duties inconsistent in any material
respect with the Employee's position as set forth above, or
otherwise diminish the Employee's position, duties or
responsibilities.
C. Pursuant to the terms and conditions of a Consulting Contract
dated __, 1996, between the Employee and the Company, the
Employee and the Company hereby agree to and ratify the
above-referenced Consulting Contract, and the Employee shall
serve as a consultant pursuant to that agreement from the date
hereof until the Effective Date.
3. TERM OF EMPLOYMENT. Subject to the provisions of Section 5, the term of
the Employee's Employment shall be for a continually renewing term of three (3)
years commencing on the Effective Date and renewing each day thereafter for an
additional day without any further action by either the Co pany or the Employee,
it being the intention of the parties that there shall be continuously a
remaining term of three (3) years' duration of the Employee's Employment until
an event has occurred as described in, or one of the parties shall have made an
appropriate election pursuant to, the provisions of Section 5. When the
Termination Date shall have occurred and the Company shall have paid to the
Employee all the applicable amounts Section 5 provides the Company shall pay as
a result of the termination of the Employee's Employment, including all amounts
accruing during the Separation Period, if any, this Agreement will terminate and
have no further force or effect, except that Sections 4(C), 8, 9, 10 and 11
shall survive that termination indefinitely and Section 7 shall survive for the
period of time provided for therein.
4. COMPENSATION
A. BASE SALARY. A Base Salary shall be payable to the Employee by
the Company as a guaranteed minimum annual amount hereunder
for each calendar year during the period from the Effective
Date to the the Termination Date, subject to the rights of the
Employee during the Separation Period. That Base Salary shall
be payable in the intervals consistent with the Company's
normal payroll schedules (but in no event less infrequently
than semi-monthly), shall be payable initially at the annual
rate of $120,000 and shall be increased (but not decreased or
adjusted other than as provided in Section 5) as follows:
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(i) on the first and each subsequent anniversary of the
Effective Date, by the same percentage increase (if any) in
the CPI for the twelve (12) month period immediately preceding
such anniversary;
(ii) on the first and each subsequent anniversary of the
Effective Date, by such additional amount as shall be
determined in the sole discretion of the Compensation
Committee, but only in such form and to such extent as the
Compensation Committee may from time to time approve, as
evidenced by the written minutes or records of the
Compensation Committee and its written notices of such
determinations or approvals to the Employee; and
(iii) if the Employee relocates from a state without a
personal income tax at the time of his relocation to a state
having a personal income tax, or if the Employee resides in a
state without a personal income tax on the date hereof which
subsequently adopts a personal income tax, then, in either
case, the Base Salary in effect at the time of such relocation
or adoption, as applicable, shall immediately be increased by
the amount equal to the Base Salary immediately prior to this
increase multiplied by seventy percent (70%) of the highest
personal income tax rate of such state; for example, if the
Employee relocates from a state without a personal income tax
to a state having a personal income tax and the highest rate
of that tax is six percent (6%) when the Base Salary is
$200,000, then the Base Salary will be increased by $8,400
(computed at 70% x 6% x $200,000); provided, however, that the
obligation of the Company to pay the Base Salary earned by the
Employee for his service in the period beginning on the
Effective Date and ending on the date that is the first to
occur of (a) the IPO Closing Date, (b) the Termination Date or
(c) such other date as the Board in its sole discretion may
determine shall be deferred to the last day of that period in
such amounts as the Board in its sole discretion may from time
to time determine, on which day the Company shall pay in full
to the Employee, without interest, the aggregate earned but
unpaid amount of the Base Salary for that period. Effective as
of the Separation Effective Date, the Base Salary theretofore
in effect shall be adjusted as provided in Section 5(E).
B. OTHER COMPENSATION.
(i) The Employee shall be entitled to participate in all
Compensation Plans from time to time in effect during the term
hereof, regardless of
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whether the Employee is an Executive Officer. All awards to
the Employee under all Incentive Plans shall take into account
the Employee's positions with and duties and responsibilities
to the Company and its subsidiaries. The Company hereby
convenants and agrees to establish a health, life and
disability insurance program and a policy for reimbursement of
country club dues and related business expense reimbursements
as of the Effective Date, or to be effective as of the
Effective Date, and to establish a retirement plan and
incentive compensation plan that is effective as of the end of
the first calendar year after the IPO Effective Date.
(ii) The Company shall grant to the Employee 52.50 shares of
it's pre- IPO common stock, subject to a subscription
agreement to establish the private placement exemption for
private placement purposes.
(iii) Employer shall be responsible for the Employee's
reasonable moving expenses regarding his families' household
furnishings and goods to the city of the Corporation's
headquarters.
C. TAX INDEMNITY. Should any of the payments of Base Salary,
other incentive or supplemental compensation, benefits,
allowances, awards, payments, reimbursements or other
perquisites, or any other payment in the nature of
compensation, singly, in any combination or in the aggregate,
that are provided for hereunder to be paid to or for the
benefit of the Employee be determined or alleged to be subject
to an excise or similar purpose tax pursuant to Section 4999
of the Code, or any successor or other comparable federal,
state or local tax law by reason of being a "parachute
payment" (within the meaning of Section 280G of the Code), the
Company shall pay to the Employee such additional compensation
as is necessary (after taking into account all federal, state
and local taxes payable by the Employee as a result of the
receipt of such additional compensation) to place the Employee
in the same after-tax position (including federal, state and
local taxes) he would have been in had no such excise or
similar purpose tax (or interest or penalties thereon) been
paid or incurred. The Company hereby agrees to pay such
additional compensation within the earlier to occur of (i)
five (5) business days after the Employee notifies the Company
that the Employee intends to file a tax return taking the
position that such excise or similar purpose tax is due and
payable in reliance on a written opinion of the Employee's tax
counsel
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(such tax counsel to be chosen solely by the Employee) that it
is more likely than not that such excise tax is due and
payable or (ii) twenty-four (24) hours of any notice of or
action by the Company that it intends to take the position
that such excise tax is due and payable. The costs of
obtaining the tax counsel opinion referred to in clause (i) of
the preceding sentence shall be borne by the Company, and as
long as such tax counsel was chosen by the Employee in good
faith, the conclusions reached in such opinion shall not be
challenged or disputed by the Company. If the Employee intends
to make any payment with respect to any such excise or similar
purpose tax as a result of an adjustment to the Employee's tax
liability by any federal, state or local tax authority, the
Company will pay such additional compensation by delivering
its cashier's check payable in such amount to the Employee
within five (5) business days after the Employee notifies the
Company of his intention to make such payment. Without
limiting the obligation of the Company hereunder, the Employee
agrees, in the event the Employee makes any payment pursuant
to the preceding sentence, to negotiate with the Company in
good faith with respect to procedures reasonably requested by
the Company which would afford the Company the ability to
contest the imposition of such excise or similar purpose tax;
provided, however, that the Employee will not be required to
afford the Company any right to contest the applicability of
any such excise or similar purpose tax to the extent that the
Employee reasonably determines (based upon the opinion of his
tax counsel) that such contest is inconsistent with the
overall tax interests of the Employee.
5. TERMINATION, SEPARATION PERIOD, DISABILITY AND DEATH
A. TERMINATION OF EMPLOYMENT BY THE COMPANY.
(i) The Company shall be entitled, if acting at the direction
of the Required Board Majority, to terminate the Employee's
Employment (a) at any time for Cause or (b) subject to the
payments obligations of the Separation Period, at any time
without Cause. The Company's termination of the Employee's
Employment hereunder will be effective on
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the date the Company delivers a Notice of Termination for
Cause to the Employee pursuant hereto. Subject to the payment
provisions applicable to the Separation Period, the Employee
shall be required to vacate the premises of the Company, with
all of the Employee's personal property no later than five (5)
business days after the Notice of Termination.
(ii) If the Company terminates the Employee's Employment for
Cause, the Company promptly thereafter, and in any event
within five (5) business days thereafter, shall pay the
Employee his Base Salary to and including the end of the
calendar month of the Termination Date and the amount of all
compensation previously deferred by the Employee (together
with any accrued interest or earnings thereon), in each case
to the extent not theretofore paid, and, when that payment is
made, the Company shall, notwithstanding Section 3, have no
further or other obligations hereunder to the Employee.
(iii) If the Company otherwise terminates the Employee's
Employment, the respective rights and obligations of the
Company and the Employee during the Separation Period will be
as set forth in Section 5(E).
B. TERMINATION OF EMPLOYMENT BY THE EMPLOYEE.
(i) The Employee shall be entitled to terminate his
Employment, other than for Disability, at any time after one
hundred eighty (180) days after a Notice of Termination, (b)
by reason of a Change of Control at any time within three
hundred sixty-five (365) days after that Change of Control
occurs, or (c) at any time after thirty (30) days after
receipt of a Notice of Termination for material breach of any
provision of this Agreement, and the Company has not cured
that breach during the thirty (30) day period. The Employee's
termination of his Employment by reason of a Change of Control
will be effective on the first date on which the Change of
Control Payment shall have been paid in full to the Employee.
The Employee's termination of his Employment pursuant to (a)
and (b) above shall be effective on the Termination Date,
subject to the payment obligations of the Company during the
Separation Period.
(ii) If the Employee terminates his Employment by reason of a
Change of Control, the Company shall pay to the Employee in a
cash lump sum within five (5) business days after the date the
Company receives the Employee's Notice of Termination by
reason of that Change of Control
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<PAGE>
the amount equal to the sum of (a) the portion of the Base
Salary to and including the Termination Date which has not yet
been paid, (b) all compensation previously deferred by the
Employee (together with any accrued interest and earnings
thereon), (c) any accrued but unpaid vacation pay and (d) the
Change of Control Payment.
(iii) If the Employee terminates his Employment, other than
for Disability, the Company shall pay to the Employee, in a
cash lump sum within five (5) business days after the
Termination Date, the amount equal to the sum of (a) the
portion of the Base Salary to and including the Termination
Date which has not yet been paid, (b) all compensation
previously deferred by the Employee (together with any accrued
interest and earnings thereon) which has not yet been paid,
(c) any accrued but unpaid vacation pay and (d) the amount
equal to fifty percent (50%) of the Base Salary being paid for
the calendar year in which the Company receives the Employee's
Notice of Termination, and other than for Disability.
C. TERMINATION BY REASON OF DISABILITY. If the Employee incurs
any Disability during the term hereof, either the Employee or
the Company may terminate the Employee's Employment effective
on the third (3rd) anniversary of the date the Nonterminating
Party receives a Notice of Termination from the Terminating
Party pursuant to this Section 5(C). If the Employee's
Employment is terminated by reason of the Employee's
Disability, the respective rights and obligations of the
Company and the Employee during the Separation Period will be
as set forth in Section 5(E).
D. TERMINATION OF EMPLOYMENT BY DEATH. The Employee's Employment
shall terminate during the term hereof automatically at the
time of his death. If the Employee's Employment is terminated
by reason of the Employee's death, the Company shall pay to
the Person the Employee has designated in a written notice
delivered to the Company as his beneficiary entitled to such
payment, if any, or to the Employee's estate, as applicable,
in a cash lump sum within thirty (30) days after the
Termination Date, the amount equal to the sum of (i) the
portion of the Base Salary through the end of the month in
which the Termination Date occurs which has not yet been paid,
(ii) all compensation previously deferred by the Employee
(together with any accrued interest or earnings thereon) which
has not yet been paid, (iii) any accrued but unpaid vacation
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<PAGE>
pay and (iv) (a) the product of the Base Salary being paid for
the calendar year of death multiplied by three (3).
E. EMPLOYEE'S PAYMENT RIGHTS DURING THE SEPARATION PERIOD.
(i) The Company shall pay the Employee a Base Salary, in the
intervals consistent with the Company's normal payroll
schedules (but in no event less frequently than semi-monthly)
from the Separation Effective Date to and including the third
anniversiary thereof in the amounts determined from time to
time as follows: the Base Salary payable by the Company to the
Employee shall be as follows:
(a) if the Separation Effective Date occurs as a result
of the receipt by the Nonterminating Party of a Notice
of Termination other than for Cause, the amount equal to
the Average Annual Cash Compensation of the Employee
determined as of the Separation Effective Date; and (b)
if the Separation Effective Date occurs as a result of
the receipt by the Nonterminating Party of a Notice of
Termination for Disability pursuant to Section 5(C), the
amount equal to the amount by which (1) seventy-five
percent (75%) of the Average Annual Cash Compensation of
the Employee determined as of the Part-time Employment
Effective Date exceeds (2) the aggregate amount of
periodic payments the Employee receives during the
thirty-six (36) months beginning on that date under
Compensation Plans then in effect and providing for the
payment to the Employee solely as a result or on account
of disability; and
(b) on the first and each subsequent anniversary of the
Separation Date, the Base Salary payable pursuant to
this Section 5(E) shall be increased (but not decreased)
by the same percentage increase (if any) in the CPI for
the twelve (12) month period immediately preceding that
anniversary.
(ii) (a) The Employee shall continue to participate in all
Compensation Plans from time to time in effect during
the Separation Period, provided, however, that: (1) the
Employee shall not be entitled to receive any new award
or grant under any incentive plan, and any such new
award or grant shall be at the
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<PAGE>
sole discretion of the Compensation Committee or the
Board, as applicable, with respect to that incentive
plan; and (2) if (A) the terms of any such plan preclude
the Employee's continued participation therein or (B)
his continued participation in any such plan would or
reasonably could be expected to disqualify that plan
under the Code, the Employee shall not be entitled to
participate in that plan, but the Company instead shall
provide the Employee with the after-tax equivalent of
the benefits that would have been provided to the
Employee were a participant in that plan.
(b) For purposes of determining eligibility (including
years of service) for retirement benefits payable under
any Compensation Plan, the Employee shall be deemed to
have retired at the Termination Date.
(iii) Subject to the provisions of Section 7, the Employee
shall not be prevented from accepting other employment or
engaging in (and devoting substantially all his time to) other
business activities and shall not be required to perform any
regular duties for the Company, and the Employee may seek or
accept additional employment with any other Person. If the
Employee, at his discretion, shall accept any such additional
employment or engage in any such other business activity there
shall be no offset, reduction or effect upon any rights,
benefits or payments to which the Employee is entitled
pursuant to this Agreement. Furthermore, the Employee shall
have no obligation to account for, remit, rebate or pay over
to the Company any compensation or other amounts earned or
derived in connection with such additional employment or
business activity.
The Employee shall, however, make himself generally
available for special projects or to consult with the Company
and its employees at such times and at such places as may be
reasonably requested by the Company and which shall be
reasonably satisfactory to the Employee and consistent with
the Employee's regular duties and responsibilities in the
course of his then new occupation or other employment, if any.
(iv) Unless and until the Employee shall have sustained a
Disability, the Company shall continue to provide the Employee
with either the same or, at the Company's election, at a
different location within thirty-five (35) miles of the
Employee's principal residence, in any case reasonably
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<PAGE>
acceptable to the Employee, alternate but comparable office
space, furnishings, facilities, reserved parking, supplies,
services, equipment, secretarial and administrative assistance
that are in each case at least commensurate with the size and
quality of that which were provided to the Employee during the
calendar year immediately preceding the Separation Effective
Date pursuant to Section 6(C), but in no event less than are
being furnished or provided on the date hereof. The Company
and Employee may mutually agree upon an equivalent monthly
cash allowance in lieu of the Employee being provided all or
any part of these items.
(v) The Employee shall remain entitled to the benefits of
Section 4(C).
F. RETURN OF PROPERTY. On termination of the Employee's
Employment, however brought about, the Employee (or his
representatives) shall promptly deliver and return to the
Company all the Company's property that is in the possession
or under the control of the Employee.
G. STOCK OPTIONS. Notwithstanding any provision of this Agreement
to the contrary: (i) except in the case of a termination of
the Employee's Employment for Cause, all stock options
previously granted to the Employee under incentive plans that
have not been exercised and are outstanding as of the time
immediately prior to the Termination Date shall,
notwithstanding any contrary provision of any applicable
incentive plan, remain outstanding (and continue to become
exercisable pursuant to their respective terms) until
exercised or the expiration of their term, whichever is
earlier; and (ii) in the case of a termination of the
Employee's Employment for Cause, all stock options previously
granted to the Employee under incentive plans that have not
been exercised and are outstanding as of the time immediately
prior to the Termination Date shall, notwithstanding any
contrary provision of any applicable incentive plan, remain
outstanding and continue to be exercisable until exercised or
the date that is ten (10) days after the Termination Date,
whichever is earlier. No stock option previously granted to
the Employee under any incentive plan shall, notwithstanding
any contrary provision of that incentive plan, expire or fail
to become exercisable or, if exercisable, cease to be
exercisable by reason of the occurrence of the Employee's
Separation Effective Date.
6. OTHER EMPLOYEE RIGHTS
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A. PAID VACATION; HOLIDAYS. The Employee shall be entitled to not
less than four (4) weeks of annual vacation and all legal
holidays during which times his applicable compensation shall
be paid in full. Further, it is understood by the Employee
that all paid vacation days shall be taken by or on December
31 of the calender year. Any and all vacation days which were
not taken by said date, shall be paid to the Employee on the
second pay period of the following January.
B. BUSINESS EXPENSES. The Employee is authorized to incur, and
will be entitled to receive prompt reimbursement for, all
reasonable expenses incurred by the Employee in performing his
duties and carrying out his responsibilities hereunder,
including business meal, entertainment and travel expenses,
provided that the Employee complies with the applicable
policies, practices and procedures of the Company relating to
the submission of expense reports, receipts or similar
documentation of those expenses. The Company shall either pay
directly or promptly reimburse the Employee for such expenses
not more than twenty (20) days after the submission to the
Company by the Employee from time to time of an itemized
accounting of such expenditures for which direct payment or
reimbursement is sought. Unpaid reimbursements after such
twenty (20) day period shall accrue interest in accordance
with Section 9(K).
C. SUPPORT. During the term hereof, the Employee shall be
provided by the Company with office space, furnishings, and
facilities, reserved parking, secretarial and administrative
assistance, supplies and other support equipment (including a
computer, facsimile machine and photocopier).
7. COVENANT NOT TO COMPETE
A. The Employee re ognizes that in each of the highly competitive
businesses in which the Company is engaged, personal contact
is of primary importance in securing new orthodontic practices
and in retaining the accounts and goodwill of present
practices and protecting the business of the Company. The
Employee, therefore, agrees that during the term of Employment
and for a period of one (1) year after the Termination Date,
Employee will not, within fifty (50) miles of the corporate
headquarters: (i) accept employment or render service to any
Person that is engaged in a business directly competitive with
the business then engaged in by the
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<PAGE>
Company or (ii) enter into or take part in or lend Employee's
name, counsel or assistance to any business, either as
proprietor, principal, investor, partner, director, officer,
employee, consultant, advisor, agent, independent contractor,
or in any other capacity whatsoever, for any purpose that
would be competitive with the business of the Company.
B. If the provisions of this Section 7 are violated in any
material respect, the Company shall be entitled, upon
application to any court of proper jurisdiction, to a
temporary restraining order or preliminary injunction (without
the necessity of posting any bond with respect thereto) to
restrain and enjoin the Employee from that violation. If the
provisions of this Section 7 should ever be deemed to exceed
the time, geographic or occupational limitations permitted by
the applicable law, the Employee and the Company agree that
such provisions shall be and are hereby reformed to the
maximum time, geographic or occupational limitations permitted
by the applicable law.
8. CONFIDENTIAL INFORMATION
A. The Employee acknowledges that the Employee has had and will
continue to have access to various Confidential Information.
The Employee agrees, therefore, that Employee will not at any
time, either while employed by the Company or afterwards,
knowingly make any independent use of, or knowingly disclose
to any other person (except as authorized by the Company) any
Confidential Information. Confidential Information shall not
include (i) information that becomes known to the public
generally through no fault of the Employee, (ii) information
required to be disclosed by law or legal process or the order
of any governmental authority under color of law, provided,
that prior to disclosing any information pursuant to this
clause (ii), the Employee shall, if possible, give prior
written notice thereof to the Company and provide the Company
with the opportunity to contest such disclosure, or (iii) the
Employee reasonably believes that such disclosure is required
in connection with the defense of a lawsuit against the
Employee. In the event of a breach or threatened breach by the
Employee of the provisions of this Section 8(A) with respect
to any Confidential Information, the Company shall be entitled
to a temporary restraining order and a preliminary and
permanent injunction (without the necessity of posting any
bond in connection therewith) restraining the Employee from
disclosing, in whole or in part, that Confidential
Information. Nothing herein shall be construed as prohibiting
the
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Company from pursuing any other available remedy for that
breach or threatened breach, including the recovery of
damages.
B. The Employee shall disclose promptly to the Company any and
all conceptions and ideas for inventions, improvements, and
valuable discoveries, whether patentable or not, which are
conceived or made by the Employee solely or jointly with any
other Person or Persons during the term of Employment and
which pertain primarily to the material business activities of
the Company, and the Employee hereby assigns and agrees to
assign all his interests therein to the Company or to its
nominee; whenever requested to do so by the Company, the
Employee shall execute any and all applications, assignments
or other instruments which the Company shall deem necessary to
apply for and obtain Letters of Patent of the United States or
any foreign country or to otherwise protect the Company's
interest therein. These obligations shall (i) continue beyond
the Termination Date with respect to inventions, improvements,
and valuable discoveries, whether patentable or not,
conceived, made or acquired by the Employee during the term of
Employment and (ii) be binding upon the Employee's assigns,
executors, administrators and other legal representatives.
9. GENERAL PROVISIONS
A. SEVERABILITY. If any one or more of the provisions of this
Agreement shall, for any reason, be held or found by final
judgment of a court of competent jurisdiction to be invalid,
illegal or unenforceable in any respect, (i) such invalidity,
illegality or unenforceability shall not affect any other
provisions of this Agreement, (ii) this Agreement shall be
construed as if such invalid, illegal or unenforceable
provision had never been contained herein (except that this
clause (ii) shall not prohibit any modification allowed under
Section 7(B)), and (iii) if the effect of a holding or finding
that any such provision is invalid, illegal or unenforceable
is to modify to the Employee's detriment, reduce or eliminate
any compensation, reimbursement, payment, allowance or other
benefit to the Employee intended by the Company and Employee
in entering into this Agreement, the Company shall, within
thirty (30) days after the date of such finding or holding,
negotiate and expeditiously enter into an agreement with the
Employee which contains alternative provisions (reasonably
acceptable to the Employee) that will restore to the Employee
(to the extent lawfully permissible) substantially the same
economic,
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substantive and income tax benefits and legal rights the
Employee would have enjoyed had such provision been upheld as
legal, valid and enforceable.
B. NONEXCLUSIVITY OF RIGHTS. Nothing herein shall prevent or
limit the Employee's continuing or future participation in any
Compensation Plan or, subject to Section 9(N), limit or
otherwise affect such rights as the Employee may have under
any other contract or agreement with the Company. Vested
benefits and other amounts to which the Employee is or becomes
entitled to receive under any Compensation Plan on or after
the Termination Date shall be payable in accordance with that
Compensation Plan, except as expressly modified hereby.
C. FULL SETTLEMENT. The Company's obligations to make the
payments provided for in, and otherwise to perform its
undertakings in, this Agreement shall not be affected by any
right of set-off, counterclaim, recoupment, defense or other
action, claim or right the Company may have against the
Employee or others. In no event shall the Employee be
obligated to seek other employment or take any other action by
way of mitigation of the amounts payable to the Employee under
any provision hereof, and those amounts shall not be reduced,
regardless of whether the Employee obtains other employment or
becomes self-employed.
D. SUCCESSORS.
(i) This Agreement is personal to the Employee and, without
the prior written consent of the Company, is not assignable by
the Employee otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit and be
enforceable by the Employee's legal representatives acting in
their capacities as such pursuant to applicable law.
(ii) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns. If
the Employee is not an Executive Officer, but is an officer of
a subsidiary of the Company, the Company shall be entitled to
assign all its obligations hereunder to that subsidiary and
treat the Employee as an employee of that subsidiary for all
purposes, but the Company shall remain liable for the full,
timely performance of all the obligations so assigned as if
the assignment had not been made.
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(iii) The Company shall require any successor (direct or
indirect and whether by purchase, merger, consolidation, share
exchange or otherwise) to the business, properties and assets
of the Company substantially as an entirety expressly to
assume and agree to perform this Agreement in the same manner
and to the same extent the Company would have been required to
perform it had no such succession taken place.
E. AMENDMENTS; WAIVERS. This Agreement may not be amended or
modified except by a written agreement executed and delivered
by the parties hereto or their respective successors or legal
representatives acting in their capacities as such pursuant to
applicable law.
F. NOTICES. All notices and other communications under this
Agreement shall be in writing and shall be given by hand
delivery or by registered or certified mail, return receipt
requested, postage prepaid, addressed to the appropriate
Person at the address of such Person set forth below (or at
such other address as such Person may designate by written
notice to each other party in accordance herewith):
(a) if to the Employee, addressed as follows:
W. Daniel Cook
745 International Blvd.
Houston, TX 77057 and
(b) if to the Company, addressed as follows:
APPLE ORTHODONTIX, INC.
One West Loop South, Suite 100
Houston, Texas 77027
Attn: Corporate Secretary
G. NO WAIVER. The failure of the Company or the Employee to
insist on strict compliance with any provision of, or to
assert any right under, this agreement (including the right of
the Employee to terminate his Employment for Good Reason or by
reason of a Change of Control pursuant to Section 5(B)(i))
shall not be deemed a waiver of that provision or of any other
provision of or right under this Agreement.
H. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED
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BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
TEXAS, WITHOUT REFERENCE TO ANY PRINCIPLES OF CONFLICTS OF
LAWS.
I. JURISDICTION AND VENUE. The Company irrevocably consents with
respect to any action, suit or other legal proceeding
pertaining directly to this Agreement or to the interpretation
or enforcement of any of the Employee's rights hereunder to
service of process in the State of Texas and hereby waives any
right to contest or oppose receipt of such service of process.
The Company irrevocably (i) agrees that any such action, suit
or other legal proceeding may be brought in the courts of such
state or in the courts of the United States sitting in such
state, (ii) consents to the jurisdiction of each such court in
any such action, suit or other legal proceeding, and (iii)
waives any objection it may have to the laying of venue of any
such action, suit or other legal proceeding in any of such
courts.
J. HEADINGS. The headings of Sections and subsections hereof are
included solely for convenience of reference and shall not
control the meaning or interpretation of any of the provisions
of this Agreement.
K. INTEREST. If any amounts required to be paid or reimbursed to
the Employee hereunder are not so paid or reimbursed at the
times provided herein (including amounts required to be paid
by the Company pursuant to Sections 6 and 10, those amounts
shall accrue interest compounded daily at the annual
percentage rate which is three percentage points (3%) above
the interest rate announced by Texas Commerce Bank National
Association, Houston, Texas (or its successor), from time to
time, as its Base Rate (or prime lending rate), from the date
those amounts were required to have been paid or reimbursed to
the Employee until those amounts are finally and fully paid or
reimbursed; provided, however, that in no event shall the
amount of interest contracted for, charged or received
hereunder exceed the maximum non-usurious amount of interest
allowed by applicable law.
L. PUBLICITY. The Company agrees with the Employee that, except
to the extent required by law or legal process (including the
Exchange Act and the Securities Act), it will not make or
publish, without the prior written consent of the Employee,
any written or oral statement concerning the terms of the
Employee's employment relationship with the Company and
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will not, if a Notice of Termination is given by either the
Company or the Employee for any reason, publish or cause to be
published any statement concerning the Employee, including his
work-related performance or the reasons or basis for the
giving of that Notice of Termination.
M. TAX WITHHOLDING. Notwithstanding any other provision hereof,
the Company may withhold from amounts payable hereunder all
Federal, state, local and foreign taxes that are required to
be withheld by applicable laws or regulations.
N. ENTIRE AGREEMENT. Except for the Consulting Contract ratified
hereby and the agreements related to the IPO, including the
Plan and Agreement of Merger, the Company and the Employee (i)
acknowledge that this Agreement supersedes all prior written
and oral agreements between them with respect to the
employment of the Employee by the Company.
10. INTENDED BENEFITS TO EMPLOYEE; PAYMENT OF EXPENSES; RESOLUTION OF
DISPUTES
A. INTENDED BENEFITS; PAYMENT OF EXPENSES. In entering into this
Agreement the Company intends that the Employee receive
without reduction or delay all the intended benefits of this
Agreement and that those benefits, and the terms and
conditions hereof, be construed in a manner most favorable to
the Employee; the Company, therefore, agrees that it will
strive expeditiously and in good faith to construe and resolve
in the Employee's favor and to his benefit any ambiguities or
uncertainties that may be created by the express language
hereof. If, however, at any time during the term hereof or
afterwards: (i) there should exist a dispute or conflict
between the Employee and the Company or another Person as to
the validity, interpretation or application of any term or
condition hereof, or as to the Employee's entitlement to any
benefit intended to be bestowed hereby, which is not resolved
to the satisfaction of the Employee, (ii) the Employee must
(a) defend the validity of this Agreement, (b) contest any
determination by the Company concerning the amounts payable
(or reimbursable) by the Company to the Employee, or (c)
determine in any tax year of the Employee the tax consequences
to the Employee of any amounts payable (or reimbursable) under
Section 4(c) or 4(B)(iii), or (iii) the Employee must prepare
responses to an Internal Revenue Service ("IRS") audit of, or
otherwise defend, his personal
24
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income tax return for any year the subject of any such audit,
or an adverse determination, administrative proceedings or
civil litigation arising therefrom that is occasioned by or
related to an audit by the IRS of the Company's income tax
returns, then the Company hereby unconditionally agrees: (a)
on written demand of the Company by the Employee, to provide
sums sufficient to advance and pay on a current basis (either
by paying directly or by reimbursing the Employee) not less
than thirty (30) days after a written request therefor is
submitted by the Employee, the Employee's out of pocket costs
and expenses (including attorney's fees, expenses of
investigation, travel, lodging, copying, delivery services and
disbursements for the fees and expenses of experts, etc.)
incurred by the Employee in connection with any such matter;
(b) the Employee shall be entitled, upon application to any
court of competent jurisdiction, to the entry of a mandatory
injunction without the necessity of posting any bond with
respect thereto which compels the Company to pay or advance
such costs and expenses on a current basis; and (c) the
company's obligations under this Section 10(A) will not be
affected if the Employee is not the prevailing party in the
final resolution of any such matter.
11. INDEMNIFICATION
Pursuant to the express terms and conditions of the Certificate of Incorporation
and Bylaws of the Company, the Company hereby ratify and confirm and enter into
an express separate contract to provide that the Employee shall be held harmless
from monetary damages and be fully indemnified by the Company to the maximum
extent permitted by the law of Delaware, the state of the Company's
incorporation, and the l w of the state of incorporation of any subsidiary of
the Company of which the Employee is a director or an officer or employee, as
the same may be in effect from time to time.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the day and year indicated above.
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<PAGE>
APPLE ORTHODONTIX, INC.
By: /s/ WILLIAM W. SHERRILL
William W. Sherrill,
Chairman of Compensation Committee
By: /s/ JOHN G. VONDRAK, D.D.S.
John G. Vondrak, D.D.S.,
Chief Executive Officer
EMPLOYEE
/s/ W. DANIEL COOK
W. Daniel Cook
Employee's Permanent Address:
745 International Blvd.
Houston, TX 77057
26
EXHIBIT 10.6
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SERVICE AGREEMENT
DATED AS OF THE ____ DAY OF ________________, 1997
BY AND BETWEEN
APPLE ORTHODONTIX, INC.
APPLE ORTHODONTIX SUBSIDIARY, INC.
__________________, D.D.S.
AND
_____________________________________________
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TABLE OF CONTENTS
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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............................................ 20
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.......................................... 23
Section 9.5 Termination by Orthodontist................................... 24
Section 9.6 Effective Date of Termination................................. 24
Section 9.7 Purchase of Assets............................................ 25
Section 9.8 Terms of Purchase............................................. 25
Section 9.9 Exception to Purchase......................................... 26
Section 9.10 Effect Upon Termination....................................... 26
ARTICLE X.................................................................................. 26
General Provisions................................................................. 26
Section 10.1 Assignment.................................................... 26
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........... 27
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................................ 28
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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.................................................. 30
Section 10.21 Defined Terms................................................. 30
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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 Subsidiary, Inc., a Delaware corporation
("Apple"), ______________, D.D.S., ("Orthodontist") and
___________________________, a California __________ (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 ____________________
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 _________________,
dated February , 1997, among AOI, ____________________, and
Orthodontist.
(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 .
(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 .
(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 .
(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 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 (v) 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 .
(p) "Loan Termination Date" shall have the meaning set forth in
SECTION .
(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 )
and the Personal Property (as defined in SECTION ), 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 California 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 .
(w) "Personal Property" shall have the meaning set forth in
SECTION .
(x) "Practice Plans" shall have the meaning set forth in
SECTION .
(y) "Premises" shall have the meaning set forth in SECTION .
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(z) "Purchase Assets" shall have the meaning set forth in
SECTION .
(aa)"Purchase Closing" shall have the meaning set forth in
SECTION .
(ab)"Security Agreement" shall have the meaning set forth in
SECTION .
(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 .
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 . 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 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 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 ), 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 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 __ miles of any Premises.
(b) The Orthodontic Entity agrees that in the event of a breach
of SECTION 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 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 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 __ 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
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
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 and 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 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 _____ 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 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 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 . The invalidity or non-enforceability of
any provision of the restrictive covenants or this ARTICLE in any respect shall
not affect the validity or enforceability of the remainder of the restrictive
covenants or this ARTICLE 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 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) Apple shall receive a base annual fee (the "Base Fee") equal to
thirteen and one-half percent (13.5%) of Orthodontic Entity's and Orthodontist's
gross revenues received from patients for orthodontic services provided ("Cash
Receipts").
(b) Apple shall receive a fee equal to $____________ to the extent that
Net Operating Amount is less than or equal to $__________.
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(c) Each month Apple shall be reimbursed for the amount of all
Orthodontic Entity and Orthodontist Expenses and all Excluded Orthodontic Entity
and Orthodontist Expenses recorded by Apple in accordance with the terms of this
Agreement.
For purposes of this SECTION 6.1, "Net Operating Amount" for any month
shall mean the Orthodontic Entity's and Orthodontist's Cash Receipts less
Orthodontic Entity and Orthodontist Expenses on a cash basis.
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.
(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
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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 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 California. 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.
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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 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 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.
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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 or SECTION or automatically extended
pursuant to the terms of SECTION .
SECTION 9.2 EXTENDED TERM. Unless earlier terminated as provided for in
either SECTION or SECTION , 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.
(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
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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 ; provided, however, that Orthodontist
shall give Apple at least one (1) year notice of such voluntary
termination. In the event termination with respect to the Orthodontist
in accordance with this SECTION , the restrictive covenants contained in
SECTION 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 ) 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 and (ii) this Agreement cannot be reformed
pursuant to Section or Section 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:
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(a) Immediately upon receipt of a termination notice pursuant to
either SECTION or SECTION ;
(b) Upon the expiration of this Agreement pursuant to SECTIONS
and ; 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 (D), SECTION (E) or
SECTION 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 ) and Apple shall be
able to exercise its option under this Section (unless this Agreement is
terminated pursuant to SECTION ) 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 and . In
connection with the purchase and sale of the Purchase Assets pursuant to this
SECTION , 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 (the "Purchase Closing") shall occur (a) on the
Termination Date if this Agreement expires pursuant to the terms of SECTIONS and
, 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 or . 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
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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.
(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
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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.
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 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 and
SECTION . In the event any governmental authority, agency or
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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 CALIFORNIA. THE PARTIES AGREE THAT THIS
AGREEMENT SHALL BE PERFORMABLE IN CALIFORNIA.
SECTION 10.11 NO WAIVER; REMEDIES CUMULATIVE. Apple shall not by any act
(except by written instrument pursuant to SECTION 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.
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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):
If to Apple: Apple Subsidiary, Inc.
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
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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 __________,
__________. Each of the parties hereto consents to the IN PERSONAM jurisdiction
of any state or federal court in __________, __________ and waives any objection
to the venue of any such suit, action or proceeding. The parties hereto
recognize that courts outside __________, __________ 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 __________, __________, 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 __________,
__________, 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. [NOTE: THE INTENT IS THAT THE BLANKS
BE FILLED IN WITH THE CITY OF AOI'S HEADQUARTERS.]
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 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.
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:_______________________
Title:____________________
Orthodontist:
_____________________________________
___________________________, D.D.S.
Apple:
APPLE ORTHODONTIX SUBSIDIARY, INC.
By:________________________________
Title:_____________________________
AOI:
APPLE ORTHODONTIX, INC.
By:_______________________________
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
-------------------------------
and
-------------------------------------------
ORTHODONTIC ENTITY PROFESSIONAL EMPLOYMENT AGREEMENTS
<PAGE>
EXHIBIT 6.4
to the
Service Agreement dated _______________________, 1997
by and between
-------------------------------
and
-------------------------------------------
FORM OF SECURITY AGREEMENT
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), is entered into on March 20,
1997 by and between APPLE ORTHODONTIX, INC., a Delaware corporation (the
"Company") and H. STEVEN WALTON (the "Employee").
R E C I T A L S:
In entering into this Agreement, the Company desires to provide he
Employee with substantial incentives to serve the Company as a senior executive
performing at the highest levels of leadership and stewardship, without
distraction or concern over minimum compensation, benefits or tenure, to develop
and implement the Company's initial development plan and thereafter assist in
managing the Company's future growth and development and maximizing the returns
to the Company's stockholders.
NOW, THEREFORE, in consideration of the foregoing and the mutual provis
ons contained herein, and for other good and valuable consideration, the parties
hereto agree with each other as follows:
1. CERTAIN DEFINITIONS
A. CERTAIN DEFINITIONS. As used herein, the following terms have
the meanings assigned to them below:
"ACQUIRING PERSON" means any Person who or which, together
with all Affiliates and Associates of such Person, is or are
the Beneficial Owner of twenty-five percent (25%) or more of
the shares of Common Stock then outstanding, but does not
include any Exempt Person; provided, however, that a Person
shall not be or become an Acquiring Person if such Person,
together with its Affiliates and Associates, shall become the
Beneficial Owner of twenty-five percent (25%) or more of the
shares of Common Stock then outstanding solely as a result of
a reduction in the number of shares of Common Stock
outstanding due to the repurchase of Common Stock by the
Company, unless and until such time as such Person or any
Affiliate or Associate of such Person shall purchase or
otherwise become the Beneficial Owner of additional shares of
Common Stock constituting one percent (1%) or more of the then
outstanding shares of Common Stock or any other Person (or
Persons) who is (or collectively are) the Beneficial Owner of
shares of Common Stock constituting one percent (1%) or more
of the then outstanding shares of Common Stock shall become an
Affiliate or Associate of such Person,
<PAGE>
unless, in either such case, such Person, together with all
Affiliates and Associates of such Person, is not then the
Beneficial Owner of twenty-five percent (25%) or more of the
shares of Common Stock then outstanding.
"ACQUISITION" shall mean (a) the direct or indirect
acquisition (by merger, stock purchase, asset purchase or
otherwise), by the Company or any of its Affiliates, of all or
substantially all the equity interest in, or assets of, a
Person through which any business or enterprise is or is
proposed to be conducted or (b) the entry by the Company or
any of its Affiliates of any service agreement or similar
contract or arrangement (or the amendment of an existing
service agreement or similar contract or arrangement that
alters the amounts payable to the Company or any of its
Affiliates by such agreement, contract or arrangement) through
which the Company or such Affiliate shall provide management
services or similar assistance to any Person. The term
"Acquisition," however, does not include the opening by the
Company of a new orthodontic center (de novo start-up), unless
the Employee directly participates in the negotiation for the
new center and the treatment of such start-up as an
"Acquisition" for purposes of this Agreement is approved in
advance by the President of the Company; PROVIDED, HOWEVER,
THAT if the development of one or more start-up operations or
orthodontic or dental centers is an integral part of the basis
on which an Acquisition is made (or if revenue from any
start-up operations are included in the pro forma analysis
which form part of the basis upon which the Company effects an
Acquisition), then such start-up shall be considered an
"Acquisition."
"AFFILIATE" has the meaning ascribed to that term in Exchange
Act Rule 12b-2.
"ANNUAL CASH COMPENSATION" of the Employee for any calendar
year means the sum of the salary, bonus and commissions earned
by the Employee during that calendar year, including all
amounts deferred at the election of the Employee pursuant to a
Compensation Plan intended to qualify as a plan under Section
401(k) of the Code or otherwise. If salary, bonus or
commissions are paid in whole or in part in property other
than cash (such as Common Stock) the amount so paid shall be
the fair market value thereof on the date of payment.
"AVERAGE ANNUAL CASH COMPENSATION" of the Employee means, as
of the Separation Effective Date, the average of (a) the
Annual Cash Compensation earned by the Employee in each of the
two (2) calendar years next preceding that date or, if fewer
than two (2) calendar years have occurred prior to that date
and since the Effective Date, (b) the average of the Annual
Cash Compensation in any calendar year restated
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<PAGE>
on an annualized basis.
"BASE SALARY" means the guaranteed minimum annual salary
payable by the Company to the Employee pursuant to Section
4(A), plus the amount of commissions paid pursuant to 4(B) to
the Employee over the immediately preceding 12 months (or the
annualized amount of such commissions, if the determination of
Base Salary is made before the first anniversary of the IPO
Closing Date).
"BENEFICIAL OWNER" is as defined in Exchange Act Rule 13d-3.
"CAUSE" to permit the Company to terminate the Employee's
Employment pursuant to the terms hereof means: (a) the
Employee's final conviction of a felony crime that involved
moral turpitude or that enriched the Employee at the expense
of the Company; (b) the Employee's deliberate, intentional or
highly reckless continuing failure to substantially perform
his duties and responsibilities hereunder (except by reason of
the Employee's incapacity to perform his duties due to
physical or mental illness or injury) for a period of
forty-five (45) days after the CEO, Board or President has
delivered to the Employee a written demand for substantial
performance hereunder which specifically identifies the bases
for the determination that the Employee has not substantially
performed his duties and responsibilities hereunder (such
period being the "Grace Period"); provided that, for purposes
of clause (b) the Company shall not have Cause to terminate
the Employee's employment unless (1) at a meeting of the Board
called and held following the Grace Period in the city in
which the Company's principal executive offices are located of
which the Employee was given not less than 10 days prior
written notice and at which the Employee was afforded the
opportunity to appear and be heard, the Required Board
Majority shall adopt a written resolution setting forth the
Required Board Majority's determination that the Employee has
failed to substantially perform his duties hereunder and that
such failure has continued up to the end of the Grace Period.
"CHANGE OF CONTROL" means the occurrence of any of the
following events that occurs after the IPO Closing Date: (a)
any Person becomes an Acquiring Person; (b) at any time the
then Continuing Directors cease to constitute a majority of
the members of the Board; (c) a merger of the Company with or
into, or a sale by the Company of its properties and assets
substantially as an entirety to, another Person occurs and,
3
<PAGE>
immediately after that occurrence, any Person, other than an
Exempt Person, together with all Affiliates, shall be the
Beneficial Owner of twenty-five percent (25%) or more of the
total voting power of the then outstanding Voting Shares of
the Person surviving that transaction (in the case or a merger
or consolidation) or the Person acquiring those properties and
assets substantially as an entirety.
"CHANGE OF CONTROL PAYMENT" means at any time the amount equal
to three (3) times the Employee's highest Base Salary during
the term of this Agreement.
"CODE" means the Internal Revenue Code of 1986.
"COMMON STOCK" means the common stock of the Company.
"COMPANY" means (a) APPLE ORTHODONTIX, INC., a Delaware
corporation, and (b) any Person that assumes the obligations
of "the Company" hereunder, by operation of law, pursuant to
Section 9(D)(iii) or otherwise.
"COMPENSATION PLAN" means any compensation arrangement, plan,
policy, practice or program established, maintained or
sponsored by the Company or any subsidiary of the Company, or
to which the Company or any subsidiary of the Company
contributes, on behalf of any Executive Officer or any member
of the family of any Executive Officer, (a) including (I) any
"employee pension benefit plan" (as defined in Section 3(2) of
ERISA) or other "employee benefit plan" (as defined in Section
3(3) of ERISA), (ii) any other retirement and savings plan,
including any supplemental benefit arrangement relating to any
plan intended to be qualified under Section 401(a) of the Code
or whose benefits are limited by the Code or ERISA, (iii) any
"employee welfare plan" (as defined in Section 3(1) of ERISA),
(iv) any arrangement, plan, policy, practice or program
providing for severance pay, deferred compensation or
insurance benefit, (v) any plan which provides for incentive,
bonus or other performance-based awards of cash, stock , stock
appreciation rights or other restricted stock option plan, not
otherwise included in this definition, and (vi) any
arrangement, plan, policy, practice or program (A) authorizing
and providing for the payment or reimbursement of expenses
attributable to first-class air travel and first-class hotel
occupancy while on travel or (B) providing for the payment of
business luncheon and country
4
<PAGE>
club dues, long-distance charges, mobile phone monthly air
time or other recurring monthly charges or any other fringe
benefit, allowance or accommodation of employment, but (b)
excluding any compensation arrangement, plan, policy, practice
or program to the extent it provides for annual base salary.
"COMPENSATION COMMITTEE" means the committee of the Board to
which the Board has delegated duties respecting the
compensation of Executive Officers and the administration of
Incentive Plans, if any, intended to qualify for the Exchange
Act Rule 16b-3 exemption.
"CONFIDENTIAL INFORMATION" means, with respect to the Company
or any subsidiary of the Company, all trade secrets and other
confidential, nonpublic and/or proprietary information of that
Person, including information derived from reports,
investigations, research, work in progress, codes, marketing
and sale programs, customer lists, records of customer service
requirements, capital expenditure projects, cost summaries,
pricing formulae, contract analyses, financial information,
projections, confidential filings with any governmental
authority and all other confidential, nonpublic concepts,
methods of doing business, ideas, materials or information
prepared or performed for, by or on behalf of that Person.
"CPI" means for any period the Consumer Price Index for All
Urban Consumers--All Items Index for Houston, Texas (or any
substantially similar index published for the same area), as
published by the United States Department of Labor, Bureau of
Labor Statistics (or its successor) for that period.
"CONTINUING DIRECTOR" means at any time any individual who
then (a) is a member of the Board and was a member of the
Board as of the IPO Closing Date or whose nomination for his
first election, or that first election, to the Board following
that date was recommended or approved by a majority of the
then Continuing Directors (acting separately or as a part of
any action taken by the Board or any committee thereof) and
(b) is not an Acquiring Person, an Affiliate or Associate of
an Acquiring Person or a nominee or representative of an
Acquiring Person or of any such Affiliate or Associate.
"DISABILITY" of the Employee means the Employee has been
5
<PAGE>
determined, as a result of a physical or mental illness or
personal injury he has incurred (including illness or injury
resulting from any substance abuse), by a Qualified Physician,
to be unable to perform, at the time of that determination
and, in all reasonable medical likelihood, indefinitely
thereafter, the normal duties then most recently assigned,
under and in accordance with the terms hereof, to the Employee
during the term hereof; provided that, the determination
whether the Employee has incurred a Disability shall be made
by the Company by it causing the selection of three (3)
Qualified Physicians, the majority determination of which
shall be binding on the Company (a) one (1) of whom shall be
selected by the Employee, (b) one (1) of whom shall be
selected by the Company and (c) the remaining one (1) of whom
shall be selected by the Qualified Physicians selected by the
Employee and the Company pursuant to clauses (a) and (b) of
this proviso and the fees and expenses of whom will be shared
and paid in equal amounts by the Employee and the Company, if:
(1)(A) the Company has reasonably withheld its consent to the
Qualified Physician, if any, selected by the Employee or (B)
the Employee has reasonably withheld his consent to the
Qualified Physician, if any, selected by the Company and (2)
the Qualified Physicians selected by the Employee and the
Company disagree as to whether the Employee has incurred a
Disability. For purposes of this definition, if the Employee
is unable by reason of illness or injury to give an informed
consent to the performance of the treatment of that illness or
injury, a Qualified Physician selected by any Person who is
authorized by applicable law to give that consent will be
deemed to have been selected by the Employee.
"EFFECTIVE DATE" means the date that the Registration
Statement on Form S-1, relating to an unwritten initial public
offering of the Company's Common Stock (the "IPO"), is filed
initially with the Securities and Exchange Commission.
"ERISA" means the Employee Retirement Income Security Act of
1974.
"EMPLOYMENT" means the salaried employment of the Employee by
the Company or at the direction of the Company hereunder.
"EXCHANGE ACT" means the Securities Exchange Act of 1934.
"EXECUTIVE OFFICER" means any of the chairman of the board,
the chief executive officer, the chief operating officer, the
chief financial
6
<PAGE>
officer, the president, any executive or senior vice president
or the general counsel of the Company.
"EXEMPT PERSON" means (a) (1) the Company, any subsidiary of
the Company, any employee benefit plan of the Company or of
any subsidiary of the Company and (2) any Person organized,
appointed or established by the Company for or pursuant to the
terms of any such plan or for the purpose of funding any such
plan or funding other employee benefits for employees of the
Company or subsidiary of the Company and (b) the Employee, any
Affiliate of the Employee or any group (as that term is used
in Exchange Act Rule 13d-5(b)) of which the Employee or any
Affiliate of the Employee is a member.
"INCREMENTAL EPS" shall mean, with respect to any Acquisition,
the average annual amount, if any, by which the earnings per
share of the Company are reasonably projected to be increased
as a result of such Acquisition (and any related or resulting
planned or proposed business developments or actions,
including without limitation start-ups of new treatment
centers, offices or professional service locations following
such acquisition) in the two years immediately following
completion of such Acquisition in the pro forma model for such
acquisition prepared by the Company in good faith in respect
of such Acquisition, consistent with management's expectations
and experience. Further, Employee and Company shall execute a
"sign off" sheet specifically enumerating the total commission
for each acquisition prior to any disbursement of the
commission fee; provided, that (i) this "sign off" sheet is
intended solely to ensure that both the Employee and the
Company agree on the calculation of the commission, which
calculation shall in each case be governed by the terms of
this Agreement, and (ii) though the Employee and the Company
shall each use their reasonable best efforts to execute the
"sign off" sheets for each Acquisition the Company shall
effect, the closing of an Acquisition before or in the absence
of an executed commission "sign off" shall not effect the
affect the Employee's entitlement to a commission in respect
of such Acquisition.
"IPO" means the first time a registration statement filed
under the Securities Act and respecting an underwritten
primary offering by the Company of shares of Common Stock is
declared effective under that act and the shares registered by
that registration statement are issued and sold by the Company
(otherwise than pursuant to the exercise of any
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<PAGE>
over-allotment option).
"IPO CLOSING DATE" means the date on which the Company first
receives payment for the shares of Common Stock it sells in
the IPO.
"NONTERMINATING PARTY" means the Employee or the Company, as
the case may be, to which the Terminating Party delivers a
Notice of Termination.
"NOTICE OF TERMINATION" to or from the Employee means a
written notice that: (a) to the extent applicable, sets forth
in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Employee's Employment,
and if the Termination Date is other than the date of receipt
of the notice, (b) sets forth that Termination Date.
"OUTSIDE DIRECTOR" means at any time a member of the Board at
that time who is not then an employee of the Company or any
subsidiary of the Company.
"PERSON" means any natural person, sole proprietorship,
corporation, partnership of any kind having a separate legal
status, limited liability company, business trust,
unincorporated organization or association, mutual company,
joint stock company, joint venture, estate, trust, union or
employee organization or governmental authority.
"QUALIFIED PHYSICIAN" means, in the case of any determination
whether the Employee has sustained a Disability, a physician
(a) holding an M.D. degree from a medical school located in
the United States and having a national reputation in the
United States as a leading medical school, (b) specializing
and board-certified in the treatment of the injury or illness
that has or may have caused that Disability, (c) duly licensed
to practice that specialty and (d) having admission privileges
to one or more private hospitals located in the Texas Medical
Center in Houston, Texas or in a hospital of comparable
reputation in the state in which the Employee then is
domiciled.
"REQUIRED BOARD MAJORITY" means at any time a majority of the
members of the Board at that time which includes at least a
majority of the Outside Directors at that time.
8
<PAGE>
"RETIREMENT" of the Employee means the Employee terminates his
Employment on or after the date he has attained age 65.
"SECURITIES ACT" means the Securities Act of 1933.
"SEPARATION EFFECTIVE DATE" means the date the Nonterminating
Party receives the Terminating Party's Notice of Termination
(a) if the Company elects pursuant hereto to terminate the
Employee's Employment other than for Cause or (b) if the
Employee elects pursuant hereto to terminate his Employment
pursuant to the terms and conditions hereof, or by reason of
Disability.
"SEPARATION PERIOD" means the period of time which begins on
the Separation Effective Date and ends on the third (3rd)
anniversary of that Separation Effective Date.
"TERMINATING PARTY" means the Employee or the Company, as the
case may be, who or which terminates the Employee's Employment
by means of a Notice of Termination.
"TERMINATION DATE" means: (a) if the Employee's Employment is
terminated by reason of the Employee's death or Retirement,
the date of that death or Retirement; (b) if the Employee's
Employment is terminated by reason of the Employee's giving a
Notice of Termination following a Change of Control pursuant
to Section 5(B)(i)(b), the first date on which the Company
pays to the Employee in full the amounts owed to the Employee
pursuant to Section 5(B)(iii); (c) if the Employee's
Employment is terminated by the Employee giving a written
notice of breach of contract which is not cured within thirty
(30) days, or 180 days written Notice Termination pursuant to
the terms hereof, and other than for Disability; (d) the date
the Employee receives the Company's Notice of Termination.
"VOTING SHARES" means: (a) in the case of any corporation,
stock of that corporation of the class or classes having
general voting power under ordinary circumstances to elect a
majority of that corporation's board of directors; and (b) in
the case of any other entity, equity interests of the class or
classes having general voting power under ordinary
circumstances equivalent to the Voting Shares of the
Corporation.
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<PAGE>
2. EMPLOYMENT
A. On the terms and subject to the conditions hereinafter set
forth, and beginning as of the Effective Date, the Company
will employ the Employee as its Vice President of
Acquisitions, and the Employee will serve in the Company's
employ in this position and have shall be responsible for
managing and shall have the authority to manage all phases of
the Company's efforts to effect Acquisitions. Any material
reduction of the Employee's responsibilities in the area
described above shall be considered a Good Reason for purposes
of Section 5 of this Agreement. The Employee shall perform
such duties and have such powers, authority, functions, duties
and responsibilities for the Company and corporations
affiliated with the Company as are commensurate and consistent
with his employment as the Company's Vice President of
Acquisitions, and the Employee shall report directly to the
President of the Company. The Employee also shall have such
additional powers, authority, functions, duties and
responsibilities as may be assigned to him by the President,
CEO or the Board of Directors; provided that, without the
Employee's written consent, such additional powers, authority,
functions, duties and responsibilities shall not be
inconsistent or interfere with, or detract from, those herein
vested in, or otherwise then being performed for the Company
by the Employee. Effective no later than 60 days after the IPO
Closing Date and throughout the term of this Employment
Agreement, no officer, employee or consultant to the Company
who is under direct supervision or control of Employee whose
duties involve the rendering of legal services or the
participation in business acquisition activities on behalf of
the Company (other than the Company's Chief Executive Officer
or Chief Operating Officer) shall serve on the Company's Board
of Directors.
B. The Employee shall not, at any time during his Employment,
engage in any other activities unless those activities do not
interfere materially with the Employee's duties and
responsibilities for the Company at that time, except that the
Employee shall be entitled, subject to the provisions of
Section 7, (a) to continue with such activities as making and
managing his personal investments and participating in other
business or civic activities and (b) to serve on corporate or
other business, civic or charitable boards or committees and
trade association or similar boards or committees. The Company
shall not assign Employee duties inconsistent in any material
respect with the Employee's position as set forth above, or
otherwise diminish the Employee's position, duties or
responsibilities.
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<PAGE>
C. Pursuant to the terms and conditions of a Consulting Contract
dated __, 1996, between the Employee and the Company, the
Employee and the Company hereby agree to and ratify the
above-referenced Consulting Contract, and the Employee shall
serve as a consultant pursuant to that agreement from the date
hereof until the Effective Date.
3. TERM OF EMPLOYMENT. Subject to the provisions of Section 5, the term of
the Employee's Employment shall be for a continually renewing term of three (3)
years commencing on the Effective Date and renewing ach day thereafter for an
additional day without any further action by either the Company or the Employee,
it being the intention of the parties that there shall be continuously a
remaining term of three (3) years' duration of the Employee's Employment until
an event has occurred as described in, or one of the parties shall have made an
appropriate election pursuant to, the provisions of Section 5. When the
Termination Date shall have occurred and the Company shall have paid to the
Employee all the applicable amounts Section 5 provides the Company shall pay as
a result of the termination of the Employee's Employment, including all amounts
accruing during the Separation Period, if any, this Agreement will terminate and
have no further force or effect, except that Sections 4(C), 8, 9, 10 and 11
shall survive that termination indefinitely and Section 7 shall survive for the
period of time provided for therein.
4. COMPENSATION
A. BASE SALARY. A Base Salary shall be payable to the Employee by
the Company as a guaranteed minimum annual amount hereunder
for each calendar year during the period from the Effective
Date to the the Termination Date, subject to the rights of the
Employee during the Separation Period. That Base Salary shall
be payable in the intervals consistent with the Company's
normal payroll schedules (but in no event less infrequently
than semi-monthly), shall be payable initially at the annual
rate of $130,000 and shall be increased (but not decreased or
adjusted other than as provided in Section 5) as follows:
(i) on the first and each subsequent anniversary of the
Effective Date, by the same percentage increase (if any) in
the CPI for the twelve (12) month period immediately preceding
such anniversary;
(ii) on the first and each subsequent anniversary of the
Effective Date, by such additional amount as shall be
determined in the sole discretion of the Compensation
Committee, but only in such form and to such extent as the
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<PAGE>
Compensation Committee may from time to time approve, as
evidenced by the written minutes or records of the
Compensation Committee and its written notices of such
determinations or approvals to the Employee; and
(iii) if the Employee relocates from a state without a
personal income tax at the time of his relocation to a state
having a personal income tax, or if the Employee resides in a
state without a personal income tax on the date hereof which
subsequently adopts a personal income tax, then, in either
case, the Base Salary in effect at the time of such relocation
or adoption, as applicable, shall immediately be increased by
the amount equal to the Base Salary immediately prior to this
increase multiplied by seventy percent (70%) of the highest
personal income tax rate of such state; for example, if the
Employee relocates from a state without a personal income tax
to a state having a personal income tax and the highest rate
of that tax is six percent (6%) when the Base Salary is
$200,000, then the Base Salary will be increased by $8,400
(computed at 70% x 6% x $200,000); provided, however, that the
obligation of the Company to pay the Base Salary earned by the
Employee for his service in the period beginning on the
Effective Date and ending on the date that is the first to
occur of (a) the IPO Closing Date, (b) the Termination Date or
(c) such other date as the Board in its sole discretion may
determine shall be deferred to the last day of that period in
such amounts as the Board in its sole discretion may from time
to time determine, on which day the Company shall pay in full
to the Employee, without interest, the aggregate earned but
unpaid amount of the Base Salary for that period. Effective as
of the Separation Effective Date, the Base Salary theretofore
in effect shall be adjusted as provided in Section 5(E).
B. COMMISSIONS.
(i) The Employee shall be entitled to receive a commission in
respect of every Acquisition effected by the Company or its
Affiliates. The amount of each such commission shall be equal
to the product of (x) $8,125, (y) the Incremental EPS
attributable to such Acquisition and (z) a fraction, the
numerator of which shall be the fully diluted number of shares
outstanding on the date of the closing of such Acquisition and
the denominator of which shall be the fully diluted number of
shares outstanding on the IPO Closing Date. In no event,
however, shall the commission payable to the Employee in
respect of any Acquisition effected by the Company or its
Affiliates be less than $4,000 (and, if an Acquisition
involves more than orthodontic or dental practice, $4,000 per
orthodontist or dentist whose practice is directly affected
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<PAGE>
by such Acquisition), which amount, as well as the dollar
amount set forth in (x) immediately above, shall be increased
on each anniversary of the Effective Date by the same
percentage increase (if any) in the CPI for the twelve (12)
month period immediately preceding such anniversary.
(ii) Each commission due to the Employee pursuant to (i) above
shall be paid in cash to the Employee no later than the 20th
day following the closing of the Acquisition in respect of
which the commission was earned; PROVIDED, HOWEVER, that, with
the mutual consent of the Employee and the Company,
commissions may be paid on the due date in Common Stock
(valued for such purpose at the average closing trading price
of such Common Stock over the five trading days ended
immediately before the closing date of such Acquisition) or in
Options (valued for such purpose using the Black-Shoales
formula for valuing stock options and applying such formula as
of the date of the closing of such Acquisition; any such
Options to have a duration of not less than 10 years and to be
fully vested and immediately exercisable on the date of
grant).
(iii) If in any annual period commencing on the IPO Date or
the anniversary of the IPO Date and ending on the day
immediately preceding the next anniversary of the IPO Date,
the commissions earned by the Employee shall exceed $162,500,
then each commission payable to the Employee pursuant to
Subsection 4.B.(i) above during the remainder of such annual
period shall be increased by 30%.
C. OTHER COMPENSATION.
(i) From the Effective Date until any Separation Effective
date, the Employee shall be entitled to participate in all
Compensation Plans, regardless of whether the Employee is an
Executive Officer. All awards to the Employee under all
Incentive Plans shall take into account the Employee's
positions with and duties and responsibilities to the Company
and its subsidiaries. The Company acknowledges that the
Employee's right to receive commissions under Section 4.B.
above is intended to incentivize the Employee to effect
profitable acquisitions on behalf of the Company, and to
compensate him for effecting such Acquisitions, and further
acknowledges that the Employee's commission rights shall not
impair the Employee's right to participate in Incentive Plans,
or to receive incentive bonuses, in respect of his services as
an Executive Officer of the Company.
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<PAGE>
(ii) Effective on the IPO Closing Date, the Company will pay
the Employee an amount equal to the sum of (a) $5,416.67 [1/2
the $130,000 base salary for the period from February 15 to
February 28] and (b) the product of $356.16 and the number of
days from February 28, 1997 to and including the IPO Closing
Date [the $130,000 base salary from March 1, 1997 to IPO
closing].
(iii) On the IPO Closing Date, the Company shall grant the
Employee the following Options:
(a) 85,000 Options with an exercise price equal to the
per share net proceeds received by the Company in the
IPO. Unless the vesting schedule for these Options is
otherwise accelerated pursuant to this Agreement or by
action of the Board of Directors of the Company (or an
authorized Committee of such Board), 1/4 of these
Options shall vest on the IPO Closing Date and 1/4 of
these Options shall vest on the first, second and third
anniversary of the IPO Closing Date.
(b) A number of Options equal to the number shares of
Common Stock into which 23.5 shares of such stock
outstanding on the date of this Agreement shall be split
or converted into as a result of or on completion of the
IPO. The exercise price for these options shall be equal
to the per share net proceeds received by the Company in
the IPO. Unless the vesting schedule for these Options
is otherwise accelerated pursuant to this Agreement or
by action of the Board of Directors of the Company (or
an authorized Committee of such Board), 1/2 of these
Options shall vest on the IPO Closing Date and 1/2 of
these Options shall vest on the first anniversary of the
IPO Closing Date.
(iv) During the term of this Agreement, the Employee shall be
entitled to receive such number of additional Options on such
terms as the Board of Directors of the Company (or an
authorized Committee of such Board) shall determine. The
Employee's right to receive such Options shall be independent
of, and set without regard to, the commission compensation
otherwise received by the Employee under this Agreement.
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<PAGE>
(v) Commencing on the IPO Closing Date, the Employee shall be
entitled to request and receive from the Company one or more
loans in an aggregate principal amount not to exceed the
aggregate exercise price of all Options issued to the Employee
pursuant to Subsection 4.C.(iv)(B) above. Each loan will be
used solely for the purpose of paying the exercise price of
Options. Each such loan will have a term of not less than 30
years, shall bear no interest, shall permit no recourse to the
Employee, the estate or heirs of the Employee or any assets of
the Employee or the Employee's estate or heirs and shall not
be subject to default or acceleration or any principal
amortization until the final maturity date of such loan. Upon
the exercise of any Options issued to the Employee pursuant to
Subsection 4.C.(iv)(B) above or sale by the Employee of any
shares of Common Stock acquired by the Employee upon such
exercise, the Company shall reimburse (and gross-up the
Employee for any deemed income or additional taxes owing as a
result of such reimbursement) the Employee for the state or
federal income taxes that result so as to ensure that the net
cost to the Employee for taxes, if any, imposed upon the
exercise of such Options and sale of such shares of Common
Stock shall be identical to the net tax cost the Employee
would have borne had the Company issued to the Employee on
December 9, 1996, 23.5 shares of Common Stock at a purchase
price of $1 per share.
TAX INDEMNITY. Should any of the payments of Base Salary,
other incentive or supplemental compensation, benefits,
allowances, awards, payments, reimbursements or other
perquisites, or any other payment in the nature of
compensation, singly, in any combination or in the aggregate,
that are provided for hereunder to be paid to or for the
benefit of the Employee be determined or alleged to be subject
to an excise or similar purpose tax pursuant to Section 4999
of the Code, or any successor or other comparable federal,
state or local tax law by reason of being a "parachute
payment" (within the meaning of Section 280G of the Code), the
Company shall pay to the Employee such additional compensation
as is necessary (after taking into account all federal, state
and local taxes payable by the Employee as a result of the
receipt of such additional compensation) to place the Employee
in the same after-tax position (including federal, state and
local taxes) he would have been in had no such excise or
similar purpose tax (or interest or penalties thereon) been
paid or incurred. The Company hereby agrees to pay such
additional compensation within the earlier to occur of (i)
five (5) business days after the Employee notifies the Company
that the Employee intends to
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file a tax return taking the position that such excise or
similar purpose tax is due and payable in reliance on a
written opinion of the Employee's tax counsel (such tax
counsel to be chosen solely by the Employee) that it is more
likely than not that such excise tax is due and payable or
(ii) twenty-four (24) hours of any notice of or action by the
Company that it intends to take the position that such excise
tax is due and payable. The costs of obtaining the tax counsel
opinion referred to in clause (i) of the preceding sentence
shall be borne by the Company, and as long as such tax counsel
was chosen by the Employee in good faith, the conclusions
reached in such opinion shall not be challenged or disputed by
the Company. If the Employee intends to make any payment with
respect to any such excise or similar purpose tax as a result
of an adjustment to the Employee's tax liability by any
federal, state or local tax authority, the Company will pay
such additional compensation by delivering its cashier's check
payable in such amount to the Employee within five (5)
business days after the Employee notifies the Company of his
intention to make such payment. Without limiting the
obligation of the Company hereunder, the Employee agrees, in
the event the Employee makes any payment pursuant to the
preceding sentence, to negotiate with the Company in good
faith with respect to procedures reasonably requested by the
Company which would afford the Company the ability to contest
the imposition of such excise or similar purpose tax;
provided, however, that the Employee will not be required to
afford the Company any right to contest the applicability of
any such excise or similar purpose tax to the extent that the
Employee reasonably determines (based upon the opinion of his
tax counsel) that such contest is inconsistent with the
overall tax interests of
5. TERMINATION, SEPARATION PERIOD, DISABILITY AND DEATH
A. TERMINATION OF EMPLOYMENT BY THE COMPANY.
(i) The Company shall be entitled, if acting at the direction
of the Required Board Majority, to terminate the Employee's
Employment (a) at any time for Cause or (b) subject to the
payment obligations of the Separation Period and other
provisions of this Agreement, at any time without Cause. The
Company's termination of the Employee's Employment hereunder
will be effective on the date the Company delivers a Notice of
Termination for Cause to the Employee pursuant hereto. Subject
to the payment provisions applicable to the Separation Period,
the Employee shall be required to vacate the premises of the
Company, with all of the Employee's personal property no later
than five (5) business days after the Notice of Termination.
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(ii) If the Company terminates the Employee's Employment for
Cause, the Company promptly thereafter, and in any event
within five (5) business days thereafter, shall pay the
Employee his Base Salary to and including the the end of the
calendar month of the Termination Date and the amount of all
compensation previously deferred by the Employee (together
with any accrued interest or earnings thereon), in each case
to the extent not theretofore paid, and, when that payment is
made, the Company shall, notwithstanding Section 3, have no
further or other obligations hereunder to the Employee.
(iii) If the Company terminates the Employee's Employment
without Cause, the respective rights and obligations of the
Company and the Employee during the Separation Period will be
as set forth in Section 5(E).
B. TERMINATION OF EMPLOYMENT BY THE EMPLOYEE.
(i) The Employee shall be entitled to terminate his
Employment, other than for Disability, (a) for Good Reason at
any time within one hundred eighty (180) days after facts or
circumstances constituting that Good Reason first exist or is
known to the Employee, but only after the Employee has given
the Company written notice of such Good Reason and it has not
been fully cured within 30 days following receipt of such
Notice, (b) by reason of a Change of Control at any time
within three hundred sixty-five (365) days after that Change
of Control occurs, or (c) without Good Reason and other than
for Disability at any time.. The Employee's termination of his
Employment by reason of a Change of Control will be effective
on the first date on which the Change of Control Payment shall
have been paid in full to the Employee. The Employee's
termination of his Employment pursuant to (a) and (b) above
shall be effective on the Termination Date, subject to the
payment obligations of the Company during the Separation
Period.
(ii) If the Employee terminates his Employment by reason of a
Change of Control, the Company shall pay to the Employee in a
cash lump sum within five (5) business days after the date the
Company receives the Employee's Notice of Termination by
reason of that Change of Control the amount equal to the sum
of (a) the portion of the Base Salary to and including the
Termination Date which has not yet been paid, (b) all
compensation previously deferred by the Employee (together
with any accrued interest and earnings thereon), (c) any
accrued but unpaid vacation pay and (d) the Change of Control
Payment.
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(iii) If the Employee terminates his Employment, other than
for Disability, the Company shall pay to the Employee, in a
cash lump sum within five (5) business days after the
Termination Date, the amount equal to the sum of (a) the
portion of the Base Salary to and including the Termination
Date which has not yet been paid, (b) all compensation
previously deferred by the Employee (together with any accrued
interest and earnings thereon) which has not yet been paid,
(c) any accrued but unpaid vacation pay and (d) the amount
equal to fifty percent (50%) of the Base Salary being paid for
the calendar year in which the Company receives the Employee's
Notice of Termination, and other than for Disability.
(iv) If the Employee terminates his Employment for Good
Reason, the respective rights and obligations of the Company
and the Employee shall be as set forth in Section 5(E).
C. TERMINATION BY REASON OF DISABILITY. If the Employee incurs
any Disability during the term hereof, either the Employee or
the Company may terminate the Employee's Employment effective
on the third (3rd) anniversary of the date the Nonterminating
Party receives a Notice of Termination from the Terminating
Party pursuant to this Section 5(C). If the Employee's
Employment is terminated by reason of the Employee's
Disability, the respective rights and obligations of the
Company and the Employee during the Separation Period will be
as set forth in Section 5(E).
D. TERMINATION OF EMPLOYMENT BY DEATH. The Employee's Employment
shall terminate during the term hereof automatically at the
time of his death. If the Employee's Employment is terminated
by reason of the Employee's death, the Company shall pay to
the Person the Employee has designated in a written notice
delivered to the Company as his beneficiary entitled to such
payment, if any, or to the Employee's estate, as applicable,
in a cash lump sum within thirty (30) days after the
Termination Date, the amount equal to the sum of (i) the
portion of the Base Salary through the end of the month in
which the Termination Date occurs which has not yet been paid,
(ii) all compensation previously deferred by the Employee
(together with any accrued interest or earnings thereon) which
has not yet been paid, (iii) any accrued but unpaid vacation
pay and (iv) (a) the product of the Base Salary being paid for
the calendar year of death multiplied by three (3).
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E. EMPLOYEE'S PAYMENT RIGHTS DURING THE SEPARATION PERIOD.
(i) The Company shall pay the Employee a Base Salary, in the
intervals consistent with the Company's normal payroll
schedules (but in no event less frequently than semi-monthly)
from the Separation Effective Date to and including the third
anniversiary thereof in the amounts determined from time to
time as follows: the Base Salary payable by the Company to the
Employee shall be as follows:
(a) if the Separation Effective Date occurs as a result
of the receipt by the Nonterminating Party of a Notice
of Termination other than for Cause, the amount equal to
the Average Annual Cash Compensation of the Employee
determined as of the Separation Effective Date; and (b)
if the Separation Effective Date occurs as a result of
the receipt by the Nonterminating Party of a Notice of
Termination for Disability pursuant to Section 5(C), the
amount equal to the amount by which (1) seventy-five
percent (75%) of the Average Annual Cash Compensation of
the Employee determined as of the Part-time Employment
Effective Date exceeds (2) the aggregate amount of
periodic payments the Employee receives during the
thirty-six (36) months beginning on that date under
Compensation Plans then in effect and providing for the
payment to the Employee solely as a result or on account
of disability; and
(b) on the first and each subsequent anniversary of the
Separation Date, the Base Salary payable pursuant to
this Section 5(E) shall be increased (but not decreased)
by the same percentage increase (if any) in the CPI for
the twelve (12) month period immediately preceding that
anniversary.
(ii) (a) The Employee shall continue to participate in all
Compensation Plans from time to time in effect during
the Separation Period, provided, however, that: (1) the
Employee shall not be entitled to receive any new award
or grant under any incentive plan, and any such new
award or grant shall be at the sole discretion of the
Compensation Committee or the Board, as applicable, with
respect to that incentive plan; and (2) if (A) the terms
of any such plan preclude the Employee's continued
participation therein or (B) his continued participation
in any such plan would or reasonably could be expected
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to disqualify that plan under the Code, the Employee
shall not be entitled to participate in that plan, but
the Company instead shall provide the Employee with the
after-tax equivalent of the benefits that would have
been provided to the Employee were a participant in that
plan.
(b) For purposes of determining eligibility (including
years of service) for retirement benefits payable under
any Compensation Plan, the Employee shall be deemed to
have retired at the Termination Date.
(iii) Subject to the provisions of Section 7, the Employee
shall not be prevented from accepting other employment or
engaging in (and devoting substantially all his time to) other
business activities and shall not be required to perform any
regular duties for the Company, and the Employee may seek or
accept additional employment with any other Person. If the
Employee, at his discretion, shall accept any such additional
employment or engage in any such other business activity there
shall be no offset, reduction or effect upon any rights,
benefits or payments to which the Employee is entitled
pursuant to this Agreement. Furthermore, the Employee shall
have no obligation to account for, remit, rebate or pay over
to the Company any compensation or other amounts earned or
derived in connection with such additional employment or
business activity.
The Employee shall, however, make himself generally
available for special projects or to consult with the Company
and its employees at such times and at such places as may be
reasonably requested by the Company and which shall be
reasonably satisfactory t the Employee and consistent with the
Employee's regular duties and responsibilities in the course
of his then new occupation or other employment, if any.
(iv) Unless and until the Employee shall have sustained a
Disability, the Company shall continue to provide the Employee
with either the same or, at the Company's election, at a
different location within thirty-five (35) miles of the
Employee's principal residence, in any case reasonably
acceptable to the Employee, alternate but comparable office
space, furnishings, facilities, reserved parking, supplies,
services, equipment, secretarial and administrative assistance
that are in each case at least commensurate with the size and
quality of that which were provided to the Employee during the
calendar year immediately preceding the Separation Effective
Date pursuant to Section 6(C),
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but in no event less than are being furnished or provided on
the date hereof. The Company and Employee may mutually agree
upon an equivalent monthly cash allowance in lieu of the
Employee being provided all or any part of these items. (v)
The Employee shall remain entitled to the benefits of Section
4(D).
F. RETURN OF PROPERTY. On termination of the Employee's
Employment, however brought about, the Employee (or his
representatives) shall promptly deliver and return to the
Company all the Company's property that is in the possession
or under the control of the Employee.
G. STOCK OPTIONS. Notwithstanding any provision of this Agreement
to the contrary: (i) except in the case of a termination of
the Employee's Employment for Cause, all stock options
previously granted to the Employee under this Agreement or
under incentive plans that have not been exercised and are
outstanding as of the time immediately prior to the
Termination Date shall, notwithstanding any contrary provision
of any applicable incentive plan, remain outstanding (and
continue to become exercisable pursuant to their respective
terms) until exercised or the expiration of their term,
whichever is earlier; and (ii) in the case of a termination of
the Employee's Employment for Cause, all stock options
previously granted to the Employee under this Agreement or
under incentive plans that have not been exercised and are
outstanding as of the time immediately prior to the
Termination Date shall, notwithstanding any contrary provision
hereof or of any applicable incentive plan, remain outstanding
and continue to be exercisable until exercised or the date
that is ten (10) days after the Termination Date, whichever is
earlier. No stock option previously granted to the Employee
under this Agreement or under any incentive plan shall,
notwithstanding any contrary provision of that incentive plan,
expire or fail to become exercisable or, if exercisable, cease
to be exercisable by reason of the occurrence of the
Employee's Separation Effective Date.
6. OTHER EMPLOYEE RIGHTS
A. PAID VACATION; HOLIDAYS. The Employee shall be entitled to not
less than four (4) weeks of annual vacation and all legal
holidays during which times his applicable compensation shall
be paid in full. Further, it is understood by the Employee
that all paid vacation days shall be taken by or on December
31 of the calender year. Any and all vacation days which were
not taken by said date, shall be paid to the Employee on the
second pay
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period of the following January.
B. BUSINESS EXPENSES. The Employee is authorized to incur, and
will be entitled to receive prompt reimbursement for, all
reasonable expenses incurred by the Employee in performing his
duties and carrying out his responsibilities hereunder,
including business meal, entertainment and travel expenses,
provided that the Employee complies with the applicable
policies, practices and procedures of the Company relating to
the submission of expense reports, receipts or similar
documentation of those expenses. The Company shall either pay
directly or promptly reimburse the Employee for such expenses
not more than twenty (20) days after the submission to the
Company by the Employee from time to time of an itemized
accounting of such expenditures for which direct payment or
reimbursement is sought. Unpaid reimbursements after such
twenty (20) day period shall accrue interest in accordance
with Section 9(K). The foregoing right to reimbursement shall
apply to all expenses incurred by the Employee on behalf of
the Company, regardless of whether incurred before or after
the date of this Agreement. If the Company should relocate its
executive offices of this Agreement to a location more than 35
miles from the Company's then current executive offices, then
the Company will reimburse the Employee for all reasonable
expenses (and gross up the Employee for the additional income
taxes, if any, imposed on the Employee as a result of such
reimbursement and such gross up) incurred by the Employee as a
result of such relocation, including without limitation, (i)
the costs and expenses of moving and temporary housing for up
to six (6) months, (ii) the costs and expenses of searching
for a new residence, including at least two visits to the
metropolitan area of the new executive office by the Employee
and his family, (iii) the realtor commissions on the purchase
by the Employee of a new residence in the vicinity of the new
executive offices and on the disposition of his previous
residence in the vicinity of the previous executive
officesidence"), (iv) if the Employee should acquire a new
residence before he shall have disposed of the Previous
Residence, the mortgage payments, property taxes, insurance
charges, subdivision and maintenance fees and similar costs
and expenses on, or relating to the ownership of, the new
residence, accruing until the date on which the Employee
disposes of the Previous Residence, but not to exceed six (6)
months, and (v) should the Employee sell the Previous
Residence following any such relocation for less than the sum
of (x) his cost-basis in the Previous Residence and (y) the
product of (x) and the average increase in the cost of homes
in the metropolitan area in which the Previous Residence is
located over the period from the original purchase of the
Previous Residence
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(and, in the case of improvements that are a material part of
the cost-basis, the date such improvements are made) to the
date of sale, then the difference between the sum of the
preceding (x) and (y) and the net sale price for the Previous
Residence.
C. SUPPORT. During the term hereof, the Employee shall be
provided by the Company with office space, furnishings, and
facilities, reserved parking, secretarial and administrative
assistance, supplies and other support equipment (including a
computer, facsimile machine and photocopier). The Company
agrees that it, and it's Executive Officers and other
employees will provide the Employee with reasonable assistance
in pursuing, evaluating and closing Acquisitions. .
7. COVENANT NOT TO COMPETE
A. The Employee recognizes that in each of the highly competitive
businesses in which the Company is engaged, personal contact
is of primary importance in securing new orthodontic practices
and in retaining the accounts and goodwill of present
practices and protecting the business of the Company. The
Employee, therefore, agrees that during the term of Employment
and for a period of one (1) year after the Termination Date,
Employee will not, within fifty (50) miles of the corporate
headquarters: (i) accept employment or render service to any
Person that is engaged in a business directly competitive with
the business then engaged in by the Company or (ii) enter into
or take part in or lend Employee's name, counsel or assistance
to any business, either as proprietor, principal, investor,
partner, director, officer, employee, consultant, advisor,
agent, independent contractor, or in any other capacity
whatsoever, for any purpose that would be competitive with the
business of the Company.
B. If the provisions of this Section 7 are violated in any
material respect, the Company shall be entitled, upon
application to any court of proper jurisdiction, to a
temporary restraining order or preliminary injunction (without
the necessity of posting any bond with respect thereto) to
restrain and enjoin the Employee from that violation. If the
provisions of this Section 7 should ever be deemed to exceed
the time, geographic or occupational limitations permitted by
the applicable law, the Employee and the Company agree that
such provisions shall be and are hereby reformed to the
maximum time, geographic or occupational limitations permitted
by the applicable law.
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8. CONFIDENTIAL INFORMATION
A. The Employee acknowledges that the Employee has had and will
continue to have access to various Confidential Information.
The Employee agrees, therefore, that Employee will not at any
time, either while employed by the Company or afterwards,
knowingly make any independent use of, or knowingly disclose
to any other person (except as authorized by the Company) any
Confidential Information. Confidential Information shall not
include (i) information that becomes known to the public
generally through no fault of the Employee, (ii) information
required to be disclosed by law or legal process or the order
of any governmental authority under color of law, provided,
that prior to disclosing any information pursuant to this
clause (ii), the Employee shall, if possible, give prior
written notice thereof to the Company and provide the Company
with the opportunity to contest such disclosure, or (iii) the
Employee reasonably believes that such disclosure is required
in connection with the defense of a lawsuit against the
Employee. In the event of a breach or threatened breach by the
Employee of the provisions of this Section 8(A) with respect
to any Confidential Information, the Company shall be entitled
to a temporary restraining order and a preliminary and
permanent injunction (without the necessity of posting any
bond in connection therewith) restraining the Employee from
disclosing, in whole or in part, that Confidential
Information. Nothing herein shall be construed as prohibiting
the Company from pursuing any other available remedy for that
breach or threatened breach, including the recovery of
damages.
B. The Employee shall disclose promptly to the Company any and
all conceptions and ideas for inventions, improvements, and
valuable discoveries, whether patentable or not, which are
conceived or made by the Employee solely or jointly with any
other Person or Persons during the term of Employment and
which pertain primarily to the material business activities of
the Company, and the Employee hereby assigns and agrees to
assign all his interests therein to the Company or to its
nominee; whenever requested to do so by the Company, the
Employee shall execute any and all applications, assignments
or other instruments which the Company shall deem necessary to
apply for and obtain Letters of Patent of the United States or
any foreign country or to otherwise protect the Company's
interest therein. These obligations shall (i) continue beyond
the Termination Date with respect to
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inventions, improvements, and valuable discoveries, whether
patentable or not, conceived, made or acquired by the Employee
during the term of Employment and (ii) be binding upon the
Employee's assigns, executors, administrators and other legal
representatives.
9. GENERAL PROVISIONS
A. SEVERABILITY. If any one or more of the provisions of this
Agreement shall, for any reason, be held or found by final
judgment of a court of competent jurisdiction to be invalid,
illegal or unenforceable in any respect, (i) such invalidity,
illegality or unenforceability shall not affect any other
provisions of this Agreement, (ii) this Agreement shall be
construed as if such invalid, illegal or unenforceable
provision had never been contained herein (except that this
clause (ii) shall not prohibit any modification allowed under
Section 7(B)), and (iii) if the effect of a holding or finding
that any such provision is invalid, illegal or unenforceable
is to modify to the Employee's detriment, reduce or eliminate
any compensation, reimbursement, payment, allowance or other
benefit to the Employee intended by the Company and Employee
in entering into this Agreement, the Company shall, within
thirty (30) days after the date of such finding or holding,
negotiate and expeditiously enter into an agreement with the
Employee which contains alternative provisions (reasonably
acceptable to the Employee) that will restore to the Employee
(to the extent lawfully permissible) substantially the same
economic, substantive and income tax benefits and legal rights
the Employee would have enjoyed had such provision been upheld
as legal, valid and enforceable.
B. NONEXCLUSIVITY OF RIGHTS. Nothing herein shall prevent or
limit the Employee's continuing or future participation in any
Compensation Plan or, subject to Section 9(N), limit or
otherwise affect such rights as the Employee may have under
any other contract or agreement with the Company. Vested
benefits and other amounts to which the Employee is or becomes
entitled to receive under any Compensation Plan on or after
the Termination Date shall be payable in accordance with that
Compensation Plan, except as expressly modified hereby.
C. FULL SETTLEMENT. The Company's obligations to make the
payments provided for in, and otherwise to perform its
undertakings in, this Agreement shall not be affected by any
right of set-off, counterclaim, recoupment, defense or other
action, claim or right the Company may have against the
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Employee or others. In no event shall the Employee be
obligated to seek other employment or take any other action by
way of mitigation of the amounts payable to the Employee under
any provision hereof, and those amounts shall not be reduced,
regardless of whether the Employee obtains other employment or
becomes self-employed.
D. SUCCESSORS.
(i) This Agreement is personal to the Employee and, without
the prior written consent of the Company, is not assignable by
the Employee otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit and be
enforceable by the Employee's legal representatives acting in
their capacities as such pursuant to applicable law.
(ii) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns. If
the Employee is not an Executive Officer, but is an officer of
a subsidiary of the Company, the Company shall be entitled to
assign all its obligations hereunder to that subsidiary and
treat the Employee as an employee of that subsidiary for all
purposes, but the Company shall remain liable for the full,
timely performance of all the obligations so assigned as if
the assignment had not been made.
(iii) The Company shall require any successor (direct or
indirect and whether by purchase, merger, consolidation, share
exchange or otherwise) to the business, properties and assets
of the Company substantially as an entirety expressly to
assume and agree to perform this Agreement in the same manner
and to the same extent the Company would have been required to
perform it had no such succession taken place.
E. AMENDMENTS; WAIVERS. This Agreement may not be amended or
modified except by a written agreement executed and delivered
by the parties hereto or their respective successors or legal
representatives acting in their capacities as such pursuant to
applicable law.
F. NOTICES. All notices and other communications under this
Agreement shall be in writing and shall be given by hand
delivery or by registered or certified mail, return receipt
requested, postage prepaid, addressed to the appropriate
Person at the address of such Person set forth below (or at
such other address as such Person may designate by written
notice to each other party in accordance herewith):
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(a) if to the Employee, addressed as follows:
H. Steven Walton
18419 Cypress Rosehill Road
Cypress, TX 77429 and
(b) if to the Company, addressed as follows:
APPLE ORTHODONTIX, INC.
One West Loop South, Suite 100
Houston, Texas 77027
Attn: Chief Executive Officer
G. NO WAIVER. The failure of the Company or the Employee to
insist on strict compliance with any provision of, or to
assert any right under, this agreement (including the right of
the Employee to terminate his Employment for Good Reason or by
reason of a Change of Control pursuant to Section 5(B)(i))
shall not be deemed a waiver of that provision or of any other
provision of or right under this Agreement.
H. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS,
WITHOUT REFERENCE TO ANY PRINCIPLES OF CONFLICTS OF LAWS.
I. JURISDICTION AND VENUE. The Company irrevocably consents with
respect to any action, suit or other legal proceeding
pertaining directly to this Agreement or to the interpretation
or enforcement of any of the Employee's rights hereunder to
service of process in the State of Texas and hereby waives any
right to contest or oppose receipt of such service of process.
The Company irrevocably (i) agrees that any such action, suit
or other legal proceeding may be brought in the courts of such
state or in the courts of the United States sitting in such
state, (ii) consents to the jurisdiction of each such court in
any such action, suit or other legal proceeding, and (iii)
waives any objection it may have to the laying of venue of any
such action, suit or other legal proceeding in any of such
courts.
J. HEADINGS. The headings of Sections and subsections hereof are
included solely for convenience of reference and shall not
control the meaning or interpretation of any of the provisions
of this Agreement.
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K. INTEREST. If any amounts required to be paid or reimbursed to
the Employee hereunder are not so paid or reimbursed at the
times provided herein (including amounts required to be paid
by the Company pursuant to Sections 6 and 10, those amounts
shall accrue interest compounded daily at the annual
percentage rate which is three percentage points (3%) above
the interest rate announced by Texas Commerce Bank National
Association, Houston, Texas (or its successor), from time to
time, as its Base Rate (or prime lending rate), from the date
those amounts were required to have been paid or reimbursed to
the Employee until those amounts are finally and fully paid or
reimbursed; provided, however, that in no event shall the
amount of interest contracted for, charged or received
hereunder exceed the maximum non-usurious amount of interest
allowed by applicable law.
L. PUBLICITY. The Company agrees with the Employee that, except
to the extent required by law or legal process (including the
Exchange Act and the Securities Act), it will not make or
publish, without the prior written consent of the Employee,
any written or oral statement concerning the terms of the
Employee's employment relationship with the Company and will
not, if a Notice of Termination is given by either the Company
or the Employee for any reason, publish or cause to be
published any statement concerning the Employee, including his
work-related performance or the reasons or basis for the
giving of that Notice of Termination.
M. TAX WITHHOLDING. Notwithstanding any other provision hereof,
the Company may withhold from amounts payable hereunder all
Federal, state, local and foreign taxes that are required to
be withheld by applicable laws or regulations.
N. ENTIRE AGREEMENT. Except for the Consulting Agreement, the
Company and the Employee (i) acknowledge that this Agreement
supersedes all prior written and oral agreements between them
with respect to the employment of the Employee by the Company.
10. INTENDED BENEFITS TO EMPLOYEE; PAYMENT OF EXPENSES; RESOLUTION OF
DISPUTES
A. INTENDED BENEFITS; PAYMENT OF EXPENSES. In entering into this
Agreement the Company intends that the Employee receive
without reduction or delay all the intended benefits of this
Agreement and that those benefits, and the terms and
conditions hereof, be construed in a manner most favorable
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to the Employee; the Company, therefore, agrees that it will
strive expeditiously and in good faith to construe and resolve
in the Employee's favor and to his benefit any ambiguities or
uncertainties that may be created by the express language
hereof. If, however, at any time during the term hereof or
afterwards: (i) there should exist a dispute or conflict
between the Employee and the Company or another Person as to
the validity, interpretation or application of any term or
condition hereof, or as to the Employee's entitlement to any
benefit intended to be bestowed hereby, which is not resolved
to the satisfaction of the Employee, (ii) the Employee must
(a) defend the validity of this Agreement, (b) contest any
determination by the Company concerning the amounts payable
(or reimbursable) by the Company to the Employee, or (c)
determine in any tax year of the Employee the tax consequences
to the Employee of any amounts payable (or reimbursable) under
Section 4(c) or 4(B)(iii), or (iii) the Employee must prepare
responses to an Internal Revenue Service ("IRS") audit of, or
otherwise defend, his personal income tax return for any year
the subject of any such audit, or an adverse determination,
administrative proceedings or civil litigation arising
therefrom that is occasioned by or related to an audit by the
IRS of the Company's income tax returns, then the Company
hereby unconditionally agrees: (a) on written demand of the
Company by the Employee, to provide sums sufficient to advance
and pay on a current basis (either by paying directly or by
reimbursing the Employee) not less than thirty (30) days after
a written request therefor is submitted by the Employee, the
Employee's out of pocket costs and expenses (including
attorney's fees, expenses of investigation, travel, lodging,
copying, delivery services and disbursements for the fees and
expenses of experts, etc.) incurred by the Employee in
connection with any such matter; (b) the Employee shall be
entitled, upon application to any court of competent
jurisdiction, to the entry of a mandatory injunction without
the necessity of posting any bond with respect thereto which
compels the Company to pay or advance such costs and expenses
on a current basis; and (c) the Company's obligations under
this Section 10(A) will not be affected if the Employee is not
the prevailing party in the final resolution of any such
matter.
11. INDEMNIFICATION
Pursuant to the express terms and conditions of the Certificate of Incorporation
and Bylaws of the Company, the Company hereby ratify and confirm and enter into
an express separate contract to provide that the Employee shall be held harmless
from monetary damages and be fully indemnified by the Company to the maximum
extent permitted by the law of Delaware, the state of the
28
<PAGE>
Company's incorporation, and the law of the state of incorporation of any
subsidiary of the Company of which the Employee is a director or an officer or
employee, as the same may be in effect from time to time.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the day and year indicated above.
APPLE ORTHODONTIX, INC.
By: /s/ JOHN G. VONDRAK
John G. Vondrak,
Chief Executive Officer
EMPLOYEE
/s/ H. STEVEN WALTON
H. Steven Walton
Employee's Permanent Address:
18419 Cypress Rosehill Road
Cypress, TX 77429
29
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 21, 1997
