AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1998
REGISTRATION NO. 333-28937
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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APPLE ORTHODONTIX, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8021 74-2795193
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2777 ALLEN PARKWAY, SUITE 700
HOUSTON, TEXAS 77019
(713) 852-2500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
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W. DANIEL COOK
SENIOR VICE PRESIDENT
APPLE ORTHODONTIX, INC.
2777 ALLEN PARKWAY, SUITE 700
HOUSTON, TEXAS 77019
(713) 852-2500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective.
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If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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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, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 7, 1998
PROSPECTUS
[Logo of Apple Orthodontix, Inc.]
CLASS A COMMON STOCK
This Prospectus covers the offer and sale of up to 654,217 shares of Class
A Common Stock, par value $.001 per share ("Common Stock"), of Apple
Orthodontix, Inc. ("Apple" or the "Company"), which Apple may issue from
time to time in connection with future affiliations with orthodontic practices
("Practices") and acquisitions of other businesses and operating assets in
business combination transactions (collectively, "Affiliations"). The Common
Stock is entitled to one vote per share, and the Class B Common Stock, par value
$.001 per share, of the Company ("Class B Stock") is entitled to three-tenths
(3/10ths) of a vote per share.
Apple expects that the terms on which it may issue the shares in
Affiliations will be determined through negotiations and that the shares issued
will be valued at prices reasonably related to market prices for the Common
Stock prevailing either at the time an Affiliation agreement is executed or at
the time an Affiliation is consummated.
Apple may require persons receiving Common Stock in connection with
Affiliations to hold all or some portion of the Common Stock for varying periods
of time. In addition, pursuant to the provisions of Rule 145 under the
Securities Act of 1933, as amended (the "Securities Act"), the volume
limitations and certain other requirements of Rule 144 under the Securities Act
will apply to resales of those shares by affiliates of the Practices or
businesses with which the Company affiliates or which the Company acquires for a
period of one year from the date of affiliation or acquisition (or such shorter
period as the Securities and Exchange Commission (the "SEC") may prescribe). See
"Plan of Distribution."
As of May 4, 1998, 10,540,016 shares of Common Stock were issued and
outstanding. The Common Stock trades on The American Stock Exchange under the
symbol "AOI." On May , 1998, the last reported sales price of the Common
Stock on The American Stock Exchange was $ per share.
Apple will pay all expenses of this offering. It does not expect to pay any
underwriting discounts or commissions, but may pay finder's fees from time to
time with respect to specific Affiliations. Any person receiving any such fee
may be deemed to be an underwriter within the meaning of the Securities Act.
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
------------------------
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.
The date of this Prospectus is May , 1998
<PAGE>
PROSPECTUS SUMMARY
UNLESS OTHERWISE INDICATED BY THE CONTEXT, REFERENCES HEREIN TO (I)
"APPLE" OR THE "COMPANY" MEAN APPLE ORTHODONTIX, INC., A DELAWARE
CORPORATION, (II) "AFFILIATED PRACTICES" MEAN THE ORTHODONTIC PRACTICES WITH
WHICH THE COMPANY HAS AFFILIATED AND THOSE, IF ANY, WITH WHICH THE COMPANY
AFFILIATES IN THE FUTURE, (III) "NEW CASE STARTS" MEAN THE NUMBER OF NEW
PATIENTS BEGINNING TREATMENT DURING A PERIOD OF TIME AND (IV) "CASE ACCEPTANCE
RATE" MEAN, FOR ANY SPECIFIED PERIOD OF TIME, THE PERCENTAGE OF POTENTIAL
PATIENTS WHO UNDERGO AN INITIAL EXAMINATION AT AN ORTHODONTIC PRACTICE AND ELECT
TO BEGIN TREATMENT WITH THE EXAMINING ORTHODONTIST.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY
INVOLVES A HIGH DEGREE OF RISK, AND PROSPECTIVE INVESTORS SHOULD CAREFULLY
CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS."
THE COMPANY
Apple is a leading provider of practice management services (which exclude
the management and delivery of orthodontic services) to orthodontic practices in
the United States and Canada. The Company offers its Affiliated Practices a full
range of such services designed to facilitate the delivery of high-quality,
affordable orthodontic treatment to consumers. The Company's Affiliated
Practices benefit from a Company-developed practice operating approach designed
to (i) stimulate demand in their local markets by increasing consumer awareness
of the benefits, availability and affordability of orthodontic treatment, (ii)
improve the productivity and profitability of their practices and (iii) leverage
the benefits of orthodontist affiliation by providing basic services that
include clinical and financial information management, access to capital and
sophisticated technology, group purchasing and comprehensive marketing
techniques.
The Company seeks to grow through affiliating with additional orthodontic
practices and developing new offices. It earns revenue by providing management,
administrative, development and other services to its Affiliated Practices. As
of May 4, 1998, the Company provided management services to 59 orthodontic
practices representing 84 orthodontists operating in 18 states in the United
States and 3 provinces in Canada.
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 approximately 3% being affiliated with public orthodontic
practice management companies. 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. Management believes that the potential
market for orthodontic services could be significantly increased based on
growing acceptance among adult consumers and industry data indicating that only
one out of five children who could benefit from orthodontics receives treatment.
The traditional orthodontic practice relies primarily on referrals from general
dentists.
Through its practice operating approach, the Company seeks to stimulate
productivity and internal growth in its Affiliated Practices. This approach
consists principally of (i) implementing practice-building and external
marketing programs designed to generate new case 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 communications with patients and prospective patients and increase
productivity, (v) developing new offices to expand the scope of the geographic
markets the Affiliated Practices serve and (vi) utilizing a customized
management information system to provide detailed financial and operating data
and related analyses to Affiliated Practices and management. The Company
believes that its approach has resulted in local market expansion,
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<PAGE>
increased new case starts and practice profitability, greater orthodontist
productivity and heightened patient satisfaction in its existing Affiliated
Practices.
The Company is pursuing 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. It intends to
expand its network of Affiliated Practices through future affiliations and new
office development. Management believes that, because of the highly fragmented
nature of the industry, there are numerous orthodontic practices that are
attractive candidates to become Affiliated Practices. The Company focuses on
candidates having favorable reputations in their local markets and the desire to
implement the Company's practice operating approach. It seeks to build on the
reputations and relationships of the orthodontists associated with the existing
Affiliated Practices to identify and develop candidates to become future
Affiliated Practices.
RISK FACTORS
The Common Stock involves a high degree of risk. See "Risk Factors."
RECENT DEVELOPMENTS
During 1998 (through May 4), the Company has affiliated with 18 additional
orthodontists, 14 of which have established Practices. These Practices operate
in 13 locations. The total consideration for these affiliations consisted of
approximately 404,000 shares of Common Stock and approximately $3.5 million in
cash, assumed debt and deferred purchase price.
On May 5, 1998, the Company announced earnings per share of $0.10 on a
basic and diluted basis for the quarter ended March 31, 1998, compared to $0.07
per share on a basic and diluted basis for the prior quarter ended December 31,
1997. It reported net income of $1.3 million in the first quarter of this year,
compared with $872,246 in net income in the fourth quarter of 1997.
The Company also announced that John G. Vondrak, D.D.S., chairman and
chief executive officer, has been given the added responsibilities of president
and chief operating officer, replacing Robert J. Syverson. Stephen T. Yavorsky,
formerly head of real estate operations, has been elected vice president of
business development, replacing H. Steven Walton. The Company also announced the
election of W. Daniel Cook, currently chief administrative officer, to the
position of senior vice president of practice affiliations, with primary
responsibility for attracting additional orthodontists to affiliate with the
Company. In conjunction with these management changes, the Company announced
that it would record a special pretax nonrecurring charge of approximately $3.7
million during the second quarter of 1998, which reflects severance costs
associated with these management changes, costs of terminated transaction
negotiations and certain other items.
The Company also announced that has received a commitment to increase its
credit facility to $25 million from $15 million, and that the Company's board
membership has been increased from five to seven members with the appointment of
Richard J. Marxen and Robert L. Brewton.
In reaction to recent trends in the practice management industry, the
Company has changed its estimate of the remaining useful life of its intangible
assets to a maximum of a 25-year useful life effective April 1, 1998. These
costs have historically been amortized over a period of 30 to 40 years to match
the term of the related Service Agreement.
EXCEPT WHERE OTHERWISE SPECIFIED, INDUSTRY INFORMATION USED IN THIS
PROSPECTUS IS DERIVED FROM THE 1997 JOURNAL OF CLINICAL ORTHODONTISTS
ORTHODONTIC PRACTICE STUDY ("1997 JCO STUDY"), A BIENNIAL STUDY, AND RELATES
TO 1996 UNLESS OTHERWISE INDICATED. THE INFORMATION COMPILED IN THE 1997 JCO
STUDY RELATES TO ORTHODONTISTS WHO HAVE COMPLETED ACCREDITED GRADUATE
ORTHODONTIC TRAINING PROGRAMS AND NEITHER THAT INFORMATION NOR ANY OTHER
INDUSTRY INFORMATION SET FORTH IN THIS PROSPECTUS RELATES TO GENERAL AND
SPECIALTY DENTISTS WHO ALSO PERFORM ORTHODONTIC SERVICES.
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SUMMARY FINANCIAL DATA
The information set forth below for the year ended December 31, 1997 and
for the period from inception of operations (July 15, 1996) through December 31,
1996 is derived from the audited consolidated financial statements of the
Company included elsewhere in this Prospectus. The Company believes that
comparison of results for 1997 to those for the 1996 period are not meaningful
because the Company was effectively not in operation in 1996.
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
YEAR ENDED (JULY 15, 1996) THROUGH
DECEMBER 31, 1997 DECEMBER 31, 1996
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Management service fee revenues(1)... $ 19,186 $--
Costs and expenses(2):
Salaries and benefits........... 8,411 627
Orthodontic supplies............ 2,352 --
Rent............................ 2,156 20
Advertising and marketing....... 484 --
General and administrative...... 3,617 232
Depreciation and amortization... 943 5
Special compensation and
consulting expense related to
issuance of stock(3).......... -- 23,425
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Total costs and expenses... 17,963 24,309
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Operating income (loss).............. 1,223 (24,309)
Interest expense..................... 274 --
Interest and other income............ (207) --
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Income (loss) before income tax
provision............................ 1,156 (24,309)
Income tax provision................. 439 --
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Net income (loss).................... $ 717 $ (24,309)
================== =======================
Earnings (loss) per common and common
equivalent share:
Basic........................... $ 0.09 $ (7.24)
Diluted......................... 0.09 (7.24)
Weighted average shares outstanding:
Basic........................... 8,132 3,359
Diluted......................... 8,344 3,359
DECEMBER 31,
---------------------------------------------
1997 1996
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BALANCE SHEET DATA:
Working capital...................... $ 2,645 $ (2,324)
Total assets......................... 55,180 1,461
Long-term debt, net of current
portion.............................. 248 --
Stockholders' equity................. 35,493 (884)
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(1) Reflects management service fees since June 1, 1997 from the Practices (the
"Founding Affiliated Practices") with which the Company affiliated
concurrently with the completion of its initial public offering of Common
Stock (the "IPO") on May 29, 1997. Management service fees from
Affiliations after the IPO are included from the dates of Affiliation.
(2) Corporate office expenses are included for all periods presented.
(3) Reflects non-recurring charges recorded at $7.00 per share for shares issued
to management and advisors of the Company in October and December 1996.
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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 ACQUIRING ANY OF THE SHARES OF THE COMMON STOCK
OFFERED HEREBY. THIS PROSPECTUS CONTAINS STATEMENTS OF MANAGEMENT'S PLANS AND
OBJECTIVES AND OTHER "FORWARD-LOOKING" STATEMENTS THAT INVOLVE A NUMBER OF
RISKS, UNCERTAINTIES AND ASSUMPTIONS. NO ASSURANCE CAN BE GIVEN THAT ACTUAL
RESULTS WILL NOT DIFFER MATERIALLY FROM THESE STATEMENTS AS A RESULT OF VARIOUS
FACTORS, INCLUDING THOSE DISCUSSED BELOW. THE ABILITY OF THE COMPANY TO IMPROVE
ITS OPERATING RESULTS DEPENDS ON THE EXTENT TO WHICH ITS BUSINESS STRATEGIES FOR
GROWTH SUCCEED. NO ASSURANCE CAN BE GIVEN THAT THE COMPANY WILL NOT ENCOUNTER
UNFORESEEN COSTS, DELAYS OR IMPEDIMENTS IN IMPLEMENTING THESE STRATEGIES, THAT
THESE STRATEGIES WILL PRODUCE THE BENEFITS MANAGEMENT EXPECTS OR THAT THESE
STRATEGIES WILL BE SUCCESSFUL.
LIMITED COMBINED OPERATING HISTORY
The Company was incorporated in July 1996 and conducted no practice
management operations before it completed its initial public offering of Common
Stock (the "IPO") in May 1997. Because the Company has a limited combined
operating history, there can be no assurance that its efforts to integrate the
management and administrative functions of the Affiliated Practices will be
successful. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- Service Agreements."
RELIANCE ON AFFILIATED PRACTICES AND ORTHODONTISTS
The Company receives fees for services provided to the Affiliated Practices
under long-term service agreements (the "Service Agreements"). It does not
employ orthodontists or control the practice of orthodontics by the
orthodontists the Affiliated Practices employ, and its services revenue
generally depends on the revenues the Affiliated Practices generate. In some
cases, the fees are based on the costs and expenses the Company incurs in
connection with providing services. The profitability of the Affiliated
Practices and the performance of the individual orthodontists they employ affect
the Company's profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Service
Agreements."
The revenues of the Affiliated Practices (and, therefore, the success of
the Company) depend on the fees their orthodontists generate. Typically, each
orthodontist affiliated with an Affiliated Practice enters into an employment
agreement, generally with a term ranging from five to seven years, 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. In addition, 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. Failure by the Affiliated Practices to
employ a sufficient number of orthodontists (whether by renewals of existing
employment agreements or otherwise) would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Industry" and " -- Orthodontist Employment Agreements."
RISKS ASSOCIATED WITH EXPANSION STRATEGY
The success of the Company's expansion strategy depends on a number of
factors, including the Company's ability to (i) identify attractive candidates
to become Affiliated Practices, (ii) affiliate with 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, including regulatory and licensing requirements applicable to
orthodontists and their services and facilities, (iv) expand the Company's
infrastructure and management to accommodate expansion and (v) obtain suitable
financing to
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facilitate its expansion program. Effecting affiliations can be a lengthy,
complex and costly process. 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 provide services
effectively 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 affiliations
could result in significant dilution to then-existing stockholders. In addition,
affiliations accounted for as purchases may result in substantial noncash
amortization charges for intangible assets in the Company's statements of
operations. In this connection, the Company changed, effective April 1, 1998,
its estimate of the remaining useful life of its intangible assets in light of
recent trends in the practice management industry. From that date, it will use a
maximum 25-year useful life for amortizing intangible assets attributable to
Affiliations. Prior to that date, these costs were being amortized over a period
of 30 to 40 years to match the term of the related Service Agreement. See
" -- Competition," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" and "Business -- Strategy."
NEED FOR ADDITIONAL FINANCING
The Company's expansion strategy requires substantial capital resources.
Capital is needed for future Affiliations and the effective integration,
operation and expansion of the existing and future 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 loans by the Company to Affiliated Practices
under various circumstances. The extent to which the Company is able or willing
to use shares of Common Stock to enter into future affiliations or provide
future financing will depend on the market value of the Common Stock from time
to time and, in the case of affiliations, the willingness of owners of Practices
to accept Common Stock as full or partial payment of the consideration for
affiliations. Using shares of Common Stock for these purposes may result in
significant dilution to then-existing stockholders. The Company will require
additional capital from outside financing sources in order to continue its
expansion program. 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
COMPETITION
The Company faces substantial competition from other companies to establish
affiliations with additional orthodontic practices. The Company is aware of a
number of other public and private practice management companies focused on
orthodontics, as well as several companies pursuing similar strategies in
dentistry and other segments of the health care industry. The Company is aware
that general dental practice management companies have, or intend to, provide
orthodontic services and seek to affiliate with or employ orthodontists. Certain
of these competitors have greater financial and other resources than the
Company. 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
operates. The Affiliated Practices face 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, that additional
competitors will not enter their markets or that additional competition will not
have a material adverse effect on the Company.
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GOVERNMENT REGULATION
Various U.S. federal and state laws and Canadian laws 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, as well as certain other activities.
The specific restrictions against the corporate practice of orthodontics and the
interpretation of those restrictions by state regulatory authorities vary from
jurisdiction to jurisdiction. The restrictions are generally designed to
prohibit an entity not wholly owned by orthodontists (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 jurisdictions, employing dental hygienists or orthodontic
assistants), or controlling the content of an orthodontist's advertising or
professional practice. Apple does not acquire any professional assets or employ
any orthodontists who provide orthodontic services at any of the Affiliated
Practices' locations. The laws of many jurisdictions also prohibit orthodontists
from sharing professional fees with non-orthodontic entities. 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 certain conditions are met. There can be no assurance 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 that have 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.
See "Business -- Government Regulation."
DEPENDENCE ON KEY PERSONNEL
The success of the Company's operations will depend on the efforts of its
executive officers. The business and prospects of the Company could be adversely
affected if any of these persons do not continue in their respective management
roles and the Company is unable to attract and retain qualified replacements. In
May 1998, the Company undertook a management reorganization in which the
employment of the Company's president and vice president of business development
was terminated, the Company's chief executive officer assumed the
responsibilities of the president, the Company's chief administrative officer
became a senior vice president of professional affiliations and the Company
elected a new vice president of business development. See "Management." The
success of the Company's growth strategy also depends on the Company's ability
to attract and retain additional qualified personnel.
LITIGATION
The Company is a party to a pending lawsuit with Orthodontic Centers of
America, Inc. ("OCA") in which OCA is seeking compensatory and punitive
damages and equitable relief against the Company and its chief executive
officers and others. See "Business -- Insurance and Litigation." The Company
intends to vigorously defend the claims made by OCA, which the Company believes
are without merit, but cannot assure it will be successful.
The Company is not currently a party to any material claims, suits or
complaints relating to services and products provided by the Company or the
existing Affiliated Practices, although there can be no assurance that such
claims will not be asserted against the Company in the future. The Company is
subject to certain pending claims as a result of successor liability in
connection with its affiliations with existing Affiliated Practices.
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
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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.
There can be no assurance 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 -- Insurance and Litigation."
EXTENT OF PROTECTION OF PROPRIETARY RIGHTS
Apple relies in part on trademark, service mark, trade dress, trade secret,
unfair competition and copyright laws to protect its intellectual property
rights. There can be no assurance that actions taken by the Company will be
adequate to protect its intellectual property rights from misappropriation by
others, that the Company's proprietary information will not become known to
competitors, that others will not independently develop substantially equivalent
or better intellectual properties that do not infringe on the Company's
intellectual property rights or that others will not assert rights in, and
ownership of, proprietary rights of the Company. The Company's rights to its
"APPLE ORTHODONTIX" common law service mark may be limited in market areas
where a similar trademark or service mark may already be in use. The Company has
not applied for or obtained any registrations of its trademarks or service
marks. The Company is aware of several other businesses that utilize an
"APPLE" service mark in connection with the provision of general dental
services, some of which have obtained federal or state trademark registrations.
The Company is aware of one other orthodontic practice in the United States that
utilizes a service mark similar to the Company's, which practice is not located
in a market where any of the existing Affiliated Practices' offices are located.
See "Business -- Extent of Protection of Proprietary Rights."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
As of May 4, 1998, 10,540,016 shares of Common Stock and 3,048,107 shares
of Class B Stock were outstanding. The 4,617,500 shares of Common Stock sold in
the IPO and a registered public offering in November 1997 generally are freely
tradable. Approximately 3,449,000 shares of Common Stock are subject to
contractual restrictions on resale that lapse on May 29, 1998, when these shares
will become eligible for resale subject to the applicable limitations of
Securities Act Rule 144. Approximately 1,346,000 shares are subject to
contractual restrictions on resale that lapse at various times during the 12
months ending April 30, 1999. These shares were registered under the Securities
Act by means of the Registration Statement of which the Prospectus is a part.
Beginning in June 1998, substantially all the remaining outstanding shares of
Common Stock (including shares issued and held in trust for exchange for
securities of a Canadian subsidiary) and the outstanding Class B Stock will be
eligible for resales either subject to the applicable limitations of Securities
Act Rule 144 or by means of a shelf registration statement the Company will file
under the Securities Act
Pursuant to Securities Act Rule 145, the volume limitations and certain
other requirements of Rule 144 will apply to resales of the Common Stock this
Prospectus covers by affiliates of the Practices with which the Company
affiliates or the business the Company acquires for a period of one year from
the date of the affiliation or acquisition (or such shorter period as the SEC
may prescribe), but otherwise these shares will be freely tradable by persons
not affiliated with the Company unless it restricts their resale by contract.
The availability for sale, or sale, of the shares of Common Stock eligible
for future sale could adversely affect the market price of the Common Stock
prevailing from time to time. See "Shares Eligible for Future Sale."
FLUCTUATIONS IN OPERATING RESULTS
The company's results of operations may fluctuate significantly from
quarter to quarter or year to year. Results may fluctuate due to a number of
factors, including the timing of future Affiliations and new 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."
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VOLATILITY OF STOCK PRICE
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 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 the Company's ability to open new
offices, affiliations by the Company or its competitors, government relations,
developments or disputes concerning proprietary rights, changes in health care
policy in the United States and Canada, the issuance of stock market analyst
reports and recommendations, and economic and other external factors beyond the
control of the Company, as well as operating results of the Company and
fluctuations in the Company's financial results. In this connection, if those
operating results do not meet analysts' consensus expectations for a period (as
happened for the Company's quarter ended March 31, 1998), the market price for
the Common Stock may be severely impacted. See "Price Range of Common Stock."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
(the "Charter") and Bylaws and of Delaware corporation 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 Common Stock. The Charter provides
for (i) "blank check" preferred stock, which may be issued without stockholder
approval and (ii) a classified Board of Directors. It also provides that
stockholders may act only at an annual or special meeting of stockholders and
may not act by written consent. In addition, the Company's Bylaws restrict the
right of the stockholders to call a special meeting of stockholders, nominate
directors, submit proposals to be considered at stockholders' meetings and adopt
amendments to the Bylaws. The Company also is subject to Section 203 of the
Delaware General Corporation Law, which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business 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."
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends on its capital stock and does
not anticipate paying cash dividends on its Common Stock or Class B Stock in the
foreseeable future. The Company's existing credit facility prohibits the payment
of dividends.
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THE COMPANY
Apple is a leading provider of practice management services (which exclude
the management and delivery of orthodontic services) to orthodontic practices in
the United States and Canada. The Company offers its Affiliated Practices a full
range of such services to facilitate the efficient and productive delivery of
high-quality, affordable orthodontic treatment to consumers. As of May 4, 1998,
the Company provided services to 59 orthodontic practices representing 84
orthodontists in 18 states in the United States and 3 provinces in Canada.
The Company was incorporated as a Delaware corporation in July 1996. Its
principal executive offices are located at 2777 Allen Parkway, Suite 700,
Houston, Texas 77019, and its telephone number is (713) 852-2500.
RECENT DEVELOPMENTS
During 1998 (through May 4), the Company has affiliated with 18 additional
orthodontists, 14 of which have established Practices. These Practices operate
in 13 locations. The total consideration for these affiliations consisted of
approximately 404,000 shares of Common Stock and approximately $3.5 million in
cash, assumed debt and deferred purchase price.
On May 5, 1998, the Company announced earnings per share of $0.10 on a
basic and diluted basis for the quarter ended March 31, 1998, compared to $0.07
per share on a basic and diluted basis for the prior quarter ended December 31,
1997. It reported net income of $1.3 million in the first quarter of this year,
compared with $872,246 in net income in the fourth quarter of 1997.
The Company also announced that John G. Vondrak, D.D.S., chairman and
chief executive officer, has been given the added responsibilities of president
and chief operating officer, replacing Robert J. Syverson. Stephen T. Yavorsky,
formerly head of real estate operations, has been elected vice president of
business development, replacing H. Steven Walton. The Company also announced the
election of W. Daniel Cook, currently chief administrative officer, to the
position of senior vice president of practice affiliations, with primary
responsibility for attracting additional orthodontists to affiliate with the
Company. In conjunction with these management changes, the Company announced
that it would record a special pretax nonrecurring charge of approximately $3.7
million during the second quarter of 1998, which reflects severance costs
associated with these management changes, costs of terminated transaction
negotiations and certain other items.
The Company also announced that has received a commitment to increase its
credit facility to $25 million from $15 million, and that the Company's board
membership has been increased from five to seven members with the appointment of
Richard J. Marxen and Robert L. Brewton.
In reaction to recent trends in the practice management industry, the
Company has changed its estimate of the remaining useful life of its intangible
assets to a maximum of a 25-year useful life effective April 1, 1998. These
costs have historically been amortized over a period of 30 to 40 years to match
the term of the related Service Agreement.
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PRICE RANGE OF COMMON STOCK
The following table sets forth the range of the high and low sale prices
for the Common Stock on The American Stock Exchange for the periods indicated:
HIGH LOW
---- ----
Year Ended December 31, 1997:
Second Quarter (commencing May
23)............................... $11 11/16 $ 7 5/8
Third Quarter...................... 16 1/4 9
Fourth Quarter..................... 16 1/8 10
Year Ending December 31, 1998:
First Quarter...................... 14 1/8 10 7/16
Second Quarter (through May 5)..... 16 1/2 6 1/2
The closing sale price per share of the Common Stock, as reported on The
American Stock Exchange, was (i) $12 15/16 on May 4, 1998, the last trading day
before the Company issued a press release announcing its earnings for the
quarter ended March 31, 1998, the management changes described under
"Management" and the special charge described under "The Company -- Recent
Developments," (ii) $7 3/16 on the date of that announcement and (iii) $ on
May , 1998. As of May 4, 1998, there were approximately 162 holders of record
of the Common Stock, as shown on the records of the transfer agent and registrar
for the Common Stock. The number of record holders does not bear any
relationship to the number of beneficial owners of the Common Stock.
DIVIDEND POLICY
The Company has never paid any cash dividends on its capital stock and does
not anticipate paying cash dividends on its Common Stock or Class B Stock in the
foreseeable future. The Company currently intends to retain earnings to support
operations and finance expansion. The Company's existing credit facility
prohibits the payment of dividends.
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SELECTED FINANCIAL DATA
The information set forth below for the year ended December 31, 1997 and
for the period from inception of operations (July 15, 1996) through December 31,
1996 is derived from the audited consolidated financial statements of the
Company included elsewhere in this Prospectus. The Company believes that
comparison of results for 1997 to those for the 1996 period are not meaningful
because the Company was effectively not in operation in 1996.
PERIOD FROM INCEPTION
(JULY 15, 1996)
YEAR ENDED THROUGH
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ---------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Management service fee revenues(1)... $19,186 $--
Costs and expenses(2):
Salaries and benefits........... 8,411 627
Orthodontic supplies............ 2,352 --
Rent............................ 2,156 20
Advertising and marketing....... 484 --
General and administrative...... 3,617 232
Depreciation and amortization... 943 5
Special compensation expense
related to issuance
of stock(3)................... -- 13,812
Special consulting expense
related to issuance of
stock(3)...................... -- 9,613
----------------- ---------------------
Total costs and expenses... 17,963 24,309
----------------- ---------------------
Operating income (loss).............. 1,223 (24,309)
Interest expense..................... 274 --
Interest and other income............ (207) --
----------------- ---------------------
Income (loss) before income tax
provision.......................... 1,156 (24,309)
Income tax provision................. 439 --
----------------- ---------------------
Net income (loss).................... $ 717 $ (24,309)
================= =====================
Earnings (loss) per common and common
equivalent share:
Basic........................... $ 0.09 $ (7.24)
Diluted......................... 0.09 (7.24)
Weighted average shares outstanding:
Basic........................... 8,132 3,359
Diluted......................... 8,344 3,359
DECEMBER 31,
--------------------
1997 1996
--------- ---------
BALANCE SHEET DATA:
Working capital...................... $ 2,645 $ (2,324)
Total assets......................... 55,180 1,461
Long-term debt, net of current
portion.............................. 248 --
Stockholders' equity................. 35,493 (884)
- ------------
(1) Reflects management service fees from the Founding Affiliated Practices
since June 1, 1997. Management service fees from Affiliations after the IPO
are included from the dates of Affiliation.
(2) Corporate office expenses are included for all periods presented.
(3) Reflects non-recurring charges recorded at $7.00 per share for shares issued
to management and advisors of the Company in October and December 1996.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN STATEMENTS OF A
FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL
PERFORMANCE OF THE COMPANY. SUCH STATEMENTS ARE ONLY PREDICTIONS AND THE ACTUAL
EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. THE
HISTORICAL RESULTS SET FORTH IN THIS DISCUSSION AND ANALYSIS ARE NOT INDICATIVE
OF TRENDS WITH RESPECT TO ANY ACTUAL OR PROJECTED FUTURE FINANCIAL PERFORMANCE
OF THE COMPANY. THIS DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE FINANCIAL STATEMENTS OF THE COMPANY AND THE RELATED NOTES THERETO INCLUDED
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company conducted no significant operations before its IPO in May 1997
when the Company acquired the tangible and intangible assets and liabilities of,
and entered into Service Agreements with, the 31 Founding Affiliated Practices.
Since that time and through May 4, 1998, the Company has affiliated with an
additional 28 Practices and 53 orthodontists operating in 53 offices. The
Company expects that its future growth will come from (i) implementing a
comprehensive practice operating approach designed to drive internal growth of
the Affiliated Practices, (ii) entering into Service Agreements with new
Affiliated Practices and (iii) developing new orthodontic centers, including
satellite offices (branch locations of existing Affiliated Practices), with
existing and future Affiliated Practices.
Through its Service Agreements, the Company provides a full complement of
practice management services to Affiliated Practices in return for management
service fees. The management service fees earned by the Company are in
accordance with three general types of Service Agreements -- the standard form
of the Service Agreement (the "Standard Contract"), the alternative form of
the Service Agreement (the "Alternative Contract") and a Service Agreement
based on a flat fee (the "Flat Fee Contract"). The Standard Contract calls for
a calculation of the monthly service fee based on the total patient revenues
earned by the Affiliated Practice, 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 patient revenues, the practices retain
a percentage of the Affiliated Practices' cash collections.
The Alternative Contract is used in certain jurisdictions where use of the
Standard Contract is not permitted. It is a cost-plus fee arrangement, whereby
the service fee includes the reimbursement of defined expenses incurred by the
Company in the course of providing services to the Affiliated Practice plus a
percentage of revenues. The Flat Fee Contract is based on a flat fee that is
subject to adjustment on an annual basis. It is used when local jurisdictions do
not allow use of the Standard Contract or the Alternative Contract. The Company
believes the fees generated by each of these formulas reflect the fair market
value of the services provided and are comparable to the fees earned by other
practice management service companies in the respective jurisdictions where
these arrangements exist. 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 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 existing Affiliated Practices. In addition to the operating costs and
expenses discussed above, the Company incurs personnel and administrative
expenses in connection with establishing and maintaining a corporate office,
which provides management, administrative, marketing and business development
services.
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In accordance with Staff Accounting Bulletin ("SAB") No. 48, "Transfers
of Nonmonetary Assets by Promoters or Shareholders," published by the SEC, the
acquisition of the assets and assumption of certain liabilities for all the
Founding Affiliated Practices has been accounted for by the Company at the
transferors' historical cost basis, with the shares of Common Stock issued in
those transactions being valued at the historical cost of the nonmonetary assets
acquired net of liabilities assumed. The cash consideration paid at closing on
May 29, 1997 is reflected as a dividend by the Company to the owners of the
Founding Affiliated Practices in 1997. SAB No. 48 is not applicable to
Affiliations effected by the Company after the IPO. These subsequent
Affiliations have resulted and will continue to result in substantial noncash
amortization charges for intangible assets in the Company's statements of
operations. In this connection, the Company changed, effective April 1, 1998,
its estimate of the remaining useful life of its intangible assets in light of
recent trends in the practice management industry. From that date, it will use a
maximum 25-year useful life for amortizing intangible assets attributable to
Affiliations. Prior to that date, these costs were being amortized over a period
of 30 to 40 years to match the term of the related Service Agreement.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FROM
INCEPTION (JULY 15, 1996) THROUGH DECEMBER 31, 1996
MANAGEMENT SERVICE FEE REVENUES
The Company generated management service fee revenues of $19.2 million for
the year ended December 31, 1997. The Company conducted no significant
operations during 1996 through the date of the IPO. Following completion of the
IPO and the affiliations with the Founding Affiliated Practices on May 29, 1997,
the Company began operations effective June 1, 1997. Therefore, management
service fee revenues reflect only seven months of operations during the year
ended December 31, 1997 and there were no management service fee revenues during
the year ended December 31, 1996.
COSTS AND EXPENSES
The Company incurred costs and expenses of $18.0 million (93.6% of service
fee revenues) for the year ended December 31, 1997. The Company's costs and
expenses consisted primarily of salaries and benefits, orthodontic supplies,
rent, advertising and marketing, general and administrative and depreciation and
amortization. Costs and expenses of $24.3 million for 1996 represented corporate
office expenses for the period from inception (July 15, 1996) through December
31, 1996. Of the $24.3 million of costs and expenses for the period ended
December 31, 1996, $23.4 million related to the valuing of stock issued to
founders, management and advisors of the Company in October and December 1996 at
the initial public offering price of $7.00 per share. This valuation resulted in
special compensation expense of $13.8 million and special consulting expense of
$9.6 million, with a corresponding increase in additional paid-in capital of
$23.4 million. There was no net effect on stockholders' equity. The Company also
incurred various legal, accounting, travel, personnel and marketing costs during
the period from inception (July 15, 1996) through December 31, 1996 in
connection with the IPO and the Affiliations with the Founding Affiliated
Practices.
OPERATING INCOME
The Company generated operating income of $1.2 million for the year ended
December 31, 1997. This operating income amount comprised 6.4% of service fee
revenues for the period. The Company generated an operating loss of $24.3
million for the year ended December 31, 1996, which was primarily attributable
to compensation and consulting charges described above. As stated above, these
results reflect the impact of the Company's Service Agreements only for the
period from June 1, 1997 through December 31, 1997 (i.e., the period subsequent
to the IPO) for the Founding Affiliated Practices and from the dates of
Affiliation through December 31, 1997 for all subsequent Affiliations. General
and administrative expenses were incurred during the entire period from
inception (July 15, 1996) through May 29, 1997 in connection with the IPO and
the Affiliations with the Founding Affiliated Practices.
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INTEREST EXPENSE
Interest expense of $273,506 for the year ended December 31, 1997 reflected
the cost of borrowings under the Company's revolving credit facility entered
into on July 28, 1997, certain indebtedness of the Founding Affiliated Practices
that was assumed by the Company and certain capital lease obligations for
computer and office equipment. No interest expense was incurred during the 1996
period.
INTEREST INCOME
Interest income of $190,669 for the year ended December 31, 1997 reflected
interest earned on the Company's net proceeds from the IPO and on notes
receivable from certain of the Founding Affiliated Practices. There was no
interest income generated during the 1996 period.
INCOME TAX PROVISION
The Company incurred an income tax provision of $439,282 for the year ended
December 31, 1997 representing an effective tax rate of 38%. The Company
incurred no income taxes for the 1996 period. The benefit of the net operating
loss generated during that period was fully reserved.
NET INCOME (LOSS)
As a result of the foregoing factors, the Company generated net income of
$716,725 for the year ended December 31, 1997, or earnings per share of $0.09.
This net income amount comprised 3.7% of service fee revenues for the year. The
net loss of $24.3 million for the 1996 period represented a loss per share of
$7.24.
YEAR 2000 IMPACT ON INFORMATION TECHNOLOGY INFRASTRUCTURE
During 1997, the Company completed a comprehensive evaluation of its
information technology infrastructure to analyze the impact of the technical
problems anticipated for the year 2000. Following its evaluation, the Company
determined that substantially all its information technology infrastructure
would be unaffected by such problems and that the financial impact of the year
2000 on the Company's information technology infrastructure would be negligible.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
The Company has financed its capital requirements to date with borrowings
from banks and issuances of equity securities. To date, the Company has been
able to obtain satisfactory financing for its operations and believes that it
will be able to obtain such financing as it requires in the future. On July 28,
1997, the Company entered into a three-year, $15.0 million revolving credit
facility with Chase Bank of Texas, N.A. (the "Chase Facility"). Availability
under the Chase Facility is tied to the Company's cash flow and liquidity.
Advances under the Chase Facility bear interest, at the Company's option, at a
prime rate or LIBOR, in each case plus a margin calculated based on the
Company's ratio of indebtedness to cash flow. At May 4, 1998, $8.0 million was
outstanding under this facility.
In May 1997, the Company issued and sold 2,702,500 shares of Common Stock
in the IPO. The IPO provided the Company with net proceeds of approximately
$12.1 million, which it used to fund cash paid for Affiliations with the
Founding Affiliated Practices ($6.6 million) and subsequent Affiliations with
additional Practices ($5.5 million). In November 1997, the Company issued and
sold 1,490,014 shares of Common Stock in a public offering (the "Offering").
The Company has used the net proceeds of the Offering ($15.3 million) to repay
$12.2 million under the Chase Facility, to affiliate with additional
orthodontists, to develop new offices, for capital expenditures and for general
corporate purposes.
Total long-term debt increased from zero at December 31, 1996, to $247,624
at December 31, 1997. The increase was attributable to borrowings for
Affiliations, the purchase of property and equipment and general working capital
needs, net of repayment of borrowings under the Chase Facility with the proceeds
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of the Offering. The Company's weighted average cost of indebtedness was 8.7%
per annum for the year ended December 31, 1997.
WORKING CAPITAL MANAGEMENT
The Company's strategy in managing its working capital is to maintain
sufficient availability under its bank credit facility to finance short-term
capital needs in excess of internally generated funds and minimize excess cash
on its balance sheet.
The cash and cash equivalents balance of $2.1 million at December 31, 1997
primarily consisted of net proceeds remaining from the Offering.
The restricted cash balance of $2.1 million at December 31, 1997 consisted
of borrowings under the Chase Facility which were placed into escrow pending the
resolution of certain post-closing contingencies related to an Affiliation
completed during the third quarter of 1997. A favorable resolution of these
post-closing contingencies would result in payment of the $2.1 million to the
sellers in January 1999. The Company has the right to post a letter of credit in
order to have the $2.1 million released from escrow to the Company prior to
January 1999.
CAPITAL EXPENDITURES AND NEW AFFILIATIONS
The Company made capital expenditures for the Affiliated Practices during
1997 of approximately $3.6 million to fund, among other things, the development
of new offices. The average cost of developing a new office (which may vary by
geographic market) is estimated to be approximately $250,000 to $400,000,
including initial working capital requirements. The Service Agreements provide
for advances by the Company to the Affiliated Practices for working capital
requirements (including any deficits in cash flows of Affiliated Practices
resulting from, among other factors, development of satellite offices) and other
purposes. Such loans bear interest at prime plus 1% and are repayable over
varying periods of time not to exceed five years. Total notes receivable from
Affiliated Practices were $1.6 million at December 31, 1997. It is anticipated
that capital expenditures in 1998 will be funded from the Company's cash flow
from operations, the net proceeds from the Offering and borrowings under the
Chase Facility.
The Company's expansion strategy requires substantial capital resources.
Capital is needed for future Affiliations and the effective integration,
operation and expansion of the existing and future 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
extent to which the Company is able or willing to use shares of Common Stock to
enter into future Affiliations or provide future financing will depend on the
market value of the Common Stock from time to time and, in the case of
Affiliations, the willingness of owners of potential Affiliated Practices to
accept Common Stock as full or partial payment of consideration for
Affiliations. The Company will require additional capital from outside financing
sources in order to continue its expansion program. 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.
The availability of these capital sources will depend on prevailing market
conditions, interest rates and the then existing financial condition of the
Company. During the year ended December 31, 1997, the Company spent $8.7 million
of cash (including $321,000 in deferred payments and $1.5 million in related
out-of-pocket costs) and issued 1.9 million shares of Common Stock in connection
with Affiliations with new Affiliated Practices.
AFFORDABLE PAYMENT PLANS
A part of the Company's business strategy is to encourage Affiliated
Practices to offer more affordable payment plans to patients. The Company does
not expect the affordable payment plans, or any potential increase in bad debt
expense resulting from these plans, to have any significant negative impact on
the working capital or liquidity of the Affiliated Practices. Existing
Affiliated Practices using such payment plans have experienced an initial
decrease in working capital; however, the Company believes that the
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decrease in working capital generally will be offset by an increase in the
number of patients receiving orthodontic treatment because of the combined
effect of advertising, offering more affordable payment plans and the use of the
Company's practice-building program. Moreover, the Company believes the existing
Affiliated Practices have the financial wherewithal to sustain any negative
impact that may result from these payment plans. Therefore, the Company does not
anticipate that the offering by the Affiliated Practices of more affordable
payment plans will impair the Company's ability to collect service fees from the
Affiliated Practices.
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BUSINESS
OVERVIEW
The Company provides practice management services (which exclude the
management and delivery of orthodontic services) to orthodontic practices in the
United States and Canada. The Company offers the Affiliated Practices a full
range of such services designed to facilitate the delivery of high-quality,
affordable orthodontic treatment to consumers. The Company's Affiliated
Practices benefit from the Company's practice operating approach designed to (i)
stimulate demand in their local markets by increasing consumer awareness of the
benefits, availability and affordability of orthodontic treatment, (ii) improve
the productivity and profitability of their practices and (iii) leverage the
benefits of orthodontist affiliation by providing basic services that include
clinical and financial information management, access to capital and
sophisticated technology, group purchasing and comprehensive marketing
techniques. The Company seeks to grow through affiliations with additional
orthodontic practices and the development of new offices that complement
geographic areas served by the Affiliated Practices. The Company earns revenue
by providing management, administrative, development and other services to its
Affiliated Practices.
Concurrently with the IPO in May 1997, the Company acquired substantially
all the tangible and intangible assets and assumed certain liabilities of, and
began providing long-term management services to, the Founding Affiliated
Practices. During the remainder of 1997, the Company affiliated with an
additional 20 practices with aggregate historical gross patient revenues of
$23.2 million for their most recently completed fiscal year. As of May 4, 1998,
the Company provided services to 59 orthodontic practices representing 84
orthodontists operating in 18 states in the United States and three provinces in
Canada.
The Company selects Practices for affiliation on the basis of 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. The
Company also considers the local and national reputations of the Affiliated
Practices within the orthodontic services industry, their ability to manage
multi-location practices providing high levels of quality care and their desire
to grow and improve the operating efficiency of their respective practices. The
Company selects its Affiliated Practices based on the recommendations of its
affiliated orthodontists and management's extensive experience with orthodontic
practices in the United States and Canada.
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 approximately 3% being affiliated with public
orthodontic practice management companies. 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.
Orthodontic treatments are principally provided by orthodontists who have
completed two years of post-graduate studies following graduation from dental
school. The number of orthodontists in the United States has grown slowly since
1990, which the Company 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 herein
does not include orthodontic treatments provided by dentists.
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.
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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.
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 practice operating approach, the Company assists its 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 also assists the Affiliated Practices in developing satellite offices to
expand the scope of the geographic areas they serve.
The Company believes its approach provides benefits to orthodontists who
choose to affiliate with it by providing opportunities 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.
OPERATING STRATEGY
Through its practice operating approach, the Company seeks to stimulate
increased productivity and internal growth within its Affiliated Practices. This
approach consists principally of (i) implementing practice-building and external
marketing programs designed to generate new case 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 communications with patients and prospective patients and increase
productivity, (v) developing satellite offices to expand the geographic markets
the Affiliated Practices serve and (vi) utilizing customized management
information systems to provide detailed financial and operating data and related
analyses to Affiliated Practices and management. The Company believes that its
approach has resulted in local market expansion, increased new case starts and
practice profitability, increased orthodontist productivity and heightened
patient satisfaction in its existing Affiliated Practices.
Over time, the Company plans to implement a regional management structure
aligned with the locations of its Affiliated Practices. The Company believes a
regional structure will allow it to respond to the management and operational
issues within a particular region in a more timely and focused manner. In
addition, a regional structure will allow management to compare the operating
results of its Affiliated Practices to regularly published regional industry
statistics.
EXPANSION STRATEGY
The Company is pursuing an aggressive expansion strategy designed to
strengthen its position in its current markets and expand its network of
existing Affiliated Practices into markets it does not currently serve. The
Company believes that, because of the highly fragmented nature of the industry,
there are numerous orthodontic practices that are attractive candidates to
become Affiliated Practices. The Company focuses on candidates having favorable
reputations in their local markets and the desire to implement the Company's
practice operating approach. The Company leverages the reputations and
relationships of the orthodontists associated with the existing Affiliated
Practices to identify and develop 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,
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combined with the acquisition experience of management, provides the Company
with certain advantages in identifying, negotiating and consummating future
affiliations. As consideration for future affiliations, the Company intends to
use various combinations of its Common Stock, cash and notes. The Company
anticipates that the agreements entered into in connection with its future
affiliations will contractually restrict the resale of all or a portion of the
shares issued in those transactions for varying periods of time.
The Company is developing new offices within selected markets served by the
existing Affiliated Practices. The Company believes that the new offices will
increase the geographic area served by the existing Affiliated Practices,
thereby increasing the potential market and leveraging the advertising budget of
the existing Affiliated Practices. The Company expects that these offices
generally will be located in high traffic areas.
Satellite offices (branch locations of existing Affiliated Practices)
developed by the Company generally will be staffed on a part-time basis by an
orthodontist from an Affiliated Practice. The Company's other new offices
generally will be staffed on a full-time basis by a newly recruited
orthodontist. The average cost of developing a new office varies by geographic
market and the square footage of the office and is estimated to range from
$250,000 to $400,000, including initial working capital requirements. The
Company provides management services and capital to develop these new offices.
The Company is responsible for selecting the site, negotiating the lease,
designing the office layout and furnishing the new office. The Company also
assists the Affiliated Practices in recruiting orthodontists and support staff
for these new offices, which generally will be open full-time.
SERVICES AND OPERATIONS
The Company generally provides services with respect to all aspects of the
operations of its Affiliated Practices other than the provision of orthodontic
treatment. Except in Canada, the Company employs all business personnel at the
offices of the Affiliated Practices and, where permitted by applicable law and
governmental regulations, also employs the orthodontic assistants.
ADMINISTRATIVE. The Company earns revenue by providing services to the
Affiliated Practices, including staffing, education and training, billing and
collections, cash management, group 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 benefit from the support
provided by the Company and that these services substantially reduce the amount
of time the orthodontists are required to spend on administrative matters,
thereby enabling them to dedicate more time to the growth of their professional
practices. Through economies of scale, the Company is able to provide these
services at a lower cost than could be obtained by any of the Affiliated
Practices individually. In addition, because of its size and purchasing power,
the Company has been able to negotiate discounts on, among other things,
orthodontic and office supplies, health and malpractice insurance and equipment.
PRACTICE-BUILDING PROGRAM. The Company believes patient satisfaction
levels, practice productivity and profitability can be substantially enhanced
through a consistent training program emphasizing practice-building techniques.
The Company implements 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. The Company believes that these programs have a positive effect on
the patients' experience and therefore positively affect the number of patient
referrals and case acceptance rates of Affiliated Practices.
EXTERNAL MARKETING. The Company and its Affiliated Practices utilize
multimedia advertising in certain local markets to stimulate demand for
orthodontic treatment and promote name recognition for the
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Company 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
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 also stress the quality of care available at the
Affiliated Practices and the advantages of receiving orthodontic treatment from
a professionally trained orthodontist as opposed to a general dentist. The
advertisements also 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 is responsible for
subcontracting the production of all broadcast advertising, which is tailored to
meet local requirements. The frequency and airing times for any television
advertisements are determined by regional media consultants retained by the
Company 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 encourages the Affiliated Practices to
make orthodontic services available to a larger portion of the population in
their respective markets by offering more affordable payment plans. Many of the
existing 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. The typical payment plan recommended by the Company
consists of a modest initial down payment and monthly payments thereafter for
the duration of the treatment period, generally between 26 and 34 months.
Existing Affiliated Practices using such payment plans have experienced an
initial decrease in working capital; however, the Company believes that the
decrease in working capital generally will be offset by an increase in the
number of patients receiving orthodontic treatment because of the combined
effect of advertising, offering more affordable payment plans and the use of the
Company's practice-building program. The Company believes that offering more
affordable payment plans combined with the use of advertising has resulted in an
increase in the number of patients inquiring about orthodontic treatment. The
Company also believes that this increase, combined with the use of its internal
marketing programs, has resulted in an increase in the number of patients
receiving orthodontic treatment at the existing Affiliated Practices.
TRAINING AND EDUCATION. Staff and practice development programs are an
integral part of the Company's operating strategy. The Company believes its
programs (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 collectively result in increased referrals from existing and
former patients and increased case acceptance rates for the Affiliated
Practices. The Company provides 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 provides each member of the
Affiliated 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 is conducted both at individual clinics and in group sessions and
includes proprietary manuals, tapes and role playing activities.
MANAGEMENT INFORMATION SYSTEM. The Company believes that access to
accurate, relevant and timely financial and operating information is a key
element to providing practice management services to orthodontic practices. The
Company offers a fully integrated financial reporting, productivity measurement
and patient management system to each existing Affiliated Practice. This system
is 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
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improvement and take corrective action in a timely manner. Productivity measures
that are monitored include case acceptance rates, treatment times and case
starts. In addition, the management information system facilitates optimization
of the orthodontists' time through computerized scheduling and diagnostic and
treatment recordkeeping systems. The Company believes this system has improved
the productivity of the existing Affiliated Practices that have implemented it
through benchmarking programs that identify and help to establish the most
efficient operational procedures.
LOCATIONS
As of May 4, 1998, the Company provided management services in the
following locations:
NUMBER OF
-------------------------------------------
STATE/PROVINCE PRACTICES OFFICES ORTHODONTISTS
- --------------------------------- --------- --------- -------------
Alberta.......................... 5 6 5
Arizona.......................... 2 5 3
British Columbia................. 2 4 2
California....................... 11 15 12
Colorado......................... 6 12 7
Connecticut...................... 6 8 8
Georgia.......................... 1 1 1
Illinois......................... 1 4 1
Kentucky......................... 2 2 2
Massachusetts.................... 1 1 1
Michigan......................... 1 6 6
Montana.......................... 1 3 1
Nevada........................... 1 1 2
New Mexico....................... 1 2 1
New York......................... 1 2 1
Ontario.......................... 3 4 6
Pennsylvania..................... 2 4 2
South Carolina................... 1 2 1
Texas............................ 7 22 16
Utah............................. 2 4 2
Virginia......................... 2 3 4
--- --- ---
Totals...................... 59 111 84
=== === ===
SERVICE AGREEMENTS
The Company enters into a Service Agreement with each Affiliated Practice
and such practice's orthodontist employees under which the Company is the
exclusive administrator of non-orthodontic services relating to the operation of
the Affiliated Practice. The following is intended to be a brief summary of the
typical form of Service Agreement the Company has entered into and expects to
enter into with Affiliated Practices. The actual terms of the various Service
Agreements may vary from the description below on a case-by-case basis,
depending on negotiations with the individual Affiliated Practices and the
requirements of applicable law and governmental regulations.
The service fees payable to the Company by the Affiliated Practices under
the Service Agreements are calculated in accordance with the Company's three
general types of Service Agreements -- the Standard Contract, the Alternative
Contract and the Flat Fee Contract. The Standard Contract calls for a
calculation of the monthly service fee based on the total revenues earned by the
Affiliated Practices, 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 Company retains a percentage of the Affiliated
Practices' cash collections. The Alternative
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Contract is used in certain jurisdictions where use of the Standard Contract is
not permitted. It is a cost-plus fee arrangement, whereby the service fee
includes the reimbursement of defined expenses incurred by the Company in the
course of providing services to the Affiliated Practice plus a percentage of
revenues. The Flat Fee Contract is based on a flat fee that is subject to
adjustment on an annual basis. It is used when local jurisdictions do not allow
use of the Standard Contract or the Alternative Contract. The Company believes
the fees generated by each of these formulas are reflective of the fair market
value of the service provided and are comparable to the fees earned by other
management service companies in the respective jurisdictions where these
arrangements exist. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview".
Pursuant to each Service Agreement, the Company, among other things, (i)
acts as the exclusive manager and administrator of non-orthodontist services
relating to the operation of the Affiliated Practice, subject to matters
reserved to the Affiliated Practice, (ii) administers the billing of patients,
insurance companies and other third-party payors and collects on behalf of the
Affiliated Practice the fees for professional orthodontic and other services and
products rendered or sold by the Affiliated Practice, (iii) provides, as
necessary, clerical, accounting, payroll, legal, bookkeeping and computer
services and personnel, information management, tax return information,
printing, postage and duplication services and transcribing services, (iv)
supervises and maintains custody of substantially all files and records, (v)
provides facilities, equipment and furnishings for the Affiliated Practice, (vi)
prepares, in consultation with the Affiliated Practice, all annual capital and
operating budgets, (vii) orders and purchases inventory and supplies as
reasonably requested by the Affiliated Practice and (viii) implements, in
consultation with the Affiliated Practice, advertising programs.
Under each Service Agreement, the applicable 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 Affiliated
Practices are exclusively in control of all aspects of the practice of
orthodontics and the provision of orthodontic services.
During the term of the Service Agreement (generally 20 to 40 years) and,
subject to certain exceptions and limitations, for a period of two years
thereafter, the existing Affiliated Practices have agreed not to compete with
the Company or the other Affiliated Practices within a specified geographic
area. In addition, each orthodontist employee has agreed, subject to certain
exceptions and limitations, not to compete with the Company or the other
Affiliated Practices within a specified geographic area until the later of (i)
the fifth anniversary date of the Service Agreement or (ii) five years from the
date the employee becomes a stockholder of the Affiliated Practice, and for a
period of two years after the earlier of his or her termination of employment
with the Affiliated Practice or termination of the applicable Service Agreement.
The existing Affiliated Practices also have agreed not to disclose certain
confidential and proprietary information relating to the Company and the
Affiliated Practices.
Each Affiliated Practice is responsible for obtaining professional
liability insurance for the employees of the Affiliated Practice (which names
the Company as an additional insured).
ORTHODONTIST EMPLOYMENT AGREEMENTS
The revenues of the Affiliated Practices (and, therefore, the success of
the Company) are dependent on fees generated by the orthodontists the Affiliated
Practices employ. Each Affiliated Practice is a party to an employment agreement
with each orthodontist associated with its practice (the "Orthodontist
Employment Agreements"). The Orthodontist Employment Agreements are generally
for an initial term ranging from five to seven years, and continue thereafter on
a year-to-year basis until terminated under the terms of the agreements. The
Orthodontist Employment Agreements generally provide that the orthodontist will
not compete with the Company within a specified geographic area for a period of
two years following
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termination of the agreement. The Company does not employ orthodontists and,
where prohibited by applicable law, does not employ orthodontic hygienists or
orthodontic assistants.
COMPETITION
The Company faces substantial competition from other companies to establish
affiliations with additional orthodontic practices. The Company is aware of a
number of other public and private practice management companies focused on
orthodontics, as well as several companies pursuing similar strategies in
dentistry and other segments of the health care industry. The Company is aware
that general dental practice management companies have provided, or intend to
provide, orthodontic services and have sought, or intend to seek, to affiliate
with or employ orthodontists. Certain of these competitors have greater
financial and other resources than the Company. 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 operates. The Affiliated
Practices face 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. The Company 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, that additional competitors will not enter their markets or
that additional competition will not have a material adverse effect on the
Company.
EMPLOYEES
As of April 30, 1998, the Company had 583 employees, of which 34 are
employed at the Company's headquarters and 549 are employed at the locations of
the existing Affiliated Practices. None of the Company's employees is
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.
INSURANCE AND LITIGATION
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
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 of the existing Affiliated
Practices has undertaken to comply with all applicable regulations and legal
requirements, and the Company maintains liability insurance for itself and is
named as an additional insured party on the liability insurance policies of the
existing Affiliated Practices. The existing Affiliated Practices 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. The Company expects that it will require
future Affiliated Practices to maintain comparable insurance coverage. In the
event an Affiliated Practice employs more than one orthodontist, that practice
will maintain insurance with a separate limit for claims against that practice
in an amount acceptable to the Company. There can be no assurance 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.
The Company and the existing Affiliated Practices maintain 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.
On December 10, 1996, OCA filed a complaint in the United States District
Court for the Eastern District of Louisiana against the Company, Dr. Vondrak,
John G. Vondrak, P.C. and John G. Vondrak Apple Orthodontix, Inc. ("JGVAOI"),
one of the Founding Affiliated Practices, alleging, among other things,
misappropriation of trade secrets and certain breaches of a confidentiality
agreement executed by
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Dr. Vondrak, on behalf of John G. Vondrak, P.C., in favor of OCA. While the
Company is not a party to the confidentiality agreement, OCA alleged that the
Company should be bound by its terms as a result of the relationship between Dr.
Vondrak and the Company (specifically, OCA alleged that Dr. Vondrak and Apple
are alter egos and, alternatively, that Dr. Vondrak was acting as the Company's
agent when he executed the confidentiality agreement). OCA's complaint stated
that OCA was seeking monetary damages in excess of $75,000. In August 1997, the
court dismissed OCA's claims without prejudice on the grounds that the court
lacked jurisdiction. There can be no assurance that OCA will not seek to
overturn the court's decision or file a similar suit in another jurisdiction.
In August 1997, the Company filed a declaratory judgment action in the
District Court of Harris County, Texas (164th Judicial District) seeking a
finding by the court that neither the Company nor Dr. Vondrak has violated the
terms of the confidentiality agreement, otherwise used confidential information
supplied by OCA or unfairly competed against OCA. In October 1997, OCA filed an
answer generally denying the Company's allegations, as well as asserting a
counterclaim against the Company, JGVAOI, Apple Orthodontix of Texas, Inc.,
Apple Acquisition of Texas, Inc., Dr. Vondrak, John G. Vondrak, P.C., one of the
Founding Affiliated Practices and the orthodontist associated with such
practice. OCA's counterclaim alleges, among other things, unfair competition,
misappropriation of trade secrets, tortious interference with prospective
contractual arrangements and certain breaches of confidentiality agreements
executed by each of Dr. Vondrak, on behalf of John G. Vondrak, P.C., and the
affiliated orthodontist, on behalf of the Founding Affiliated Practice referred
to above, in favor of OCA. While the Company is not a party to these
confidentiality agreements, OCA alleged that the Company should be bound by
their terms as a result of the relationships between Dr. Vondrak, the affiliated
orthodontist and the Company (specifically, OCA alleged that Dr. Vondrak and the
Company are alter egos and that the Company and abetted or conspired with Dr.
Vondrak and the affiliated orthodontist in their wrongful conduct). OCA's
complaint states that it is seeking monetary damages in excess of the minimum
jurisdictional limits of the court, punitive damages, injunctive relief,
prejudgment interest and attorneys' fees. The Company intends to vigorously
defend the claims made by OCA, which the Company believes are without merit.
This lawsuit is still pending, and the Company cannot predict whether it will
succeed in obtaining the declarations sought from the court or, if it is not
successful, what effect this may have on the Company.
In November 1997, the Company received notice that an acquaintance of Dr.
Vondrak, Mr. Donald Rose, was threatening to sue the Company, JGVAOI, Dr.
Vondrak and John G. Vondrak, P.C., alleging, among other things, certain
breaches of an alleged oral agreement with Dr. Vondrak pursuant to which Dr.
Vondrak was to award Mr. Rose 10% of any stock issued to Dr. Vondrak in the IPO
in exchange for Mr. Rose's effort to obtain venture capital for the Company. On
January 8, 1998, Dr. Vondrak filed a declaratory judgment action in the District
Court of Harris County, Texas (269th Judicial District) seeking a finding by the
court that Mr. Rose was not entitled to any of Dr. Vondrak's stock or any other
remuneration. Mr. Rose has filed a special appearance challenging jurisdiction
and a general denial. The Company is not a party to the declaratory judgment
action filed by Dr. Vondrak. While the Company was not a party to the alleged
oral agreement, Mr. Rose has maintained that the Company should be bound by its
terms as a result of the relationship between Dr. Vondrak and the Company.
Although the Company believes that these allegations are without merit, there
can be no assurance that a lawsuit will not be filed and, if filed, that the
Company will obtain a successful outcome.
The Company is not currently a party to any material claims, suits or
complaints relating to services and products provided by the Company or the
existing Affiliated Practices, although there can be no assurance that such
claims will not be asserted against the Company in the future. The Company is
subject to certain pending claims as a result of successor liability in
connection with its affiliations with existing Affiliated Practices; however,
the Company believes that the ultimate resolution of those claims will not have
a material adverse effect on the financial position or operating results of the
Company.
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GOVERNMENT REGULATION
The orthodontic services industry in the U.S. and Canada is regulated
extensively at both the state, provincial and federal levels. Regulatory
oversight includes, but is not limited to, considerations of fee-splitting,
corporate practice of orthodontics and state insurance regulation.
CORPORATE PRACTICE OF ORTHODONTICS; FEE-SPLITTING
The laws of many states in the U.S. and provinces of Canada prohibit
business corporations such as the Company from engaging in the practice of
orthodontics or employing orthodontists to practice orthodontics. The specific
restrictions against the corporate practice of orthodontics, as well as the
interpretation of those restrictions by state regulatory authorities, vary from
jurisdiction to jurisdiction. The restrictions are generally designed to
prohibit an entity not wholly owned by orthodontists (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 jurisdictions, employing dental hygienists or orthodontic
assistants), or controlling the content of an orthodontist's advertising or
professional practice. The Company does not acquire any professional assets and,
as provided in the Service Agreements, does not control the practice of
orthodontics or employ orthodontists to practice orthodontics at any of the
Affiliated Practices' locations. Moreover, in jurisdictions 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 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 applicable orthodontic practice acts and believes that its
operations comply with the above-described laws to which it is subject. The laws
of many jurisdictions also prohibit orthodontists from sharing professional fees
with non-orthodontic entities.
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: (i) a
licensed dentist or orthodontist has complete control and custody over the
professional assets; (ii) the non-orthodontic entity does not employ or control
the orthodontists (or, in some states, orthodontic hygienists or orthodontic
assistants); (iii) all orthodontic services are provided by a licensed dentist
or orthodontist; and (iv) licensed dentists or orthodontists have control over
the manner in which orthodontic care is provided and all decisions affecting the
provision of orthodontic care. Applicable 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 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.
There can be no assurance 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 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
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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. 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 U.S. 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, which would reduce the service fees
payable to the Company.
EXTENT OF PROTECTION OF PROPRIETARY RIGHTS
The Company relies in part on trademark, service mark, trade dress, trade
secret, unfair competition and copyright laws to protect its intellectual
property rights. There can be no assurance that actions taken by the Company
will be adequate to protect its intellectual property rights from
misappropriation by others, that the Company's proprietary information will not
become known to competitors, that others will not independently develop
substantially equivalent or better intellectual properties that do not infringe
on the Company's intellectual property rights or that others will not assert
rights in, and ownership of, proprietary rights of the Company. Furthermore, the
Company's rights to its "APPLE ORTHODONTIX" common law service mark may be
limited in market areas where a similar trademark or service mark may already be
in use. The Company has not applied for or obtained any registrations of its
trademarks or service marks. The Company is aware of several other businesses
that utilize an "APPLE" service mark in connection with the provision of
general dental services, some of which have obtained federal or state trademark
registrations. The Company is aware of one other orthodontic practice in the
United States that utilizes a service mark similar to the Company's, which
practice is not located in a market where any of the existing Affiliated
Practices' offices are located.
27
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth the names, ages (as of May 1, 1998) and
positions of the Company's executive officers, key employees and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ----------------------------------------
<S> <C>
John G. Vondrak, D.D.S.................... 57 Chairman of the Board, President and
Chief Executive Officer
W. Daniel Cook............................ 43 Senior Vice President of Practice
Affiliations and Director
Michael W. Harlan......................... 37 Vice President and Chief Financial
Officer
Stephen T. Yavorsky....................... 47 Vice President of Business Development
LeeAnn Peniche(1)......................... 37 Vice President of Training and Marketing
Robert L. Brewton......................... 45 Director
Rod L. Crosby, Jr......................... 59 Director
Richard J. Marxen......................... 51 Director
William W. Sherrill(2).................... 71 Director
Clyde C. Waddell, Jr...................... 56 Director
</TABLE>
- ------------
(1) Key employee.
(2) Elected by holders of the Class B Stock.
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. is the founder of the Company and has been Chairman
of the Board of Directors and Chief Executive Officer of the Company since
October 1996 and President of the Company since May 1998. He has served as a
director of the Company since July 1996. Dr. Vondrak was 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
served as President of the New Mexico Orthodontic Society in 1979.
W. DANIEL COOK has served as a director of the Company since October 1996
and as Chief Administrative Officer from February 1997 to May 1998. He has
served as Senior Vice President of Practice Affiliations since May 1998. From
December 1996 to May 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. from March 1996 to May 1997 and was associated with the
law firm of Page, Mannio, Peresich, Dickinson & McDermott, P.L.L.C. from 1991 to
1995.
MICHAEL W. HARLAN has been Vice President and Chief Financial Officer of
the Company since March 1997. From December 1996 to February 1997, Mr. Harlan
served as a consultant to the Company on financial and accounting matters. From
April 1991 through December 1996, Mr. Harlan held various positions in the
finance and acquisition departments of Sanifill, Inc., an international
environmental services company that was acquired by USA Waste Services, Inc. in
1996. He served as the Treasurer of Sanifill, Inc. beginning in September 1993.
While at Sanifill, Inc., Mr. Harlan participated in numerous acquisitions and
was actively involved in raising public and private capital.
STEPHEN T. YAVORSKY has served as Vice President of Business Development
since May 1998. From December 1997 to May 1998, he was an employee of the
Company who developed new offices. From March 1995 to December 1997, Mr.
Yavorsky served as Executive Vice President of The Walters Group, a real estate
development company. From 1988 to 1995, Mr. Yavorsky served as Chairman, Chief
Executive Officer and President of Union Land Title Company.
28
<PAGE>
LEEANN PENICHE has been Vice President of Training and Marketing since June
1997. Prior to that time, she served as Director of Training of the Company
beginning in 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 the IPO. 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.
ROBERT L. BREWTON has served as a director of the Company since February
1998. Since January 1996, Mr. Brewton has served as the Chief Investment Officer
of Residential Company of America, Ltd., a privately-held real estate investment
and management company. From 1987 until January 1996, Mr. Brewton served as
President of the multifamily division of the Transwestern Property Company, the
predecessor of Residential Company of America, Ltd.
ROD L. CROSBY, JR. has served as a director of the Company since July 1997.
Mr. Crosby has served as the Senior Vice President of Business Development of
Corporate Express, a supplier of office products and services, since 1995. From
1994 to 1995, Mr. Crosby served as a director of U.S. Delivery Systems, Inc., a
delivery service company formed as a result of a combination in November 1993 of
a number of delivery companies, including ViaNet, Inc., a company founded by Mr.
Crosby. Prior to that time, Mr. Crosby served as Chairman and Chief Executive
Officer of ViaNet, Inc. from 1986 until 1993. Mr. Crosby serves on the board of
directors of e-CommLink, a software company serving the banking and medical
industries.
RICHARD J. MARXEN has served as a director of the Company since February
1998. Mr. Marxen is the founder of Connective Technologies, Inc., a
privately-held business solutions provider for systems integration, and has
served as its chairman, president and chief executive officer since 1990. Prior
to that time, Mr. Marxen founded a business consulting firm and a management
systems consulting firm.
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
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 to fill an unexpired term as Governor of the Federal Reserve
Board in Washington, D.C. and was reappointed 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. Mr. Sherrill initially
was appointed to the Company's Board of Directors pursuant to the provisions of
a funding agreement between the Company and TriCap Funding I, L.L.C.
("TriCap"). See "Certain Transactions".
CLYDE C. WADDELL, JR. has served as a director of the Company since July
1997. Mr. Waddell is the owner, President and Chief Executive Officer of
Hester's Office Center, Inc., an office supply company, and has served in such
capacity for more than the past five years. Mr. Waddell is a certified public
accountant.
In May 1998, the Company undertook a management reorganization, as follows:
Dr. Vondrak was given added responsibilities as President and the chief
operating officer, replacing Robert J. Syverson; Mr. Yavorsky, formerly head of
real estate operations, replaced H. Steven Walton as a vice president of
business development; and Mr. Cook was elected to the new position of Senior
Vice President of Practice Affiliations.
29
<PAGE>
BOARD OF DIRECTORS
The Board of Directors of the Company currently consists of seven
directors. The Board of Directors is divided into three classes with two or
three directors in each class, with the term of one class expiring at the annual
meeting of stockholders in each year, commencing in 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 or, in the case of the Class B
director, by the holders of the Class B Stock, to succeed those directors whose
terms are expiring. The terms of Messrs. Crosby and Marxen expire in 1998, the
terms of Messrs. Brewton, Cook and Sherrill expire in 1999 and the terms of Dr.
Vondrak and Mr. Waddell expire in 2000.
Currently, there are three committees of the Board: Audit (comprised of
Messrs. Crosby, Sherrill and Waddell (chairman)), Compensation (comprised of
Messrs. Brewton, Crosby, Marxen, Waddell and Sherrill (chairman)) and
Acquisitions (comprised of Messrs. Cook and Sherrill and Dr. Vondrak
(chairman)). The members of the Audit and Compensation Committees are not
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 receives a fee of $2,000 for attendance at each Board of Directors
meeting and $1,000 for attendance at each committee meeting (unless held on the
same day as a Board of Directors meeting). 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.
On the date of the IPO, each nonemployee director was granted nonqualified
stock options ("NSOs") to purchase 10,000 shares of Common Stock. In addition,
on the first business day of the month following the date on which each annual
meeting of the Company's stockholders is held, each non-employee director
automatically will be granted NSOs to purchase an additional 5,000 shares of
Common Stock. Any person who first becomes a nonemployee director after the date
of the IPO otherwise than by election at an annual meeting of stockholders
automatically is granted, on the date of his or her election, NSOs to purchase
10,000 shares of Common Stock.
EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation of
the Company's chief executive officer and other executive officers who were
serving as such at December 31, 1997 (the "Named Executive Officers") for the
year ended December 31, 1997 and the period from the Company's inception (July
15, 1996) through December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION(1) --------------------------
------------------------------------- SHARES
OTHER ANNUAL RESTRICTED UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY(2) BONUS COMPENSATION STOCK AWARDS OPTIONS
- ------------------------------------- --------- ---------- --------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
John G. Vondrak, D.D.S............... 1997 $ 176,763 $ 52,000 $ 2,054(3) -- 135,000
Chairman of the Board and 1996 75,000 -- -- -- --
Chief Executive Officer
Robert J. Syverson(4)................ 1997 159,455 48,000 -- -- 100,000
President and Chief 1996 56,000 -- -- (5) --
Operating Officer
Michael W. Harlan.................... 1997 135,049 48,000 -- -- --
Vice President and Chief 1996 7,688 -- -- (5) 90,000
Financial Officer
H. Steven Walton(4).................. 1997 404,447(6) 37,000 -- -- 161,850
Vice President of Business 1996 -- -- -- -- --
Development
W. Daniel Cook....................... 1997 117,564 48,000 -- -- 70,000
Chief Administrative Officer 1996 10,000 -- -- (5) --
</TABLE>
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
30
<PAGE>
- ------------
(1) Excludes any perquisites and other benefits that do not exceed the lesser of
$50,000 or 10% of the total of annual salary and bonus reported for any
Named Executive Officer.
(2) Amounts shown for 1996 consist of fees earned as a consultant to the
Company. Amounts shown for 1997 include (i) fees earned as a consultant to
the Company from January 1997 to April 1997 of $62,500, $62,500, $51,021 and
$40,000 for Dr. Vondrak, Mr. Syverson, Mr. Harlan and Mr. Cook,
respectively.
(3) Consists of moving expenses reimbursed by the Company in 1997. Does not
include amounts for shares of stock purchased by Dr. Vondrak in October 1996
in respect of which the Company recorded a special compensation expense of
$9,052,346 in 1996.
(4) No longer an executive officer of the Company.
(5) Does not include amounts for shares of restricted stock purchased by Messrs.
Syverson and Cook in October 1996 and Mr. Harlan in December 1996. For
federal income tax purposes, the Company valued the shares purchased in
October 1996 at their purchase price ($1,030 for Mr. Syverson and $1,202 for
Mr. Cook) and the shares purchased by Mr. Harlan at $16,139. For financial
statement purposes, the Company recorded special compensation expense for
1996 of $1,029,980 (Mr. Syverson), $537,873 (Mr. Harlan) and $1,201,637 (Mr.
Cook). See "Certain Transactions -- Organization of the Company."
(6) Includes performance-based payment for successful completion of new
affiliations of orthodontists with the Company pursuant to Mr. Walton's
employment agreement with the Company. See "-- Employment Agreements."
OPTION GRANTS. The following table sets forth certain information on
grants of stock options during 1997 to the Named Executive Officers reflected in
the Summary Compensation Table.
STOCK OPTIONS GRANTED IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------- VALUE AT
PERCENT OF ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK
SHARES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES PRICE (PER EXPIRATION ------------------------
GRANTED IN 1997 IN 1997 SHARE)(2) DATE 5% 10%
--------------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
John G. Vondrak, D.D.S.................. 135,000(3) 14.6% $ 7.00 05/22/07 $ 594,305 $ 1,506,087
Robert J. Syverson...................... 100,000(3) 10.8 7.00 05/22/07 440,226 1,115,620
H. Steven Walton........................ 161,850(4) 17.5 7.00 05/22/07 712,506 1,805,631
W. Daniel Cook.......................... 70,000(3) 7.6 7.00 05/22/07 308,158 780,934
</TABLE>
- ------------
(1) The exercise price of the options granted was equal to the fair market value
of the Common Stock on the date of grant.
(2) The potential realizable value through the expiration date of the options
has been determined on the basis of the per share market price at the time
the options were granted, compounded annually over 10 years, net of the
exercise price. These values have been determined based upon assumed rates
of appreciation and are not intended to forecast the possible future
appreciation, if any, of the price or value of the Company's Common Stock.
(3) These options were granted in April 1997 and became exercisable with respect
to 25% of the shares subject thereto on May 29, 1997. They become
exercisable in additional 25% increments on each May 29 in the period ended
May 29, 2000.
(4) Includes options to purchase 85,000 shares granted in April 1997 which have
the exercisability schedule described in Note (1) above. The remaining
options became exercisable with respect to 38,425 shares on May 29, 1997 and
will become exercisable with respect to the remaining 38,425 shares on May
29, 1998.
31
<PAGE>
OPTION EXERCISES AND 1997 YEAR-END OPTION VALUES. The following table sets
forth certain information with respect to unexercised options to purchase Common
Stock held by the Named Executive Officers at December 31, 1997. None of the
Named Executive Officers exercised options in 1997.
YEAR-END 1997 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997(1)
------------------------------- -------------------------------
EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2)
----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
John G. Vondrak......................... 33,750 101,250 $ 164,531 $493,594
Robert J. Syverson...................... 25,000 75,000 121,875 365,625
Michael W. Harlan....................... 45,000 45,000 219,375 219,375
H. Steven Walton........................ 59,675 102,175 290,916 498,103
W. Daniel Cook.......................... 17,500 52,500 85,313 255,938
- ------------
</TABLE>
(1) Value of unexercised in-the-money options is calculated based upon the
difference between the option price and the closing price of the Common
Stock at year end, multiplied by the number of shares underlying the
options. The closing price of the Common Stock as reported on the American
Stock Exchange on December 31, 1997 was $11.875.
(2) All of these options become immediately exercisable upon a change in control
of the Company.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Dr. Vondrak and Messrs. Harlan
and Cook. Each of these agreements provides for an annual base salary in an
amount not less than $180,000, $130,000 and $120,000 for Dr. Vondrak, Mr. Harlan
and Mr. Cook, respectively, and entitles the employee to participate in all the
Company's compensation plans (as defined in the agreements) 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 in the
agreements) or by the employee with good reason (as defined in the agreements),
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 in the agreements) from the Company,
including bonuses, if any, during the two years (or the period of employment, if
shorter) preceding the termination date, and (ii) continued participation in all
the Company's compensation plans (other than the granting of new awards under
the 1997 Stock Compensation 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 1997 Stock Compensation 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 in the agreements) 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). 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.
The Company had employment agreements with Messrs. Syverson and Walton.
Both agreements, as amended in February 1998, provided that if the Company
terminates the employee's employment or the employee resigns, the employee will
be entitled to a severance benefit keyed to his prior annual cash compensation
and payable ratably over the 12-month period beginning on the date of
termination. As of March 31, 1998, the severance benefit for Mr. Syverson would
have been $682,500. As of the same date, the
32
<PAGE>
severance benefit for Mr. Walton, reflecting the commissions to which his
employment agreement entitles him in connection with the Company's new
affiliations with orthodontists, would have been a minimum of $1,600,000.
Mr. Walton's employment agreement obligated the Company to lend Mr. Walton,
on a nonrecourse unsecured basis, the amount necessary to enable him to exercise
options to purchase up to 76,850 shares of Common Stock at an exercise price of
$7.00 per share (a maximum of $537,950). The Company will treat this loan (or
loans) as compensation expense and ordinary income to Mr. Walton. In that event,
Mr. Walton's employment agreement would require the Company to reimburse
Mr. Walton in the amount necessary to place him in essentially the same tax
position had he purchased the optioned shares for a nominal amount in December
1996.
Each Affiliated Practice enters into an employment agreement with its
orthodontist employees. See "Business -- Orthodontist Employment Agreements."
1997 STOCK COMPENSATION PLAN
The objective of the Company's 1997 Stock Compensation Plan (the "Stock
Plan"), which was approved by the Board of Directors and the stockholders of
the Company, is to promote the growth and general prosperity of the Company by
enabling the Company (i) to grant to employees, non-employee directors, advisors
and orthodontists associated with Affiliated Practices shares of Common Stock
and options to purchase Common Stock, (ii) to help the Company attract and
retain superior personnel and (iii) to provide such persons with additional
incentives to contribute to the success of the Company. The number of shares of
Common Stock that may be issued under the Stock Plan is the greater of 1,000,000
shares or 12% of the number of shares outstanding on the last day of the
preceding calendar quarter (which includes 979,050 shares subject to options
previously granted).
The Stock Plan provides for the grant of stock options and restricted stock
(collectively, "Awards"). Since the date of the IPO, the Stock Plan has been
administered by the Compensation Committee of the Board of Directors, which is
comprised of five non-employee members of the Board of Directors (the
"Committee"). The Committee has, subject to the terms of the Stock Plan, the
sole authority to grant Awards, to interpret the Stock Plan and to make all
other determinations necessary or advisable for the administration of the Stock
Plan. All the Company's employees, non-employee directors, advisors and
orthodontists associated with Affiliated Practices are eligible to receive
Awards.
As of May 4, 1998, the Company had (i) outstanding options to purchase a
total of approximately 979,050 shares of Common Stock under the Stock Plan and
(ii) approximately 264,000 additional shares available for future Awards under
the Stock Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In September 1997, the Company established a Compensation Committee to make
recommendations with respect to salaries and bonuses to be paid to officers and
other employees of the Company. The current members of the Compensation
Committee of the Board are Messrs. Brewton, Crosby, Marxen, Waddell and Sherrill
(chairman), each of whom is a nonemployee director. Prior to completion of the
Company's initial public offering, matters with respect to the compensation of
executive officers and other employees of the Company were determined by the
members of the Board of Directors as a whole. Messrs. Vondrak and Cook, who were
members of the Board of Directors, participated in deliberations concerning
compensation.
33
<PAGE>
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
The following table provides certain information concerning the shares of
Class B Stock the Company issued and sold to certain of its affiliates on
October 11 and December 9, 1996:
DATE OF NUMBER PURCHASE PRICE
NAME ISSUANCE OF SHARES PER SHARE
- ----------------------------------- ----------- --------- --------------
John G. Vondrak, D.D.S............. 10/11/96 1,358,782 $ .001
TriCap Funding I, L.L.C............ 10/11/96 1,373,498 .001
Robert J. Syverson................. 10/11/96 130,809 .001
W. Daniel Cook..................... 10/11/96 171,687 .001
Michael W. Harlan.................. 12/09/96 76,850 .001
The number of shares of Class B Stock issued on October 11, 1996 to each of
the founding stockholders shown in the table was determined by negotiations
among the founding stockholders. The number of shares of Class B Stock issued to
Michael W. Harlan on December 9, 1996 was determined by negotiations between the
Board of Directors and Mr. Harlan. Class B Stock is convertible into Common
Stock on a share-for-share basis under certain circumstances.
The shares of Class B Stock the Company sold to Messrs. Syverson and
Harlan, and 76% of the shares the Company sold to Mr. Cook, in 1996 were issued
subject to restrictions on transfer and risk of forfeiture if employment were to
be terminated in certain circumstances. When the IPO closed, these restrictions
and risk lapsed with respect to 50% of the restricted shares each employee owns.
The Company expects that these restrictions and risk will lapse on May 29, 1998
on the remaining restricted shares each employee owns.
In connection with the acquisition of the assets of JGVAOI, one of the
Founding Affiliated Practices, Dr. Vondrak received approximately 259,981 shares
of Common Stock and $455,000, and entered into a Service Agreement providing for
service fee payments to the Company. In July 1997, Dr. Vondrak transferred his
practice to another orthodontist affiliated with the Company. As a result, Dr.
Vondrak is no longer a party to a Service Agreement with the Company and paid no
fees to the Company pursuant to that Service Agreement. The Company used its
proceeds from the IPO and funds advanced by TriCap to reimburse JGVAOI for the
Company's organizational expenses JGVAOI had incurred on the Company's behalf.
AGREEMENTS WITH TRICAP AND TRICAP PARTNERS
TriCap Partners, an affiliate of TriCap that is co-owned by Mr. Sherrill, a
director, was the exclusive financial advisor to the Company pursuant to a
consulting agreement that expired May 29, 1997. Pursuant to that agreement and
when the IPO closed, the Company (i) paid to TriCap Partners $500,000 and (ii)
issued to TriCap Partners a warrant to purchase 180,000 shares of Common Stock
at an exercise price per share of $7.00. The Company granted TriCap Partners
certain demand and piggyback registration rights respecting the warrant shares.
TriCap partners subsequently distributed this warrant to its investors,
including Mr. Sherrill.
Pursuant to a funding agreement between TriCap and the Company, TriCap
advanced to the Company approximately $2.6 million to fund transaction costs in
connection with the affiliation with the Founding Affiliated Practices and the
IPO. The Company used proceeds from the IPO to repay these advances, together
with expenses of approximately $400,000 incurred by TriCap on behalf of the
Company with interest. The funding agreement terminated pursuant to its terms on
May 29, 1997. In connection with the funding agreement, the Company granted
TriCap and Dr. Vondrak certain piggyback registration rights.
TriCap purchased 400,000 shares of Common Stock in the IPO. TriCap
subsequently distributed all the shares of the Company held by it, including
these shares, to its investors.
34
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the shares of Common Stock and the Class B
Stock of the Company beneficially owned directly or indirectly as of May 1, 1998
(i) by each person who is known to the Company to own beneficially more than 5%
of the Common Stock and the Class B Stock, (ii) each of the Company's directors
and Named Executive Officers and (iii) all executive officers and directors as a
group.
<TABLE>
<CAPTION>
NUMBER OF SHARES BENEFICIALLY OWNED
----------------------------------------------------------
COMBINED
COMMON PERCENT CLASS B PERCENT VOTING
STOCK(2) OF CLASS STOCK OF CLASS POWER
--------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
John G. Vondrak, D.D.S.(1)........... 377,481 3.6% 1,293,377 42.4% 6.7%
Robert J. Syverson................... 50,000 * 130,809 4.3 *
Michael W. Harlan.................... 45,000 * 76,850(3) 2.5 *
H. Steven Walton..................... 120,850 * -- -- *
W. Daniel Cook(1).................... 60,198 * 171,687 5.6 *
Robert L. Brewton.................... 2,500 * -- -- *
Rod L. Crosby, Jr. .................. 18,906 * 28,167 1.0 *
Richard J. Marxen.................... 2,500 * -- -- *
William W. Sherrill.................. 66,250 * 137,350 4.5 1.0
Clyde C. Waddell, Jr. ............... 2,500 * -- -- *
All executive officers and directors
as a group (10 persons)............ 746,185 7.1 1,838,240 60.3 11.3
</TABLE>
- ------------
* less than 1%.
(1) The address of such person is 2777 Allen Parkway, Suite 700, Houston, Texas
77019.
(2) Includes shares subject to outstanding options that are or will become
exercisable within 60 days of May 1, 1998, as follows: Dr. Vondrak --
67,500; Mr. Syverson -- 50,000; Mr. Harlan -- 45,000; Mr. Walton -- 119,350;
Mr. Cook -- 35,000 shares; and Messrs. Brewton, Crosby, Marxen, Sherrill and
Waddell -- 2,500 each. In addition, the shares shown for Mr. Sherrill
include 60,000 shares subject to an outstanding exercisable warrant.
(3) Includes 16,350 shares held of record by the Michael and Bonnie Harlan 1996
Family Trust. Mr. Harlan disclaims beneficial ownership of those shares.
35
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 25,000,000 shares of
Common Stock, par value $0.001 per share, 4,106,852 shares of Class B Stock, par
value $0.001 per share, and 10,000,000 shares of preferred stock, par value
$0.001 per share (the "Preferred Stock"). As of May 4, 1998, 10,540,016 shares
of Common Stock were issued and outstanding, 3,048,107 shares of Class B Stock
were issued and outstanding and no shares of Preferred Stock of the Company were
issued and outstanding. The following summary is qualified in its entirety by
reference to the Charter, which is included as an exhibit to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK AND CLASS B STOCK
Holders of Class B Stock have the ability to elect as a class one member of
the present seven-member Board of Directors and holders of the Common Stock have
the ability to elect as a class all other members of the Board of Directors. If
the authorized number of directors were to increase to 10 or more, holders of
Class B Stock would have the ability to elect 20% of the Board of Directors
(rounded down to the nearest whole number) and, subject to the rights of the
holders of any series of preferred stock, the holders of Common Stock would have
the right to elect the remaining directors. The Common Stock and Class B Stock
possess ordinary voting rights and vote together as a single class in respect of
all other corporate matters, holders of Common Stock having one vote per share
and holders of Class B Stock having 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 of the Common Stock or the Class B Stock, as
applicable, voting for the election of directors can elect all the directors to
be elected by the holders of such stock if they choose to do so. The Common
Stock and Class B Stock carry no preemptive rights and are not 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 all future dividends, if any,
declared on, or distributions with respect to, its shares of Common Stock and
Class B Stock will be paid on a pro rata basis to the holders of such shares.
See "Dividend Policy" for information regarding the Company's dividend policy.
Directors may be removed, with cause, by the holders of the class or
classes of stock that elected them. Directors may be removed by the Board of
Directors only for cause. Vacancies in a directorship may be filled by the vote
of the class or classes of shares that had previously filled that vacancy, or by
the remaining directors or director elected by such class or classes; however,
if there are no such directors, the vacancy may be filled by the other
directors.
Each share of Class B Stock will automatically convert to Common Stock on a
share-for-share basis (i) in the event of a disposition of such share of Class B
Stock by the holder thereof (excluding dispositions to such holder's
affiliates), (ii) in the event any person not affiliated with Apple acquires
beneficial ownership of 15% or more of the outstanding shares of capital stock
of the Company, (iii) in the event any person not affiliated with Apple offers
to acquire beneficial ownership of 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 the IPO,
(v) on the fifth anniversary of the date of the IPO or (vi) in the event the
holders of a majority of the outstanding shares of Common Stock approve such
conversion. In addition, the Company may elect to convert any outstanding shares
of Class B Stock into shares of Common Stock in the event 80% or more of the
outstanding shares of Class B Stock as of the date of the IPO 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 Charter 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,
36
<PAGE>
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 transaction. On the other hand, 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
Delaware General Corporation Law (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) on
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
37
<PAGE>
enables corporations to limit available relief to equitable remedies such as
injunction or rescission. The Charter limits the liability of directors of the
Company to the Company or its stockholders to the fullest extent permitted by
Delaware law. Specifically, directors of the Company will not be personally
liable for monetary damages for breach of a director's fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL or (iv) for any transaction
from which the director derived an improper personal benefit.
The inclusion of this provision in the Charter 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 Charter provides that stockholders may act only at an annual or special
meeting of stockholders and may not act by written consent. The Charter and the
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 Charter 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. In addition, the provisions of the Charter relating to the election of
certain directors by the holders of the Class B Stock will prevent persons
controlling a majority of the outstanding Common Stock from replacing such
directors. See "Management -- Directors, Executive Officers and Key
Employees."
The Charter 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 a director may be removed only for cause, and then only by
the affirmative vote of the holders of at least a majority of all outstanding
shares of the class entitled to vote with respect to the election of such
director. This provision, in conjunction with the Charter provisions 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
38
<PAGE>
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 ChaseMellon
Shareholder Services, L.L.C.
SHARES ELIGIBLE FOR FUTURE SALE
As of May 4, 1998, the Company had outstanding (i) 10,540,016 shares of
Common Stock and (ii) 3,048,107 shares of Class B Stock. The 4,617,500 shares of
Common Stock sold in the IPO and a registered public offering in November 1997
generally are freely tradable. Approximately 3,449,000 shares of Common Stock
are subject to contractual restrictions on resale that lapse on May 29, 1998,
when these shares will become eligible for resales subject to the applicable
limitations of Securities Act Rule 144. Approximately 1,346,000 shares of Common
Stock are subject to contractual restrictions on resale that lapse at various
times during the 12 months ending April 30, 1999. These shares were registered
under the Securities Act by means of the Registration Statement of which this
Prospectus is a part. Beginning in June 1998, substantially all the remaining
outstanding shares of Common Stock (including shares issued and held in trust
for exchange for securities of a Canadian subsidiary) and the outstanding Class
B Stock will be eligible for resale either subject to the applicable limitations
of Rule 144 or by means of a shelf registration statement the Company will file
under the Securities Act.
In general, under Rule 144, 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 acquiror 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 1% 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 acquiror 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 SEC 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.
39
<PAGE>
As of May 4, 1998, options to purchase an aggregate of approximately
979,050 shares of Common Stock were outstanding under the Company's Stock Plan.
See "Management -- 1997 Stock Compensation 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 May 22, 1997, the date on which the Company became
subject to the reporting requirements of the Exchange Act. A total of 979,050
shares of Common Stock are eligible for resale pursuant to Rule 701 (on exercise
of options). In addition, the Company has filed a registration statement on Form
S-8 covering the 980,000 shares underlying Awards under the Stock Plan. As a
result, these shares generally will be freely tradable by non-affiliates in the
public market without restriction under the Securities Act.
Pursuant to Securities Act Rule 145, the volume limitations and certain
other requirements of Rule 144 will apply to resales of the Common Stock this
Prospectus covers by affiliates of the Practices with which the Company
affiliates or the businesses the Company acquires for a period of one year from
the date of the affiliation or acquisition (or such shorter period as the SEC
may prescribe), but otherwise these shares will be freely tradable by persons
not affiliated with the Company unless it restricts this resale by contract. The
Company anticipates that the agreements entered into in connection with its
future Affiliations will contractually restrict the resale of all or a portion
of the shares issued in those transactions for varying periods of time.
In connection with the affiliations with the Founding Affiliated Practices,
the Company entered into a registration rights agreement with former
stockholders of the Founding Affiliated Practices (the "Registration Rights
Agreement"), which provides certain registration rights with respect to the
Common Stock issued to such stockholders in connection with such affiliations.
The Registration Rights Agreement provides the holders of Common Stock subject
to the agreement with the right in the event the Company proposes to register
under the Securities Act any Common Stock for its own account or for the account
of others at any time through November 2001, subject to certain exceptions, to
require the Company to include shares owned by them in the registration. In
addition, pursuant to separate registration rights agreements with TriCap, Dr.
Vondrak and TriCap Partners, certain of these parties and certain of their
transferees have the right, in the event the Company proposes to register under
the Securities Act any Common Stock for its own account or for the account of
others at any time through November 2001, subject to certain exceptions, to
require the Company to include shares owned by them in the registration.
Furthermore, the registration rights agreement to which TriCap Partners is a
party provides for a single demand registration right pursuant to which Apple
will file a registration statement under the Securities Act to register the sale
of the shares issuable on exercise of the warrant described under "Certain
Transactions." The demand request may be made at any time before May 31, 2002,
subject to certain conditions and limitations.
In the case of each registration rights agreement described, the Company is
generally required to pay the costs associated with such an offering other than
fees and disbursements of counsel for the selling stockholders, any brokerage
fees and expenses applicable to shares of Common Stock being sold by them,
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.
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. 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
40
<PAGE>
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.
PLAN OF DISTRIBUTION
This Prospectus covers the offer and sale of up to 654,217 shares of Common
Stock the Company may issue from time to time in connection with the future
Affiliations.
The Company expects that the terms on which it may issue the shares will be
determined through negotiations with the security holders or principal owners of
the Practices with which the Company affiliates or the businesses the Company
acquires. It expects that the shares issued will be valued at prices reasonably
related to market prices for the Common Stock prevailing either at the time an
Affiliation agreement is executed or at the time an Affiliation is consummated.
The shares of Common Stock offered hereby will be included on The American
Stock Exchange, but may be subject to certain contractual holding period
restrictions.
EXPERTS
The financial statements of Apple Orthodontix, Inc. as of December 31, 1997
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.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports,
proxy statements and other information with the SEC. Such reports, proxy
statements and other information may be inspected without charge at the Public
Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and at the following regional offices of the SEC:
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 SEC at prescribed rates. The SEC 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 SEC.
The Common Stock is listed on The American Stock Exchange. The Company's
reports, proxy statements and other information are available for inspection at
the offices of The American Stock Exchange, Inc., 86 Trinity Place, New York,
New York 10006-1881.
The Company has filed with the SEC a Registration Statement on Form S-4
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 SEC. 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 are
qualified in their entirety by reference to such exhibits for complete
statements of their provisions. All these documents may be inspected without
charge at the SEC's offices or copied at prescribed rates.
41
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
AUDITED FINANCIAL STATEMENTS OF APPLE
ORTHODONTIX, INC.
Report of Independent Public
Accountants..................... F-2
Consolidated Balance Sheet...... F-3
Consolidated Statements of
Operations...................... F-4
Consolidated Statements of
Changes in Stockholders' Equity
(Deficit)....................... F-5
Consolidated Statements of Cash
Flows........................... F-6
Notes to Financial Statements... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Apple Orthodontix, Inc.:
We have audited the accompanying consolidated balance sheets of Apple
Orthodontix, Inc., a Delaware corporation, and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for the year ended December 31,
1997 and 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Apple
Orthodontix, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of its operations and its cash flows for the year ended December 31,
1997 and the period from inception, July 15, 1996, through December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 25, 1998
F-2
<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------------
1997 1996
-------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents....... $ 2,114,449 $ 21,254
Restricted cash................. 2,140,146 --
Receivable from orthodontic
practices, net of allowances
of $69,163 and $0,
respectively.................. 2,361,627 --
Prepaid expenses................ 250,205 --
Other current assets............ 644,557 --
-------------- ---------------
Total current assets....... 7,510,984 21,254
-------------- ---------------
Property and equipment, net.......... 6,025,430 --
Intangible assets, net............... 39,146,371 44,687
Receivable from orthodontic
practices, net of current
portion............................ 1,641,633 --
Deferred issuance costs.............. 34,325 1,395,350
Other assets......................... 821,508 --
-------------- ---------------
Total assets............... $ 55,180,251 $ 1,461,291
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current maturities of long-term
debt.......................... $ 1,022,710 $ --
Accounts payable and accrued
expenses...................... 3,242,000 1,830,009
Payable to orthodontic
practices..................... 250,649 --
Income tax payable.............. 351,013 --
Amounts due to venture capital
investors..................... -- 515,000
-------------- ---------------
Total current
liabilities............. 4,866,372 2,345,009
-------------- ---------------
Long-term debt, net of current
maturities......................... 247,624 --
Deferred income taxes................ 14,544,383 --
Other long-term obligations.......... 29,099 --
-------------- ---------------
Total liabilities.......... 19,687,478 2,345,009
-------------- ---------------
Commitments and contingencies
Stockholders' equity (deficit)
Class A common stock , $0.001
par value, 25,000,000 shares
authorized, 9,980,192 and 0
shares issued and
outstanding................... 9,980 --
Class B common stock, $0.001 par
value, 4,106,852 shares
authorized, 3,176,774 and
3,347,084 shares issued and
outstanding................... 3,177 3,347
Additional paid-in capital...... 58,295,163 23,422,313
Warrants........................ 777,106 --
Retained deficit................ (23,592,653) (24,309,378)
-------------- ---------------
Total stockholders' equity
(deficit)............... 35,492,773 (883,718)
-------------- ---------------
Total liabilities and
stockholders' equity
(deficit)............... $ 55,180,251 $ 1,461,291
============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM
INCEPTION
(JULY 15,
YEAR ENDED 1996) THROUGH
DECEMBER 31, DECEMBER 31,
1997 1996
------------- -------------
Management service fee revenues...... $ 19,185,550 $ --
Costs and expenses:
Salaries and benefits.............. 8,411,032 627,476
Orthodontic supplies............... 2,351,786 --
Rent............................... 2,155,876 19,676
Advertising and marketing.......... 483,973 --
General and administrative......... 3,616,596 232,232
Depreciation and amortization...... 943,437 4,510
Special compensation expense
related to issuance of stock.... -- 13,812,681
Special consulting expense related
to issuance of stock............ -- 9,612,803
------------- -------------
Total costs and expenses... 17,962,700 24,309,378
------------- -------------
Operating income (loss).... 1,222,850 (24,309,378)
Interest expense..................... 273,506 --
Interest income...................... (190,669) --
Other expense (income), net.......... (15,994) --
------------- -------------
Income (loss) before income
tax provision........... 1,156,007 (24,309,378)
Income tax provision................. 439,282 --
------------- -------------
Net income (loss).......... $ 716,725 $ (24,309,378)
============= =============
Earnings (loss) per common and common
equivalent share:
Basic...................... $ 0.09 $ (7.24)
============= =============
Diluted.................... $ 0.09 $ (7.24)
============= =============
Number of shares used in calculating
earnings (loss) per common and
common equivalent share:
Basic...................... 8,131,905 3,358,513
============= =============
Diluted.................... 8,344,398 3,358,513
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CLASS A AND B TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------------- PAID-IN RETAINED EQUITY
SHARES AMOUNT CAPITAL WARRANTS DEFICIT (DEFICIT)
-------------- --------- ----------- -------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, July 15, 1996.................. -- $ -- $ -- $ -- $ -- $ --
Issuance of stock.................. 3,347,084 3,347 23,422,313 -- -- 23,425,660
Net loss........................... -- -- -- -- (24,309,378) (24,309,378)
-------------- --------- ----------- -------- ------------ -------------
BALANCE, December 31, 1996.............. 3,347,084 3,347 23,422,313 -- (24,309,378) (883,718)
Issuances of common stock.......... 4,196,800 4,197 27,428,872 -- -- 27,433,069
Transfers of certain assets and
liabilities by founders.......... 3,682,554 3,683 495,274 -- -- 498,957
Special dividend to founders....... -- -- (6,591,711) -- -- (6,591,711)
Issuance of warrants............... -- -- (777,106) 777,106 -- --
Issuance of stock to new affiliated
practices........................ 1,930,528 1,930 14,112,622 -- -- 14,114,552
Issuances of options to
non-employees.................... -- -- 204,899 -- -- 204,899
Net income......................... -- -- -- -- 716,725 716,725
-------------- --------- ----------- -------- ------------ -------------
BALANCE, December 31, 1997.............. 13,156,966 $ 13,157 $58,295,163 $777,106 $(23,592,653) $ 35,492,773
============== ========= =========== ======== ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
INCEPTION
(JULY 15, 1996)
YEAR ENDED THROUGH
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............... $ 716,725 $ (24,309,378)
Adjustments to reconcile net
income (loss) to net cash used
in operating activities:
Depreciation and
amortization............ 943,437 4,510
Deferred income tax
expense................. 88,270 --
Special compensation and
consulting expense paid
in stock................ -- 23,425,484
Provision for doubtful
accounts................ 69,163 --
Changes in assets and
liabilities, excluding effects
of acquisitions:
Receivable from orthodontic
practices............... (2,322,907) --
Prepaid expenses........... (285,888) --
Other assets............... (683,073) --
Payables and other accrued
liabilities............. (1,766,379) 404,215
----------------- -----------------
Net cash used in
operating
activities......... (3,240,652) (475,169)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............ (3,631,962) --
Payments for new affiliated
practices..................... (6,815,963) --
Payments of costs associated
with entering into new
affiliations.................. (1,548,751)
Payment into escrow for a new
affiliated practice........... (2,140,146) --
Advances to affiliates.......... (1,868,446) --
Repayment of advances by
affiliates.................... 123,142 --
----------------- -----------------
Net cash used in
investing
activities......... (15,882,126) --
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings........ 14,934,130 798,744
Repayments of borrowings........ (15,353,817) (253,300)
Proceeds from issuances of
common stock.................. 33,723,540 176
Cash paid related to common
stock issuance costs.......... (5,496,169) (49,197)
Special dividend to founders.... (6,591,711) --
----------------- -----------------
Net cash provided by
financing
activities......... 21,215,973 496,423
----------------- -----------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 2,093,195 21,254
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................ 21,254 --
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 2,114,449 $ 21,254
================= =================
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Apple Orthodontix, Inc. ("Apple" or the "Company") was founded in July
1996 to provide practice management services to orthodontic practices in the
United States and Canada. On May 29, 1997, Apple acquired substantially all of
the tangible and intangible assets and assumed certain of the liabilities of 31
orthodontic practices (collectively, the "Founding Affiliated Practices") in
exchange for 3.7 million shares of its class A common stock, par value $.001 per
share (the "Common Stock"), and $6.6 million (the "Acquisitions").
Simultaneous with the Acquisitions, Apple closed its initial public offering
(the "IPO") of 2.7 million shares of Common Stock. The net proceeds of the
Common Stock issued in the IPO (after deducting the underwriting discounts and
commissions) were $17.6 million. Total related offering costs were $5.5 million.
Apple effectively began operations with the Founding Affiliated Practices
on June 1, 1997. Apple has subsequently acquired the assets and assumed the
liabilities of additional practices (the "New Orthodontist Affiliations"). The
New Orthodontist Affiliations together with the Founding Affiliated Practices
are collectively referred to as the "Affiliated Practices."
The acquisitions of the Founding Affiliated Practices have been accounted
for in accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin ("SAB") No. 48. In accordance with SAB No. 48, the acquisition of the
assets and assumption of certain liabilities for all of the Founding Affiliated
Practices has been accounted for by the Company at the transferors' historical
cost basis, with the shares of Common Stock issued in those transactions being
valued at the historical cost of the nonmonetary assets acquired net of
liabilities assumed. The cash consideration paid at closing on May 29, 1997, is
reflected as a dividend by the Company to the owners of the Founding Affiliated
Practices in the quarter ended June 30, 1997. SAB No. 48 is not applicable to
affiliations made by the Company subsequent to the IPO.
The acquisitions of assets and liabilities of the New Orthodontist
Affiliations are accounted for by allocating the fair market value of the
consideration paid by Apple to the assets acquired, net of liabilities assumed,
including intangible assets. As a result of this allocation process, the Company
records a significant portion of the consideration as a service fee intangible.
The service fee intangible has resulted and will continue to result in
substantial noncash amortization charges for intangible assets in the Company's
consolidated statements of operations.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany transactions and balances
have been eliminated.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all time deposits and certificates of deposit with original maturities
of three months or less to be cash equivalents.
RECEIVABLE FROM ORTHODONTIC PRACTICES, NET
The Company grants credit to its customers (i.e. the Affiliated Practices),
which are located in various geographic regions throughout the United States and
Canada. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains an allowance for
doubtful accounts at a level which management believes is sufficient to cover
potential credit losses.
F-7
<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT, NET
Property and equipment is stated at cost. Equipment under capital leases is
stated at the net present value of the future minimum lease payments at the
inception of the related leases. Depreciation of property and equipment is
calculated using the straight-line method over the estimated useful lives of the
assets. Routine maintenance and repairs are charged to expense as incurred,
while costs of betterment and renewals are capitalized.
INTANGIBLE ASSETS, NET
Intangible assets consist primarily of service fee intangibles which are
amortized over the life of the service agreement (ranging from 20 to 40 years)
with the respective Affiliated Practice. Service fee intangibles represent the
excess of the costs of affiliation over the fair value of the net assets
acquired. The costs of affiliation include the consideration paid to the owners
of the Affiliated Practices, the incremental out-of-pocket costs incurred in
connection with the affiliation and the direct costs related to the Apple
employees who identify, evaluate, negotiate and close the affiliation. Such
costs are recorded as other noncurrent assets until consummation of the
affiliation. If an affiliation is not consummated, all such costs are expensed
in the period in which the affiliation is abandoned. The Company's management
periodically evaluates the realizability of the intangible assets on a practice
by practice basis considering such factors as profitability and net cash flow.
Should this evaluation result in an assessment that the value of the intangible
asset is overstated, an adjustment will be made in the period that the
adjustment is identified. If it is determined that the estimated remaining
service period requires revision, that revision will be made on a prospective
basis.
REVENUE RECOGNITION
The management service fee revenues (the "Service Fees") payable to the
Company by the Founding Affiliated Practices under their Service Agreements with
the Company (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. Except with respect to Service Agreements providing for the payment of
flat fees, the Service Fees earned by the Company are in accordance with the
Company's two general types of Service Agreements. The Standard Contract calls
for a calculation of the monthly Service Fee based on the total revenues earned
by the Founding Affiliated Practices, 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 practices retain a
percentage of the Founding Affiliated Practices' 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 practices
on a monthly basis. The Alternative Contract is used in California. It is a cost
plus fee arrangement, whereby the service fee includes the reimbursement of
expenses incurred by Apple in the course of providing services to the Founding
Affiliated Practice plus a percentage based on revenues.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative costs include office expenses, professional
fees, clerical and other administrative overhead.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for expected
future tax consequences of events that have been recognized in the financial
statements or tax returns. Deferred tax assets and liabilities are determined
based on the differences between the financial statement carrying amounts and
the tax bases
F-8
<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of assets and liabilities using enacted tax rates and laws in effect in the
years in which the differences are expected to reverse.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables and debt instruments. The book
values of each of these items are considered to be representative of their
respective fair values.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." This statement establishes new standards for
computing and presenting earnings per share requiring the presentation of
"basic" and "diluted" earnings per share as compared to "primary" and
"fully diluted" earnings per share. The Company adopted SFAS No. 128 for the
year ended December 31, 1997 and restated its prior period earnings per share
data.
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. NEW ORTHODONTIST AFFILIATIONS
During the period from commencement of operations (June 1, 1997) through
December 31, 1997, the Company completed New Orthodontist Affiliations with 21
practices representing 27 orthodontists and 37 office locations. In addition,
eight orthodontists joined existing Affiliated Practices. The New Orthodontist
Affiliations generated patient revenue of $23.2 million (unaudited) for their
most recently completed fiscal year. Prior patient revenue is not necessarily
indicative. of the level of patient revenue that these practices may be expected
to generate in the future and is not necessarily indicative of the future
Service Fees that the Company will receive in conjunction with these
affiliations.
Total consideration related to the New Orthodontist Affiliations is
summarized as follows:
Cash................................. $ 6,815,963
Deferred payments.................... 321,054
Debt assumed......................... 650,000
Common stock......................... 14,114,552
--------------
Total consideration........ $ 21,901,569
==============
In addition to the above consideration, the Company incurred out-of-pocket
costs of $1.5 million related to entering into service agreements with the New
Orthodontist Affiliations. The Company also placed $2.1 million into an escrow
account pending the resolution of certain post-closing contingencies related to
one of the New Orthodontist Affiliations closed during the third quarter of
1997. This $2.1 million is reflected as restricted cash on the accompanying
consolidated balance sheet. A favorable resolution of these post-closing
contingencies would result in payment of the $2.1 million to the sellers in
January 1999. The Company has the right to post a letter of credit in order to
have the $2.1 million released from escrow to the Company prior to January 1999.
Upon the resolution of these contingencies beyond a reasonable doubt, the
Company will record a liability for the consideration and allocate the
consideration to the assets to be acquired, primarily intangibles.
F-9
<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The cost of each of the above New Orthodontist Affiliations has been
allocated on the basis of the estimated fair market value of the assets acquired
and liabilities assumed, resulting in gross service fee intangibles of $39.5
million. These allocations may be adjusted to the extent that management becomes
aware of additional information within one reporting year of the affiliation
date which results in a material change in the amount of any contingency or
changes in the estimated fair market value of assets acquired and liabilities
assumed.
4. PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
USEFUL DECEMBER 31,
LIVES IN -----------------------
YEARS 1997 1996
-------- ------------ ---------
Equipment............................ 5 $ 1,440,889 $ --
Furniture and fixtures............... 7 1,371,330 --
Computer software.................... 5 1,310,521 --
Leasehold improvements............... 5 1,073,448 --
Construction in progress............. -- 831,250 --
Computer hardware.................... 3 487,460 --
------------ ---------
6,514,898 --
Less: accumulated depreciation....... (489,468) --
------------ ---------
$ 6,025,430 $ --
============ =========
5. INTANGIBLE ASSETS
A summary of intangible assets is as follows:
DECEMBER 31,
-------------------------
1997 1996
-------------- ---------
Service fee intangible............... $ 39,482,835 $ --
Other................................ 122,015 49,197
-------------- ---------
39,604,850 49,197
Less: accumulated amortization....... (458,479) (4,510)
-------------- ---------
$ 39,146,371 $ 44,687
============== =========
6. LONG-TERM DEBT
A summary of long-term debt is as follows:
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
Unsecured revolving credit
facility........................... $ -- $ --
Notes payable, maturing in varying
amounts through October 2002, with
interest ranging from 7.5% to
9.25%.............................. 1,076,020 --
Capitalized lease obligations, due in
monthly installments through April
2001, with interest ranging from
9.5% to 24.66%..................... 194,314 --
------------ ------------
1,270,334 --
Less: current maturities........ 1,022,710 --
------------ ------------
Long-term debt, net of current
maturities........................... $ 247,624 $ --
============ ============
F-10
<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On July 28, 1997, the Company entered into a three-year, $15 million
unsecured revolving credit facility with Chase Manhattan Bank. Advances under
this facility bear interest, at the Company's option, at prime rate or LIBOR, in
each case plus a margin which is calculated based upon the Company's ratio of
indebtedness to cashflow. The Company is required to maintain certain financial
covenants regarding net worth, coverage ratios and additional indebtedness.
The notes payable primarily relate to debts of the Affiliated Practices
that were assumed by the Company.
Total assets recorded under capital leases and the accumulated depreciation
thereon were $263,781 and $76,958 as of December 31, 1997, respectively. There
were no capital leases at December 31, 1996.
Aggregate maturities of the notes payable and the future minimum payments
under leases are as follow:
Year Ended December 31,
1998............................ $ 1,022,710
1999............................ 142,252
2000............................ 54,303
2001............................ 34,383
2002............................ 16,686
Thereafter...................... --
------------
$ 1,270,334
============
7. STOCKHOLDERS' EQUITY
COMMON STOCK
Holders of the Company's Class A common stock (the "Class A Stock") are
entitled to one vote per share. Holders of the Company's Class B common stock
(the "Class B Stock") are entitled to three-tenths ( 3/10ths) of a vote per
share. The Class B Stock is convertible into Class A Stock in certain
circumstances, including the disposition of shares of Class B Stock by the
holder thereof (excluding dispositions to such holder's affiliates). During the
year ended December 31, 1997, 170,310 shares of Class B Stock were converted
into Class A Stock. Included in the 9,980,192 shares of Class A Stock at
December 31, 1997 were 1,027,354 nonvoting exchangeable shares issued in
connection with Canadian affiliations during 1997 which are exchangeable into
shares of Class A Stock.
DIVIDENDS
With the exception of a special dividend paid to the Founding Affiliated
Practices in connection with the Acquisitions (see Note 1), the Company has
never paid cash dividends on its common stock and has no present intention to
pay cash dividends. In addition, the Company's unsecured revolving credit
facility prohibits the payment of cash dividends on its common stock. It is the
Company's intention to retain earnings to finance the expansion of its business.
WARRANTS
In May 1997, the Company granted stock purchase warrants that entitled
certain venture capital investors to purchase 180,000 shares of the Company's
common stock at a price of $7.00 per share through May 2002. All of the warrant
shares were vested at issuance. The warrants were recorded at their estimated
value of $777,106 by applying the Black-Scholes option pricing model at the date
of grant.
F-11
<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTION PLAN
The Company maintains an incentive compensation plan (the "Incentive
Plan") which provides the ability to grant non-qualified options, restricted
stock, deferred stock, incentive stock options, stock appreciation rights and
other long-term incentive awards. Stock options are typically granted under the
Incentive Plan at an exercise price which equals the fair market value of the
stock on the date of the grant. The number of shares available for issuance
under the Incentive Plan at any time is limited to the greater of 1.0 million
shares of common stock or 12% of the number of shares of common stock
outstanding on the last day of the preceding calendar quarter.
The Company issued options to purchase 922,550 shares and 0 shares during
the years ended December 31, 1997 and 1996, respectively. No options were
exercised during either of the two years ended December 31, 1997 or 1996. At
December 31, 1997, options were outstanding at prices ranging from $3.00 to
$15.25 per share, of which 225,925 were exercisable. All of the Company's
options were issued at fair market value.
As allowed by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company accounts for awards under its 1997 Stock Option Plan under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized for stock options issued with exercise prices greater than or
equal to the fair market value at the date of grant. Had compensation cost for
these plans been determined consistent with SFAS No. 123, the Company's net loss
and loss per share would have been reduced to the following pro forma amounts:
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996
---------- ---------------
Net income (loss)
As reported........................ $ 716,725 $ (24,309,378)
========== ===============
Pro forma.......................... $ 591,637 $ (24,309,378)
========== ===============
Income (loss) per share
As reported........................ $ 0.09 $ (7.24)
========== ===============
Pro forma.......................... $ 0.07 $ (7.24)
========== ===============
During the year ended December 31, 1997, the Company issued options to
purchase 28,000 shares to individuals other than employees and directors of the
Company as consideration for the closing of New Orthodontist Affiliations. The
fair value of these options was determined using the Black-Scholes option
pricing model at the date of grant and capitalized as a cost of affiliation.
PROFIT SHARING PLAN
In 1997, the Company established a defined contribution 401(k) profit
sharing plan for employees meeting certain employment requirements. Eligible
employees may contribute amounts up to the lesser of 15% of their annual
compensation or the maximum amount permitted under IRS regulations to their
401(k) account. The Company does not match any portion of employee
contributions.
F-12
<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return. Affiliated Practices file "short-period" federal returns through their
respective acquisition dates and thereafter are included in the Company's
consolidated return. The new practices established by the affiliating
orthodontists file separate federal returns and are solely responsible for their
tax liabilities on an ongoing basis.
The amounts of consolidated federal and state income tax expense are as
follows:
YEAR ENDED DECEMBER
31,
----------------------
1997 1996
---------- ----------
Current:
Federal......................... $ 298,361 $ --
State........................... 52,652 --
---------- ----------
351,013 --
---------- ----------
Deferred:
Federal......................... 79,782 --
State........................... 8,487 --
---------- ----------
88,269 --
---------- ----------
$ 439,282 $ --
========== ==========
A reconciliation of total income tax expense to the amounts calculated by
applying the federal statutory tax rate is as follows:
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
---------- ------------
Tax at statutory rate................ $ 393,382 $ (300,524)
Add (deduct):
State income taxes.............. 45,774 (26,516)
Nondeductible expenses.......... 27,166 --
Valuation allowance............. (27,040) 327,040
---------- ------------
Income tax expense................... $ 439,282 $ --
========== ============
F-13
<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred income tax liabilities and assets are as
follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
--------------- --------------
Deferred income tax liabilities:
Property and equipment.......... $ (38,000) $ --
Intangibles..................... (14,718,642) --
--------------- --------------
Total deferred income tax
liabilities............. (14,756,642) --
--------------- --------------
Deferred income tax assets:
Estimated tax basis resulting
from affiliation with founding
practices..................... 300,000 --
Bad debt reserves............... 26,220 --
Accrued expenses................ 186,039 --
Net operating loss.............. -- 327,040
Less: valuation allowance....... (300,000) (327,040)
--------------- --------------
Total deferred income tax
assets..................... 212,259 --
--------------- --------------
Net deferred income tax
liabilities................ $ (14,544,383) $ --
=============== ==============
9. EARNINGS PER SHARE
Earnings per common and common equivalent share have been computed based on
the weighted average number of shares outstanding. The following table
reconciles the number of common shares outstanding with the number of common
shares used in computing earnings per share:
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996
------------ -----------
Common shares outstanding............ 13,156,966 3,347,084
Effect of using weighted average
common shares outstanding during
the period......................... (5,025,061) 11,429
------------ -----------
Shares used in calculating basic
earnings per share................. 8,131,905 3,358,513
Effect of shares issuable under stock
option plans and warrant agreements
based on the treasury stock
method............................. 212,493 --
------------ -----------
Shares used in calculating diluted
earnings per share................. 8,344,398 3,358,513
============ ===========
10. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information are as follows:
YEAR ENDED DECEMBER
31,
---------------------
1997 1996
---------- ---------
Interest paid during the period, net
of capitalized interest............ $ 279,313 $ --
Income taxes paid during the
period............................. -- $ --
The Company acquired assets in capital lease transactions for $263,781 and
$0 in 1997 and 1996, respectively.
F-14
<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
The Company has entered into various non-cancelable operating lease
agreements, primarily for facilities and equipment utilized for operations.
Rental expense under operating leases was $1,801,944 and $19,676 in 1997 and
1996, respectively. Minimum future annual lease payments under these agreements
are as follows:
Year Ended December 31,
1998............................ $ 2,086,462
1999............................ 1,731,841
2000............................ 1,480,489
2001............................ 1,185,844
2002............................ 743,002
Thereafter...................... 1,215,345
------------
$ 8,442,983
============
The Company has secured employment agreements with various officers and
certain key employees of the Company. The agreements generally provide for the
employee's annual base salary and bonus participation. The agreements also
generally provide for one year non-competition agreements and severance payments
of between one and three year's salary in the event the employee is terminated
without cause.
The Company carries a broad range of insurance coverage, including general
liability, comprehensive property damage, workers' compensation, employers'
liability, directors' and officers' liability and other coverage customary in
the industry. The Company and the existing Affiliated Practices maintain
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.
12. RELATED PARTY TRANSACTIONS
In 1996, the Company entered into an agreement with TriCap Funding I,
L.L.C. ("TriCap"), which is co-owned by a director of the Company, whereby
TriCap agreed to provide $3 million to finance costs related to the IPO. The $3
million, to the extent expended, was repaid out of proceeds from the IPO,
including interest at a rate of prime plus 25 basis points. The Company also
entered into an agreement with TriCap during 1996 that provided for the payment
to TriCap of a $500,000 financial advisory fee and the issuance to TriCap of
warrants to purchase 180,000 shares of common stock with an exercise price of
$7.00 per share, each upon the consummation of the IPO.
The practice of a founding stockholder of the Company (the "Founding
Stockholder") paid for certain costs and expenses on behalf of the Company
prior to the consummation of the IPO. The amount payable to the Founding
Stockholder's practice at December 31, 1996 was $30,444 and was included in
accounts payable and accrued expenses in the accompanying balance sheet. This
amount was repaid with the proceeds from the IPO.
13. CONCENTRATIONS OF SERVICE FEE REVENUE
For the year ended December 31, 1997, 14% of the Company's revenues were
derived from one Affiliated Practice, which was the only Affiliated Practice
that provided 10% or more of revenues. For the year ended December 31, 1997, 25%
of the Company's revenues were derived from Affiliated Practices in Canada.
F-15
<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. COMBINED PATIENT DATA
Combined operating data for the Affiliated Practices for the period from
initial affiliation through December 31, 1997 is as follows:
PATIENT CASH
REVENUES COLLECTIONS
----------- ------------
Practices participating under the
Standard Contract.................. $14,891,945 $ 13,617,373
Practices participating under the
Alternative Contract............... 4,095,918 3,982,313
Practices participating under flat
fee agreements..................... 6,054,841 6,054,841
----------- ------------
$25,042,704 $ 23,654,527
=========== ============
Combined patient receivables, net of the Affiliated Practices as of
December 31, 1997 is as follows:
Patient receivables.................. $ 3,471,028
Unbilled patient receivables......... 3,443,896
Patient prepayments.................. (2,410,327)
------------
Patient receivables, net of
prepayments............. $ 4,504,597
============
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
1997
Management service fee
revenues...................... $ -- $ 1,685,957 $ 7,479,653 $ 10,019,940
Operating income (loss)......... (475,322) (609,521) 873,995 1,433,698
Net income (loss)............... (475,322) (192,962) 512,763 872,246
Basic earnings (loss) per
share......................... (0.14) (0.03) 0.05 0.07
Diluted earnings (loss) per
share......................... (0.14) (0.03) 0.05 0.07
1996
Management service fee
revenues...................... $ -- $ -- $ -- $ --
Operating income (loss)......... -- -- (172,395) (24,136,983)
Net income (loss)............... -- -- (172,395) (24,136,983)
Basic earnings (loss) per
share......................... -- -- (0.05) (7.19)
Diluted earnings (loss) per
share......................... -- -- (0.05) (7.19)
</TABLE>
16. SUBSEQUENT EVENTS
Since December 31, 1997, nine additional orthodontists have affiliated with
the Company. Five of these orthodontists had established practices, and four
agreed to join Affiliated Practices. The additional orthodontists in established
practices operate four locations and generated historical patient revenue of
$1.9 million for their most recently completed fiscal year. Prior patient
revenue is not necessarily indicative of the level of patient revenue that these
practices may be expected to generate in the future and is not necessarily
indicative of the future Service Fees that the Company will receive in
conjunction with these affiliations. Total consideration to these new
orthodontists consisted of 149,799 shares of common stock and $819,490 of cash,
assumed debt and deferred purchase price.
F-16
<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. 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...................... 2
Risk Factors............................ 5
The Company............................. 10
Price Range of Common Stock............. 11
Dividend Policy......................... 11
Selected Financial Data................. 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 13
Business................................ 18
Management.............................. 28
Certain Transactions.................... 34
Security Ownership of Certain Beneficial
Owners and Management................. 35
Description of Capital Stock............ 36
Shares Eligible for Future Sale......... 39
Plan of Distribution.................... 41
Experts................................. 41
Additional Information.................. 41
Index to Financial Statements........... F-1
[LOGO]
APPLE ORTHODONTIX, INC.
COMMON STOCK
--------------------------
PROSPECTUS
--------------------------
MAY , 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgements, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding, if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
such person's 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 such person
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 such person's 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 such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation, and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such 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 present or
former director or officer 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, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person 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 present or former director, officer, employee or
agent is proper in the circumstances because such person has met the applicable
standard of conduct set forth in subsections (a) and (b). Such determination
shall be made with respect to a person who is a director or officer at the time
of such determination, (1) by the board of directors by a majority vote of the
directors who were not parties to such action, suit or proceeding, even though
less than a quorum, or (2) by a committee of such directors, even though less
than a quorum, or (3) 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 (4) by the stockholders.
II-1
<PAGE>
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 such
person is not entitled to be indemnified by the corporation as authorized in
Section 145. Such expenses (including attorneys' fees) incurred by former
directors and officers or other employees and agents may be so paid upon such
terms and conditions, if any, as the operator 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 such person's 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 such person and incurred by such person
in any such capacity, or arising out of such person's status as such, whether or
not the corporation would have the power to indemnify such person 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.
RESTATED 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 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
II-2
<PAGE>
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.
INSURANCE
The Company maintains liability insurance for the benefit of its directors
and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
*3.1 -- Restated Certificate of Incorporation (Incorporated herein by reference to Exhibit 3.1 of
the Company's Registration Statement on Form S-1 (Registration No. 333-22785)).
*3.2 -- Bylaws (Incorporated herein by reference to Exhibit 3.2 of the Company's Registration
Statement on Form S-1 (Registration No. 333-22785)).
*4.1 -- Form of certificate evidencing ownership of Common Stock of Apple Orthodontix, Inc.
(Incorporated herein by reference to Exhibit 4.1 of the Company's Registration Statement
on Form S-1 (Registration No. 333-22785)).
*4.2 -- Form of Registration Rights Agreement (Incorporated herein by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-1 (Registration No. 333-22785)).
*4.3 -- Registration Rights Agreement among Apple Orthodontix, Inc., John G. Vondrak, D.D.S. and
TriCap Funding I, L.L.C. (Incorporated herein by reference to Exhibit 4.3 of the Company's
Registration Statement on Form S-1 (Registration No. 333-22785)).
*4.4 -- Registration Rights Agreement between TriCap Partners, L.L.C. and Apple Orthodontix, Inc.
(Incorporated herein by reference to Exhibit 4.4 of the Company's Registration Statement
on Form S-1 (Registration No. 333-22785)).
4.5 -- Amended Support Agreement among Apple Orthodontix, Inc., Apple Orthodontix of Canada, Inc.
and Texas Commerce Bank, National Association.
4.6 -- Amended Voting and Exchange Agreement among Apple Orthodontix, Inc, Apple Orthodontix of
Canada, Inc. and Texas Commerce Bank, National Association.
+5.1 -- Opinion of H. Steven Walton.
*10.1 -- Apple Orthodontix, Inc. 1997 Stock Compensation Plan (Incorporated herein by reference to
Exhibit 10.2 of the Company's Registration Statement on Form S-1 (Registration No.
333-38817)).
*10.2 -- Employment Agreement between Apple Orthodontix, Inc. and John G. Vondrak, D.D.S.
(Incorporated herein by reference to Exhibit 10.2 of the Company's Registration Statement
on Form S-1 (Registration No. 333-22785)).
II-3
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
*10.3 -- Employment Agreement between Apple Orthodontix, Inc. and Robert J. Syverson (Incorporated
herein by reference to Exhibit 10.3 of the Company's Registration Statement on Form S-1
(Registration No. 333-22785)).
*10.4 -- Employment Agreement between Apple Orthodontix, Inc. and Michael W. Harlan (Incorporated
herein by reference to Exhibit 10.4 of the Company's Registration Statement on Form S-1
(Registration No. 333-22785)).
*10.5 -- Employment Agreement between Apple Orthodontix, Inc. and W. Daniel Cook (Incorporated
herein by reference to Exhibit 10.5 of the Company's Registration Statement on Form S-1
(Registration No. 333-22785)).
*10.6 -- Employment Agreement of H. Steven Walton (Incorporated herein by reference to Exhibit 10.7
of the Company's Registration Statement on Form S-1 (Registration No. 333-22785)).
*10.7 -- Amendment to Employment Agreement of H. Steven Walton (Incorporated herein by reference to
Exhibit 10.9 of the Company's Registration Statement on Form S-1 (Registration No.
333-38817)).
*10.8 -- Second Amendment to Employment Agreement of H. Steven Walton (Incorporated herein by
reference to Exhibit 99.2 of the Company's Current Report on Form 8-K dated February 24,
1998).
*10.9 -- Revolving Credit Facility with Texas Commerce Bank, National Association (Incorporated
herein by reference to Exhibit 10.1 of the Company's Registration Statement on Form S-1
(Registration No. 333-38817)).
*10.10 -- Form of Option Agreement for the Apple Orthodontix, Inc. 1997 Stock Compensation Plan
(Incorporated herein by reference to Exhibit 10.3 of the Company's Registration Statement
on Form S-1 (Registration No. 333-38817)).
*10.11 -- Form of Service Agreement for Founding Affiliated Practices (Incorporated herein by
reference to Exhibit 10.8 of the Company's Registration Statement on Form S-1
(Registration No. 333-22785)).
*10.12 -- Form of Alternative Service Agreement for Founding Affiliated Practices (Incorporated
herein by reference to Exhibit 10.6 of the Company's Registration Statement on Form S-1
(Registration No. 333-22785)).
*10.13 -- Form of Flat Fee Service Agreement for Founding Affiliated Practices (Incorporated herein
by reference to Exhibit 10.11 of the Company's Registration Statement on Form S-1
(Registration No. 333-22785)).
*10.14 -- First Amendment to Employment Agreement of Robert J. Syverson (Incorporated herein by
reference to Exhibit 99.1 of the Company's Current Report on Form 8-K dated February 24,
1998).
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Arthur Andersen LLP.
+23.2 -- Consent of H. Steven Walton (included in Exhibit 5.1).
24.1 -- Power of Attorney (included on the signature page of this Registration Statement).
27.1 -- Financial Data Schedule.
</TABLE>
- ------------
* Incorporated herein by reference as indicated.
+ 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.
(c) Report, opinion or appraisal.
No report, opinion or appraisal is included in this Registration
Statement because it is not applicable.
II-4
<PAGE>
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
(a) The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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 initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described in Item 14,
or otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payments
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of 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.
(5) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(6) That every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
II-5
<PAGE>
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.
(b) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
(c) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS POST-EFFECTIVE
AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Date: May 7, 1998.
APPLE ORTHODONTIX, INC.
By: /s/ JOHN G. VONDRAK
JOHN G. VONDRAK, D.D.S.
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Michael W. Harlan
and W. Daniel Cook, and each of them, any of whom may act without the joinder of
the other, as his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign any and all amendments (including post-effective
amendments) to this Registration Statement and any registration statement for
the same offering filed pursuant to rule 462 under the Securities Act of 1933,
as amended, and to file the same, with all exhibits thereto and all other
documents in connection therewith, with the commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing appropriate or necessary to be done, as fully and for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS POST-EFFECTIVE AMENDMENT TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED AND ON MAY 7, 1998.
<TABLE>
<CAPTION>
NAME CAPACITY
- ---------------------------------------- --------------------------------------------------------
<S> <C>
/s/JOHN G. VONDRAK Chairman of the Board and Chief Executive
JOHN G. VONDRAK, D.D.S. 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/ROBERT L. BREWTON Director
ROBERT L. BREWTON
/s/ROD L. CROSBY, JR. Director
ROD L. CROSBY, JR.
/s/RICHARD J. MARXEN Director
RICHARD J. MARXEN
/s/WILLIAM W. SHERRILL Director
WILLIAM W. SHERRILL
/s/CLYDE C. WADDELL, JR. Director
CLYDE C. WADDELL, JR.
</TABLE>
II-7
EXHIBIT 4.5
AMENDED SUPPORT AGREEMENT
This Amended Support Agreement (this "Agreement"), dated for reference May 10,
1997, is by and among Apple Orthodontix Inc., a Delaware corporation ("AOI"),
718842 Alberta Inc., an Alberta corporation ("Apple") and Texas Commerce Bank
National Association, a national banking association having an office in the
City of Houston, Texas (the "Trustee").
WITNESSETH:
WHEREAS AOI is the sole holder of Apple's issued and outstanding Class A
Common Shares (the "Apple Common Stock");
AND WHEREAS certain shares of Class A Common Stock of AOI, having voting
rights of one vote per share (the "AOI Common Stock") are in the process of
being listed on the American Exchange;
AND WHEREAS pursuant to a consulting agreement with Dr. Duncan Y. Brown
Apple issued certain Class A Non-Voting, Exchangeable Shares of Apple (the
"Class A Exchangeable Shares") which are exchangeable for AOI Common Stock.
AND WHEREAS pursuant to an acquisition agreement, Apple acquired certain
assets and issued in consideration therefore certain Class B Non-Voting
Exchangeable Shares of Apple (the "Class B Exchangeable Shares") which are
exchangeable for AOI Common Stock;
AND WHEREAS Apple reorganized its capital by filing articles of amendment
dated effective May 10, 1997 and such articles of amendment set forth the
rights, privileges, restrictions and conditions (collectively the "Exchangeable
Share Provisions") attaching to the Class A and Class B Exchangeable Shares
(collectively, the "Exchangeable Shares");
AND WHEREAS the Trustee holds the voting, rights with respect to certain
AOI Common Stock for the benefit of the holders of the Exchangeable Shares;
AND WHEREAS the parties hereto desire to establish a procedure whereby AOI
will take certain actions and make certain payments and deliveries necessary to
ensure that Apple will be able to make certain payments and to deliver or cause
to be delivered shares of AOI Common Stock in satisfaction of the obligations of
Apple under the Exchangeable Share Provisions with respect to the payment and
satisfaction of dividends, Liquidation Price and Retraction Price, all in
accordance with the Exchangeable Share Provisions;
NOW THEREFORE in consideration of the respective covenants and agreements
provided in this Agreement and for other good and valuable consideration (the
receipt and sufficiency of which are hereby acknowledged), the parties agree as
follows:
-1-
<PAGE>
ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 DEFINED TERMS. Each term denoted herein by initial capital letters and not
otherwise defined herein has the meaning ascribed thereto in the Exchangeable
Share Provisions, unless the context requires otherwise.
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC. The division of this Agreement
into articles, sections and paragraphs and the insertion of headings are for
convenience of reference only and will not affect the construction or
interpretation of this Agreement.
1.3 NUMBER, GENDER, ETC. Words imparting the singular number only include the
plural and vice versa. Words imparting the use of any gender include all
genders.
1.4 DATE FOR ANY ACTION. IF any date on which any action is required to be taken
under this Agreement is not a Business Day, such action is required to be taken
on the next succeeding Business Day. For the purposes of this Agreement, a
"Business Day" means a day other than a Saturday, a Sunday or a statutory
holiday in the City of Calgary, Alberta or the City of Houston, Texas.
ARTICLE 2
COVENANTS OF AOI AND APPLE
2.1 COVENANTS OF PARENT REGARDING EXCHANGEABLE SHARES. So long as any
Exchangeable Shares are outstanding, AOI will:
(a) not declare or pay any dividend on AOI Common Stock unless (i) Apple
has sufficient assets, funds or other property available to enable the due
declaration and the due and punctual payment in accordance with applicable
law, of an equivalent dividend on the Class B Exchangeable Shares and (ii)
Apple simultaneously declares or pays, as the case may be, an equivalent
dividend on the Class B Exchangeable Shares;
(b) cause Apple to declare simultaneously with the declaration of any
dividend on AOI Common Stock an equivalent dividend on the Class B
Exchangeable Shares and, when such dividend is paid on AOI Common Stock,
cause Apple to pay simultaneously therewith such equivalent dividend on
the Class B Exchangeable Shares, in each case in accordance with the
Exchangeable Share Provisions;
(c) advise Apple sufficiently in advance of the declaration by AOI of any
dividend on AOI Common Stock and take all such other actions as are
necessary, in cooperation
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with Apple, to ensure that the respective declaration date, record date and
payment date for a dividend on the Class B Exchangeable Shares will be the same
as the record date, declaration date and payment date for the corresponding
dividend on AOI Common Stock and such dividend on the Class B Exchangeable
Shares will correspond with any requirement of the stock exchange on which the
Exchangeable Shares are listed;
(d) ensure that the record date for any dividend declared on AOI Common
Stock is not less than 1O Business Days after the declaration date for
such dividend;
(e) take all such actions and do all such things as are necessary or
desirable to enable and permit Apple, in accordance with applicable law,
to pay and otherwise perform its obligations with respect to the
satisfaction of the Liquidation Price with respect to each issued and
outstanding Exchangeable Share upon the liquidation, dissolution or
winding-up of Apple, including without limitation all such actions and all
such things as are necessary or desirable to enable and permit Apple to
cause to be delivered shares of AOI Common Stock to the holders of
Exchangeable Shares in accordance with the provisions of Article 6 of the
Exchangeable Share Provisions;
(f) take all such actions and do all such things as are necessary or
desirable to enable and permit Apple, in accordance with applicable law,
to pay and otherwise perform its obligations with respect to the
satisfaction of the Retraction Price, including without limitation of such
actions and all such things as are necessary or desirable to enable and
permit Apple to cause to be delivered shares of AOI Common Stock to the
holders of Exchangeable Shares upon the retraction of the Exchangeable
Share;
(g) not exercise its vote as a shareholder to initiate the voluntary
liquidation, dissolution or winding-up of Apple nor take any action or
omit to take any action that is designed to or may result in the
liquidation, dissolution or winding-up of Apple; and
(h) not Transfer to any person in the business of providing management
services to orthodontic practices in Canada any interest in any of the
Apple Common Stock it owns and will take all such actions and do all such
things as are necessary or desirable to cause Apple not to issue any
securities, or grant or commit to grant any rights with respect to any
securities, other than its Exchangeable Shares, to any such person other
than AOI, and any attempt to do so will be void and, because the parties
hereto acknowledge the inadequacies of money damages in such
circumstances, will be subject to one or both of specific performance and
injunctive relief at the instance of any of the parties hereto.
For purposes of this Agreement, Transfer includes to issue, sell, assign,
surrender, gift, bequest, lease, license, pledge, mortgage, charge, create a
security interest, hypothecate or otherwise dispose of, exchange, encumber or
deal with any Apple Common Stock or any interest, whether legal or beneficial,
in any Apple Common Stock whether voluntarily, involuntarily, directly or
indirectly, conditionally, contingently or otherwise, by operation of law or
otherwise or to enter
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into any agreement, arrangement or undertaking or any action which results or
may result in the foregoing.
2.2 SEGREGATION OF FUNDS. AOI will cause Apple to deposit sufficient funds in a
separate account and segregate a sufficient amount of such assets and other
property as is necessary to enable Apple to pay or otherwise satisfy the
applicable dividends, Liquidation Price or Retraction Price, in each case for
the benefit of holders from time to time of the Exchangeable Shares, and will
use such funds, assets and other property so segregated exclusively for the
payment of dividends and the payment or other satisfaction of the Liquidation
Price or the Retraction Price, as applicable.
2.3 RESERVATION OF SHARES OF AOI COMMON STOCK. AOI hereby represents, warrants
and covenants that it has irrevocably reserved for issuance and will at all
times keep available, free from pre-emptive and other rights, out of its
authorized and unissued capital stock such number of shares of AOI Common Stock
(or other shares or securities into which AOI Common Stock may be reclassified
or changed as contemplated by section 2.7 hereof) (a) as is equal to the sum of
(i) the number of Exchangeable Shares issued and outstanding from time to time
and (ii) the number of Exchangeable Shares issuable upon the exercise of all
rights to acquire Exchangeable Shares outstanding from time to time and (b) as
are now and may hereafter be required to enable and permit Apple to meet its
obligations hereunder, under the Voting and Exchange Agreement, under the
Exchangeable Share Provisions and under any other security or commitment
pursuant to which AOI may now or hereafter be required to issue shares of AOI
Common Stock.
2.4 NOTIFICATION OF CERTAIN EVENTS. In order to assist AOI to comply with its
obligations hereunder, Apple will give AOI notice of each of the following
events at the time set forth below:
(a) in the event of any determination by the Board of Directors of Apple
to institute voluntary liquidation, dissolution or winding up
proceedings with respect to Apple or to effect any other
distribution of the assets to Apple among its shareholders for the
purpose of winding up its affairs, at least 60 days prior to the
proposed effective date of such liquidation, dissolution, winding up
or other distribution;
(b) immediately, upon the earlier of (i) receipt by Apple of notice, and
(ii) Apple otherwise becoming aware of, any threatened or instituted
claim, suit, petition or other proceedings with respect to the
involuntary liquidation, dissolution or winding up of Apple or to
effect any other distribution of the assets of Apple among its
shareholders for the purpose of winding up its affairs;
(c) immediately, upon receipt by Apple of a Retraction Request (as
defined in the Exchangeable Share Provisions); and
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(d) as soon as practicable upon the issuance by Apple of any
Exchangeable Shares or rights to acquire Exchangeable Shares.
2.5 DELIVERY OF SHARES OF AOI COMMON STOCK. In furtherance of its obligations
under sections 2. 1 (e) and 2. 1 (f) hereof, upon notice of any event which
requires Apple to cause to be delivered shares of AOI Common Stock to any holder
of Exchangeable Shares, AOI will forthwith issue and deliver the requisite
shares of AOI Common Stock to or to the order of the former holder of the
surrendered Exchangeable Shares, as Apple directs. All such shares of AOI Common
Stock will be duly issued as fully paid and non-assessable and will be free and
clear of any lien, claim, encumbrance, security interest or adverse claim.
2.6 QUALIFICATION OF SHARES OF AOI COMMON STOCK. AOI covenants that if any
shares of AOI Common Stock (or other shares or securities into which AOI Common
Stock may be reclassified or changed as contemplated by Section 2.7 hereof) to
be issued and delivered hereunder, including for greater certainty, pursuant to
the Exchangeable Share Provisions, or pursuant to the Exchange Right as defined
in the Voting and Exchange Agreement require registration or qualification with
or approval of or the filing of any document including any prospectus or similar
document or the taking of any proceeding with or the obtaining of any order,
ruling or consent from any governmental or regulatory authority under any
Canadian or United States federal, provincial or state law or regulation or
pursuant to the rules and regulations of any regulatory authority or the
fulfilment of any other legal requirement (collectively, the "Applicable Laws")
before such shares (or other shares or securities into which AOI Common Stock
may be reclassified or changed as contemplated by Section 2.7 hereof may be
issued and delivered by AOI to the initial holder thereof, AOI will
expeditiously take all such actions and do all such things as are necessary to
cause such shares of AOI Common Stock (or other shares or securities into which
AOI Common Stock may be reclassified or changed as contemplated by Section 2.7
hereof to be and to remain duly registered, qualified or approved. In addition
to the foregoing, AOI represents, warrants and covenants that it will take all
action and do all things as are necessary under Applicable Laws as they exist on
the particular date thereof to cause the shares of AOI Common Stock (or other
shares or securities into which AOI Common Stock may be reclassified or changed
as contemplated by Section 2.7 hereof) to be issued and delivered hereunder,
including for greater certainty, pursuant to the Exchangeable Share Provisions,
or pursuant to the Exchange Right as defined in the Voting and Exchange
Agreement to be eligible for resale in the United States and Canada by the
initial holder thereof upon the expiration of the Restricted Period, as defined
in any agreement pursuant to which Apple or any affiliate of Apple (being 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 government body
that directly or indirectly through one or more intermediaries or otherwise,
controls, is controlled by or is under common control with Apple) has acquired
property and issued shares in consideration therefore (an "Acquisition
Agreement"); provided however that the transfer of such shares to a person
related to the Holder is not restricted by this Section 2.6 (other than
restrictions on transfer by reason of
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a holder being a "control person" of AOI for purposes of Canadian federal or
provincial securities law or an "affiliate" of AOI for purposes of United States
federal or state securities law). AOI will expeditiously take all such actions
and do all such things as are necessary to cause all shares of AOI Common Stock
(or other shares or securities into which AOI Common Stock may be reclassified
or changed as contemplated by Section 2.7 hereof) to be delivered hereunder,
including for greater certainty, pursuant to the Exchangeable Share Provisions,
or pursuant to the Exchange Right as defined in the Voting and Exchange
Agreement, to be listed, quoted or posted for trading on all stock exchanges and
quotation systems on which such shares are listed, quoted or posted for trading
at such time.
2.7 ECONOMIC EQUIVALENCE
(a) In the event that AOI determines to:
(i) issue or distribute shares of AOI Common Stock (or securities
exchangeable for or convertible into or carrying rights to acquire
shares of AOI Common Stock) to the holders of all or substantially
all of the then outstanding AOI Common Stock by way of stock
dividend or other distribution, other than an issue of shares of AOI
Common Stock (or securities exchangeable for or convertible into or
carrying rights to acquire shares of AOI Common Stock) to holders of
shares of AOI Common Stock who exercise an option to receive
dividends in AOI Common Stock (or securities exchangeable for or
convertible into or carrying rights to acquire shares of AOI Common
Stock) in lieu of receiving cash dividends; or
(ii) issue or distribute rights, options or warrants to the holders of
all or substantially all of the then outstanding shares of AOI
Common Stock entitling them to subscribe for or to purchase shares
of AOI Common Stock (or securities exchangeable for or convertible
into or carrying rights to acquire shares of AOI Common Stock); or
(iii) issue or distribute to the holders of all or substantially all of
the then outstanding shares of AOI Common Stock (A) shares or
securities of AOI of any class other than AOI Common Stock (other
than shares convertible into or exchangeable for or carrying rights
to acquire shares of AOI Common Stock), (B) rights, options or
warrants other than those referred to in subsection 2.7(a)(ii)
above, (C) evidences of indebtedness of AOI or (D) assets of AOI;
AOI will cause Apple to simultaneously issue or distribute the economic
equivalent on an after tax basis, if any, on a per share basis of such rights,
options, securities, shares, evidences of indebtedness or other assets to
holders of the Class B Exchangeable Shares.
(b) In the event that AOI determines to:
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(i) subdivide, redivide or change the then outstanding shares of
AOI Common Stock into a greater number of shares of AOI Common
Stock; or
(ii) reduce, combine or consolidate or change the then outstanding
shares of AOI Common Stock into a lesser number of shares of
AOI Common Stock; or
(iii) reclassify or otherwise change the shares of AOI Common Stock
or effect an amalgamation, merger, reorganization or other
transaction affecting the shares of AOI Common Stock;
AOI will cause Apple to simultaneously make the same or an economically
equivalent change with respect to the rights of holders of the Class B
Exchangeable Shares.
(c) AOI will ensure that the record date for any event referred to in
section 2.7(a) or 2.7(b) above, or (if no record date is applicable for such
event) the effective date for any such event, is not less than 20 Business Days
after the date on which such event is declared or announced by AOI (with
simultaneous notice thereof to be given by AOI to Apple).
(d) The Board of Directors of AOI will determine, in good faith and in its
sole discretion (with the assistance of such reputable and qualified independent
financial advisors and/or other experts as the board may require), economic
equivalence for the purposes of any event referred to in sections 2.7(a) or
2.7(b) above. In making each such determination, the following factors will,
without excluding other factors determined by the Board to be relevant, be
considered by the Board of Directors of AOI:
(i) in the case of any stock dividend or other distribution
payable in shares of AOI Common Stock, the number of such
shares issued in proportion to the number of shares of AOI
Common Stock previously outstanding;
(ii) in the case of the issuance or distribution of any rights,
options or warrants to subscribe for or purchase shares of AOI
Common Stock (or securities exchangeable for or convertible
into or carrying rights to acquire shares of AOI Common
Stock), the relationship between the exercise price of each
such right, option or warrant and the current market value (as
determined by the Board of Directors of AOI in the manner
above contemplated) of a share of AOI Common Stock;
(iii) in the case of the issuance or distribution of any other form
of property (including without limitation any shares or
securities of AOI of any class other than AOI Common Stock,
any rights options or warrants other than
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those referred to in subsection 2.7(d)(ii) above, any
evidences of indebtedness of AOI or any assets of AOI), the
relationship between the fair market value (as determined by
the Board of Directors of AOI in the manner above
contemplated) of such property to be issued or distributed
with respect to each outstanding share of AOI Common Stock and
the current market value (as determined by the Board of
Directors of Apple in the manner above contemplated) of a
share of AOI Common Stock;
(iv) in the case of any subdivision, redivision or change of the
then outstanding shares of AOI Common Stock into a greater
number of shares of AOI Common Stock or the reduction,
combination or consolidation or change of the then outstanding
shares of AOI Common Stock into a lesser number of shares of
AOI Common Stock or any amalgamation, merger, reorganization
or other transaction affecting AOI Common Stock, the effect
thereof upon the then outstanding shares of AOI Common Stock;
and
(v) in all such cases, the general taxation consequences of the
relevant event to holders of Exchangeable Shares to the extent
that such consequences may differ from the taxation
consequences to holders of shares of AOI Common Stock as a
result of differences between taxation laws of Canada and the
United States (except for any differing consequences arising
as a result of differing marginal taxation rates and without
regard to the individual circumstances of holders of
Exchangeable Shares).
For purposes of the foregoing determinations, the current market value of any
security listed and traded or quoted on a securities exchange will be the
weighted average of the daily trading prices of such security during a period of
not less than 20 consecutive trading days ending not more than five trading days
before the date of determination on the principal securities exchange on which
such securities are listed and traded or quoted; provided, however, that if in
the opinion of the Board of Directors of AOI, acting reasonably, the public
distribution or trading activity of such securities during such period does not
create a market which reflects the fair market value of such securities, then
the current market value thereof will be determined by the Board of Directors of
AOI, in good faith and in its sole discretion.
2.8 TENDER OFFERS, ETC. In the event that a tender offer, share exchange offer,
issuer bid, take-over bid or similar transaction with respect to AOI Common
Stock (an "Offer") is proposed by AOI or is proposed to AOI or its shareholders
and is recommended by the Board of Directors of AOI, or is otherwise effected or
to be effected with the consent or approval of the Board of Directors of AOI,
AOI will use its best efforts expeditiously and in good faith to take all such
actions and do all such things as are necessary or desirable to enable and
permit holders of Exchangeable Shares to participate in such Offer to the same
extent and on an economically equivalent basis as the holders of shares of AOI
Common Stock, without discrimination.
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Without limiting the generality of the foregoing, AOI will use its best efforts
expeditiously and in good faith to ensure that holders of Exchangeable Shares
may participate in all such Offers without being required to retract
Exchangeable Shares as against Apple (or, if so required, to ensure that any
such retraction will be effective only upon, and will be conditional upon, the
closing of the Offer and only to the extent necessary to tender or deposit to
the Offer).
2.9 OWNERSHIP OF OUTSTANDING SHARES. Without the prior approval of Apple and the
prior approval of the holders of the Exchangeable Shares given in accordance
with Section 8.2 of the Exchangeable Share Provisions, AOI covenants and agrees
in favour of Apple that, as long as any outstanding Exchangeable Shares are
owned by any person or entity other than AOI or any of its Affiliates, AOI will
be and remain the direct or indirect beneficial owner of all issued and
outstanding shares in the capital of Apple and all outstanding securities of
Apple carrying or otherwise entitled to voting rights in any circumstances, in
each case other than the Exchangeable Shares.
2.10 PARENT NOT TO VOTE EXCHANGEABLE SHARES. AOI covenants and agrees that it
will appoint and cause to be appointed proxyholders with respect to all
Exchangeable Shares held by AOI and its subsidiaries for the sole purpose of
attending each meeting of holders of Exchangeable Shares in order to be counted
as part of the quorum for each such meeting. AOI further covenants and agrees
that it will not, and will cause its subsidiaries not to, exercise any voting
rights which may be exercisable by holders of Exchangeable Shares from time to
time pursuant to the Exchangeable Share Provisions or pursuant to the provisions
of the Business Corporations Act (Alberta) (or any successor or other corporate
statute by which Apple may in the future be governed) with respect to any
Exchangeable Shares held by it or by its subsidiaries in respect of any matter
considered at any meeting of holders of Exchangeable Shares.
2.11 DUE PERFORMANCE. On and after the effective date hereof, AOI will duly and
timely perform all of its obligations provided for in this Agreement and all
agreements related hereto, including without limitation any obligations that may
arise upon the exercise of AOI's rights under the Exchangeable Share Provisions.
2.12 NO SPECIFIED FINANCIAL INSTITUTIONS. On and after the effective date hereof
and until Apple no longer has any Class B Exchangeable Shares issued and
outstanding, neither AOI nor any of its Affiliates will be a "specified
financial institution" as that term is defined in the Income Tax Act (Canada).
ARTICLE 3
GENERAL
3.1 TERM. This Agreement will come into force and be effective as of the date
hereof and
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will terminate and be of no further force and effect at such time as no
Exchangeable Shares (or securities or rights convertible into or exchangeable
for or carrying rights to acquire Exchangeable Shares) are held by any party
other than AOI and any of its Affiliates.
3.2 CHANGES IN CAPITAL OF PARENT AND APPLE. Notwithstanding the provisions of
section 3.4 hereof, at all times after the occurrence of any event effected
pursuant to section 2.7 or 2.8 hereof, as a result of which either AOI Common
Stock or the Exchangeable Shares or both are in any way changed, this Agreement
will forthwith be amended and modified as necessary in order that it will apply
with full force and effect, MUTATIS MUTANDIS, to all new securities into which
AOI Common Stock or the Exchangeable Shares or both are so changed and the
parties hereto will execute and deliver an agreement in writing giving effect
to and evidencing such necessary amendments and modifications.
3.3 SEVERABILITY. If any provision of this Agreement is held to be invalid,
illegal or unenforceable, the validity, legality or enforceability of the
remainder of this Agreement will not in any way be affected or impaired thereby
and this Agreement will be carried out as nearly as possible in accordance with
its original terms and conditions.
3.4 AMENDMENTS, MODIFICATIONS, ETC. This Agreement may not be amended or
modified except by an agreement in writing executed by Apple and AOI and
approved by the holders of the Exchangeable Shares in accordance with Section
8.2 of the Exchangeable Share Provisions.
3.5 MINISTERIAL AMENDMENTS. Notwithstanding the provisions of section 3.4, the
parties to this Agreement may in writing, at any time and from time to time,
without the approval of the holders of the Exchangeable Shares, amend or modify
this Agreement for the purposes of:
(a) adding to the covenants of either or both parties for the protection
of the holders of the Exchangeable Shares;
(b) making such amendments or modifications not inconsistent with this
Agreement as may be necessary or desirable with respect to matters
or questions which, in the opinion of the Board of Directors of each
of Apple and AOI, it may be expedient to make, provided that each
such board of directors is of the opinion that such amendments or
modifications will not be prejudicial to the interests of the
holders of the Exchangeable Shares; or
(c) making such changes or corrections which, on the advice of counsel
to Apple and AOI, are required for the purpose of curing or
correcting any ambiguity or defect or inconsistent provision or
clerical omission or mistake or manifest error, provided that the
boards of directors of each of Apple and AOI are of the opinion that
such changes or corrections will not be prejudicial to the interests
of the holders of the Exchangeable Shares.
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3.6 MEETING TO CONSIDER AMENDMENTS. Apple, at the request of AOI, will call a
meeting or meetings of the holders of the Exchangeable Shares for the purpose of
considering any proposed amendment or modification requiring approval pursuant
to section 3.4 hereof. Any such meeting or meetings will be called and held in
accordance with the by-laws of Apple, the Exchangeable Share Provisions and all
applicable laws.
3.7 AMENDMENTS ONLY IN WRITING. No amendment to or modification or waiver of any
of the provisions of this Agreement otherwise permitted hereunder will be
effective unless made in writing and signed by both of the parties hereto.
3.8 ENUREMENT. This Agreement will be binding upon and enure to the benefit of
the parties hereto and their respective successors and assigns.
3.9 NOTICES TO PARTIES. 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 will be deemed to be delivered and
received (i) if personally delivered or if delivered by telex, telegram, or
courier service, when actually received by the party to whom notice is sent (ii)
if delivered by telecopier, on the date of sending provided such sending is
evidenced by electronic verification or receipt and is and a hard copy is sent
by regular mail, or (iii) if delivered by mail, upon receipt by the party
addressed 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 AOI:
Apple Orthondontix Inc.
100 West Loop South, Suite 100
Houston, Texas 77024
Fax No.: (713) 964-6883
Attention:Steve Walton
with a copy to:
Jackson & Walker, L.L.P.
1100 Louisiana, Suite 4200
Houston, Texas 77002
Fax No.: (713) 752-4221
Attention:Richard S. Roth
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If to Apple:
718842 Alberta Inc.
290, 10655 Southport Rd. S.W.
Calgary, Alberta, Canada
T2W 4YI
Fax No.: (403) 271-1454
Attention:Dr. Duncan Y. Brown
with a copy to:
Code Hunter Wittmann
1400, 700 2nd St. S.W.
Calgary, Alberta, Canada
T2P 4V5
Fax No.: (403) 263-9193
Attention:Kevin W. Keyes
If to the Trustee:
Texas Commerce Bank National Association
Global Trust Services
600 Travis Street, Suite 1150
Houston, Texas 77002
Fax No.: (713) 216-5476
Attention:JoAnne K. Gulliver
3.10 COUNTERPARTS. This Agreement may be executed in counterparts each of which
will be deemed an original, and all of which taken together will constitute one
and the same instrument.
3.11 JURISDICTION. This Agreement shall be construed under, and governed by the
laws of the State of Texas, excluding, however, (a) its choice of law rules and
(b) the portions of the Texas Trust Code Sec. 111.001, ET SEQ. of the Texas
Property Code concerning fiduciary duties and liabilities of trustees. All of
the Trustee's rights hereunder are cumulative of any other rights it may have at
law, in equity or otherwise.
3.12 ATTORNMENT. The parties hereto agree that the forum for resolution of any
dispute arising under this Agreement shall be Harris County, Texas, and AOI and
Apple hereby consent, and submit themselves to the jurisdiction of any state or
federal court sitting in Harris County, Texas.
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3.13 TRUSTEE. Any rights in this Agreement which enure to the benefit of holders
of Exchangeable Shares may be enforced on behalf of such holders by the Trustee.
3.14 FURTHER ASSURANCES. The parties hereto will promptly do all such acts and
things and execute and deliver all such further agreements, instruments, deeds
and documents, as may be required to carry out the transactions contemplated by
this Agreement to give effect to the intent of said agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly signed, sealed and delivered as of the date first above written.
718842 ALBERTA INC.
By:__________________________
APPLE ORTHONDONTIX, INC.
By:__________________________
TEXAS COMMERCE BANK
NATIONAL ASSOCIATION, AS TRUSTEE
By: (Seal)
Name:
Title:
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EXHIBIT 4.6
AMENDED VOTING AND EXCHANGE AGREEMENT
This Amended Voting and Exchange Agreement (this "Agreement"), dated for
reference May 10, 1997, is by and among Apple Orthodontix Inc., a Delaware
corporation ("AOI"), 718842 Alberta Inc., an Alberta corporation ("Apple") and
Texas Commerce Bank National Association, a national banking association having
an office in Houston, Texas (the "Trustee").
W I T N E S S E T H:
WHEREAS the parties desire to enter into a Voting and Exchange Agreement
containing the terms and conditions set forth herein;
AND WHEREAS pursuant to certain agreements among Apple and certain of its
shareholders, Apple has issued certain Exchangeable Non-Voting Shares (the
"Exchangeable Shares");
AND WHEREAS the rights, privileges, restrictions and conditions attaching
to such Exchangeable Shares (collectively the "Exchangeable Share Provisions")
are set out in articles of amendment of Apple dated as of May 10, 1997;
AND WHEREAS AOI is to provide voting rights in AOI to each registered
holder, from time to time, other than AOI, its subsidiaries and Affiliates, of
Exchangeable Shares (a "Holder"), such voting rights per Exchangeable Share to
be equivalent to the voting rights per share of AOI Common Stock (the "AOI
Common Stock");
AND WHEREAS AOI is to grant to and in favour of the Holders the right, in
the circumstances set forth herein, to require AOI to purchase from each such
Holder all or any part of the Exchangeable Shares held by the Holder;
AND WHEREAS the parties desire to make appropriate provision and to
establish a procedure whereby voting rights in AOI will be exercisable by
Holders by and through the Trustee, which will hold legal title to that number
of shares of AOI Common Stock equal to the number of Exchangeable Shares
outstanding from time to time (the "AOI Trust Stock") and will hold the voting
rights with respect to such AOI Trust Stock for the benefit of the Holders of
the Exchangeable Shares and whereby the rights to require AOI to purchase
Exchangeable Shares from the Holders will be exercisable by such Holders by and
through the Trustee, which will hold legal title to such rights for the benefit
of such Holders;
AND WHEREAS these recitals and any statements of fact in this Agreement
are made by AOI and Apple and not by the Trustee:
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NOW THEREFORE in consideration of the respective covenants and agreements
provided in this Agreement and for other good and valuable consideration (the
receipt and sufficiency of which are hereby acknowledged), the parties agree as
follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS. In this Agreement, the following terms have the following
meanings:
"AFFILIATE" of any person means any other person directly or indirectly
controlled by, or under common control of, that person. For the purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control of"), as applied to any person, means
the possession by another person, directly or indirectly, of the power to direct
or cause the direction of the management and policies of that first mentioned
person, whether through the ownership of voting securities, by contract or
otherwise.
"AOI COMMON STOCK" has the meaning ascribed thereto in the recitals hereto.
"AOI CONSENT" has the meaning ascribed thereto in section 4.2 hereof.
"AOI MEETING" has the meaning ascribed thereto in section 4.2 hereof.
"AOI TRUST STOCK" has the meaning ascribed thereto in the recitals hereto.
"AOI SUCCESSOR" has the meaning ascribed thereto in subsection 11.1(a) hereof.
"AUTOMATIC EXCHANGE RIGHTS" means the benefit of the obligation of AOI to effect
the automatic exchange of shares of AOI Common Stock for Exchangeable Shares
pursuant to section 5.12 hereof.
"BOARD OF DIRECTORS" means the Board of Directors of Apple.
"BUSINESS DAY" means a day other than a Saturday, a Sunday or a statutory
holiday in either the City of Calgary, Alberta or the City of Houston, Texas.
"CANADIAN DOLLAR EQUIVALENT" means in respect of an amount expressed in a
foreign currency (the "Foreign Currency Amount") at any date the product
obtained by multiplying (a) the Foreign Currency Amount by (b) the noon spot
exchange rate on such date for such foreign currency expressed in Canadian
dollars as reported by the Bank of Canada or, in the event such spot exchange
rate is not available, such exchange rate on such date for such foreign currency
expressed in Canadian dollars as may be deemed by the Board of Directors to be
appropriate for such purpose.
"CURRENT MARKET PRICE" means, in respect of a share of AOI Common Stock on any
date, the Canadian Dollar Equivalent of the average of the closing, bid and
asked prices of shares of AOI
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Stock during a period of 20 consecutive trading days ending not more than five
trading days before such date on the American Stock Exchange, or, if the shares
of AOI Common Stock are not then quoted on the American Stock Exchange, on such
other stock exchange or automated quotation system on which the shares of AOI
Common Stock are listed or quoted as the case may be, as may be selected by the
Board of Directors for such purpose; provided, however, that if in the opinion
of the Board of Directors of Apple, acting reasonably, the public distribution
or trading activity of AOI Common Stock during such period does not create a
market which reflects the fair market value of such securities, then the current
market value thereof will be determined by a reputable and qualified independent
financial advisor appointed by the Board of Directors of Apple, in good faith
and in its sole discretion, and provided further that any such determination by
such reputable and qualified independent financial advisor will be conclusive
and binding.
"EXCHANGE RIGHT" has the meaning ascribed thereto in Section 5.1 hereof,
"EXCHANGEABLE SHARE PROVISIONS" means the rights, privileges, restrictions and
conditions attaching to the Exchangeable Shares.
"EXCHANGEABLE SHARES" has the meaning ascribed thereto in the recitals hereto.
"HOLDER VOTES" has the meaning ascribed thereto in section 4.2 hereof.
"INSOLVENCY EVENT" means the institution by Apple of any proceeding to be
adjudicated a bankrupt or insolvent or to be dissolved or wound up, or the
consent of Apple to the institution of bankruptcy, insolvency, dissolution or
winding up proceedings against it, or the filing of a petition, answer or
consent seeking dissolution or winding up under any bankruptcy, insolvency or
analogous laws, including without limitation the Companies Creditors'
Arrangement Act (Canada) and the Bankruptcy and Insolvency Act (Canada), and the
failure by Apple to contest in good faith any such proceedings commenced in
respect of Apple within 15 days of becoming aware thereof, or the consent by
Apple to the filing of any such petition or to the appointment of a receiver, or
the making by Apple of a general assignment for the benefit of creditors, or the
admission in writing by Apple of its inability to pay its debts generally as
they become due, or if the fair market value of Apple's assets is less than the
amount of its liabilities at any time, or Apple is not permitted pursuant to
solvency requirements of applicable law to redeem any Retracted Shares pursuant
to Section 5.6 of the Exchangeable Share Provisions.
"LIQUIDATION CALL RIGHT" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"LIQUIDATION EVENT" has the meaning ascribed thereto in subsection 5.12(b)
hereof.
"LIQUIDATION EVENT EFFECTIVE DATE" has the meaning ascribed thereto in
subsection 5.12(c) hereof
"LIQUIDATION OFFER" has the meaning ascribed thereto in the Exchangeable Share
Provisions.
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"LIQUIDATION PRICE" has the meaning ascribed thereto in the Exchangeable Share
Provisions.
"LIST" has the meaning ascribed thereto in section 4.6 hereof,
"OFFICER'S CERTIFICATE" means, with respect to AOI or Apple, as the case may be,
a certificate signed by any one of the Chairman of the Board, the Vice-Chairman
of the Board, the President, any Vice- President or any other officer of AOI or
Apple, as the case may be.
"RETRACTED SHARES" has the meaning ascribed thereto in section 5.7 hereof,
"RETRACTION CALL RIGHT" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"RETRACTION OFFER" has the meaning ascribed thereto in the Exchangeable Share
Provisions.
"RETRACTION PRICE" has the meaning ascribed thereto in the Exchangeable Share
Provisions.
"RETRACTION REQUEST" has the meaning ascribed thereto in the Exchangeable Share
Provisions.
"SUPPORT AGREEMENT" means that certain support agreement made as of even date
hereof among Apple, AOI and the Trustee.
"TRANSFER AGENT" means Chase Mellon Shareholder Services Inc.
"TRUST" means the trust created by this Agreement.
"TRUST ESTATE" means: the Exchange Right, the Automatic Exchange Rights, the
right to enforce the Support Agreement, the Voting Rights, all other rights and
privileges with respect to AOI Trust Stock and any other property which may be
held by the Trustee from time to time pursuant to this Agreement.
"VOTING RIGHTS" means the voting rights attached to the AOI Trust Stock.
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC. The division of this Agreement
into articles, sections and paragraphs and the insertion of headings are for
convenience of reference only and will not affect the construction or
interpretation of this Agreement.
1.3 NUMBER, GENDER, ETC. Words imparting the singular number only include the
plural and vice versa. Words imparting the use of any gender include all
genders.
1.4 DATE FOR ANY ACTION. If any date on which any action is required to be taken
under this Agreement is not a Business Day, such action will be required to be
taken on the next succeeding Business Day.
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ARTICLE 2
DECLARATION OF TRUST
2.1 ESTABLISHMENT OF TRUST. The Trust is hereby created for the benefit of the
Holders and AOI, as herein provided. The Trustee will hold:
(a) the Exchange Right, the Automatic Exchange Rights, the right to
enforce the Support Agreement, and the Voting Rights with respect to
the AOI Trust Stock issued by AOI to and deposited with the Trustee,
on behalf of and for the benefit and use of the Holders;
(b) all other rights and privileges with respect to AOI Trust Stock
issued by AOI to and deposited with the Trustee which will be held
by the Trustee, as trustee, on behalf of and for the benefit and use
of AOI; and
(c) such other property as may be held by the Trustee from time to time,
on behalf of and for the benefit and use of such of the Holders and
AOI as are designated by the Trustee.
ARTICLE 3
AOI TRUST STOCK AND RELATED RIGHTS
3.1 ISSUE AND OWNERSHIP OF RIGHTS RESPECTING THE AOI TRUST STOCK. AOI hereby
settles upon the Trustee the AOI Trust Stock to be hereafter held of record by
the Trustee as trustee for and on behalf of, and for the use and benefit of AOI
and the Holders in accordance with the provisions of this Agreement. During the
term of the Trust and upon and subject to the terms and conditions of this
Agreement, including without limitation Section 5.1 hereof pursuant to which the
transfer of the Voting Rights from AOI to and for the benefit of the Holders is
acknowledged, the Trustee will possess and be vested with full legal ownership
of the AOI Trust Stock and will be entitled to exercise all of the rights and
powers of an owner with respect to the AOI Trust Stock; provided that the
Trustee will:
(a) hold the Exchange Right, the Automatic Exchange Rights and the
Voting Rights, for the benefit of the Holders and hold all other
rights and privileges with respect to the AOI Trust Stock the
benefit of AOI; and
(b) except as specifically authorized by this Agreement, have no power
or authority to sell, transfer, vote or otherwise deal in or with
the AOI Trust Stock and the AOI Trust Stock will not be used or
disposed of by the Trustee for any purpose other than the purposes
for which this Trust is created pursuant to this Agreement.
3.2 LEGENDED SHARE CERTIFICATES. Apple will cause each certificate representing
Exchangeable Shares to bear an appropriate legend notifying the Holders of,
among other things,
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their right to instruct the Trustee with respect to the exercise of the Voting
Rights with respect to the Exchangeable Shares held by a Holder.
3.3 SAFE KEEPING OF CERTIFICATE. The certificate representing the AOI Trust
Stock will at all times be held in safe keeping by the Trustee or its agent.
ARTICLE 4
EXERCISE OF VOTING RIGHTS
4.1 VOTING RIGHTS. The Trustee, as the holder of record of the AOI Trust Stock,
will be entitled to all of the Voting Rights, including the right to consent to
or to vote in person or by proxy the AOI Trust Stock, on any matter, question or
proposition whatsoever that may property come before the stockholders of AOI at
an AOI Meeting or in connection with a AOI Consent (in each case, as hereinafter
defined). The Voting Rights will be and remain vested in and exercised by the
Trustee. Subject to section 7.15 hereof, the Trustee will exercise the Voting
Rights only on the basis of instructions received pursuant to this Article 4
from Holders entitled to instruct the Trustee as to the voting thereof at the
time at which AOI Consent is sought or AOI Meeting is held. To the extent that
no instructions are received from a Holder with respect to the Voting Rights to
which such Holder is entitled, the Trustee will not exercise or permit the
exercise of such Holder's Voting Rights.
4.2 NUMBER OF VOTES. With respect to all meetings of stockholders of AOI at
which holders of shares of AOI Common Stock are entitled to vote (an "AOI
Meeting") and with respect to all written consents sought by AOI from its
stockholders including the holders of shares of AOI Common Stock (an "AOI
Consent"), each Holder will be entitled to instruct the Trustee to cast and
exercise, in the manner instructed, one of the votes comprised in the Voting
Rights for each Exchangeable Share owned of record by such Holder on the record
date established by AOI or by applicable law for such AOI Meeting or AOI
Consent, as the case may be (the "Holder Votes") in respect of each matter,
question or proposition to be voted on at such AOI Meeting or to be consented to
in connection with such AOI Consent.
4.3 MAILINGS TO SHAREHOLDERS. With respect to each AOI Meeting and AOI Consent,
the Trustee will mail or cause to be mailed (or otherwise communicate in the
same manner as AOI utilizes in communications to holders of AOI Common Stock,
subject to the Trustee's ability to provide this method of communication and
upon being advised in writing of such method) to each of the Holders named in
the List on the same day as the initial mailing or notice (or other
communication) with respect thereto is given by AOI to its stockholders:
(a) a copy of such notice, together with any proxy or information
statement and related materials to be provided to stockholders of
AOI;
(b) a statement that such Holder is entitled to instruct the Trustee as
to the exercise of the Holder Votes with respect to such AOI Meeting
or AOI Consent, as the case may be,
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or, pursuant to section 4.7 hereof, to attend such AOI Meeting and
to exercise personally the Holder Votes thereat;
(c) a statement as to the manner in which such instructions may be given
to the Trustee, including an express indication that instructions
may be given to the Trustee to give:
(i) a proxy to such Holder or his designee to exercise personally
the Holder Votes; or
(ii) a proxy to a designated agent or other representative of the
management of AOI to exercise such Holder Votes;
(d) a statement that if no such instructions are received from the
Holder the Holder Votes to which such Holder is entitled will not be
exercised;
(e) a form of direction whereby the Holder may so direct and instruct
the Trustee as contemplated herein; and
(f) a statement of (i) the time and date by which such instructions must
be received by the Trustee in order to be binding upon it, which in
the case of a AOI Meeting will not be earlier than the close of
business on the second Business Day prior to such meeting, and (ii)
the method for revoking or amending such instructions.
The materials referred to above are to be provided by AOI to the Trustee, but
will be subject to review and comment by the Trustee.
For the purpose of determining Holder Votes to which a Holder is entitled in
respect of any such AOI Meeting or AOI Consent, the number of Exchangeable
Shares owned of record by the Holder will be determined at the close of business
on the record date established by AOI or by applicable law for purposes of
determining stockholders entitled to vote at such AOI Meeting or to give written
consent in connection with such AOI Consent. AOI will notify the Trustee in
writing of any decision of the Board of Directors of AOI with respect to the
calling of any such AOI Meeting or the seeking of any such AOI Consent and will
provide all necessary information and materials to the Trustee in each case
promptly and in any event in sufficient time to enable the Trustee to perform
its obligations contemplated by this section 4.3.
4.4 COPIES OF STOCKHOLDER INFORMATION. AOI will deliver to the Trustee copies of
all proxy materials, (including notices of AOI Meetings but excluding proxies to
vote shares of AOI Common Stock), information statements, reports (including
without limitation all interim and annual financial statements) and other
written communications that are to be distributed from time to time to holders
of AOI Common Stock in sufficient quantities and in sufficient time so as to
enable the Trustee to send those materials to each Holder at the same time as
such materials are first sent to holders of AOI Common Stock. The Trustee will
mail or otherwise send to each Holder, at the
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expense of AOI, copies of all such materials (and all materials specifically
directed to the Holders or to the Trustee for the benefit of the Holders by AOI)
received by the Trustee from AOI at the same time as such materials are first
sent to holders of AOI Common Stock. AOI will make copies of all such materials
available for inspection by any Holder at an AOI or Apple office in Calgary,
Alberta and Houston, Texas.
4.5 OTHER MATERIALS. Immediately after receipt by AOI or any stockholder of AOI
of any material sent or given generally to the holders of AOI Common Stock by or
on behalf of a third party, including without limitation dissident proxy and
information circulars (and related information and material) and tender and
exchange offer circulars (and related information and material), AOI will use
its best efforts to obtain and deliver to the Trustee copies thereof in
sufficient quantities so as to enable the Trustee to forward such material
(unless the same has been provided directly to Holders by such third party) to
each Holder as soon as possible thereafter. As soon as practicable after receipt
thereof, the Trustee will mail or otherwise send to each Holder, at the expense
of AOI, copies of all such materials received by the Trustee from AOI. The
Trustee will also make copies of all such materials available for inspection by
any Holder at the Trustee's office in Houston, Texas.
4.6 LIST OF PERSONS ENTITLED TO VOTE. Apple will, (a) prior to each annual,
general and special AOI Meeting or the seeking of any AOI Consent and (b)
forthwith upon each request made at any time by the Trustee in writing, prepare
or cause to be prepared a list (a "List") of the names and addresses of the
Holders arranged in alphabetical order and showing the number of Exchangeable
Shares held of record by each such Holder, in each case at the close of business
on the date specified by the Trustee in such request or, in the case of a List
prepared in connection with a AOI Meeting or a AOI Consent, at the close of
business on the record date established by AOI or pursuant to applicable law for
determining the holders of AOI Common Stock entitled to receive notice of such
AOI Meeting or to give consent in connection with such AOI Consent. Each such
List will be delivered to the Trustee promptly after receipt by Apple of such
request or the record date for such meeting or seeking of consent, as the case
may be, and in any event within sufficient time as to enable the Trustee to
perform its obligations under this Agreement. AOI agrees to give Apple written
notice (with a copy to the Trustee) of the calling of any AOI Meeting or the
seeking of any AOI Consent, together with the record dates therefor sufficiently
prior to the date of the calling of such meeting or seeking of such consent so
as to enable Apple to perform its obligations under this section 4.6.
4.7 ENTITLEMENT TO DIRECT VOTES. Any Holder named in a List prepared in
connection with any AOI Meeting or any AOI Consent will be entitled (a) to
instruct the Trustee in the manner described in section 4.3 hereof with respect
to the exercise of the Holder Votes to which such Holder is entitled or (b) to
attend such meeting and personally to exercise thereat (or to exercise with
respect to any written consent), as the proxy of the Trustee, the Holder Votes
to which such Holder is entitled except, in each case, to the extent that such
Holder has transferred the ownership of any Exchangeable Shares in respect of
which such Holder is entitled to Holder Votes after the close of business on the
record date for such meeting or seeking of consent.
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4.8 VOTING BY TRUSTEE, AND ATTENDANCE OF TRUSTEE REPRESENTATIVE, AT
MEETING.
(a) In connection with each AOI Meeting and AOI Consent, the Trustee
will exercise, either in person or by proxy, in accordance with the
instructions received from a Holder pursuant to section 4.3 hereof,
the Holder Votes as to which such Holder is entitled to direct the
vote (or any lesser number thereof as may be set forth in the
instructions); provided, however, that such written instructions are
received by the Trustee from the Holder prior to the time and date
fixed by it for receipt of such instructions in the notice given by
the Trustee to the Holder pursuant to section 4.3 hereof.
(b) The Trustee will cause such representatives as are empowered by it
to sign and deliver, on behalf of the Trustee, proxies for Voting
Rights to attend each AOI Meeting. Upon submission by a Holder (or
its designee) of identification satisfactory to the Trustee's
representatives, and at the Holder's request, such representatives
will sign and deliver to such Holder (or its designee) a proxy to
exercise personally the Holder Votes as to which such Holder is
otherwise entitled hereunder to direct the vote, if such Holder
either (i) has not previously given the Trustee instructions
pursuant to section 4.3 hereof in respect of such meeting, or (ii)
submits to the Trustee's representatives written revocation of any
such previous instructions. At such meeting, the Holder exercising
such Holder Votes will have the same rights as the Trustee to speak
at the meeting in respect of any matter, question or proposition, to
vote by way of ballot at the meeting in respect of any matter,
question or proposition and to vote at such meeting by way of a show
of hands in respect of any matter, question or proposition.
4.9 DISTRIBUTION OF WRITTEN MATERIALS. Any written materials to be distributed
by the Trustee to the Holders pursuant to this Agreement will be delivered or
sent by mail (or otherwise communicated in the same manner as AOI utilizes in
communications to holders of AOI Common Stock) to each Holder at its address as
shown on the books of Apple. Apple will provide or cause to be provided to the
Trustee for this purpose, on a timely basis and without charge or other expense:
(a) current lists of the Holders; and
(b) upon the request of the Trustee, mailing labels to enable the
Trustee to carry out its duties under this Agreement.
The materials referred to above are to be provided by AOI to the Trustee, but
will be subject to review and comment by the Trustee.
4.10 TERMINATION OF VOTING RIGHTS. All of the rights of a Holder with respect to
the Holder Votes exercisable in respect of the Exchangeable Shares held by such
Holder, including the right to instruct the Trustee as to the voting of or to
vote personally such Holder Votes, will be deemed to
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be surrendered by the Holder to AOI and such Holder Votes and the Voting Rights
represented thereby will cease immediately upon the delivery by such Holder to
the Trustee of the certificates representing such Exchangeable Shares in
connection with the exercise by the Holder of the Exchange Right or the
occurrence of the automatic exchange of Exchangeable Shares for shares of AOI
Common Stock as specified in Article 5 hereof (unless in either case the Trustee
has not delivered the requisite shares of AOI Common Stock issuable in exchange
therefor to the Holders), or upon the redemption of Exchangeable Shares pursuant
to Article 5 of the Exchangeable Share Provisions, or upon the effective date of
the liquidation, dissolution or winding-up of Apple pursuant to Article 6 of the
Exchangeable Share Provisions, or upon the purchase of Exchangeable Shares from
the Holder thereof by AOI pursuant to the exercise by AOI of the Retraction Call
Right or the Liquidation Call Right.
ARTICLE 5
EXCHANGE RIGHT AND AUTOMATIC EXCHANGE
5.1 GRANT AND OWNERSHIP OF THE EXCHANGE RIGHT. AOI hereby acknowledges that it
has granted to the Holders to be held by the Trustee as trustee for and on
behalf of, and for the use and benefit of, the Holders (a) the right (the
"Exchange Right"), upon the occurrence and during the continuance of an
Insolvency Event, to require AOI to purchase from each or any Holder all or any
part of the Exchangeable Shares held by the Holder (b) the Automatic Exchange
Rights, and (c) the Voting Rights, all to be held and exercised in accordance
with the provisions of this Agreement and the receipt whereof on the foregoing
basis is hereby acknowledged by the Trustee. AOI hereby acknowledges receipt
from the Holders, or from the Trustee as trustee for and on behalf of the
Holders, of good and valuable consideration (and the adequacy thereof) for the
grant of the Exchange Right, the Automatic Exchange Rights and the Voting Rights
by AOI to the Trustee. During the term of the Trust and subject to the terms and
conditions of this Agreement, the Trustee will possess and be vested with full
legal ownership of the Exchange Right and the Automatic Exchange Rights and will
be entitled to exercise all of the rights and powers of an owner with respect to
the Exchange Right and the Automatic Exchange Rights, provided that the Trustee
will:
(a) hold the Exchange Right, the Automatic Exchange Rights and the
Voting Rights and the legal title thereto as trustee solely for the
use and benefit of the Holders in accordance with the provisions of
this Agreement; and
(b) except as specifically authorized by this Agreement, have no power
or authority to exercise or otherwise deal in or with the Exchange
Right, the Automatic Exchange Rights or the Voting Rights and the
Trustee will not exercise any such rights for any purpose other than
the purposes for which this Trust is created pursuant to this
Agreement.
5.2 LEGENDED SHARE CERTIFICATES. Apple will cause each certificate representing
Exchangeable Shares to bear an appropriate legend notifying the Holders of:
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(a) their right to instruct the Trustee with respect to the exercise of
the Exchange Right in respect of the Exchangeable Shares held by a
Holder; and
(b) the Automatic Exchange Rights.
5.3 GENERAL EXERCISE OF EXCHANGE RIGHT. The Exchange Right will be and remain
vested in and exercised by the Trustee. Subject to section 7.15 hereof, the
Trustee will exercise the Exchange Right only on the basis of instructions
received pursuant to this Article 5 from Holders entitled to instruct the
Trustee as to the exercise thereof. To the extent that no instructions are
received from a Holder with respect to the Exchange Right, the Trustee will not
exercise or permit the exercise of the Exchange Right.
5.4 PURCHASE PRICE. The purchase price payable by AOI for each Exchangeable
Share to be purchased by AOI under the Exchange Right will be calculated and
satisfied as set out in the Exchangeable Share Provisions. In connection with
each exercise of the Exchange Right, AOI will provide to the Trustee an
Officer's Certificate setting forth the calculation of the purchase price for
each Exchangeable Share.
5.5 EXERCISE INSTRUCTIONS. Subject to the terms and conditions herein set forth,
a Holder will be entitled, upon the occurrence and during the continuance of an
Insolvency Event, to instruct the Trustee to exercise the Exchange Right with
respect to all or any part of the Exchangeable Shares registered in the name of
such Holder on the books of Apple. To cause the exercise of the Exchange Right
by the Trustee, the Holder will deliver to the Trustee, in person or by
certified or registered mail, at its office in Houston, Texas or at such other
places as the Trustee may from time to time designate by written notice to the
Holders, the certificates representing the Exchangeable Shares which such Holder
desires AOI to purchase, duly endorsed in blank and accompanied by such other
documents and instruments as may be required to effect a transfer of
Exchangeable Shares and such additional documents and instruments as the Trustee
may reasonably require together with (a) a duly completed form of notice of
exercise of the Exchange Right, contained on the reverse of or attached to the
Exchangeable Share certificates, stating (i) that the Holder thereby instructs
the Trustee to exercise the Exchange Right so as to require AOI to purchase from
the Holder the number of Exchangeable Shares specified therein, (ii) that such
Holder has good title to and owns all such Exchangeable Shares to be acquired by
AOI free and clear of all liens, claims and encumbrances, (iii) the names in
which the certificates representing AOI Common Stock issuable in connection with
the exercise of the Exchange Right are to be issued and (iv) the names and
addresses of the persons to whom such new certificates should be delivered and
(b) payment (or evidence satisfactory to the Trustee, Apple and AOI of payment)
of the taxes (if any) payable as contemplated by section 5.8 of this Agreement.
If only a part of the Exchangeable Shares represented by any certificate or
certificates delivered to the Trustee are to be purchased by AOI under the
Exchange Right, a new certificate for the balance of such Exchangeable Shares
will be issued to the Holder at the expense of Apple.
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5.6 DELIVERY OF AOI COMMON STOCK: Promptly after receipt of the certificates
representing the Exchangeable Shares which the Holder desires AOI to purchase
under the Exchange Right (together with such documents and instruments of
transfer and a duly completed form of notice of exercise of the Exchange Right
(and payment of taxes, if any, or evidence thereof)), duly endorsed for transfer
to AOI, the Trustee will notify AOI and Apple of its receipt of the same, which
notice to AOI and Apple will constitute exercise of the Exchange Right by the
Trustee on behalf of the Holder, and the Trustee will within three Business Days
present and surrender at the office of the Transfer Agent the certificate or
certificates of AOI Trust Stock (and other AOI Common Shares if necessary)
representing the appropriate number of AOI Common Shares payable in connection
with the exercise of the Exchange Right, together with such other documents and
instruments as may be required to effect such transfer and such other documents
and instruments as the Transfer Agent may reasonably require, and request the
Transfer Agent to deliver or cause to be delivered to the Holder of such
Exchangeable Shares (or to such other persons, if any, properly designated by
such Holder), the certificates for the number of shares of AOI Trust Stock (and
other AOI Common Shares if necessary) deliverable in connection with the
exercise of the Exchange Right, which shares will be duly issued as fully paid
and non-assessable and will be free and clear of any lien, claim or encumbrance,
and cheques for the balance, if any, of the total purchase price therefor
without interest; provided, however, that no such delivery will be made unless
and until the Holder requesting the same will have paid (or provided evidence
satisfactory to the Trustee, Apple and AOI of the payment of) the taxes (if any)
payable as contemplated by section 5.8 of this Agreement. Immediately upon the
giving of notice by the Trustee to AOI and Apple of the exercise of the Exchange
Right, as provided in this section 5.6, the closing of the transaction of
purchase and sale contemplated by the Exchange Right will be deemed to have
occurred, and the Holder of such Exchangeable Shares will be deemed to have
transferred to AOI all of its right, title and interest in and to such
Exchangeable Shares and in the related interest in the Trust Estate and will
cease to be a Holder of such Exchangeable Shares and will not be entitled to
exercise any of the rights of a Holder in respect thereof, other than the right
to receive his proportionate part of the total purchase price therefor, unless
the requisite number of shares of AOI Trust Stock (together with a cheque for
the balance, if any, of the total purchase price therefor without interest) is
not allotted, issued and delivered by the Trustee to such Holder (or to such
other persons, if any, properly designated by such Holder), within five Business
Days of the date of the giving of such notice by the Trustee, in which case the
rights of the Holder will remain unaffected until such shares of AOI Trust Stock
are so allotted, issued and delivered by AOI and any such cheque is so delivered
and paid. Concurrently with such Holder ceasing to be a Holder of Exchangeable
Shares, the Holder will be considered and deemed for all purposes to be the
holder of the shares of AOI Trust Stock delivered to it pursuant to the Exchange
Right and such AOI Trust Stock will immediately cease to be subject to the terms
of this Agreement.
5.7 EXERCISE OF EXCHANGE RIGHT SUBSEQUENT TO RETRACTION. In the event that a
Holder has exercised its right under Article 5 of the Exchangeable Share
Provisions to require Apple to redeem any or all of the Exchangeable Shares held
by the Holder (the "Retracted Shares") and is notified by Apple pursuant to
Section 5.6 of the Exchangeable Share Provisions that Apple will not be
permitted as a result of solvency requirements of applicable law to redeem all
such Retracted Shares, subject
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to receipt by the Trustee of written notice to that effect from Apple and
provided that AOI has not exercised the Retraction Call Right with respect to
the Retracted Shares and that the Holder has not revoked the retraction request
delivered by the Holder to Apple pursuant to Section 5.1 of the Exchangeable
Share Provisions, the retraction request will constitute and will be deemed to
constitute notice from the Holder to the Trustee instructing the Trustee to
exercise the Exchange Right with respect to those Retracted Shares which Apple
is unable to redeem. In any such event, Apple hereby agrees with the Trustee and
in favour of the Holder immediately to notify the Trustee of such prohibition
against Apple redeeming all of the Retracted Shares and immediately to forward
or cause to be forwarded to the Trustee all relevant materials delivered by the
Holder to Apple or to the transfer agent of the Exchangeable Shares (including
without limitation a copy of the retraction request delivered pursuant to
Section 5.1 of the Exchangeable Share Provisions) in connection with such
proposed redemption of the Retracted Shares and the Trustee will thereupon
exercise the Exchange Right with respect to the Retracted Shares that Apple is
not permitted to redeem and will require AOI to purchase such shares in
accordance with the provisions of this Article 5.
5.8 STAMP OR OTHER TRANSFER TAXES. Upon any sale of Exchangeable Shares to AOI
pursuant to the Exchange Right or the Automatic Exchange Rights, the share
certificate or certificates representing AOI Common Stock to be delivered in
connection with the payment of the total purchase price therefor will be issued
in the name of the Holder of the Exchangeable Shares so sold or in such names as
such Holder may otherwise direct in writing without charge to the Holder of the
Exchangeable Shares so sold, provided, however, that such Holder (a) will pay
(and neither AOI, Apple nor the Trustee will be required to pay) any
documentary, stamp, transfer or other similar taxes that may be payable in
respect of any transfer involved in the issuance or delivery of such shares to a
person other than such Holder or (b) has established to the satisfaction of the
Trustee, AOI and Apple that such taxes, if any, have been paid.
5.9 NOTICE OF INSOLVENCY EVENT. Immediately upon the occurrence of an Insolvency
Event or any event which with the giving of notice or the passage of time or
both would be an Insolvency Event, Apple and AOI will give written notice
thereof to the Trustee. As soon as practicable after receiving notice from Apple
and AOI or from any other person of the occurrence of an Insolvency Event, the
Trustee will mail to each Holder, at the expense of AOI a notice of such
Insolvency Event in the form provided by AOI, which notice will contain a brief
statement of the right of the Holders with respect to the Exchange Right.
5.10 QUALIFICATION OF SHARES OF AOI COMMON STOCK. AOI covenants that if any
shares of AOI Common Stock (or other shares or securities into which AOI Common
Stock may be reclassified or changed as contemplated by Section 2.7 of the
Support Agreement) to be issued and delivered pursuant to the Exchange Right or
the Automatic Exchange Rights require registration or qualification with or
approval of or the filing of any document including any prospectus or similar
document or the taking of any proceeding with or the obtaining of any order,
ruling or consent from any governmental or regulatory authority under any
Canadian or United States federal, provincial or state law or regulation or
pursuant to the rules and regulations of any regulatory authority or the
fulfilment of any other legal requirement (collectively, the "Applicable Laws")
before such shares
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(or other shares or securities into which AOI Common Stock may be reclassified
or changed) may be issued and delivered by AOI to the Holder thereof, AOI will
expeditiously take all such actions and do all such things as are necessary to
cause such shares of AOI Common Stock (or other shares or securities into which
AOI Common Stock may be reclassified or changed) to be and to remain duly
registered, qualified or approved. In addition to the foregoing, AOI represents,
warrants and covenants that it will take all action and do all things as are
necessary under Applicable Laws as they exist on the particular date thereof to
cause the shares of AOI Common Stock (or other shares or securities into which
AOI Common Stock may be reclassified or changed) to be issued and delivered
pursuant to the Exchange Right and the Automatic Exchange Rights to be eligible
for resale in the United States and Canada by the initial holder thereof upon
the expiration of the Restricted Period, as defined in any agreement pursuant to
which Apple or any affiliate of Apple (being 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 government body, that directly or
indirectly through one or more intermediaries or otherwise, controls, is
controlled by or is under common control with Apple), has acquired property and
issued shares in consideration therefore (an "Acquisition Agreement"), provided
however that the transfer of such shares to a person related to the Holder is
not restricted by this Section 5.10 (other than restrictions on transfer by
reason of a holder being a "control person" of AOI for purposes of Canadian
federal or provincial securities law or an "affiliate" of AOI for purposes of
United States federal or state securities law). AOI will expeditiously take all
such actions and do all such things as are necessary to cause all shares of AOI
Common Stock (or other shares or securities into which AOI Common Stock may be
reclassified or changed) to be delivered pursuant to the Exchange Right or the
Automatic Exchange Right, to be listed, quoted or posted for trading on all
stock exchanges and quotation systems on which such shares are listed, quoted or
posted for trading at such time.
5.11 INTENTIONALLY DELETED.
5.12 AUTOMATIC EXCHANGE ON LIQUIDATION OF AOI.
(a) AOI will give the Trustee written notice of each of the following
events at the time set forth below:
(i) in the event of any determination by the Board of Directors of
AOI to institute voluntary liquidation, dissolution or
winding-up proceedings with respect to AOI or to effect any
other distribution of assets of AOI among its stockholders for
the purpose of winding-up its affairs, at least 60 days prior
to the proposed effective date of such liquidation,
dissolution, winding-up or other distribution; and
(ii) immediately, upon the earlier of (A) receipt by AOI of notice
of and (B) AOI otherwise becoming aware of any threatened or
instituted claim, suit, petition or other proceedings with
respect to the involuntary liquidation, dissolution
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or winding up of AOI or to effect any other distribution of
assets of AOI among its stockholders for the purpose of
winding-up its affairs.
(b) Within three Business Days of receipt by the Trustee from AOI of
notice of any event (a "Liquidation Event") contemplated by section
5.12(a)(i) or 5.12(a)(ii) above, the Trustee will give notice
thereof to the Holders. Such notice will be provided by AOI to the
Trustee and will include a brief description of the automatic
exchange of Exchangeable Shares for shares of AOI Common Stock
provided for in section 5.12(c) below.
(c) In order that the Holders will be able to participate on a pro rata
basis with the holders of AOI Common Stock in the distribution of
assets of AOI in connection with a Liquidation Event, on the fifth
Business Day prior to the effective date (the "Liquidation Event
Effective Date") of a Liquidation Event each of the then outstanding
Exchangeable Shares will be automatically exchanged for shares of
AOI Common Stock. To effect such automatic exchange, AOI will
purchase each Exchangeable Share outstanding on the fifth Business
Day prior to the Liquidation Event Effective Date and held by
Holders, and each Holder will sell the Exchangeable Shares held by
it at such time for the purchase price per share set out in the
Exchangeable Share Provisions which will be satisfied in the manner
set out in the Exchangeable Share Provisions. In connection with
such automatic exchange, AOI will provide to the Trustee an
Officer's Certificate setting forth the calculation of the purchase
price for each Exchangeable Share.
(d) On the fifth Business Day prior to the Liquidation Event Effective
Date, the closing of the transaction of purchase and sale
contemplated by the automatic exchange of Exchangeable Shares for
AOI Common Stock will be deemed to have occurred, and each Holder of
Exchangeable Shares will be deemed to have transferred to AOI all of
the Holder's right, title and interest in and to such Exchangeable
Shares and the related interest in the Trust Estate and will cease
to be a Holder of such Exchangeable Shares and the Trustee will
within three Business Days thereafter present and surrender at the
office of the Transfer Agent the certificate or certificates of AOI
Trust Stock representing the appropriate number of AOI Common Shares
deliverable upon the automatic exchange of Exchangeable Shares,
together with such other documents and instruments as may be
required to effect such transfer and such other documents and
instruments as the Transfer Agent may reasonably require, and
request the Transfer Agent to deliver to the relevant holder, at the
address of the holder record in the securities register of Apple for
the Exchangeable Shares, or by holding for pick up by the holder at
the registered office of Apple or at any office of the Transfer
Agent as may be specified by Apple by notice to the Holders of
Exchangeable Shares, certificates representing the required number
of AOI Common Shares registered in the name of the Holder and will
deliver to the Trustee for delivery to the Holder a cheque for the
balance, if any, of the total purchase price for
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such Exchangeable Shares without interest. Concurrently with such
Holder ceasing to be a Holder of Exchangeable Shares, the Holder
will be considered and deemed for all purposes to be the holder of
the shares of AOI Common Stock issued to it pursuant to the
automatic exchange of Exchangeable Shares for AOI Common Stock and
the certificates held by the Holder previously representing the
Exchangeable Shares exchanged by the Holder with AOI pursuant to
such automatic exchange will thereafter be deemed to represent the
shares of AOI Common Stock issued to the Holder by the Trustee
pursuant to such automatic exchange. Upon the request of a Holder
and the surrender by the Holder of Exchangeable Share certificates
deemed to represent shares of AOI Common Stock, duly endorsed in
blank and accompanied by such instruments of transfer as AOI may
reasonably require, the Trustee will deliver or cause to be
delivered to the Holder certificates representing the shares of AOI
Common Stock of which the Holder is the holder.
ARTICLE 6
TRANSFER OF AOI TRUST STOCK PURSUANT TO SUPPORT AGREEMENT
6.1 DELIVERY OF AOI TRUST STOCK IN RESPECT OF RETRACTION CALL RIGHT AND
LIQUIDATION CALL RIGHT. To complete the purchase by AOI of Exchangeable Shares
pursuant to the Retraction Call Right described in the provisions of Article 5
of the Exchangeable Share Provisions or the liquidation, dissolution or
winding-up of Apple pursuant to the Liquidation Call Right described in the
provisions of Article 6 of the Exchangeable Share Provisions, upon notice from
AOI to the Trustee of its acceptance of a Retraction Offer or a Liquidation
Offer, as the case may be, the Trustee will present and surrender at the office
of the Transfer Agent the certificate or certificates of AOI Trust Stock
representing the appropriate number of AOI Common Shares payable in respect of
the Retraction Price or the Liquidation Price, as the case may be, together with
such other documents and instruments as may be required to effect such transfer
and such other documents and instruments as the Transfer Agent may reasonably
require, and request the Transfer Agent to deliver to the relevant Holder, at
the address of the Holder recorded in the securities register of Apple for the
Exchangeable Shares or at the address specified in the Holder's Retraction
Request, if applicable, or by Holder for pick up by the Holder at the registered
office of Apple or at any office off the Transfer Agent as may be specified by
Apple by notice to the Holders, certificates representing the required number of
AOI Common Shares registered in the name of the Holder or in such other name as
the Holder may request in payment of the Retraction Price or the Liquidation
Price, as the case may be.
ARTICLE 7
CONCERNING THE TRUSTEE
7.1 POWERS AND DUTIES OF THE TRUSTEE. The rights, powers and authorities of the
Trustee under this Agreement, in its capacity as trustee of the Trust, will
include:
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(a) receipt and deposit of the AOI Trust Stock from AOI as trustee for
and on behalf of the Holders and AOI in accordance with the
provisions of this Agreement;
(b) granting proxies and distributing materials to Holders as provided in
this Agreement;
(c) voting the Holder Votes in accordance with the provisions of this
Agreement;
(d) receiving the grant of the Exchange Right and the Automatic Exchange
Rights from AOI as trustee for and on behalf of the Holders in
accordance with the provisions of this Agreement;
(e) exercising the Exchange Right and enforcing the benefit of the
Automatic Exchange Rights, in each case in accordance with the
provisions of this Agreement, and in connection therewith receiving
from Holders Exchangeable Shares and other requisite documents and
distributing to such Holders the shares of AOI Common Stock and
cheques, if any, to which such Holders are entitled upon the
exercise of the Exchange Right or pursuant to the Automatic Exchange
Rights, as the case may be;
(f) holding title to the Trust Estate;
(g) investing any moneys forming, from time to time, a part of the Trust
Estate as provided in this Agreement;
(h) taking action at the direction of a Holder or Holders to enforce the
obligations of AOI under this Agreement and AOI and Apple under the
Support Agreement; and
(i) taking such other actions and doing such other things as are
specifically provided in this Agreement.
In the exercise of such rights, powers and authorities the Trustee will have
(and is granted) such incidental and additional rights, powers and authorities
not in conflict with any of the provisions of this Agreement as the Trustee,
acting in good faith and in the reasonable exercise of its discretion, may deem
necessary, appropriate or desirable to effect the purpose of the Trust. Any
exercise of such discretionary rights, powers and authorities by the Trustee
will be final, conclusive and binding upon all persons. For greater certainty,
the Trustee will have only those duties as are set out specifically in this
Agreement. The Trustee in exercising its rights, powers, duties and authorities
hereunder will act honestly and in good faith with a view to the best interests
of the Holders and will exercise the care, diligence and skill that a reasonably
prudent trustee would exercise in comparable circumstances. The Trustee will not
be bound to give any notice or do or take any act, action or proceeding by
virtue of the powers conferred on it hereby unless and until it is specifically
required to do so under the terms hereof, nor will the Trustee be required to
take any notice of, or to do or to take any act, action or proceeding as a
result of any default or breach of any provision hereunder, unless and until
notified in writing of such default or breach, which notices will distinctly
specify
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the default or breach desired to be brought to the attention of the Trustee and
in the absence of such notice the Trustee may for all purposes of this Agreement
conclusively assume that no default or breach has been made in the observance or
performance of any of the representations, warranties, covenants, agreements or
conditions contained herein.
7.2 NO CONFLICT OF INTEREST. The Trustee represents to Apple and AOI that at the
date of execution and delivery of this Agreement there exists no material
conflict of interest in the role of the Trustee as a fiduciary hereunder and the
role of the Trustee in any other capacity. The Trustee will, within 90 days
after it becomes aware that such a material conflict of interest exists, either
eliminate such material conflict of interest or resign in the manner and with
the effect specified in Article 10 hereof. If, notwithstanding the foregoing
provisions of this section 7.2, the Trustee has such a material conflict of
interest, the validity and enforceability of this Agreement will not be affected
in any manner whatsoever by reason only of the existence of such material
conflict of interest. If the Trustee contravenes the foregoing provisions of
this section 7.2, any interested party may apply to a court of competent
jurisdiction for an order that the Trustee be replaced as trustee hereunder.
7.3 DEALINGS WITH TRANSFER AGENTS, REGISTRARS, ETC. Apple and AOI irrevocably
authorize the Trustee, from time to time, to:
(a) consult, communicate and otherwise deal with the respective
registrars and transfer agents, and with any such subsequent
registrar or transfer agent, of the Exchangeable Shares and AOI
Common Stock; and
(b) requisition, from time to time:
(i) from any such registrar or transfer agent any information
readily available from the records maintained by it which the
Trustee may reasonably require for the discharge of its duties
and responsibilities under this Agreement, and
(ii) from the transfer agent of AOI Common Stock, and any
subsequent transfer agent of such shares, the share
certificates issuable upon the exercise from time to time of
the Exchange Right and pursuant to the Automatic Exchange
Rights in the manner specified in Article 5 hereof and the
Retraction Call Right and Liquidation Call Right in the manner
described in Article 6 hereof.
Apple and AOI irrevocably authorize their respective registrars and transfer
agents to comply with all such requests. AOI covenants that it will supply its
transfer agent with duly executed share certificates for the purpose of
completing the exercise from time to time of the Exchange Right and the
Automatic Exchange Rights, in each case pursuant to Article 5 hereof and the
Retraction Call Right and Liquidation Call Right in the manner described in
Article 6 hereof.
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7.4 BOOKS AND RECORDS. The Trustee will keep available for inspection by AOI and
Apple, at the Trustee's office in Houston, Texas correct and complete books and
records of account relating to the Trustee's actions under this Agreement,
including without limitation all information relating to mailings and
instructions to and from Holders and all transactions pursuant to the Voting
Rights, the Exchange Right, and the Automatic Exchange Rights, the Retraction
Call Right and the Liquidation Call Right for the term of this Agreement. On or
before February 1, 1998, and on or before February 1 in every year thereafter,
so long as the AOI Trust Stock is on deposit with the Trustee, the Trustee will
transmit to AOI and Apple a brief report, dated as of the preceding December 31,
with respect to:
(a) the property and funds comprising the Trust Estate as of that date;
(b) the number of exercises of the Exchange Right, the Retraction Call
Right and the Liquidation Call Right, if any, and the aggregate
number of Exchangeable Shares received by the Trustee on behalf of
Holders in consideration of the issue and delivery by the Trustee of
shares of AOI Common Stock in connection with the Exchange Right,
the Retraction Call Right and the Liquidation Call Right, during the
calendar year ended on such date; and
(c) all other actions taken by the Trustee in the performance of its
duties under this Agreement which it had not previously reported.
7.5 INCOME TAX RETURNS AND REPORTS. The Trustee will, to the extent necessary,
cause to be prepared and filed on behalf of the Trust at the expense of AOI: (a)
appropriate United States and Canadian income tax returns, and (b) any other
returns or reports required by applicable law or the rules and regulations of
any securities exchange or other trading system through which the Exchangeable
Shares are traded, all as directed by and at the expense of AOI. If requested by
the Trustee, AOI will retain such experts for purposes of providing such advice
and assistance.
7.6 INDEMNIFICATION PRIOR TO CERTAIN ACTIONS BY TRUSTEE. The Trustee will
exercise any or all of the rights, duties, powers or authorities vested in it by
this Agreement at the request, order or direction of any Holder upon such Holder
furnishing to the Trustee reasonable funding, security and indemnity against the
costs, expenses and liabilities which may be incurred by the Trustee therein or
thereby, provided that no Holder will be obligated to furnish to the Trustee any
such funding, security or indemnity in connection with the exercise by the
Trustee of any of its rights, duties, powers and authorities with respect to the
AOI Trust Stock pursuant to Article 4 hereof, subject to section 7.15 hereof,
and with respect to the Exchange Right pursuant to Article 5 hereof, subject to
section 7.15 hereof, and with respect to the Automatic Exchange Rights pursuant
to Article 5 hereof. None of the provisions contained in this Agreement will
require the Trustee to expend or risk its own funds or otherwise incur financial
liability in the exercise of any of its rights, powers, duties or authorities
unless funded, given funds, security and indemnified as aforesaid.
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7.7 ACTIONS BY HOLDERS. No Holder will have the right to institute any action,
suit or proceeding or to exercise any other remedy authorized by this Agreement
for the purpose of enforcing any of its rights or for the execution of any trust
or power hereunder unless the Holder has requested the Trustee to take or
institute such action, suit or proceeding and furnished the Trustee with the
funding, security and indemnity referred to in section 7.10 hereof and the
Trustee has failed to act within a reasonable time thereafter. In such case, but
not otherwise, the Holder will be entitled to take proceedings in any court of
competent jurisdiction such as the Trustee might have taken; it being understood
and intended that no one or more Holders will have any right in any manner
whatsoever to affect, disturb or prejudice the rights hereby created by any such
action, or to enforce any right hereunder or under the Voting Rights, the
Exchange Right or the Automatic Exchange Rights, except subject to the
conditions and in the manner herein provided, and that all powers and trusts
hereunder will be exercised and all proceedings at law will be instituted, had
and maintained by the Trustee, except only as herein provided, and in any event
for the equal benefit of all Holders.
7.8 RELIANCE UPON DECLARATIONS. The Trustee will not be considered to be in
contravention of any of its rights, powers, duties and authorities hereunder if,
when required, it acts and relies in good faith upon lists, mailing labels,
notices, statutory declarations, certificates, opinions, reports or other papers
or documents furnished pursuant to the provisions hereof or required by the
Trustee to be furnished to it in the exercise of its rights, powers, duties and
authorities hereunder and such lists, mailing labels, notices, statutory
declarations, certificates, opinions, reports or other papers or documents
comply with the provisions of this Agreement.
7.9 EVIDENCE AND AUTHORITY TO TRUSTEE. Apple and/or AOI will furnish to the
Trustee evidence of compliance with the conditions provided for in this
Agreement relating to any action or step required or permitted to be taken by
Apple and/or AOI or the Trustee under this Agreement or as a result of any
obligation imposed under this Agreement, including, without limitation, in
respect of the Voting Rights, the Exchange Right, the Automatic Exchange Rights,
the Retraction Call Right or the Liquidation Call Right and the taking of any
other action to be taken by the Trustee at the request of or on the application
of Apple and/or AOI forthwith if and when:
(a) such evidence is required by any other section of this Agreement to
be furnished to the Trustee in accordance with the terms of this
section 7.9; or
(b) the Trustee in the exercise of its rights, powers, duties and
authorities under this Agreement, gives Apple and/or AOI written
notice requiring it to furnish such evidence in relation to any
particular action or obligation specified in such notice.
Such evidence will consist of an Officer's Certificate of Apple and/or AOI or a
statutory declaration or a certificate made by persons entitled to sign an
Officer's Certificate stating that any such condition has been complied with in
accordance with the terms of this Agreement. Whenever such evidence relates to a
matter other than the Voting Rights, the Exchange Right, the Automatic Exchange
Rights, the Retraction Call Right or the Liquidation Call Right, and except as
otherwise specifically provided herein, such evidence may consist of a report or
opinion of any solicitor,
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auditor, accountant, appraiser, valuer, engineer or other expert or any other
person whose qualifications give authority to a statement made by him, provided
that if such report or opinion is furnished by a director, officer or employee
of Apple and/or AOI it will be in the form of an Officer's Certificate or a
statutory declaration. Each statutory declaration, certificate, opinion or
report furnished to the Trustee as evidence of compliance with a condition
provided for in this Agreement will include a statement by the person giving the
evidence:
(c) declaring that he has read and understands the provisions of this
Agreement relating to the condition in question;
(d) describing the nature and scope of the examination or investigation
upon which he based the statutory declaration, certificate,
statement or opinion; and
(e) declaring that he has made such examination or investigation as he
believes is necessary to enable him to make the statements or give
the opinions contained or expressed therein.
7.10 EXPERTS, ADVISERS AND AGENTS. The Trustee may:
(a) in relation to these presents act and rely on the opinion or advice
of or information obtained from or prepared by any solicitor,
auditor, accountant, appraiser, valuer, engineer or other expert,
whether retained by the Trustee or by Apple and/or AOI or otherwise,
and may employ such assistants as may be necessary to the proper
determination and discharge of its powers and duties and
determination of its rights hereunder and may pay proper and
reasonable compensation for all such legal and other advice or
assistance as aforesaid; and
(b) employ such agents and other assistants as it may reasonably require
for the proper determination and discharge of its powers and duties
hereunder, and may pay reasonable remuneration for all services
performed for it (and will be entitled to receive reasonable
remuneration for all services performed by it) in the discharge of
the trusts hereof and compensation for all disbursements, costs and
expenses made or incurred by it in the determination and discharge
of its duties hereunder and in the management of the Trust.
7.11 INVESTMENT OF MONEYS HELD BY TRUSTEE. The Trustee shall invest and reinvest
any monies held by it in the Vista 100% U.S. Treasury Fund, unless otherwise
instructed in writing by AOI. Such written instructions, if any, referred to in
the foregoing sentence shall specify the type and identity of the investments to
be purchased and/or sold and shall also include the name of the broker-dealer,
if any, which AOI directs the Trustee to use in respect of such investment, any
particular settlement procedures required, if any (which settlement procedures
shall be consistent with industry standards and practices), and such other
information as the Trustee may require. The Trustee shall not be liable for
failure to invest or reinvest funds absent sufficient written direction.
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Unless the Trustee is otherwise directed in such written instructions, the
Trustee may use a broker-dealer of its own selection, including a broker-dealer
owned by or affiliated with the Trustee or any of its Affiliates. It is
expressly agreed and understood by the parties hereto that the Trustee shall not
in any way whatsoever be liable for losses on any investments, including, but
not limited to, losses from market risks due to premature liquidation or
resulting from other actions taken pursuant to this Agreement.
7.12 TRUSTEE NOT REQUIRED TO GIVE SECURITY. The Trustee will not be required to
give any bond or security in respect of the execution of the trusts, rights,
duties, powers and authorities of this Agreement or otherwise in respect of the
premises.
7.13 TRUSTEE NOT BOUND TO ACT ON COMPANY'S REQUEST. Except as in this Agreement
otherwise specifically provided, the Trustee will not be bound to act in
accordance with any direction or request of Apple and/or AOI or of the directors
thereof until a duly authenticated copy of the instrument or resolution
containing such direction or request has been delivered to the Trustee, and the
Trustee will be empowered to act and rely upon any such copy purporting to be
authenticated and believed by the Trustee to be genuine.
7.14 AUTHORITY TO CARRY ON BUSINESS. The Trustee represents to Apple and AOI
that at the date of execution and delivery by it of this Agreement it is a
national banking association, duly organized and existing under the laws of the
United States of America, having the powers of a trust company. If,
notwithstanding the provisions of this section 7.14, it ceases to be so
qualified, the validity and enforceability of this Agreement and the Voting
Rights, the Exchange Right and the Automatic Exchange Rights will not be
affected in any manner whatsoever by reason only of such event but the Trustee
will, within 90 days after ceasing to be authorized to carry on the business of
a trust company, either become so authorized or resign in the manner and with
the effect specified in Article 10 hereof.
7.15 CONFLICTING CLAIMS. If conflicting claims or demands are made or asserted
with respect to any interest of any Holder in any Exchangeable Shares, including
any disagreement between the heirs, representatives, successors or assigns
succeeding to all or any part of the interest of any Holder in any Exchangeable
Shares resulting in conflicting claims or demands being made in connection with
such interest, then the Trustee will be entitled, at its sole discretion, to
refuse to recognize or to comply with any such claim or demand. In so refusing,
the Trustee may elect not to exercise any Voting Rights, Exchange Right or
Automatic Exchange Rights subject to such conflicting claims or demands and, in
so doing, the Trustee will not be or become liable to any person on account of
such election or its failure or refusal to comply with any such conflicting
claims or demands. The Trustee will be entitled to continue to refrain from
acting and to refuse to act until:
(a) the rights of all adverse claimants with respect to the Voting
Rights, Exchange Right or Automatic Exchange Rights subject to such
conflicting claims or demands have been adjudicated by a final
judgment of a court of competent jurisdiction; or
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(b) all differences with respect to the Voting Rights, Exchange Right or
Automatic Exchange Rights subject to such conflicting claims or
demands have been conclusively settled by a valid written agreement
binding on all such adverse claimants, and the Trustee will have
been furnished with an executed copy of such agreement.
If the Trustee elects to recognize any claim or comply with any demand made by
any such adverse claimant, it may in its discretion require such claimant to
furnish such surety bond or other security satisfactory to the Trustee as it
will deem appropriate fully to indemnify it as between all conflicting claims or
demands.
7.16 ACCEPTANCE OF TRUST. The Trustee hereby accepts the Trust created and
provided for by and in this Agreement and agrees to perform the same upon the
terms and conditions herein set forth and to hold all rights, privileges and
benefits conferred hereby and by law in trust for the various persons who will
from time to time be Holders, subject to all the terms and conditions herein set
forth.
ARTICLE 8
COMPENSATION
8.1 FEES AND EXPENSES OF THE TRUSTEE. AOI will pay to the Trustee reasonable
compensation for all of the services rendered by it under this Agreement and
will reimburse the Trustee for all reasonable expenses (including but not
limited to taxes, compensation paid to experts, agents and advisors and travel
expenses) and disbursements, including the cost and expense of any suit or
litigation of any character and any proceedings before any governmental agency
reasonably incurred by the Trustee in connection with its rights and duties
under this Agreement; provided that AOI will have no obligation to reimburse the
Trustee for any expenses or disbursements paid, incurred or suffered by the
Trustee in any suit or litigation in which the Trustee is determined to have
acted in bad faith or with negligence or willful misconduct.
ARTICLE 9
INDEMNIFICATION AND LIMITATION OF LIABILITY
9.1 INDEMNIFICATION OF THE TRUSTEE. AOI will indemnify and hold harmless the
Trustee and each of its directors, officers, employees and agents appointed and
acting in accordance with this Agreement (collectively, the "Indemnified
Parties") against all claims, losses, damages, costs, penalties, fines and
reasonable expenses (including reasonable expenses of the Trustee's legal
counsel) which, without fraud, negligence, willful misconduct or bad faith on
the part of such Indemnified Party, may be paid, incurred or suffered by the
Indemnified Party by reason of or as a result of the Trustee's acceptance or
administration of the Trust, its compliance with its duties set forth in this
Agreement or any written or oral instructions delivered to the Trustee by AOI
pursuant hereto. In no case will AOI be liable under this indemnity for any
claim against any of the Indemnified Parties unless AOI is notified by the
Trustee of the written assertion of a claim or of any
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action commenced against the Indemnified Parties, promptly after any of the
Indemnified Parties will have received any such written assertion of a claim or
have been served with a summons or other first legal process giving information
as to the nature and basis of the claim. AOI will be entitled to participate at
their own expense in the defense and, if AOI so elects at any time after receipt
of such notice, either of them may assume the defense of any suit brought to
enforce any such claim. The Trustee will have the right to employ separate
counsel in any such suit and participate in the defense thereof but the fees and
expenses of such counsel will be at the expense of the Trustee unless:
(a) the employment of such counsel has been authorized by AOI, such
authorization not to be unreasonably withheld; or
(b) the named parties to any such suit include both the Trustee and AOI,
and the Trustee has been advised by counsel acceptable to AOI that there may be
one or more legal defenses available to the Trustee that are different from or
in addition to those available to AOI and that an actual or potential conflict
of interest exists (in which case AOI will not have the right to assume the
defense of such suit on behalf of the Trustee but will be liable to pay the
reasonable fees and expenses of counsel for the Trustee).
9.2 LIMITATION OF LIABILITY. The Trustee will not be held liable for any loss
which may occur by reason of depreciation of the value of any part of the Trust
Estate or any loss incurred on any investment of funds pursuant to this
Agreement, except to the extent that such loss is attributable to the fraud,
negligence, willful misconduct or bad faith on the part of the Trustee.
ARTICLE 10
CHANGE OF TRUSTEE
10.1 RESIGNATION. The Trustee, or any trustee hereafter appointed, may at any
time resign by giving written notice of such resignation to AOI and Apple
specifying the date on which it desires to resign, provided that such notice
will never be given less than 60 days before such desired resignation date
unless AOI and Apple otherwise agree and provided further that such resignation
will not take effect until the date of the appointment of a successor trustee
and the acceptance of such appointment by the successor trustee. Upon receiving
such notice of resignation, AOI and Apple will promptly appoint a successor
trustee by written instrument in duplicate, one copy of which will be delivered
to the resigning trustee and one copy to the successor trustee. Failing
acceptance by a successor trustee, a successor trustee may be appointed by an
order of a court of competent jurisdiction upon application of one or more of
the parties hereto.
10.2 Removal. The Trustee, or any trustee hereafter appointed, may be removed
with or without cause, at any time on 60 days' prior notice by written
instrument executed by AOI and Apple, in duplicate, one copy of which will be
delivered to the trustee so removed and one copy to the successor trustee.
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<PAGE>
10.3 SUCCESSOR TRUSTEE. Any successor trustee appointed as provided under this
Agreement will execute, acknowledge and deliver to AOI and Apple and to its
predecessor trustee an instrument accepting such appointment. Thereupon the
resignation or removal of the predecessor trustee will become effective and such
successor trustee, without any further act, deed or conveyance, will become
vested with all the rights, powers, duties and obligations of its predecessor
under this Agreement, with like effect as if originally named as trustee in this
Agreement. However, on the written request of AOI and Apple or of the successor
trustee, the trustee ceasing to act will, upon payment of any amounts then due
it pursuant to the provisions of this Agreement, execute and deliver an
instrument transferring to such successor trustee all the rights and powers of
the trustee so ceasing to act. Upon the request of any such successor trustee,
AOI, Apple and such predecessor trustee will execute any and all instruments in
writing for more fully and certainly vesting in and confirming to such
successor trustee all such rights and powers.
10.4 NOTICE OF SUCCESSOR TRUSTEE. Upon acceptance of appointment by a successor
trustee as provided herein, AOI and Apple will cause to be mailed notice of the
succession of such trustee hereunder to each Holder specified in a List. If AOI
or Apple fail to cause such notice to be mailed within 10 days after acceptance
of appointment by the successor trustee, the successor trustee will cause such
notice to be mailed at the expense of AOI and Apple.
ARTICLE 11
AOI SUCCESSORS
11.1 CERTAIN REQUIREMENTS IN RESPECT OF COMBINATION, ETC. AOI will not enter
into any transaction (whether by way of reconstruction, reorganization,
consolidation, merger. transfer, sale, lease or otherwise) whereby all or
substantially all of its undertaking, property and assets would become the
property of any other person or, in the case of a merger, of the continuing
corporation resulting therefrom unless, but may do so if:
(a) such other person or continuing corporation is a corporation (herein
called the "AOI Successor") incorporated under the laws of any state
of the United States or the laws of Canada or any province thereof;
(b) AOI Successor, by operation of law, becomes, without more, bound by
the terms and provisions of this Agreement or, if not so bound,
executes, prior to or contemporaneously with the consummation of
such transaction a Agreement supplemental hereto and such other
instruments (if any) as are satisfactory to the Trustee and are
necessary or advisable to evidence the assumption by AOI Successor
of liability for all moneys payable and property deliverable
hereunder and the covenant of such AOI Successor to pay and deliver
or cause to be delivered the same and its agreement to observe and
perform all the covenants and obligations of AOI under this
Agreement; and
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<PAGE>
(c) such transaction will, to the satisfaction of the Trustee, be upon
such terms as substantially preserve and do not impair in any
material respect any of the rights, duties, powers and authorities
of the Trustee or of the Holders hereunder.
11.2 VESTING OF POWERS IN SUCCESSOR. Whenever the conditions of section 11.1
hereof have been duly observed and performed, the Trustee, if required, by
section 11.1 hereof, AOI Successor and Apple will execute and deliver the
supplemental agreement provided for in Article 12 hereof and thereupon AOI
Successor will possess and from time to time may exercise each and every right
and power of AOI under this Agreement in the name of AOI or otherwise and any
act or proceeding by any provision of this Agreement required to be done or
performed by the Board of Directors of AOI or any officers of AOI may be done
and performed with like force and effect by the directors or officers of such
AOI Successor.
11.3 WHOLLY-OWNED SUBSIDIARIES. Nothing herein will be construed as preventing
the amalgamation or merger of any wholly-owned subsidiary of AOI with or into
AOI or the winding-up, liquidation or dissolution of any wholly-owned subsidiary
of AOI provided that all of the assets of such subsidiary are transferred to AOI
or another wholly-owned subsidiary of AOI, and any such transactions are
expressly permitted by this Article 11.
ARTICLE 12
AMENDMENTS AND SUPPLEMENTAL AGREEMENTS
12.1 AMENDMENTS, MODIFICATIONS, ETC. This Agreement may not be amended or
modified except by an agreement in writing executed by Apple, AOI and the
Trustee and approved by the Holders in accordance with Section 10.2 of the
Exchangeable Share Provisions.
12.2 MINISTERIAL AMENDMENTS. Notwithstanding the provisions of section 12.1
hereof, the parties to this Agreement may in writing, at any time and from time
to time, without the approval of the Holders, amend or modify this Agreement for
the purposes of:
(a) adding to the covenants of any or all of the parties hereto for the
protection of the Holders hereunder;
(b) making such amendments or modifications not inconsistent with this
Agreement may be necessary or desirable with respect to matters or
questions which, in the opinion of the Board of Directors of each of
AOI and Apple and with the concurrence of the Trustee, having in
mind the best interests of the Holders as a whole, it may be
expedient to make, provided that such boards of directors and the
Trustee concur that such amendments and modifications will not be
prejudicial to the interests of the Holders as a whole or
(c) making such changes or corrections which, on the advice of counsel
to Apple and AOI, are required for the purpose of curing or
correcting any ambiguity or defect or
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<PAGE>
inconsistent provision or clerical omission or mistake or manifest
error, provided that the Trustee and the Board of Directors of each
of Apple and AOI concur that such changes or corrections will not be
prejudicial to the interests of the Holders as a whole.
12.3 MEETING TO CONSIDER AMENDMENTS. Apple at the request of AOI, will call a
meeting or meetings of the Holders for the purpose of considering any proposed
amendment or modification requiring approval pursuant hereto. Any such meeting
or meetings will be called and held in accordance with the by-laws of Apple,
the Exchangeable Share Provisions and all applicable laws.
12.4 CHANGES IN CAPITAL OF AOI AND APPLE. At all times after the occurrence of
any event effected pursuant to section 2.7 or section 2.8 of the Support
Agreement, as a result of which either AOI Common Stock or the Exchangeable
Shares or both are in any way changed, this Agreement will forthwith be amended
and modified as necessary in order that it will apply with full force and
effect, mutatis mutandis, to all new securities into which AOI Common Stock or
the Exchangeable Shares or both are so changed and the parties hereto will
execute and deliver a supplemental Agreement giving effect to and evidencing,
such necessary amendments and modifications.
12.5 EXECUTION OF SUPPLEMENTAL AGREEMENTS. No amendment to or modification or
waiver of any of the provisions of this Agreement otherwise permitted hereunder
will be effective unless made in writing and signed by all of the parties
hereto. From time to time Apple (when authorized by a resolution of the Board of
Directors), AOI (when authorized by a resolution of its Board of Directors) and
the Trustee may, subject to the provisions of these presents, and they will,
when so directed by these presents, execute and deliver by their proper
officers, agreements or other instruments supplemental hereto, which thereafter
will form part hereof, for any one or more of the following purposes:
(a) evidencing the succession of AOI Successors to AOI and the covenants
of and obligations assumed by each such AOI Successor in accordance
with the provisions of Article 11 and the successor of any successor
trustee in accordance with the provisions of Article 10;
(b) making any additions to, deletions from or alterations of the
provisions of this Agreement or the Voting Rights, the Exchange
Right or the Automatic Exchange Rights which the Trustee is
satisfied, having made due inquiry, will not be prejudicial to the
interests of the Holders as a whole or are necessary or advisable in
order to incorporate, reflect or comply with any legislation the
provisions of which apply to AOI, Apple, the Trustee or this
Agreement; and
(c) for any other purposes not inconsistent with the provisions of this
Agreement, including without limitation to make or evidence any
amendment or modification to this Agreement as contemplated hereby,
provided that the Trustee is satisfied, having
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<PAGE>
made due inquiry, that the rights of the Trustee and the Holders as
a whole will not be prejudiced thereby.
ARTICLE 13
TERMINATION
13.1 TERM. The Trust created by this Agreement will continue until the earliest
to occur of the following events:
(a) no outstanding Exchangeable Shares are held by a Holder;
(b) each of Apple and AOI elects in writing to terminate the Trust and
such termination is approved by the Holders of the Exchangeable
Shares in accordance with Section 10.2 of the Exchangeable Share
Provisions; and
(c) the earlier of 21 years after the death of the last survivor of the
descendants of His Majesty King George VI of the United Kingdom of
Great Britain and Northern Ireland living on the date of the
creation of the Trust, or the end of such other period of time as
may be required to comply with any rule against perpetuities
applicable to this Agreement.
13.2 SURVIVAL OF AGREEMENT. This Agreement will survive any termination of the
Trust and will continue until there are no Exchangeable Shares outstanding held
by a Holder; provided, however, that the provisions of Articles 8 and 9 hereof
will survive any such termination of this Agreement.
ARTICLE 14
GENERAL
14.1 SEVERABILITY. If any provision of this Agreement is held to be invalid,
illegal or unenforceable, the validity, legality or enforceability of the
remainder of this Agreement will not in any way be affected or impaired thereby
and the agreement will be carried out as nearly as possible in accordance with
its original terms and conditions.
14.2 INUREMENT. This Agreement will be binding upon and inure to the benefit of
the parties hereto and their respective successors and permitted assigns and to
the benefit of the Holders.
14.3 NOTICES TO PARTIES. 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 will be deemed to be delivered and
received (i) if personally delivered or if delivered by telex, telegram, or
courier service, when actually received by the party to whom notice is sent (ii)
if delivered by telecopier, on the date of sending provided such sending is
evidenced by electronic verification or receipt and is and a hard copy is sent
by regular mail, or (iii) if delivered by mail,
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<PAGE>
upon receipt by the party addressed 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 AOI:
Apple Orthodontix Inc.
100 West Loop South, Suite 100
Houston, Texas 77024
Fax No.: (7l3) 964-6883
Attn: Steve Walton
with a copy to:
Jackson & Walker, L.L.P.
1100 Louisiana, Suite 4200
Houston, Texas 77002
Fax No.: (7l3) 752-4221
Attn: Richard S. Roth
If to Apple:
718842 Alberta Inc.
290, 10655 Southport Rd. S.W.
Calgary, Alberta, Canada
T2W 4Y1
Fax No.: (403) 271-1454
Attn.: Dr. Duncan Y. Brown
with a copy to:
Code Hunter Wittmann
1400, 700 2nd St. S.W.
Calgary, Alberta, Canada
T2P 4V5
Fax No.: (403) 263-9193
Attn.: Kevin W. Keyes
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<PAGE>
If to the Trustee:
Texas Commerce Bank National Association
Global Trust Services
600 Travis Street, Suite 1150
Houston, Texas 77002
Fax No.: (7l3) 216-5476
Attn.: JoAnne K. Gulliver
14.4 NOTICE OF HOLDERS. Any and all notices to be given and any documents to be
sent to any Holders may be given or sent to the address of such Holder shown on
the register of holders of Exchangeable Shares in any manner permitted by the
by-laws of Apple from time to time in force in respect of notices to
shareholders and will be deemed to be received (if given or sent in such manner)
at the time specified in such by-laws, the provisions of which by-laws will
apply MUTATIS MUTANDIS to notices or documents as aforesaid sent to such
Holders.
14.5 RISK OF PAYMENTS BY POST. Whenever payments are to be made or documents are
to be sent to any Holder by the Trustee or by Apple, or by such Holder to the
Trustee or to AOI or Apple, the making of such payment or sending of such
document sent through the post will be at the risk of Apple, in the case of
pavements made or documents sent by the Trustee or Apple, and the Holder, in the
case of payments made or documents sent by the Holder.
14.6 COUNTERPARTS. This Agreement may be executed in counterparts, each of which
will be deemed an original, but all of which taken together will constitute one
and the same instrument.
14.7 JURISDICTION. This Agreement shall be construed under, and governed by the
laws of the State of Texas, excluding, however, (a) its choice of law rules and
(b) the portions of the Texas Trust Code Sec. 111.001, ET SEQ. of the Texas
Property Code concerning fiduciary duties and liabilities of trustees. All of
the Trustee's rights hereunder are cumulative of any other rights it may have at
law, in equity or otherwise.
14.8 ATTORNMENT. The parties hereto agree that the forum for resolution of any
dispute arising under this Agreement shall be Harris County, Texas, and AOI and
Apple hereby consent and submit themselves to the jurisdiction of any state or
federal court sitting in Harris County, Texas.
14.9 FURTHER ASSURANCES. The parties hereto will promptly do all such acts and
things and execute and deliver all such further agreements, instruments, deeds
and documents as may be required to carry out the transactions contemplated by
this Agreement to give effect to the intent of said agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
718842 ALBERTA INC.
By:______________________________
APPLE ORTHODONTIX, INC.
By:______________________________
TEXAS COMMERCE BANK
NATIONAL ASSOCIATION, AS TRUSTEE
By______________________________
Name:___________________________
Title:__________________________
-31-
EXHIBIT 21.1
SUBSIDIARIES OF APPLE ORTHODONTIX, INC.
Apple Orthodontix of Texas, Inc., a Texas corporation
Apple Orthodontix of Canada, Inc., an Alberta corporation
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 25, 1998 included in this registration statement on Form
S-4 and to all references to our firm in this registration statement.
April 30, 1998
Houston, Texas
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