UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended SEPTEMBER 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
for the transition period from ___________________ to ____________________
Commission file number 1-12977
APPLE ORTHODONTIX, INC.
- - --------------------------------------------------------------------------------
(exact name of Registrant as specified in its charter)
Delaware 74-2795193
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2777 Allen Parkway, Suite 700, Houston, Texas 77019
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (713) 852-2500
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of Class A Common Stock and Class B Common Stock of
the Registrant, par value $.001 per share, outstanding at November 13, 1998 was
11,368,585 and 2,576,411, respectively.
<PAGE>
FORM 10-Q REPORT INDEX
10-Q PART AND ITEM NO.
PAGE
PART I - FINANCIAL INFORMATION
Item 1 -- Financial Statements.......................................... 3
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 11
PART II - OTHER INFORMATION
Item 1 -- Legal Proceedings............................................. 16
Item 6 -- Exhibits and Reports on Form 8-K.............................. 18
Signature.................................................................... 19
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<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 1,413 $ 2,114
Restricted cash ................................................................ 2,140 2,140
Receivable from orthodontic practices, net ..................................... 10,999 2,362
Prepaid expenses ............................................................... 472 250
Other current assets ........................................................... 588 538
------------ ------------
Total current assets ........................................................ 15,612 7,404
------------ ------------
Property and equipment, net ....................................................... 7,772 6,002
Intangible assets, net ............................................................ 52,512 38,788
Receivable from orthodontic practices, net of current
portion .......................................................................... 3,233 1,642
Notes receivable .................................................................. 2,675 600
Receivable from third parties ..................................................... 762 107
Other assets ...................................................................... 1,492 256
============ ============
Total assets ................................................................ $ 84,058 $ 54,799
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ........................................... $ 122 $ 1,023
Accounts payable and accrued expenses .......................................... 7,027 3,242
Payable to orthodontic practices ............................................... 1,517 250
Income tax payable ............................................................. 781 351
------------ ------------
Total current liabilities ................................................... 9,447 4,866
------------ ------------
Long-term debt, net of current maturities ......................................... 20,170 248
Deferred income taxes ............................................................. 13,551 14,544
Other long-term obligations ....................................................... 12 29
------------ ------------
Total liabilities ........................................................... 43,180 19,687
------------ ------------
Stockholders' equity
Class A common stock , $0.001 par value, 25,000 shares
authorized, 11,369 and 9,980 shares issued and
outstanding................................................................. 11 10
Class B common stock, $0.001 par value, 4,107 shares
authorized, 2,576 and 3,177 shares issued and
outstanding................................................................. 3 3
Additional paid-in capital ..................................................... 64,406 58,295
Warrants ....................................................................... 777 777
Retained deficit ............................................................... (22,586) (23,592)
Foreign currency translation adjustment ........................................ (1,733) (381)
------------ ------------
Total stockholders' equity .................................................. 40,878 35,112
============ ============
Total liabilities and stockholders' equity .................................. $ 84,058 $ 54,799
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Management service fee revenues ....... $ 13,114 $ 7,480 $ 36,150 $ 9,166
Costs and expenses:
Salaries and benefits .............. 4,653 3,094 12,931 4,544
Orthodontic supplies ............... 1,927 998 5,129 1,198
Rent ............................... 1,294 786 3,553 1,214
Advertising and marketing .......... 689 146 1,545 153
General and administrative ......... 1,921 1,241 5,493 1,856
Depreciation and amortization ...... 897 341 2,105 412
Special charge ..................... -- -- 3,745 --
-------- -------- -------- -------
Total costs and expenses ........ 11,381 6,606 34,501 9,377
-------- -------- -------- -------
Operating income (loss) ......... 1,733 874 1,649 (211)
Interest expense, net ................. 293 141 403 148
Interest income ....................... (131) (91) (318) (105)
Other income, net ..................... (20) (3) (58) (3)
-------- -------- -------- -------
Income (loss) before income taxes 1,591 827 1,622 (251)
Income tax provision (benefit) ........ 605 314 616 (95)
-------- -------- -------- -------
Net income (loss) ............... $ 986 $ 513 $ 1,006 $ (156)
======== ======== ======== =======
Earnings (loss) per common
and common equivalent share:
Basic .............................. $ 0.07 $ 0.05 $ 0.07 $ (0.02)
======== ======== ======== =======
Diluted ............................ $ 0.07 $ 0.05 $ 0.07 $ (0.02)
======== ======== ======== =======
Number of shares used in calculating
earnings (loss) per common and common
equivalent share:
Basic .............................. 13,944 10,834 13,715 6,965
======== ======== ======== =======
Diluted ............................ 14,002 11,205 13,870 6,965
======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 1,006 $ (156)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization .................................... 2,105 412
Deferred income taxes ............................................ 430 (95)
Provision for doubtful accounts .................................. 134 34
Special compensation expense paid in stock ....................... 538 --
Changes in assets and liabilities, excluding effects of acquisitions:
Receivable from orthodontic practices ............................ (8,771) (931)
Prepaid expenses ................................................. (222) (190)
Other assets ..................................................... (108) 420
Payables and other accrued liabilities ........................... 2,283 (1,182)
-------- --------
Net cash used in operating activities ................ (2,605) (1,688)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................ (2,419) (2,327)
Payments for new affiliated practices ............................... (10,456) (3,689)
Payment into escrow for a new affiliated practice ................... -- (2,134)
Advances to third parties ........................................... (2,075) (350)
Advances to related parties ......................................... (655) --
Advances to affiliates .............................................. (1,837) (1,494)
Repayment of advances by affiliates ................................. 246 49
-------- --------
Net cash used in investing activities ................ (17,196) (9,945)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ......................................... 20,000 11,434
Repayments of borrowings ......................................... (979) (2,628)
Proceeds from issuances of common stock .......................... 79 17,623
Cash paid related to common stock issuance costs ................. -- (4,952)
Special dividend to founders ..................................... -- (6,544)
-------- --------
Net cash provided by financing activities ............ 19,100 14,933
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... (701) 3,300
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....................... 2,114 21
======== ========
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................. $ 1,413 $ 3,321
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
CLASS A AND B FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
--------------- PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL WARRANTS DEFICIT ADJUSTMENT EQUITY
------ ------ ------------ -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 ........ 13,157 $ 13 $ 58,295 $ 777 $(23,592) $ (381) $ 35,112
Issuances of common stock to new
affiliated practices .......... 523 1 3,664 -- -- -- 3,665
Issuances of common stock
under stock option plan,
including income tax benefit .. 20 -- 79 -- -- -- 79
Issuances of common stock
options to non-employees ...... -- -- 437 -- -- -- 437
Net income ..................... -- -- -- -- 1,006 -- 1,006
Foreign currency
translation adjustment ........ -- -- -- -- -- (1,352) (1,352)
Other .......................... 245 -- 1,931 -- -- -- 1,931
------ ------ ------------ -------- -------- ----------- --------
BALANCE, September 30, 1998 ....... 13,945 $ 14 $ 64,406 $ 777 $(22,586) $ (1,733) $ 40,878
====== ====== ============ ======== ======== =========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
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 "Initial Affiliations").
Simultaneous with the Initial Affiliations, 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 acquisitions of
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 effected by the Company subsequent to the IPO.
The acquisitions of assets and liabilities of the New Orthodontist Affiliations
are accounted for by allocating the 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 condensed consolidated statements of
operations.
The condensed consolidated financial statements included herein have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Pursuant to such
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes the presentation
and disclosures herein are adequate to make the information not misleading. The
financial statements reflect all elimination entries and normal adjustments that
are necessary for a fair presentation of the results for the interim periods
ended September 30, 1998 and 1997.
Operating results for interim periods are not necessarily indicative of the
results for full years. It is suggested that these condensed consolidated
financial statements be read in conjunction with the financial statements of
Apple and related notes thereto, and management's discussion and analysis
related thereto, all of which are included in the Company's annual report on
Form 10-K for the year ended December 31, 1997, as amended, as filed with the
SEC (the "1997 Form 10-K").
2. SIGNIFICANT ACCOUNTING POLICIES
INTANGIBLE ASSETS, NET
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 25 years 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.
There have been no other significant additions to or changes in accounting
policies of the Company since December 31, 1997. For a description of these
policies, see Note 2 of Notes to Consolidated Financial Statements in the 1997
Form
10-K.
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<PAGE>
APPLE ORTHODONTIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NEW ACCOUNTING STANDARDS
The Emerging Issues Task Force of the Financial Accounting Standards Board (the
"FASB") recently issued its Consensus Opinion 97-2 ("EITF 97-2"). EITF 97-2
addresses certain specific matters pertaining to the physician, dentistry and
veterinary practice management industries. EITF 97-2 will be effective for the
Company for its year ending December 31, 1998. EITF 97-2 addresses the ability
of certain practice management companies to consolidate the results of certain
practices with which it has an existing contractual relationship. The Company
currently does not consolidate the operations of the orthodontic practices that
it manages. The guidance in EITF 97-2 will not change the Company's accounting
method because the Company's arrangements with its Affiliated Practices do not
meet the requirements for consolidation as set forth in EITF 97-2.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("SFAS No. 131") - Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 will be effective for the Company for its year ending
December 31, 1998. The Company does not expect the adoption of SFAS No. 131 to
have a material effect on its financial position or results of operations.
In April 1998, Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities," was issued by the American Institute of Certified Public
Accountants. SOP 98-5 requires that all non-governmental entities expense the
costs of start-up activities as those costs are incurred. The Company is
required to adopt SOP 98-5 as of January 1, 1999. The Company does not expect
the adoption of SOP 98-5 to have a material effect on its financial position or
results of operations.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's non-U.S. operations is the local
currency. Adjustments resulting from the translation of financial statements are
reflected as a separate component of stockholders' equity.
RECLASSIFICATIONS
Certain reclassifications have been made to amounts in prior period financial
statements to conform with current period presentation.
3. NEW ORTHODONTIST AFFILIATIONS
During the period from January 1, 1998 through September 30, 1998, the Company
completed New Orthodontist Affiliations with 15 practices representing 21
orthodontists and 23 office locations. In addition, four orthodontists joined
existing Affiliated Practices. The 1998 New Orthodontist Affiliations generated
patient revenue of $9.9 million for their most recently completed fiscal years.
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 1998 New Orthodontist Affiliations consisted
of 455,604 shares of common stock and $7.1 million of cash, assumed debt and
deferred purchase price.
The cost of each of the above 1998 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 $15.0
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. Such adjustments resulted in an increase in service fee intangibles of
$4.8 million with respect to the 21 practices with which the Company affiliated
in 1997.
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<PAGE>
4. LONG-TERM DEBT
A summary of long-term debt is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Unsecured revolving credit facility ................. $ 20,000 $ --
Notes payable, maturing in varying amounts
through October 2002, with interest
ranging from 7.5% to 9.3% ........................ 138 1,076
Capitalized lease obligations, due in
monthly installments through April
2001 with interest ranging from 9.5% to 24.7%.... 154 195
------------ ------------
20,292 1,271
Less: current maturities ........................ 122 1,023
------------ ------------
Long-term debt, net of current maturities ........... $ 20,170 $ 248
============ ============
</TABLE>
During 1998, the Company amended its unsecured bank credit facility in place at
December 31, 1997 to increase its size from $15 million to $25 million and to
increase its bank group from one to two banks. The bank credit facility provides
for a revolving credit period expiring on May 31, 2002. Availability under this
facility is tied to the Company's cash flow and liquidity. Advances bear
interest, at the Company's option, at a prime rate or LIBOR, in each case plus a
margin which is calculated based upon the Company's ratio of indebtedness to
cash flow. The Company is required to maintain certain financial covenants
regarding net worth, coverage ratios and additional indebtedness. As of
September 30, 1998, the Company had $20.0 million drawn under this facility.
The notes payable relate to debts of the Affiliated Practices that were assumed
by the Company.
5. STOCK COMPENSATION PLAN
As allowed by Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," the Company accounts for awards under
its 1997 Stock Compensation Plan under Accounting Principles Board Opinion No.
25, under which no compensation cost has been recognized for stock options
issued to employees 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 (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss)
As reported .......... $ 986 $ 513 $ 1,006 $ (156)
Pro forma ............ $ 938 $ 481 $ 861 $ (249)
Earnings (loss) per share
As reported .......... $ 0.07 $ 0.05 $ 0.07 $ (0.02)
Pro forma ............ $ 0.07 $ 0.04 $ 0.06 $ (0.04)
</TABLE>
During the nine months ended September 30, 1998, the Company issued options to
purchase 35,000 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.
-9-
<PAGE>
6. COMBINED PATIENT DATA
Combined operating data for the Affiliated Practices for the period from January
1, 1998 through September 30, 1998 is as follows (in thousands):
PATIENT CASH
REVENUES COLLECTIONS
-------- -----------
Practices participating under the
Standard Contract ..................................... $ 27,490 $ 25,708
Practices participating under the
Alternative Contract .................................. 8,818 8,597
Practices participating under flat
fee agreements ........................................ 11,012 11,012
-------- -----------
$ 47,320 $ 45,317
======== ===========
Combined patient receivables, net of the Affiliated Practices as of September
30, 1998 is as follows:
Patient receivables ........................................... $ 3,555
Unbilled patient receivables .................................. 5,491
Patient prepayments ........................................... (3,187)
-------
Patient receivables, net of prepayments ................. $ 5,859
=======
7. COMPREHENSIVE INCOME
Comprehensive income, as defined by Statement of Financial Accounting Standards
No. 130 - Reporting Comprehensive Income, is net income plus direct adjustments
to stockholders' equity. The cumulative translation adjustment related to the
Company's Affiliated Practices in Canada is the only such direct adjustment
applicable to the Company. The amount of comprehensive income for the Company is
as follows (in thousands):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------- -----------------
1998 1997 1998 1997
------ ------ ------- ------
Net income (loss) reported .......... $ 986 $ 513 $ 1,006 $ (156)
Foreign currency
translation adjustment ............ (753) -- (1,352) --
------ ------ ------- ------
Comprehensive income (loss) ......... $ 233 $ 513 $ (346) $ (156)
====== ====== ======= ======
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<PAGE>
ITEM 2. 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, RISKS ASSOCIATED WITH AFFILIATIONS,
FLUCTUATIONS IN OPERATING RESULTS BECAUSE OF AFFILIATIONS AND VARIATIONS IN
STOCK PRICE, CHANGES IN GOVERNMENT REGULATIONS, COMPETITION, RISKS OF OPERATIONS
AND GROWTH OF EXISTING AND NEW AFFILIATED ORTHODONTIC PRACTICES, AND RISKS
DETAILED IN THE COMPANY'S SEC FILINGS. 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 UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND THE RELATED NOTES THERETO INCLUDED
ELSEWHERE IN THIS FORM 10-Q AND THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 1997, AS AMENDED.
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 August 12, 1998, the Company has affiliated with an
additional 35 practices and 59 orthodontists operating in 64 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
upon 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 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 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 Apple
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 subject to adjustment on an annual
basis. It is used when local jurisdictions do not allow use of the Standard
Contract or 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.
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 Founding
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.
-11-
<PAGE>
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 the Initial Affiliations 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 Apple to the owners of the Founding Affiliated Practices in the
quarter ended June 30, 1997. SAB No. 48 is not applicable to affiliations
effected by the Company after the IPO. The subsequent affiliations resulted in
substantial intangible assets being recorded and will continue to result in
substantial annual 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 INTERIM PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
MANAGEMENT SERVICE FEE REVENUES
The Company generated management service fee revenues of $13.1 million and $36.2
million for the three- and nine-month periods ended September 30, 1998,
respectively, as compared with $7.5 million and $9.2 million for the three- and
nine-month periods in 1997. The Company conducted no significant operations
through the date of the IPO. Following completion of the IPO and the Initial
Affiliations on May 29, 1997, the Company began operations effective June 1,
1997. Thus, management service fee revenues for the nine-month period in 1997
reflects only four months of operations.
COSTS AND EXPENSES
The Company incurred costs and expenses of $11.4 million (86.8% of management
service fee revenues) and $34.5 million (95.4% of management service fee
revenues) for the three- and nine-month periods ended September 30, 1998,
respectively. The Company's recurring 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 for the nine-month period in 1998 also included a $3.7
million special charge in the second quarter which reflected severance costs
associated with a series of management changes ($3.3 million), costs of
terminated transaction negotiations ($382,344) and certain other items
($84,490). The severance costs related to three officers of the Company. As of
September 30, 1998, the Company had paid $2.3 million in cash and $537,952 in
stock. Exclusive of this $3.7 million charge, costs and expenses were $30.8
million (85.1% of management service fee revenues) for the nine-month period
ended September 30, 1998.
As described more fully under the caption MANAGEMENT SERVICE FEE REVENUES above,
costs and expenses for the nine- month period ended September 30, 1997 reflects
only four months of operations. Costs and expenses for the 1997 periods do,
however, reflect corporate office expenses (consisting primarily of various
legal, accounting, travel, personnel and marketing costs incurred in connection
with the IPO and the Initial Affiliations) for the entire periods presented.
OPERATING INCOME (LOSS)
The Company generated operating income of $1.7 million and $1.6 million for the
three- and nine- month periods ended September 30, 1998, respectively. Exclusive
of the $3.7 million special charge discussed under the caption COSTS AND
EXPENSES above, the Company generated operating income of $1.7 million and $5.4
million for the respective periods. These operating income amounts comprised
13.2% and 14.9% of management service fee revenues, respectively, for such
periods. The Company generated operating income (losses) of $873,995 and
$(210,848) for the three- and nine-month periods ended September 30, 1997,
respectively. As described more fully under the captions MANAGEMENT SERVICE FEE
REVENUES and COSTS AND EXPENSES above, the nine- month period ended September
30, 1997 reflects only four months of operations, but full periods of corporate
office expenses.
INTEREST EXPENSE, NET
Interest expense is summarized as follows (in thousands):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Gross interest ............... $ 361 $ 141 $ 575 $ 148
Less: capitalized interest... (68) -- (172) --
--------- --------- --------- ---------
Interest expense .......... $ 293 $ 141 $ 403 $ 148
========= ========= ========= =========
Gross interest expense increased $220,000 (156%) and $427,000 (289%) for the
three- and nine-month periods ended September 30, 1998, as compared with 1997.
The increase in gross interest was due to higher average debt levels.
INTEREST INCOME
Interest income increased $39,259 (43.0%) and $212,942 (203.1%) for the
three-and nine- month periods ended September 30, 1998, respectively. These
increases reflected additions to notes receivable from certain of the Affiliated
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Practices to fund new office construction and working capital needs and interest
earned on certain funds held in an escrow account related to a Canadian
affiliation at the end of July 1997.
INCOME TAX PROVISION (BENEFIT)
The Company generated an income tax provision (benefit) of $604,446 and $616,201
for the three- and nine-month periods ended September 30, 1998, respectively,
and $314,274 and $(95,320) for the comparable periods in 1997. The income tax
benefit resulted from net operating losses generated by the Company during the
nine-month period in 1997.
NET INCOME (LOSS)
As a result of the foregoing factors, net income increased $473,439 (92.3%) and
$1.2 million for the three-and nine-month periods ended September 30, 1998, as
compared with 1997. Net income as a percentage of management service fee
revenues increased from 6.9% to 7.5% and from (1.7)% to 2.8% for the three- and
nine-month periods, respectively.
YEAR 2000 IMPACT ON INFORMATION TECHNOLOGY INFRASTRUCTURE
The Company is in the process of upgrading the practice management systems at
its Affiliated Practices (the "Affiliated Practice Systems"). The purpose of
this upgrade includes enhancement of the diagnostic, imaging, scheduling and
financial features of the Affiliated Practice Systems. The Company has also
conducted an evaluation of its information technology infrastructure, including
information technology systems in the Company's corporate office (the "Corporate
Systems") and the Affiliated Practice Systems, to analyze the impact of the
technical problems anticipated for the year 2000 (the "Year 2000 Issue").
Following its evaluation, the Company determined that substantially all its
Corporate Systems would be unaffected by such problems. Certain of the
Affiliated Practice Systems, however, would be affected by the Year 2000 Issue.
The Company believes that its upgrade of the Affiliated Practice Systems will
adequately address the Year 2000 Issue and that this upgrade process will be
completed (with respect to the Year 2000 Issue) on a timely basis. During the
execution of this process, the Company will continue to incur internal staff
costs as well as consulting and other expenses related to the upgrade. The
expenses of this upgrade are not expected to have a material adverse effect on
the Company's financial position or results of operations.
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LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
The Company has financed its capital requirements to date with borrowings from
banks and issuances of 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 required in the future. During 1998, the Company
amended its unsecured bank credit facility with Chase Bank of Texas, N.A. (the
"Chase Facility") in place at December 31, 1997 to increase its size from $15
million to $25 million and to increase its bank group from one to two banks. The
Chase Facility provides for a revolving credit period expiring on May 31, 2002.
Availability under the Chase Facility is tied to the Company's cash flow and
liquidity. Advances bear interest, at the Company's option, at a prime rate or
LIBOR, in each case plus a margin which is calculated based upon the Company's
ratio of indebtedness to cash flow. The Company is required to maintain certain
financial covenants regarding net worth, coverage ratios and additional
indebtedness. As of September 30, 1998, the Company had $20.0 million drawn
under the Chase 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 $12.1 million, which it
used to fund cash paid for the Initial Affiliations ($6.6 million) and
subsequent affiliations ($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 $247,624 at December 31, 1997, to $20.2
million at September 30, 1998. The increase is attributable to borrowings for
the affiliation of new orthodontic practices, the purchase of property and
equipment and general working capital needs. The Company's weighted average cost
of indebtedness was 6.9% for the third quarter of 1998.
WORKING CAPITAL MANAGEMENT
The Company's strategy in managing working capital is to maintain sufficient
availability under the Chase Facility to finance short-term capital needs in
excess of internally generated funds and minimize excess cash on its balance
sheet.
The restricted cash balance of $2.1 million at September 30, 1998 consisted
primarily of borrowings under the Chase Facility which were placed into escrow
pending the resolution of certain post-closing contingencies related to a new
affiliate orthodontist transaction closed 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 refunded from escrow
to the Company prior to January 1999.
The Company's total receivable from orthodontic practices (current and
non-current) increased $10.2 million from December 31, 1997 to September 30,
1998. This increase resulted from a number of factors, including (i)service fee
receivables related to unbilled patient receivables, (ii) the portion of service
fee receivables from the Company's Affiliated Practices in Canada which are
payable in future periods, (iii) notes receivable related to the Affiliated
Practices' share of the cost of new office development projects, (iv) notes
receivable from the Affiliated Practices for general working capital purposes,
and (v) uncollected service fees. Based on the nature of the various types of
receivables, the various types of collateral held by the Company and the
Company's strategic operating programs to grow the patient revenue of the
Affiliated Practices, the Company believes that its receivables from orthodontic
practices are collectible.
CAPITAL EXPENDITURES AND NEW AFFILIATIONS
The Company made capital expenditures for the Affiliated Practices during the
nine months ended September 30, 1998, of approximately $2.4 million to fund,
among other things, the development of satellite offices. With the exception of
one stand alone de novo office opened during the second quarter of 1998, which
cost $1.3 million to develop, the Company incurred an average cost of developing
the one de novo and seven satellite offices opened to date of approximately
$400,000 each. 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 things,
development of satellite offices) and other purposes. Such loans bear interest
at prime plus one percent and are repayable over varying periods of time not to
exceed five years. Total notes receivable from Affiliated Practices were $2.7
million at September 30, 1998. It is anticipated that capital expenditures will
be funded from the Company's cash flow from operations 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
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<PAGE>
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 capital from outside financing sources will depend upon
prevailing market conditions, interest rates and the then existing financial
condition of the Company. During the nine months ended September 30, 1998, total
consideration related to the New Orthodontist Affiliations consisted of 455,604
shares of common stock and $7.1 million of cash, assumed debt and deferred
purchase price.
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 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 Affiliated
Practices have the financial wherewithal to sustain any negative impact that may
result from these payment plans. Therefore, Apple does not anticipate that the
offering by the Affiliated Practices of more affordable payment plans will
impair the Company's ability to collect management service revenues from the
Affiliated Practices.
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<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
In November 1997, the Company received notice that Mr. Donald Rose, an
acquaintance of Dr. John G. Vondrak, the Chairman of the Board of the Company,
was threatening to sue the Company, John G. Vondrak Apple Orthodontix, Inc., 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 filed a special appearance challenging jurisdiction and a
general denial. He subsequently withdrew his challenge to jurisdiction. 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.
On April 14, 1998, Orthosoft, Inc. ("Orthosoft") filed a complaint in the
District Court of Harris County, Texas against the Company alleging, among other
things, breach of a Software License and Asset Purchase Option Agreement dated
January 31, 1997 among Orthosoft, Glenn W. Woods, Robert J. Dennington, D.D.S.
and the Company. The complaint alleges that Orthosoft has suffered damages of
approximately $3.1 million. The Company strenuously denies any wrongdoing and
intends to vigorously defend against the claims made by Orthosoft, which the
Company believes are without merit. The Company has also instituted
counterclaims for breaches of the agreement, for tortious interference with
existing and prospective contracts and for fraudulent inducement by Orthosoft,
and has instituted third-party claims against Mr. Woods and Dr. Dennington for
tortious interference with existing and prospective contracts and for fraudulent
inducement.
On August 18, 1998, Charles L. Schnibben and Charles L. Schnibben, D.D.S., M.S.,
P.C. (the "Schnibben Parties") filed a complaint in the District Court of Harris
County, Texas against the Company alleging, among other things, breach of a
Service Agreement dated May 29, 1997 among the Schnibben Parties and the Company
(the "Schnibben Agreement") and negligent misrepresentation in order to induce
the Schnibben Parties to enter in the Schnibben Agreement. The petition seeks,
among other things, to have the court rescind the Schnibben Agreement because it
is an illegal fee splitting arrangement and unspecified actual damages in favor
of the Schnibben Parties. The Company strenuously denies any wrongdoing and
intends to vigorously defend against the claims made by the Schnibben Parties,
which the Company believes are without merit. The Company has filed
counterclaims for breaches of the Schnibben Agreement by the Schnibben Parties
and third-party claims against the counsel of the Schnibben Parties, who
rendered an opinion as to, among other things, the enforceability of the
Schnibben Agreement and its compliance with the applicable fee splitting and
other dentistry regulations.
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.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders of the Company was held in Houston, Texas on
July 27, 1998 for the purpose of electing two members of the Board of Directors.
Proxies for the meeting were solicited pursuant to Regulation 14 of the
Securities Exchange Act of 1934 and there was no solicitation in opposition to
management's solicitation. Stockholders approved both of management's nominees
to the Board and the selection of Arthur Andersen LLP as the Company's
independent auditors for the 1998 fiscal year by the following votes:
ELECTION OF DIRECTORS
-------------------------------------- SELECTION OF
ROD L. CROSBY, JR. RICHARD J. MARXEN ARTHUR ANDERSEN LLP
------------------ ----------------- -------------------
For ............. 6,169,278 6,169,278 8,086,501
Against ......... 355,972 355,972 169,186
Abstaining ...... -- -- 12,720
ITEM 5. OTHER INFORMATION.
On September 8, 1998, the Company loaned $500,000 (the "Promissory Note") to Dr.
John G. Vondrak, the Company's Chairman of the Board, pursuant to a promissory
note that bears interest at 8.5% per annum and is payable in full on September
9, 2000 (the "Promissory Note"). The Promissory Note is secured by a security
interest in 250,000 shares of Class A or B common stock of the Company pursuant
to a stock pledge agreement. On September 10, 1998, the Company and Dr. Vondrak
executed an amendment to Dr. Vondrak's employment agreement to recognize Dr.
Vondrak's change in title and responsibilities with the Company as well as to
modify certain of the terms of compensation in the event Dr. Vondrak's
employment with the Company is terminated.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
*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)).
10.1 Employment Agreement between Apple Orthodontix, Inc. and A Stone
Douglass, dated August 6, 1998.
10.2 Employment Agreement between Apple Orthodontix, Inc. and James E.
Bobbitt, dated August 11, 1998.
10.3 Agreement Regarding Termination of Employment between Apple
Orthodontix, Inc. and Michael W. Harlan, dated August 11, 1998.
10.4 Agreement Regarding Termination of Employment and Severance Benefits
between Apple Orthodontix, Inc. and H. Steven Walton, dated May 6,
1998.
10.5 Consulting Agreement between Apple Orthodontix, Inc. and Michael W.
Harlan, dated August 11, 1998.
10.6 Promissory Note between Apple Orthodontix, Inc. and John G. Vondrak,
dated September 8, 1998.
10.7 Stock Pledge Agreement between Apple Orthodontix, Inc. and John G.
Vondrak, dated September 9, 1998.
10.8 Amendment to Employment Agreement of John G. Vondrak, dated September
10, 1998.
27.1 Financial Data Schedule.
- - ------------------
* Incorporated herein by reference as indicated.
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Apple Orthodontix, Inc., has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
APPLE ORTHODONTIX, INC.
Dated: November 13, 1998 /s/ JAMES E. BOBBITT
By: James E. Bobbitt
Vice President - Chief
Financial Officer
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EXHIBIT 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement"), is made and entered
into and effective this 6th day of August, 1998 (the "Effective Date"), by and
between A STONE DOUGLASS, the individual signing this Agreement below as and
referred to in this Agreement as "Executive," and APPLE ORTHODONTIX, INC., a
corporation organized under the laws of the State of Delaware (hereinafter
referred to as "Company").
W I T N E S S E T H:
WHEREAS, Company is engaged in the business (the "Business") of providing
management and business services to, and acquiring, orthodontic practices;
WHEREAS, the Board of Directors of Company (the "Board of Directors")
recognizes Executive's substantial skills and expertise in the Business and
desires to provide for the employment of Executive on the terms and conditions
herein provided;
WHEREAS, Executive is willing to serve Company on the terms and
conditions herein provided; and
WHEREAS, in order to effect the foregoing, Company and Executive wish to
enter into an employment agreement on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the remises and the mutual promises and
agreements contained herein, Executive and Company (hereinafter sometimes
collectively referred to as the "parties" or individually as a "Party,")
intending to be legally bound, hereby agree as follows:
SECTION 1. SCOPE OF EMPLOYMENT.
1.1 EMPLOYMENT. Subject to the terms of this Agreement, Company agrees to
the employment of Executive during the "Term" (as defined in Section 2.1), and
Executive accepts such employment. Executive shall hold the corporate office of
Chief Executive Officer (CEO) and President or such employment other executive
office as the Board of Directors from time to time may specify, and in
conjunction with any such office, shall perform the executive-level services
(collectively, "services") described in Company's Bylaws and as delegated to him
by the Board of Directors from time to time. Executive shall devote
substantially all of Executive's business time, energy and skill to performing
his obligations hereunder and shall perform his obligations hereunder
diligently, faithfully and to the best of Executive's abilities.
1.2 COMPLIANCE WITH POLICIES. Subject to the terms of this Agreement,
during the Term Executive shall comply in all material respects with all
policies and procedures applicable to executives of Company generally and to
Executive specifically.
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SECTION 2. TERM; TERMINATION.
2.1 TERM. The initial term of Executive's employment under this Agreement
(the "Initial Term") shall be a three (3)-year period commencing on the
Effective date. After the Initial Term, Executive's employment under this
Agreement shall automatically renew for successive additional one (1)-year
("Renewal Terms") terms (the Initial Term and any Renewal Terms being
collectively referred to as the "Term"). The Term shall be subject to
termination in accordance with Section 2.2.
2.2 TERMINATION.
(A) DEATH. The Term shall automatically and immediately terminate
upon the death of Executive.
(B) DISABILITY. The Term may be terminated by either Party upon
written notice to the other in the event Executive becomes "Disabled" (as
hereinafter defined). For purposes of this Agreement, "Disabled" shall be
defined as either: (a) the reasonable, good faith determination by a majority of
the members of the Board of Directors of Company that due to a mental or
physical impairment or disability, Executive has been incapable or unable, even
with reasonable accommodations, to fully perform the material duties performed
by Executive for Company immediately prior to such disability for a period of at
least one hundred twenty (120) days in the aggregate (although not necessarily
consecutively) within any consecutive three hundred sixty-five (365)-day period;
or (b) a determination that Executive is disabled pursuant to the terms of any
long-term disability insurance policy, if any, which Company or Executive has
purchased and which covers Executive.
(C) CAUSE. In addition to any other rights or remedies available to
company at law, in equity or pursuant to this Agreement, the Company may, in its
sole discretion, terminate the Term for "Cause" (as hereinafter defined)
effective immediately upon delivery of written notice to Executive. For purposes
of this Agreement, "Cause" shall mean any one or more of the following:
(i) the imposition by any governmental authority of any material
restriction or limitation on Executive's ability to perform his services
hereunder;
(ii) Executive's conviction of or pleading no contest to a crime
that constitutes a felony under applicable law;
(iii) Executive's breach or default in the performance of any
provision of this Agreement which Executive has not cured or corrected to
Company's reasonable satisfaction within thirty (30) days after receiving
written notice of such breach or default (provided that any breach by Executive
of any obligation under Section 5 shall be grounds for immediate termination for
"Cause" without any notice or right to cure or correct); or
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(iv) the determination by a majority of the Board of Directors
(excluding Executive's vote, if he is then a member of the Board of Directors)
that: (A) Executive has materially failed to perform his duties and to render
services on behalf of Company in an effective or professional manner (after 30
days of being provided with clear written notice of such deficiencies); (B)
executive has engaged in willful misconduct or fraudulent or unethical conduct;
or (C) Executive's conduct is materially detrimental to the reputation,
character or standing of Company.
(D) DISCRETIONARY TERMINATION. Either Company or Executive may terminate
the Term effective as of the end of the Initial Term or the then-current Renewal
Term by providing the other with written notice of termination at least sixty
(60) days prior to the end of the Initial Term or then current Renewal Term, as
the case may be.
(E) CHANGE OF CONTROL. In the event a "Change of Control" (as defined
below) occurs and within sixty (60) days following the Change of Control,
Company materially breaches this Agreement (i.e. Executive is removed as the
CEO/President and/or a material change in his duties and responsibilities as the
CEO/President as the result of the Change in Control), Executive shall have the
right, upon serving written notice to Company, to terminate the Term if Company
does not cure the breach within thirty (30) days after being provided with
written notice of the breach by Executive, with the Effective Date of such
termination to be thirty (30) days after the termination of the thirty (30)-day
cure period. For purposes of this Agreement, Change of Control shall be defined
as any Aperson@ (as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, but excluding any Company employee stock
ownership plan) becoming the beneficial owner, directly or indirectly, of
securities of the Company representing forty percent (40%) or more of the
combined voting power of the Company=s then outstanding securities, or the Board
of Directors ceasing to consist of a majority of Continuing Directors, and (ii)
AContinuing Director@ means a member of the Board of Directors who either (i)
was a member of the Board of Directors as of the Date of Grant or (ii) was
nominated or appointed (before initial election as a director) to serve as a
director by a majority of the then Continuing Directors.
SECTION 3. CASH COMPENSATION; EXPENSE.
3.1 BASE SALARY. Executive shall be paid a base salary (the "Base Salary")
during the Term at an initial rate of $170,000 per twelve (12)-month period. The
Base Salary shall be (a) payable in equal installments on the schedule that
Company may implement from time to time for general payroll purposes, and (b)
subject to any withholdings and deductions required by applicable law. Employee
shall be eligible to receive an annual discretionary cash bonus in an amount up
to 50% of his base salary. This Section in no way shall obligate the Board of
Directors or the Company to approve and issue any such bonuses. Further, the
Executive will be compensated for his travel and apartment expenses associated
with his travel and lodging in Houston, Texas for the first 60 days of this
Agreement.
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3.2 STOCK OPTIONS. See Schedule "A". Upon a Change of Control as defined
in Section 2.2 (e) above and a diminution of, and a material change to, his
duties and responsibilities as CEO/President, all stock options previously
granted to the Executive under the incentive plans that have not vested shall
vest. Executive shall have one year after the Change of Control occurs to
exercise said additional vested options.
3.3 BENEFITS. During the Term, Executive shall be entitled to participate
in the employee benefit plans as provided for and in accordance with the
Company's standard personnel policies, practices and rules, as maintained by the
Company from time to time, including but not limited to health insurance, sick
days, vacation, pension programs, stock option programs, 401K programs, life
insurance, disability insurance, etc. Nothing herein shall obligate the Company
to maintain any or all of the aforesaid benefits. In addition, and in accordance
with their terms, Executive may be entitled to participate in any plans or
agreements maintained by the Company relating to retirement, health and other
benefits. Company shall have the right to purchase in Executive's name a "key
man" life insurance policy naming Company as sole beneficiary under the policy.
Company shall be the sole owner of such policy. Executive agrees to reasonably
cooperate with the Company in obtaining such insurance, including making an
application therefor and submitting to any required medical examination in
connection therewith.
3.4 VACATION. Executive shall be entitled to three (3) paid weeks of
vacation per year during the Term, to be accrued and taken in accordance with a
policy that is consistent with Company's normal vacation policy applicable to
senior executive employees.
4. INTENTIONALLY OMITTED.
5. NON-DISCLOSURE, NON-COMPETITION AND NON-SOLICITATION COVENANTS.
5.1 DEFINITIONS. For purposes of this Section 5, the following terms shall
have the following respective meanings:
(a) "COMPETITIVE POSITION" shall mean (i) the direct or indirect
equity ownership (excluding ownership of less than one percent (1%) of the
equity of an entity whose equity is listed on a major U.S. exchange or
traded on the NASDAQ over-the-counter market) or control of all or any
portion of a "Competitor" (as hereinafter defined), or (ii) any
employment, consulting, partnership, advisory, directorship, agency,
promotional or independent contractor arrangement between Executive and
any Competitor whereby Executive, regardless of Executive's particular
title, office or position, is required to perform services substantially
similar to any of those that he is to or does perform for Company.
(b) "COMPETITOR" shall refer to any person or entity engaged, wholly
or partly, in the business of providing management and business services
to, and/or acquiring, orthodontic or dental practices.
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(c) "CONFIDENTIAL INFORMATION" shall mean any and all proprietary
and confidential data or information of company or any of its affiliates,
other than "Trade Secrets" (as hereinafter defined), which is of tangible
or intangible value to Company or any of its affiliates and is not public
information or is not generally known or available to Company's
competitors but is known only to Company or its affiliates and their
employees, independent contractors or agents to whom it must be confided
in order to apply it to the uses intended.
(d) "Trade Secrets" shall mean information of company or any
Affiliated Practice (as defined in Section 5.5) (including, but not
limited to, confidential business information, technical or non-technical
data, formulas, patterns, compilations, programs, devices, methods,
techniques, drawings, processes, financial data, financial plans, product
plans, lists of actual or potential customers or suppliers, and the terms
of this Agreement and any associated agreements between the parties) that:
(a) derives economic value, actual or potential, from not being generally
known to, and not being readily ascertainable by proper means by, other
persons who can obtain economic value from its disclosure or use; and (b)
is the subject of efforts that are reasonable under the circumstances to
maintain its secrecy.
(e) "WORK PRODUCT" shall mean all work product, property, data,
documentation, know how", concepts, plans, inventions, improvements,
techniques, processes or information of any kind, prepared, conceived,
discovered, developed or created by Executive in connection with the
performance of the Service.
5.2 ACKNOWLEDGMENTS. Executive hereby acknowledges and agrees that
during the term of this Agreement (i) Executive will frequently be
exposed to Trade Secrets and Confidential Information of Company;
and (ii) any competitive activity on Executive's part during the
Term, or any competitive activity on Executive's part for a
reasonable period thereafter, would necessarily involve Executive's
use of Company's Trade Secrets and Confidential Information and
would unfairly threaten Company's legitimate business interests,
including its substantial investment in the proprietary aspects of
its business and its associated goodwill. Moreover, Executive
acknowledges that, in the event of the termination of the Term,
Executive would have sufficient skills to find the event of the
termination of the Term, Executive would have sufficient skills to
find alternative, commensurate work in his field of expertise that
would not involve a violation of any of the provisions of this
Section 5. Therefore, Executive acknowledges and agrees that it is
reasonable for Company to require Executive to abide by the
covenants set forth in this Section 5. The Parties acknowledge and
agree that if the nature of Executive's responsibilities for or on
behalf of Company or the geographical areas in which Executive must
fulfill such responsibilities materially change, the Parties will
execute appropriate amendments to the scope of the covenants in this
Section 5.
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5.3 NONDISCLOSURE; OWNERSHIP OF PROPRIETARY PROPERTY.
(a) In recognition of Company's need to protect its legitimate
business interests, Executive hereby covenants and agrees that: (A) with
regard to each item constituting a Trade Secret, at all times during which
such item shall constitute a Trade Secret (before or after the Term): and
(B) with regard to any Confidential Information, at all times during the
Term and for a period of three (3) years following the expiration or
termination of the Term for any reason, Executive shall regard and treat
each Trade Secret and all Confidential Information of Company as strictly
confidential and wholly owned by company and will not, for any reason, in
any fashion, either directly or indirectly, sell, lend, lease, distribute,
license, give, transfer, assign, show, disclose, disseminate, or otherwise
communicate any such Trade Secret or Confidential Information, in either
case, for any purpose other than in accordance with this Agreement or as
required by applicable law.
(b) Executive shall immediately notify company of any intended or
unintended, unauthorized disclosure or use of any Trade Secrets or
Confidential Information by Executive or any other person or entity of
which Executive becomes aware. Executive shall cooperate fully with
Company in the procurement of any protection of Company's rights to or in
any of the Trade Secrets or Confidential Information.
(c) Immediately upon expiration or termination of the Term for any
reason, or if notice of termination is required hereunder, upon receipt of
such notice, or at any time after such termination or notice upon the
specific request of Company, Executive shall return to Company all written
or descriptive materials of any kind in Executive's possession or to which
Executive has access that constitute or contain any Confidential
Information or Trade Secrets, and the confidentiality obligations
described in this Agreement shall continue their expiration under the
terms of this Agreement.
(d) To the greatest extent possible, any Work Product shall be
deemed to be "work made for hire" (as defined in the Copyright Act, 17
U.S.C.A. ss. 101 ET SEQ., as amended) and owned exclusively by Company.
Executive hereby unconditionally and irrevocably transfers and assigns to
Company all rights, title and interest Executive currently has or in the
future may have, by operation of law or otherwise, in or to any Work
Product, including, without limitation, all patents, copyrights,
trademarks, Trade Secrets, service marks and other intellectual property
rights. Executive agrees to execute and deliver to Company any transfers,
assignments, documents or other instruments which Company may deem
necessary or appropriate to vest complete title and ownership of any work
Product, and all rights therein, exclusively in Company.
5.4 NON-COMPETITION. In recognition of Company's need to protect its
legitimate business interests, Executive hereby covenants and agrees that during
the Term, Executive will not, either directly or indirectly, alone or in
conjunction with any other party, accept, enter into or take any action in
furtherance of a Competitive Position. Executive further agrees that for
twenty-four (24) months following expiration or termination of the Term for
cause and for six (6) months without cause, Executive will not, either directly
or indirectly, alone or in conjunction with any other party, accept, enter into
or take any action in furtherance of a Competitive Position. (other than action
to reject an offer of a Competitive Position or to notify Company of the offer
pursuant to the requirements of the next sentence of this Section 5.4).
Executive shall notify Company promptly in writing if Executive receives an
offer of a Competitive Position during or within twenty-four (24) months for
cause and six (6) months without cause following expiration or termination of
the Term, and such notice shall describe all salient terms of such offer.
5.5 NON-SOLICITATION OF CUSTOMERS. Executive hereby covenants and agrees
that (I) during the Term, Executive will not, either directly or indirectly,
alone or in conjunction with any other party, solicit, divert or appropriate or
attempt to solicit, divert or appropriate any orthodontic practice managed, or
actively sought to be managed, by Company (in either case, an "Affiliated
Practice") for the purpose of providing (or having a Competitor or any party
other than Company provide) such Managed Practice with management services
competitive with those offered by Company; and (ii) for a period of twenty-four
(24) months following expiration or termination of the Term for any reason,
Executive will not, either directly or indirectly, alone or in conjunction with
a Competitor or any other party, solicit, divert or appropriate, or attempt to
solicit, divert or appropriate any Managed practice with which Executive had
direct or indirect contact during the Term for the purpose of providing (or
having a Competitor or any other party other than the Company provide) such
Managed Practice with a request that Executive provide Managed Practice with any
management services; and (B) provision of such services, as requested, would
constitute a violation of Executive's covenants in this Section 5. Such notice
shall include all salient information associated with such customer's request,
including, without limitation, the identity of such Managed Practice, the exact
services or products requested and the party or parties on behalf of such
Managed Practice who contacted Executive.
5.6 NONSOLICITATION OF COMPANY PERSONNEL. Executive hereby agrees that
during the Term, except to the extent that he is required to do so in connection
with his responsibilities hereunder, Executive will not, either directly or
indirectly, alone or in conjunction with any other party, solicit or attempt to
solicit any employee, consultant, contractor or other personnel of Company to
terminate, alter or lessen such party's affiliation with Company or to violate
the terms of any agreement or understanding between such party and Company.
Executive further agrees that during the twenty-four (24) months period
following expiration or termination of the Term for any reason,
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Executive will not, either directly or indirectly, alone or in conjunction with
any other party, solicit or attempt to solicit any "key" (as that term is
hereinafter defined) employee, consultant, contractor or other personnel of
Company, alter or lessen that party's affiliation with Company or to violate the
terms of any agreement or understanding between such party and Company. For
purposes of the preceding sentence "key" employees, consultants, contractors or
other personnel of Company are those with knowledge of or access to Company's
Trade Secrets or Confidential Information.
5.7 REMEDIES. Executive agrees that damages at law for Executive's
violation of any of the covenants in this Section 5 would not be an adequate or
proper remedy and that, should Executive violate or threaten to violate any of
the provisions of such covenants, Company or its successors or assigns shall be
entitled to obtain a temporary or permanent injunction against Executive in any
court having jurisdiction prohibiting any further violation of any such
covenants, in addition to any award or damages (compensatory, exemplary or
otherwise) for such violation.
5.8 PARTIAL ENFORCEMENT. Company has attempted to limit the rights of
Executive to compete only to the extent necessary to protect Company from unfair
competition. Company, however, agrees that, if the scope of enforceability of
any of these restrictive covenants is in any way disputed at any time, a court
or other trier of fact may modify and enforce such covenant to the extent that
it believes to be reasonable under the circumstances existing at the time.
5.9 SURVIVAL. Notwithstanding any expiration or termination of the Term,
the provisions of this Section 5 shall survive and remain in full force and
effect, as shall any other provision hereof that, by its terms or reasonable
interpretation thereof, sets forth obligations that extend beyond the
termination of this Agreement.
SECTION 6. RIGHTS ON TERMINATION.
(a) If Executive voluntarily resigns his employment or is
terminated for cause, death or because Executive has become Disabled
Executive shall be entitled only to receive any salary and bonus amounts
that have accrued prior to the effective date of termination of the Term
(the "Termination Date").
(b) If company terminates the Term other than in accordance
with an express right under Section 2 of this Agreement or Executive
elects to terminate the Term in accordance with Section 2.2(e), as
Executive's exclusive remedy with respect to any such termination,
Executive shall be entitled to: (a) all salary and bonus amounts accrued
through the Termination Date, and (b) payment, for a period of the longer
of (i) twelve months from the Termination Date or (ii) fifty percent (50%)
of the then remaining period of time in the Initial Term or the then
current Renewal Term, as the case may be, of any amount equal to: (i)
executive's base salary as of the Termination Date (with such payments to
be made at such times as they would be made if Executive's employment
continued for an additional year) LESS (ii) any salary or other amounts
that
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Executive is paid by any other person during that period (and Executive
hereby agrees to take a reasonably diligent action to secure employment as
soon as practicable after any such termination from Company and to
otherwise mitigate his losses resulting from the loss of salary from
Company). Executive's rights to any of the compensation or benefits
identified in the preceding sentence shall be subject to Executive's
compliance in all respects of each of Executive's obligations under this
Agreement.
SECTION 7. MISCELLANEOUS.
7.1 BINDING EFFECT. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors,
representatives, heirs, and permitted assigns.
7.2 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
7.3 HEADINGS. The titles, captions and headings contained in this
Agreement are inserted by convenience of reference only and are not intended to
be a part of or to affect in any way the meaning or interpretation of this
Agreement.
7.4 NOTICES.
(a) All notices, consents, requests and other communications hereunder
shall be in writing and shall be sent by hand delivery, by certified or
registered mail (return-receipt requested), by facsimile or by a recognized
national overnight courier service as set forth below:
If to Company: APPLE ORTHODONTIX, INC.
2777 Allen Parkway
Suite 700
Houston, TX 77019
Fax No: 713-852-2554
With a copy to Jackson Walker, LLP
Att: Richard Roth
1100 Louisana, Suite 4200
Houston, TX 77002Attn: Richard Roth, Esq.
If to Executive: A. Stone Douglass
To be filled in by Stone.
(b) Notices delivered pursuant to this Section 7.4(a) hereof shall be
deemed given: at the time delivered, if personally delivered, three (3) business
days after being
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deposited in the mail, if mailed; one (1) business day after
being sent, if faxed; and one (1) business day after timely delivery to the
courier, if by overnight courier service.
(c) Either party hereto may change the address to which notice is to be
sent by written notice to the other party hereto in accordance with this Section
7.4.
7.5 SCHEDULES. All Schedules and Exhibits to this Agreement are hereby
incorporated herein by this reference.
7.6 COUNTERPARTS; FAX SIGNATURES. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute the same Agreement. Any signature page of any
such counterpart, or any electronic facsimile thereof, may be attached or
appended to any other counterpart to complete a fully executed counterpart of
this Agreement, and any telecopy or other facsimile transmission of any
signature shall be deemed an original and shall bind such party.
7.7 ENTIRE AGREEMENT. This Agreement is intended by the parties hereto to
be the final expression of their agreement with respect to the subject matter
hereof and is the complete and exclusive statement of the terms thereof,
notwithstanding any representations, statements or agreements to the contrary
heretofore made. This Agreement may be modified only by a written instrument
signed by each of the parties hereto.
7.8 SEVERABILITY. The unenforceability or invalidity of any provision of
this Agreement shall not affect the validity or enforceability of the remaining
provisions hereof, but such remaining provisions shall be construed and
interpreted in such a manner as to carry out fully the intent of the parties
hereto; PROVIDED, HOWEVER, that should any judicial body interpreting this
Agreement deem any provision hereof to be unreasonably broad in time, territory,
scope or otherwise, it is the intent and desire of the parties hereto that such
judicial body, to the greatest extent possible, reduce the breadth of such
provision to the maximum legally allowable parameters rather than deeming such
provision totally unenforceable or invalid.
7.9 WAIVER. No waiver, termination or discharge of this Agreement, or any
of the terms or provisions hereof, shall be binding upon either party hereto
unless confirmed in writing. No waiver by either party hereto of any terms
hereof shall be more strictly construed against one party by reason of the rule
of construction that an instrument is to be construed more strictly against the
party which itself or through its agents prepared the agreement, it being agreed
that all Parties and/or their agents have participated in the preparation of
this Agreement equally.
7.10 APPLICABLE LAW. Should any provision of this Agreement, including,
without limitation, any provision relating to compensation, be found to be in
violation of any applicable law, rule or regulation, the Parties agree to
execute an amendment to this
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Agreement to bring such provision into compliance with any such law, rule or
regulation, as the case may be.
IN WITNESS WHEREOF, the Parties have executed this Agreement to be
effective as of the date first above written.
"Company"
APPLE ORTHODONTIX, INC.
By: W. DAVID COOK
Name: W. DAVID COOK
Its: SENIOR VP
[SEAL]
"Executive"
A. STONE DOUGLASS
A. STONE DOUGLASS
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EXHIBIT 10.2
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement"), is made and entered
into and effective this 11th day of August, 1998 (the "Effective Date"),
by and between JAMES E. BOBBITT, the individual signing this Agreement below as
and referred to in this Agreement as "Executive," and APPLE ORTHODONTIX, INC., a
corporation organized under the laws of the State of Delaware (hereinafter
referred to as "Company").
W I T N E S S E T H:
WHEREAS, Company is engaged in the business (the "Business") of providing
management and business services to, and acquiring, orthodontic practices;
WHEREAS, the Board of Directors of Company (the "Board of Directors")
recognizes Executive's substantial skills and expertise in the Business and
desires to provide for the employment of Executive on the terms and conditions
herein provided;
WHEREAS, Executive is willing to serve Company on the terms and
conditions herein provided; and
WHEREAS, in order to effect the foregoing, Company and Executive wish to
enter into an employment agreement on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the remises and the mutual promises and
agreements contained herein, Executive and Company (hereinafter sometimes
collectively referred to as the "parties" or individually as a "Party,")
intending to be legally bound, hereby agree as follows:
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SECTION 1. SCOPE OF EMPLOYMENT.
1. EMPLOYMENT. Subject to the terms of this Agreement, Company agrees to
the employment of Executive during the "Term" (as defined in Section 2.1), and
Executive accepts such employment. Executive shall hold the corporate office of
Chief Financial Officer (CFO) or such employment other executive office as the
Board of Directors from time to time may specify, and in conjunction with any
such office, shall perform the executive-level services (collectively,
"services") described in Company's Bylaws and as delegated to him by the Board
of Directors from time to time. Executive shall devote substantially all of
Executive's business time, energy and skill to performing his obligations
hereunder and shall perform his obligations hereunder diligently, faithfully and
to the best of Executive's abilities.
1.2 COMPLIANCE WITH POLICIES. Subject to the terms of this Agreement,
during the Term Executive shall comply in all material respects with all
policies and procedures applicable to executives of Company generally and to
Executive specifically.
SECTION 2. TERM; TERMINATION.
2.1 TERM. The initial term of Executive's employment under this Agreement
(the "Initial Term") shall be a three (3)-year period commencing on the
Effective date. After the Initial Term, Executive's employment under this
Agreement shall automatically renew for successive additional one (1)-year
("Renewal Terms") terms (the Initial Term and any Renewal Terms being
collectively referred to as the "Term"). The Term shall be subject to
termination in accordance with Section 2.2.
2.2 TERMINATION.
(A) DEATH. The Term shall automatically and immediately terminate
upon the death of Executive.
(B) DISABILITY. The Term may be terminated by either Party upon
written notice to the other in the event Executive becomes "Disabled" (as
hereinafter defined). For purposes of this Agreement, "Disabled" shall be
defined as either: (a) the reasonable, good faith determination by a majority of
the members of the Board of Directors of Company that due to a mental or
physical impairment or disability, Executive has been incapable or unable, even
with reasonable accommodations, to fully perform the material duties performed
by Executive for Company immediately prior to such disability for a period of at
least one hundred twenty (120) days in the aggregate (although not necessarily
consecutively) within any consecutive three hundred sixty-five (365)-day period;
or (b) a determination that Executive is disabled pursuant to the terms of any
long-term disability insurance policy, if any, which Company or Executive has
purchased and which covers Executive.
(C) CAUSE. In addition to any other rights or remedies available to
company at law, in equity or pursuant to this Agreement, the Company may, in its
sole discretion, terminate the Term for "Cause" (as hereinafter defined)
effective immediately upon delivery of written notice to Executive. For purposes
of this Agreement, "Cause" shall mean any one or more of the following:
(i) the imposition by any governmental authority of any material
restriction or limitation on Executive's ability to perform his services
hereunder;
(ii) Executive's conviction of or pleading no contest to a crime
that constitutes a felony under applicable law;
(iii) Executive's breach or default in the performance of any
provision of this Agreement which Executive has not cured or corrected to
Company's reasonable satisfaction within thirty (30) days after receiving
written notice of such breach or default (provided that any breach by Executive
of any obligation under Section 5 shall be grounds for immediate termination for
"Cause" without any notice or right to cure or correct); or
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(iv) the termination by a majority of the Board of Directors
(excluding Executive's vote, if he is then a member of the Board of Directors)
that: (A) Executive has materially failed to perform his duties and to render
services on behalf of Company in an effective or professional manner (after 30
days ofbeing provided with clear written notice of such deficiencies); (B)
executive has engaged in willful misconduct or fraudulent or unethical conduct;
or (C) Executive's conduct is materially detrimental to the reputation,
character or standing of Company.
(D) DISCRETIONARY TERMINATION. Either Company or Executive may terminate
the Term effective as of the end of the Initial Term or the then-current Renewal
Term by providing the other with written notice of termination at least sixty
(60) days prior to the end of the Initial Term or then current Renewal Term, as
the case may be.
(E) CHANGE OF CONTROL. In the event a "Change of Control" (as defined
below) occurs and within sixty (60) days following the change of Control,
Company materially breaches this Agreement (i.e. Executive is removed as the CFO
and/or a material change in his duties and responsibilities as the CFO as the
result of the change in control), Executive shall have the right, upon serving
written notice to Company, to terminate the Term if Company does not cure the
breach within thirty (30) days after being provided with written notice of the
breach by Executive, with the Effective Date of such termination to be thirty
(30) days after the termination of the thirty (30)-day cure period.
Notwithstanding the foregoing, Executive shall not be entitled to terminate the
Term in accordance with the subsection (e) if Executive, as a director or
shareholder of company, approved or voted in favor of the Change of Control. For
purposes of this Agreement, "Change of Control" shall be defined as defined the
occurrence of any of the following events that occurs: (a) any Person becomes an
Acquiring Person; (b) at any time the then Continuing Directors cease to
constitute a majority of the members of the Board; (c) a merger of the Company
with or into, or a sale by the Company of its properties and assets
substantially as an entirety to, another Person occurs and, immediately after
that occurrence, any Person, other than an Exempt Person, together with all
Affiliates, shall be the Beneficial Owner of forty percent (40%) or more of the
total voting power of the then outstanding Voting Shares of the Person surviving
that transaction (in the case or a merger or consolidation) or the Person
acquiring those properties and assets substantially as an entirety.
(F) RELOCATION OF CORPORATE OFFICE. Executive shall have the right to
terminate this Agreement if the Company relocates the Corporate Office outside
the Houston Metro Area and requires the Executive to move also. The Executive
shall have the same benefits and rights that accrued to him in Section 2.2 (e)
above.
SECTION 3. CASH COMPENSATION; EXPENSE.
3.1 BASE SALARY. Executive shall be paid a base salary (the
"Base Salary") during the Term at an initial rate of $140,000 per twelve
(12)-month period. The Base Salary shall be (a) payable in equal
installments on the schedule that Company may implement from time to time
for general payroll purposes, and (b) subject to any withholdings and
deductions required by applicable law. Employee shall be eligible to
receive an annual cash bonus in an amount up to 50% of his base salary.
His percentage of base salary shall be consistent, depending on his
performance, duties and responsibilities, as to what the other executive
officers received during that same year or time frame. This paragraph in
no way shall obligate the Board of Directors or the Company to approve and
issue any such bonuses.
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3.2 BENEFITS. During the Term, Executive shall be entitled to participate
in the employee benefit plans as provided for and in accordance with the
Company's standard personnel policies, practices and rules, as maintained by the
Company from time to time, including but not limited to health insurance, sick
days, vacation, pension programs, stock option programs, 401K programs, life
insurance, disability insurance, etc. Nothing herein shall obligate the Company
to maintain any or all of the aforesaid benefits. In addition, and in accordance
with their terms, Executive may be entitled to participate in any plans or
agreements maintained by the Company relating to retirement, health and other
benefits. Company shall have the right to purchase in Executive's name a "key
man" life insurance policy naming Company as sole beneficiary under the policy.
Company shall be the sole owner of such policy. Executive agrees to reasonably
cooperate with the Company in obtaining such insurance, including making an
application therefor and submitting to any required medical examination in
connection therewith.
4.2 VACATION. Executive shall be entitled to three (3) paid weeks of
vacation per year during the Term, to be accrued and taken in accordance with a
policy that is consistent with Company's normal vacation policy applicable to
senior executive employees.
5. NON-DISCLOSURE, NON-COMPETITION AND NON-SOLICITATION COVENANTS.
5.1 DEFINITIONS. For purposes of this Section 5, the following terms shall
have the following respective meanings:
(a) "COMPETITIVE POSITION" shall mean (I) the direct or indirect
equity ownership (excluding ownership of less than one percent (1%) of the
equity of an entity whose equity is listed on a major U.S. exchange or
traded on the NASDAQ over-the-counter market) or control of all or any
portion of a "Competitor" (as hereinafter defined), or (ii) any
employment, consulting, partnership, advisory, directorship, agency,
promotional or independent contractor arrangement between Executive and
any Competitor whereby Executive, regardless of Executive's particular
title, office or position, is required to perform services substantially
similar to any of those that he is to or does perform for Company.
(b) "COMPETITOR" shall refer to any person or entity engaged, wholly
or partly, in the business of providing management and business services
to, and/or acquiring, orthodontic or dental practices.
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(c) "CONFIDENTIAL INFORMATION" shall mean any and all proprietary
and confidential data or information of company or any of its affiliates,
other than "Trade Secrets" (as hereinafter defined), which is of tangible
or intangible value to Company or any of its affiliates and is not public
information or is not generally known or available to Company's
competitors but is known only to Company or its affiliates and their
employees, independent contractors or agents to whom it must be confided
in order to apply it to the uses intended.
(d) "Trade Secrets" shall mean information of company or any
Affiliated Practice (as defined in Section 5.5) (including, but not
limited to, confidential business information, technical or non-technical
data, formulas, patterns, compilations, programs, devices, methods,
techniques, drawings, processes, financial data, financial plans, product
plans, lists of actual or potential customers or suppliers, and the terms
of this Agreement and any associated agreements between the parties) that:
(a) derives economic value, actual or potential, from not being generally
known to, and not being readily ascertainable by proper means by, other
persons who can obtain economic value from its disclosure or use; and (b)
is the subject of efforts that are reasonable under the circumstances to
maintain its secrecy.
(e) "WORK PRODUCT" shall mean all work product, property, data,
documentation, know how", concepts, plans, inventions, improvements,
techniques, processes or information of any kind, prepared, conceived,
discovered, developed or created by Executive in connection with the
performance of the Service.
5.2 ACKNOWLEDGMENTS. Executive hereby acknowledges and agrees that during
the term of this Agreement (I) Executive will frequently be exposed to Trade
Secrets and Confidential Information of Company; and (ii) any competitive
activity on Executive's part during the Term, or any competitive activity on
Executive's part for a reasonable period thereafter, would necessarily involve
Executive's use of Company's Trade Secrets and Confidential Information and
would unfairly threaten Company's legitimate business interests, including its
substantial investment in the proprietary aspects of its business and its
associated goodwill. Moreover, Executive acknowledges that, in the event of the
termination of the Term, Executive would have sufficient skills to find the
event of the termination of the Term, Executive would have sufficient skills to
find alternative, commensurate work in his field of expertise that would not
involve a violation of any of the provisions of this Section 5. Therefore,
Executive acknowledges and agrees that it is reasonable for Company to require
Executive to abide by the covenants set forth in this Section 5. The Parties
acknowledge and agree that if the nature of Executive's responsibilities for or
on behalf of Company or the geographical areas in which Executive must fulfill
such responsibilities materially change, the Parties will execute appropriate
amendments to the scope of the covenants in this Section 5.
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5.3 NONDISCLOSURE; OWNERSHIP OF PROPRIETARY PROPERTY.
(a) In recognition of Company's need to protect its legitimate
business interests, Executive hereby covenants and agrees that: (A) with
regard to each item constituting a Trade Secret, at all times during which
such item shall constitute a Trade Secret (before or after the Term): and
(B) with regard to any Confidential Information, at all times during the
Term and for a period of three (3) years following the expiration or
termination of the Term for any reason, Executive shall regard and treat
each Trade Secret and all Confidential Information of Company as strictly
confidential and wholly owned by company and will not, for any reason, in
any fashion, either directly or indirectly, sell, lend, lease, distribute,
license, give, transfer, assign, show, disclose, disseminate, or otherwise
communicate any such Trade Secret or Confidential Information, in either
case, for any purpose other than in accordance with this Agreement or as
required by applicable law.
(b) Executive shall immediately notify company of any intended or
unintended, unauthorized disclosure or use of any Trade Secrets or
Confidential Information by Executive or any other person or entity of
which Executive becomes aware. Executive shall cooperate fully with
Company in the procurement of any protection of Company's rights to or in
any of the Trade Secrets or Confidential Information.
(c) Immediately upon expiration or termination of the Term for any
reason, or if notice of termination is required hereunder, upon receipt of
such notice, or at any time after such termination or notice upon the
specific request of Company, Executive shall return to Company all written
or descriptive materials of any kind in Executive's possession or to which
Executive has access that constitute or contain any Confidential
Information or Trade Secrets, and the confidentiality obligations
described in this Agreement shall continue their expiration under the
terms of this Agreement.
(d) To the greatest extent possible, any Work Product shall be
deemed to be "work made for hire" (as defined in the Copyright Act, 17
U.S.C.A. ss. 101 ET SEQ., as amended) and owned exclusively by Company.
Executive hereby unconditionally and irrevocably transfers and assigns to
Company all rights, title and interest Executive currently has or in the
future may have, by operation of law or otherwise, in or to any Work
Product, including, without limitation, all patents, copyrights,
trademarks, Trade Secrets, service marks and other intellectual property
rights. Executive agrees to execute and deliver to Company any transfers,
assignments, documents or other instruments which Company may deem
necessary or appropriate to vest complete title and ownership of any work
Product, and all rights therein, exclusively in Company.
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5.4 NON-COMPETITION. In recognition of Company's need to protect its
legitimate business interests, Executive hereby covenants and agrees that during
the Term, Executive will not, either directly or indirectly, alone or in
conjunction with any other party, accept, enter into or take any action in
furtherance of a Competitive Position. Executive further agrees that for
twenty-four (24) months following expiration or termination of the Term for
cause and for six (6) months without cause, Executive will not, either directly
or indirectly, alone or in conjunction with any other party, accept, enter into
or take any action in furtherance of a Competitive Position. (other than action
to reject an offer of a Competitive Position or to notify Company of the offer
pursuant to the requirements of the next sentence of this Section 5.4).
Executive shall notify Company promptly in writing if Executive receives an
offer of a Competitive Position during or within twenty-four (24) months for
cause and six (6) months without cause following expiration or termination of
the Term, and such notice shall describe all salient terms of such offer.
5.5 NON-SOLICITATION OF CUSTOMERS. Executive hereby covenants and agrees
that (I) during the Term, Executive will not, either directly or indirectly,
alone or in conjunction with any other party, solicit, divert or appropriate or
attempt to solicit, divert or appropriate any orthodontic practice managed, or
actively sought to be managed, by Company (in either case, an "Affiliated
Practice") for the purpose of providing (or having a Competitor or any party
other than Company provide) such Managed Practice with management services
competitive with those offered by Company; and (ii) for a period of twenty-four
(24) months following expiration or termination of the Term for any reason,
Executive will not, either directly or indirectly, alone or in conjunction with
a Competitor or any other party, solicit, divert or appropriate, or attempt to
solicit, divert or appropriate any Managed practice with which Executive had
direct or indirect contact during the Term for the purpose of providing (or
having a Competitor or any other party other than the Company provide) such
Managed Practice with a request that Executive provide Managed Practice with any
management services; and (B) provision of such services, as requested, would
constitute a violation of Executive's covenants in this Section 5. Such notice
shall include all salient information associated with such customer's request,
including, without limitation, the identity of such Managed Practice, the exact
services or products requested and the party or parties on behalf of such
Managed Practice who contacted Executive.
5.6 NONSOLICITATION OF COMPANY PERSONNEL. Executive hereby agrees that
during the Term, except to the extent that he is required to do so in connection
with his responsibilities hereunder, Executive will not, either directly or
indirectly, alone or in conjunction with any other party, solicit or attempt to
solicit any employee, consultant, contractor or other personnel of Company to
terminate, alter or lessen such party's affiliation with Company or to violate
the terms of any agreement or understanding between such party and Company.
Executive further agrees that during the twenty-four (24) months period
following expiration or termination of the Term for any reason,
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Executive will not, either directly or indirectly, alone or in conjunction with
any other party, solicit or attempt to solicit any "key" (as that term is
hereinafter defined) employee, consultant, contractor or other personnel of
Company, alter or lessen that party's affiliation with Company or to violate the
terms of any agreement or understanding between such party and Company. For
purposes of the preceding sentence "key" employees, consultants, contractors or
other personnel of Company are those with knowledge of or access to Company's
Trade Secrets or Confidential Information.
5.7 REMEDIES. Executive agrees that damages at law for Executive's
violation of any of the covenants in this Section 5 would not be an adequate or
proper remedy and that, should Executive violate or threaten to violate any of
the provisions of such covenants, Company or its successors or assigns shall be
entitled to obtain a temporary or permanent injunction against Executive in any
court having jurisdiction prohibiting any further violation of any such
covenants, in addition to any award or damages (compensatory, exemplary or
otherwise) for such violation.
5.8 PARTIAL ENFORCEMENT. Company has attempted to limit the rights of
Executive to compete only to the extent necessary to protect Company from unfair
competition. Company, however, agrees that, if the scope of enforceability of
any of these restrictive covenants is in any way disputed at any time, a court
or other trier of fact may modify and enforce such covenant to the extent that
it believes to be reasonable under the circumstances existing at the time.
5.9 SURVIVAL. Notwithstanding any expiration or termination of the Term,
the provisions of this Section 5 shall survive and remain in full force and
effect, as shall any other provision hereof that, by its terms or reasonable
interpretation thereof, sets forth obligations that extend beyond the
termination of this Agreement.
SECTION 6. RIGHTS ON TERMINATION.
(a) If Executive voluntarily resigns his employment or is
terminated for cause, death or because Executive has become Disabled
Executive shall be entitled only to receive any salary and bonus amounts
that have accrued prior to the effective date of termination of the Term
(the "Termination Date").
(b) If company terminates the Term other than in accordance
with an express right under Section 2 of this Agreement or Executive
elects to terminate the Term in accordance with Section 2.2(e), as
Executive's exclusive remedy with respect to any such termination,
Executive shall be entitled to: (a) all salary and bonus amounts accrued
through the Termination Date, and (b) payment, for a period of the longer
of (i) twelve months from the Termination Date or (ii) fifty percent (50%)
of the then remaining period of time in the Initial Term or the then
current Renewal Term, as the case may be, of any amount equal to: (i)
executive's base salary as of the Termination Date (with such payments to
be made at such times as they would be made if Executive's employment
continued for an additional year) LESS (ii) any salary or other amounts
that
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Executive is paid by any other person during that period (and Executive
hereby agrees to take a reasonably diligent action to secure employment as
soon as practicable after any such termination from Company and to
otherwise mitigate his losses resulting from the loss of salary from
Company). Executive's rights to any of the compensation or benefits
identified in the preceding sentence shall be subject to Executive's
compliance in all respects of each of Executive's obligations under this
Agreement.
SECTION 7. MISCELLANEOUS.
7.1 BINDING EFFECT. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors,
representatives, heirs, and permitted assigns.
7.2 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
7.3 HEADINGS. The titles, captions and headings contained in this
Agreement are inserted by convenience of reference only and are not intended to
be a part of or to affect in any way the meaning or interpretation of this
Agreement.
7.4 NOTICES.
(a) All notices, consents, requests and other communications hereunder
shall be in writing and shall be sent by hand delivery, by certified or
registered mail (return-receipt requested), by facsimile or by a recognized
national overnight courier service as set forth below:
If to Company: APPLE ORTHODONTIX, INC.
2777 Allen Parkway
Suite 700
Houston, TX 77019
Fax No: 713-852-2554
With a copy to Jackson Walker, LLP
1100 Louisana, Suite 4200
Houston, TX 77002Attn: Richard Roth, Esq.
If to Executive: James E. Bobbitt
2225 A Potomac
Houston, TX 77057
(b) Notices delivered pursuant to this Section 7.4(a) hereof shall be
deemed given: at the time delivered, if personally delivered, three (3) business
days after being
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deposited in the mail, if mailed; one (1) business day after being sent, if
faxed; and one (1) business day after timely delivery to the courier, if by
overnight courier service.
(c) Either party hereto may change the address to which notice is to be
sent by written notice to the other party hereto in accordance with this Section
7.4.
7.5 SCHEDULES. All Schedules and Exhibits to this Agreement are hereby
incorporated herein by this reference.
7.6 COUNTERPARTS; FAX SIGNATURES. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute the same Agreement. Any signature page of any
such counterpart, or any electronic facsimile thereof, may be attached or
appended to any other counterpart to complete a fully executed counterpart of
this Agreement, and any telecopy or other facsimile transmission of any
signature shall be deemed an original and shall bind such party.
7.7 ENTIRE AGREEMENT. This Agreement is intended by the parties hereto to
be the final expression of their agreement with respect to the subject matter
hereof and is the complete and exclusive statement of the terms thereof,
notwithstanding any representations, statements or agreements to the contrary
heretofore made. This Agreement may be modified only by a written instrument
signed by each of the parties hereto.
7.8 SEVERABILITY. The unenforceability or invalidity of any provision of
this Agreement shall not affect the validity or enforceability of the remaining
provisions hereof, but such remaining provisions shall be construed and
interpreted in such a manner as to carry out fully the intent of the parties
hereto; PROVIDED, HOWEVER, that should any judicial body interpreting this
Agreement deem any provision hereof to be unreasonably broad in time, territory,
scope or otherwise, it is the intent and desire of the parties hereto that such
judicial body, to the greatest extent possible, reduce the breadth of such
provision to the maximum legally allowable parameters rather than deeming such
provision totally unenforceable or invalid.
7.9 WAIVER. No waiver, termination or discharge of this Agreement, or any
of the terms or provisions hereof, shall be binding upon either party hereto
unless confirmed in writing. No waiver by either party hereto of any terms
hereof shall be more strictly construed against one party by reason of the rule
of construction that an instrument is to be construed more strictly against the
party which itself or through its agents prepared the agreement, it being agreed
that all Parties and/or their agents have participated in the preparation of
this Agreement equally.
7.10 APPLICABLE LAW. Should any provision of this Agreement, including,
without limitation, any provision relating to compensation, be found to be in
violation of any applicable law, rule or regulation, the Parties agree to
execute an amendment to this Agreement to bring such provision into compliance
with any such law, rule or regulation, as the case may be.
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IN WITNESS WHEREOF, the Parties have executed this Agreement to be
effective as of the date first above written.
"Company"
APPLE ORTHODONTIX, INC.
By: W. DAVID COOK
Name: W. David Cook
Its: Senior VP
[SEAL]
"Executive"
JAMES E. BOBBITT
JAMES E. BOBBITT
12
EXHIBIT 10.3
AGREEMENT REGARDING
TERMINATION OF EMPLOYMENT
WHEREAS, Michael W. Harlan ("Harlan") and Apple Orthodontix, Inc.
("Apple") have heretofore entered into an agreement dated December 9, 1996,
pursuant to which Apple employed Harlan (the employment agreement being
hereafter referred to as the "Employment Agreement"); and
WHEREAS, Apple and Harlan have jointly determined to terminate Harlan's
employment effective as of August 11, 1998; and
WHEREAS, Harlan and Apple have agreed to certain commitments and
understandings regarding amounts owed to Harlan and desire to evidence such
understandings pursuant to this agreement;
NOW, THEREFORE, Harlan and Apple agree as follows:
1. Apple and Harlan agree to jointly terminate Harlan's employment
effective August 11, 1998.
2. In lieu of the benefits which otherwise would be payable by Apple to
Harlan pursuant to the Employment Agreement, Harlan agrees to accept and Apple
agrees to pay to Harlan a cash bonus of $175,000 for his efforts during the
management realignment implemented by Apple in May of 1998.
3. Apple, its officers and directors agree not to make disparaging or
negative comments concerning Harlan's job, character or performance. Apple
agrees that any violation of the covenant described in this paragraph 3 shall
obligate Apple to pay Harlan liquidated damages in the amount of $25,000 unless
Apple, promptly after written notice is received from Harlan that Harlan
believes a violation of this paragraph 3 has occurred, retracts such comment or
otherwise takes steps to correct such violation. Nothing in this paragraph 3
shall be construed or interpreted to obligate Apple, its officers or directors,
to refuse or fail to answer fully and truthfully in any legal proceedings
involving Harlan.
4. Harlan agrees not to make disparaging or negative comments concerning
Apple or its officer's character or performance. Harlan agrees that any
violation of the covenant described in this paragraph 4 shall obligate Harlan to
pay Apple liquidated damages in the amount of $25,000 unless Harlan promptly
after written notice is received from Apple that a violation of this paragraph 4
has occurred, retracts such comment or otherwise take steps to correct such
violation. Nothing in this paragraph 4 shall be construed or interpreted to
obligate Harlan to refuse or fail to answer fully and truthfully in any legal
proceedings involving Apple or its officers or its directors.
5. Should any payments made by Apple to Harlan pursuant to this agreement
or resulting from or in connection with his prior employment with Apple, singly,
in any combination or in the aggregate, to or for the benefit of Harlan be
determined or alleged to be subject to an excise or similar purpose tax pursuant
to Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"),
or any successor or other comparable federal, state or local tax law by reason
of being a "parachute payment" (within the meaning of Section 280G of the
Code), Apple shall pay to Harlan such additional compensation as is necessary
(after taking into account all federal, state and local taxes payable by Harlan
as a result of the receipt of such additional compensation) to place Harlan in
the same after-tax position (including federal, state and local taxes) he would
have been in had no such excise or similar purpose tax (or interest or penalties
thereon) been paid or incurred. Apple hereby agrees to pay such additional
compensation within the earlier to occur of (i) five (5) business days after
Harlan notifies Apple that Harlan intends to file a tax return taking the
position that such excise or sumilar purpose tax is due and payable in reliance
on a written opinion of Harlan's tax counsel (such tax counsel to be chosen
solely by Harlan) that it is more likely than not that such excise tax is due
and payable or (ii) twenty-four (24) hours of any notice of or action by Apple
that it intends to take the position that such excise tax is due and payable.
The costs of obtaining the tax counsel opinion referred to in clause (i) of the
preceding sentence shall be borne by Apple and Apple shall not be responsible
for the costs of more than one tax counsel pursuant to this paragraph 5. If
Harlan intends to make any payment with respect to any such excise or similar
purpose tax as a result of an adjustment to Harlan's tax liability by any
federal, state or local tax authority, Apple will pay such additional
compensation by delivering its cashier's check payable in such amount to Harlan
within five (5) business days after Harlan notifies Apple in writing of his
intention to make such payment. Without limiting the obligation of
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Apple hereunder, Harlan agrees, in the event Harlan makes any payment pursuant
to the proceding sentence, to negotiate with Apple in good faith with respect to
procedures reasonably requested by Apple which would afford Apple the ability to
contest the imposition of such excise or similar purpose tax; provided, however,
that Harlan will not be required to afford Apple any right to contest the
applicability of any excise or similar purpose tax unless it was determined that
Apple had a good faith basis to contest same, after consulting with its tax
counsel and providing Harlan a written opinion of such tax counsel of its basis
to contest same.
6. If at any time during the term hereof or afterwards: (i) there should
exist a dispute or conflict between Harlan and Apple or another person or entity
as to the validity, interpretation or appliation of any term or condition
hereof, or as to Harlan's entitlement to any benefit intended to be bestowed
hereby, which is not resolved to the satisfaction of Harlan, (ii) Harlan must
(a) defend the validity of this agreement, (b) contest any determination by
Apple concerning the amounts payable (or reimbursable) by Apple to Harlan, or
(c) determine in any tax year of Harlan the tax consequences to Harlan of any
amounts payable (or reimbursable) under paragraph 4, or (iii) Harlan must
prepare responses to an Internal Revenue Service ("IRS") audit of, or
otherwise defend, his personal income tax return for any year the subject of any
such audit, or an adverse determination, administrative proceedings or civil
litigation arising therefrom that is occasioned by or related to an audit by the
IRS of Apple's income tax returns, then Apple hereby agrees:
(a) On written demand of Apple by Harlan, to provide sums sufficient to
advance and pay on a current basis (either by paying directly or by
reimbursing Harlan) not less than thirty (30) days after a written
request therefor is submitted by Harlan, Harlan's out of pocket costs
and expenses (including attorney's fees, expenses of investigation,
travel, lodging, copying, delivery services and disbursements for the
fees and expenses of experts, etc.) incurred by Harlan in connection
with any such matter;
(b) Harlan shall be entitled, upon application to any court of competent
jurisdiction, to the entry of a mandatory injunction without the
necessity of posting any bond with respect thereto which compels Apple
to pay or advance such costs and expenses on a current basis; and
(c) Apple's obligations under this Paragraph 5 will not be affected if
Harlan is not the prevailing party in the final resolution of any such
matter except if Apple is the prevailing party Harlan shall be
responsible for his own legal fee.
7. Apple agrees to pay all reasonable legal and other fees, costs and
expenses incurred by Harlan in connection with the termination of his employment
with Apple including fees, costs and expenses incurred by Harlan in connection
with and the negotiation and implementation of this agreement and certain other
agreements, limited to $5,000 in the aggregate for all related agreements.
8. Time is of the essence of this ageement. Overdue payments (whether in
cash or in kind) under this agreement shall accrue interest at a rate of 10% per
annum through the date of full and complete payment. Any failure by Apple to pay
any amounts due under this agreement that continues for more than 10 business
days after receipt of written notice from Harlan shall constitute a material
breach by Apple of this agreement and all then remaining payable pursuant to
paragraph 2 of this agreement shall thereupon be accelerated and shall be
immediately due and payable.
9. Harlan shall be indemnified by Apple with respect to his prior
employment with Apple to the maximum extent permitted by the laws of Delaware,
the state of Apple's incorporation, and the laws of the state of incorporation
of any subsidiary of Apple of which Harlan is or at any time was a director,
officer, employee or consultant as same may be in effect from time to time.
10. Harlan waives and releases all rights, claims, charges, demands and
causes of action against Apple, its predecessors, successors, parent companies,
subsidiaries and affiliates, and its officers, directors, employees, owners,
shareholders and agents of any kind or character, both past and present, known
or unknown, including but not limited to these arising under the Age
Discrimination in Employment Act of 1967. Title VII of the Civil Rights Act of
1964, and the Employee Retirement Income Security Act of 1974, all as amended,
and any other state or federal statute, regulation or the common law (contract,
tort or other),
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which relate to Harlan's employment with Apple prior to August 11, 1998 or
termination of such employment, including but not limited to any alleged
discriminatory or retaliatory employment practices, any matter relating to or
arising under the Employment Agreement or any other matter. Apple understands
and agrees that the foregoing waiver and release shall not serve to waive or
release any rights or claims that may arise after the date this agreement is
executed whether relating to this agreement or otherwise. Apple waives and
releases all rights, claims, charges, demands and causes of action against
Harlan of any kind or character, both past and present, known or unknown,
arising under any state or federal stature, regulation or the common law
(contract, tort or other), which relate to Harlan's employment or termination of
such employment any matter relating to or arising under the Employment Agreement
or any other matter. Harlan understands that the foregoing waiver and release
shall not serve to waive or release any rights or claims that may arise after
the date this agreement is executed whether relating to this agreement or
otherwise.
11. This agreement is entered into under and shall be governed for all
purposes by the laws of the State of Texas.
12. No failure by either party hereto at any time to give notice of any
breach by the other party of, or to require compliance with, any condition or
provision of this agreement shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same time or at any prior or subsequent time.
13. If a court of competent jurisdiction determines that any provision of
this agreement is invalid or unenforceable, then the invalidity or
unenforceability of that provision shall not affect the validity or
enforceability of any other provision of this agreement, and all other
provisions shall remain in full force and effect.
14. This agreement and the rights and obligations of the parties hereunder
are personal, and neither this agreement nor any right, benefit, or obligation
of either party hereto shall be subject to voluntary or involuntary assignment,
alienation, or transfer, whether by operation of law or otherwise, without the
prior written consent of the other party.
15. This agreement represents the entire agreement between the parties
hereto with respect to the matters covered herein and may not be changed,
altered, or modified in any respect except by an instrument in writing signed by
both the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
executed this 11th day of August, 1998.
APPLE ORTHODONTIX, INC.
By: JOHN G. VONDRAK
John G. Vondrak, Chairman of the
Board and Chief Executive Officer
MICHAEL W. HARLAN
Michael W. Harlan
3
EXHIBIT 10.4
AGREEMENT REGARDING
TERMINATION OF EMPLOYMENT
AND SEVERANCE BENEFITS
WHEREAS, H. Steven Walton ("Walton") and Apple Orthodontix, Inc.
("Apple") have heretofore entered into an agreement dated March 1, 1997
pursuant to which Apple employed Walton and thereafter amended such employment
agreement in certain respects (the amended employment agreement being hereafter
referred to as the "Employment Agreement"); and
WHEREAS, Apple has terminated Walton's employment effective as of May 4,
1998; and
WHEREAS, Walton and Apple have agreed to certain commitments and
understandings regarding the severance benefits which he is owed as a result of
Apple's termination of his employment and desire to evidence such understandings
pursuant to this agreement.
NOW, THEREFORE, Walton and Apple agree as follows:
1. Apple agrees that Walton's termination of employment by Apple is without
Cause (as such term is defined in the Employment Agreement) for all
purposes of the Employment Agreement.
2. In lieu of the benefits which otherwise would be payable by Apple to
Walton pursuant to Section 5(E)(i) of the Employment Agreement, Walton
agrees to accept and Apple agrees to pay to Walton a total cash
severance benefit payment in the amount of $1,600,000.00 payable in
twelve installments with the first such installment being paid to Mr.
Walton upon execution of this agreement and the remaining eleven
installments being paid on the first day of each calendar month during
the period of June 1, 1998 through April 30, 1999. In addition and if
there occurs at any time prior to May 1, 2000 a "Change of Control" of
Apple within the meaning of paragraph 6 of this agreement, Apple will
pay to Walton in a single cash payment the sum of $300,000.00 within 30
days of such Change of Control.
3. In full and complete satisfaction of its obligations in connection with
the stock options described in Section 4.C.(iv)(b) of the Employment
Agreement, Apple agrees to transfer to Walton, as against Apple's
obligation to honor the exercise of such options, (i) 76,850 shares of
its common stock, of which 38,425 shares shall be issued immediately
upon execution of this agreement and 38,425 shares shall be issued upon
May 22, 1998 and (ii) a cash payment of $250,000 on the date of
execution hereof.
4. Apple agrees not to make incorrect, disparaging or negative comments
concerning Walton. Apple agrees that any violation of the covenant
described in this paragraph 4 shall (i) cause all cash amounts described
in paragraph 2 above of this agreement to become immediately due and
payable to Walton in full and (ii) obligate Apple to pay Walton
liquidated damages in the amount of $600,000 unless (i) Apple, promptly
after written notice is received from Walton that Walton believes a
violation of this paragraph 4 has occurred, retracts such comment or
otherwise takes steps to correct such violation and (ii) Walton
determines in his reasonable discretion which determination shall not be
unreasonably withheld and confirms such determination in writing that
the corrective action taken by Apple has adequately eliminated the
injury or harm caused Walton by such violation.
5. Walton agrees not to make incorrect, disparaging or negative comments
concerning Apple or its officers and further agrees that, promptly after
written notice is received from Apple that a violation of this paragraph
5 has occurred, to retract such comment or otherwise take steps to
correct such violation. Nothing in this paragraph 5 shall be construed
or interpreted to obligate Walton to refuse or to fail to answer fully
and truthfully questions in any legal proceedings involving Apple, or
its officers or its directors.
6. Upon the occurrence of a "Change of Control" of Apple, all payments
then remaining payable pursuant to paragraph 2 above of this agreement
shall become immediately due and payable. For purposes of this paragraph
6, "Change of Control" means the occurrence of any of the following
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events: (a) any Person become an Acquiring Person; (b) at any time the
then Continuing Directors cease to constitute a majority of the members
of the Board; (c) a merger of Apple with or into, or a sale by Apple of
its properties and assets substantially as an entirety to, another
Person occurs and, immediately after that occurrence, any Person, other
than an Exempt Person, together with all Affiliates and Associates of
such Person, shall be the Beneficial Owner of twenty-five percent (25%)
or more of the total voting power of the then outstanding Voting Shares
of the Person surviving that transaction (in the case or a merger or
consolidation) or the Person acquiring those properties and assets
substantially as an entirety. For purposes of the preceding definition
of "Change of Control", the following terms shall have the following
meanings:
(i) "Acquiring Person" means any Person who or which, together with all
Affiliates and Associates of such Person, is or are the Beneficial
Owner of twenty-five percent (25%) or more of the shares of Common
Stock then outstanding, but does not include any Exempt Person;
provided, however, that a Person shall not be or become an Acquiring
Person if such Person, together with its Affiliates and Associates,
shall become the Beneficial Owner of twenty-five percent (25%) or more
of the shares of Common Stock then outstanding solely as a result of a
reduction in the number of shares of Common Stock outstanding due to
the repurchase of Common Stock by Apple, unless and until such time as
such Person or any Affiliate or Associate of such Person shall purchase
or otherwise become the Beneficial Owner of additional shares of Common
Stock constituting one percent (1%) or more of the then outstanding
shares of Common Stock or any other Person (or Persons) who is (or
collectively are) the Beneficial Owner of shares of Common Stock
constituting one percent (1%) or more of the then outstanding shares of
Common Stock shall become an Affiliates or Associate of such Person,
unless, in either such case, such Person, together with all Affiliates
and Associates of such Person, is not then the Beneficial Owner of
twenty-five percent (25%) or more of the shares of Common Stock then
outstanding.
(ii) "Affiliate" has the meaning ascribed to that term in the Securities
Exchange Act of 1934 Rule 12b-2.
(iii) "Associate" means, with reference to any Person, (a) any
corporation, firm, partnership, association, unincorporated
organization or other entity (other than Apple or a subsidiary of
Apple) of which that Person is an officer or general partner (or
officer or general partner of a general partner) or is, directly or
indirectly, the Beneficial Owner of 10% or more of any class of its
equity securities, (b) any trust or other estate in which that Person
has a substantial beneficial interest or for or of which that Person
serves as trustee or in a similar fiduciary capacity, (c) any
relative or spouse of that Person, or any relative of that spouse,
who has the same home as that Person and (d) any stockholder, partner
or owner of any equity in such Person.
(iv) "Board" means the board of directors of Apple.
(v) "Common Stock" means the common stock of Apple.
(vi) "Continuing Director" means at any time any individual who then (a)
is a member of the Board and was a member of the Board as of May 4,
1998 or whose nomination for his first election, or that first
election, to the Board following that date was recommended or approved
by a majority of the then Continuing Directors (acting separately or
as a part of any action taken by the Board or any committee thereof)
and (b) is not an Acquiring Person, an Affiliate or Associate of an
Acquiring Person or a nominee or representative of an Acquiring Person
or of any such Affiliate or Associate.
(vii) "Exempt Person" means (a) (1) Apple, any subsidiary of Apple, any
employee benefit plan of Apple or of any subsidiary of Apple and (2)
any Person organized, appointed or established by Apple for or
pursuant to the terms of any such plan or for the purpose of funding
any such plan or funding other employee benefits for employees of
Apple or any subsidiary of Apple and (b) Walton, any Affiliate or
Associate of Walton or any group (as that term is used in the
Securities
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Exchange Act of 1934 Rule 13d-5(b) of which Walton or any Affiliate
or Associate of Walton is a member.
(viii) "Person" means any natural person, sole proprietorship,
corporation, partnership of any kind having a separate legal status,
limited liability company, business trust, unincorporated
organization or association, mutual company, joint stock company,
joint venture, estate, trust, union or employee organization or
governmental authority.
(ix) "Voting Shares" means: (a) in the case of any corporation, stock of
that corporation of the class or classes having general voting power
under ordinary circumstances to elect a majority of that corporation's
board of directors; and (b) in the case of any other entity, equity
interests of the class or classes having general voting power under
ordinary circumstances equivalent to the Voting Shares of a
corporation.
7. Should any payments made by Apple to Walton pursuant to this agreement
or resulting from or in connection with his prior employment with Apple, singly,
in any combination or in the aggregate, to or for the benefit of Walton be
determined or alleged to be subject to an excise or similar purpose tax pursuant
to Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"),
or any successor or other comparable federal, state or local tax law by reason
of being a "parachute payment" (within the meaning of Section 280G of the
Code), Apple shall pay to Walton such additional compensation as is necessary
(after taking into account all federal, state and local taxes payable by Walton
as a result of the receipt of such additional compensation) to place Walton in
the same after-tax position (including federal, state and local taxes) he would
have been in had no such excise or similar purpose tax (or interest or penalties
thereon) been paid or incurred. Apple hereby agrees to pay such additional
compensation within the earlier to occur of (i) five (5) business days after
Walton notifies Apple that Walton intends to file a tax return taking the
position that such excise or similar purpose tax is due and payable in reliance
on a written opinion of Walton's tax counsel (such tax counsel to be chosen
solely by Walton) that it is more likely than not that such excise tax is due
and payable or (ii) twenty-four (24) hours of any notice of or action by Apple
that it intends to take the position that such excise tax is due and payable.
The costs of obtaining the tax counsel opinion referred to in clause (i) of the
preceding sentence shall be borne by Apple, and as long as such tax counsel was
chosen by Walton in good faith, the conclusions reached in such opinion shall
not be challenged or disputed by Apple. If Walton intends to make any payment
with respect to any such excise or similar purpose tax as a result of an
adjustment to Walton's tax liability by any federal, state or local tax
authority, Apple will pay such additional compensation by delivering its
cashier's check payable in such amount to Walton within five (5) business days
after Walton notifies Apple of his intention to make such payment. Without
limiting the obligation of Apple hereunder, Walton agrees, in the event Walton
makes any payment pursuant to the preceding sentence, to negotiate with Apple in
good faith with respect to procedures reasonably requested by Apple which would
afford Apple the ability to contest the imposition of such excise or similar
purpose tax; provided, however, that Walton will not be required to afford Apple
any right to contest the applicability of any such excise or similar purpose tax
to the extent that Walton reasonably determines (based upon the opinion of his
tax counsel) that such contest is inconsistent with the overall tax interests of
Walton.
8. In entering this agreement Apple intends that Walton receive without
reduction or delay all the intended benefits of this agreement and that those
benefits, and the terms and conditions hereof, be construed in a manner most
favorable to Walton; Apple, therefore, agrees that it will strive expeditiously
and in good faith to construe and resolve in Walton's favor and to his benefit
any ambiguities or uncertainties that may be created by the express language
hereof. If, however, at any time during the term hereof or afterwards: (i) there
should exist a dispute or conflict between Walton and Apple or another person or
entity as to the validity, interpretation or application of any term or
condition hereof, or as to Walton's entitlement to any benefit intended to be
bestowed hereby, which is not resolved to the reasonable satisfaction of Walton,
(ii) Walton must (a) defend the validity of this agreement, (b) contest any
determination by Apple concerning the amounts payable (or reimbursable) by Apple
to Walton, or (c) determine in any tax year of Walton the tax consequences to
Walton of any amounts payable (or
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reimbursable) under paragraph 7, or (iii) Walton must prepare responses to an
Internal Revenue Service ("IRS") audit of, or otherwise defend, his personal
income tax return for any year the subject of any such audit, or an adverse
determination, administrative proceedings or civil litigation arising therefrom
that is occasioned by or related to an audit by the IRS of Apple's income tax
returns, then Apple hereby unconditionally agrees:
(a) On written demand of Apple by Walton, to provide sums sufficient to
advance and pay on a current basis (either by paying directly or by
reimbursing Walton) not less than thirty (30) days after a written
request therefor is submitted by Walton, Walton's out of pocket costs
and expenses (including attorney's fees, expenses of investigation,
travel, lodging, copying, delivery services and disbursements for the
fees and expenses of experts, etc.) incurred by Walton in connection
with any such matter.
(b) Walton shall be entitled, upon application to any court of competent
jurisdiction, to the entry of a mandatory injunction without the
necessity of posting any bond with respect thereto which compels Apple
to pay or advance such costs and expenses on a current basis; and
(c) Apple's obligations under this paragraph 8 will not be affected if
Walton is not the prevailing party in the final resolution of any such
matter.
9. Apple agrees to pay all legal and other fees, costs and expenses
incurred by Walton in connection with the termination of his employment with
Apple including fees, costs and expenses incurred by Walton in connection with
and the negotiation and implementation of this agreement and certain other
proposed but ultimately not consummated agreements.
10. Time is of the essence of this agreement. Overdue payments (whether in
cash or in kind) under this agreement shall accrue interest at a rate of 18% per
annum through the date of full and complete payment. Any failure by Apple to pay
any amounts due under this agreement that continues for more than 10 business
days shall constitute a material breach by Apple of this agreement and all then
remaining payable pursuant to paragraph 2 of this agreement shall thereupon be
accelerated and shall be immediately due and payable.
11. Walton shall be indemnified by Apple with respect to his prior
employment with Apple to the maximum extent permitted by the laws of Delaware,
the state of Apple's incorporation, and the laws of the state of incorporation
of any subsidiary of Apple of which Walton is or at any time was a director,
officer, employee or consultant as same may be in effect from time to time.
12. Walton waives and releases all rights, claims, charges, demands and
causes of action against Apple, its predecessors, successors, parent companies,
subsidiaries and affiliates, and its officers, directors, employees, owners,
shareholders and agents, of any kind or character, both past and present, known
or unknown, including but not limited to those arising under the Age
Discrimination in Employment Act of 1967, Title VII of the Civil Rights Act of
1964, and the Employee Retirement Income Security Act of 1974, all as amended,
and any other state or federal statute, regulation or the common law (contract,
tort or other), which relate to Walton's employment with Apple prior to May 4,
1998 or termination of such employment, including both not limited to any
alleged discriminatory or retaliatory employment practices, any matter relating
to or arising under the Employment Agreement or any other matter. Apple
understands and agrees that the foregoing waiver and release shall not serve to
waive or release any rights or claims that may arise after the date this
agreement is executed whether relating to this agreement or otherwise. Apple
waives and releases all rights, claims, charges, demands and causes of action
against Walton of any kind or character, both past and present, known or
unknown, arising under any state or federal statute, regulation or the common
law (contract, tort or other), which relate to Walton's employment Agreement or
any other matter. Walton understands that the foregoing waiver and release shall
not serve to waive or release any rights or claims that may arise after the date
this agreement is executed whether relating to this agreement or otherwise.
13. This agreement is entered into under and shall be governed for all
purposes by the laws of the State of Texas.
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14. No failure by either party hereto at any time to give notice of any
breach by the other party of, or to require compliance with, any condition or
provision of this agreement shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same time or at any prior or subsequent time.
15. If a court of competent jurisdiction determines that any provision of
this agreement is invalid or unenforceable, then the invalidity or
unenforceability of that provision shall not affect the validity; or
enforceability of any other provision of this agreement, and all other
provisions shall remain in full force and effect.
16. This agreement and the rights and obligations of the parties hereunder
are personal, and neither this agreement nor any right, benefit, or obligation
of either party hereto shall be subject to voluntary or involuntary assignment,
alienation, or transfer, whether by operation of law or otherwise, without the
prior written consent of the other party.
17. This agreement represents the entire agreement between the parties
hereto with respect to the matters covered herein and may not be changed,
altered, or modified in any respect except by an instrument in writing signed by
both the parties hereto.
18. Except as specifically set forth in this agreement, Apple agrees that
any and all rights and benefits otherwise accruing to or benefitting Walton
under the terms of the Employment Agreement continue to be in full force and
effect.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
executed this 6th day of May, 1998.
APPLE ORTHODONTIX, INC.
By: JOHN G. VONDRAK, CEO
JOHN G. VONDRAK, CEO
H. STEVE WALTON
H. STEVE WALTON
5
EXHIBIT 10.5
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("Agreement"), effective as of August 11, 1998
("Effective Date"), is by and between APPLE ORTHODONTIX, INC., a Delaware
corporation ("Apple"), and MICHAEL W. HARLAN, an individual who resides in
Harris County, Texas ("Harlan").
WITNESSETH:
WHEREAS, Harlan will be an employee of Apple until August 11, 1998 at which
time his employment with Apple will terminate; and
WHEREAS, Apple desires Harlan to hold himself available to perform and to
perform certain services;
NOW THEREFORE, the parties, in consideration of the mutual promises,
covenants and obligations contained herein, do hereby agree as follows:
1. During the term of this Agreement, Harlan shall serve as consultant to
the management of Apple and provide as requested Consulting Services (as defined
in this Agreement) in connection with financing matters, acquisitions of
orthodontic practices and certain other items. Harlan shall render his best
efforts and professional judgment in performance of these Consulting Services
consistent with good consulting practice, and the promotion, advancement and
successful conduct of the business of Apple. Harlan agrees to be available, upon
reasonable notice and at mutually agreeable times, for such meetings, as Apple
and Harlan deem necessary for proper conduct and communication of his
consultation. It is understood that Harlan may be rendering services to others
during the term of this Agreement and, in using the Consulting Services of
Harlan hereunder, Apple will exercise due regard for other commitments of
Harlan.
2. (a) In consideration for holding himself available to provide and
providing the Consulting Services to be rendered pursuant to this Agreement,
Apple agrees to pay Harlan the following consulting fees (the "Consulting
Fees"):
(i) For each proposed affiliation by Apple with practice that has existing
patient revenue and with respect to which Harlan provides Consulting
Services, Harlan will be paid an amount equal to the greater of (i) 5%
of the historical gross revenue of such practice in the year before it
was affiliated with Apple, and (ii) $25,000. In addition, for each
associate orthodontist other than the owner working in any such
practice. Harlan will receive an additional fee in respect of such
associate equal to $12,500.
(ii) For each proposed affiliation by Apple with a doctor who is developing
a new practice and with respect to which doctor, affiliation
transaction, or both, Harlan provides Consulting Services, Harlan will
receive a Consulting Fee equal to $25,000.
(iii) For each executed transaction by Apple involving the association by a
doctor with an Apple-affiliated practice or the purchase of an
Apple-affiliated practice by a transitioning doctor with respect to
which Harlan provides Consulting Services, Harlan will receive a
Consulting Fee equal to $25,000.
(iv) For each executed transaction by Apple involving the development and
opening of a satellite or new office by an Apple-affiliated doctor
with respect to which Harlan provides Consulting Services, Harlan will
receive a Consulting Fee equal to $25,000.
(v) For each execution, amendment, modification, adjustment, expansion or
change to any of Apple's existing or future credit facilities, loans,
or other evidences of debt, Harlan will receive a fee equal to the
greater of (i) 1% of the face amount of such debt, and (ii) $100,000.
(vi) For each sale of equity securities, excluding the issuance or grant of
stock options or warrants in the normal course of business consistent
with past practices to employees or orthodontist who affiliate with
Apple, of any kind of Apple, Harlan will receive a fee equal to the
greater of (i) 1% of the gross amount of such offering, and (ii)
$100,000.
(vii) For the filing of a Shelf Registration Statement (original or
amended) on Form S-1, S-2 or S-4 with the Securities and Exchange
Commission, Harlan will receive a fee equal to $200,000.
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(viii) An initial fee equal to $25,000 due on the effective date of this
Agreement.
(ix) In addition to the fees set forth in subparagraphs (i) through (viii)
above, Apple shall pay Harlan an additional Consulting Fee of $200 per
hour for each hour spent by Harlan providing Consulting Services to
Apple in excess of 20 hours per month.
(x) Harlan shall invoice Apple for Consulting Fees earned as a result of
Consulting Services performed pursuant to this Agreement on a monthly
basis and Apple shall tender payment of the Consulting Fees billed
within 10 business days of receipt of Harlan's invoice, net of any
amounts due to Apple by Harlan pursuant to paragraph 4 of this
Agreement.
The maximum aggregate amount of Consulting Fees to be paid to Harlan
pursuant to this Agreement shall be $601,000. Upon such aggregate amount of
Consulting Fees having been paid to Harlan (with, if any payment are past due,
interest as provided in this Agreement), Harlan shall have no further obligation
to providing Consulting Services to Apple and shall have no further right to
receive Consulting Fees from Apple, except as provided in subparagraph (b)
below.
(b) Notwithstanding anything to the contrary contained herein, Harlan, only
upon request by Apple, shall provide Consulting Services to Apple and its
managers and the members of its Board of Directors with respect to any proposed
transaction or series of transactions that would, if consummated, result in a
Change of Control (as defined in this Agreement). Such Consulting Services shall
be performed consistent with the other terms of this Agreement. In consideration
of such services, Apple will pay Harlan his hourly rate set forth in
subparagraph (a)(ix) above with respect to his work on such transaction or
series of transactions and $200,000 in cash upon closing of such transaction
which would result in such Change in Control, except in the case of a
transaction which is executed within 45 days of the Effective Date of this
Agreement. Harlan's hourly rate will be paid pursuant to the schedule for such
payments shown in subparagraph (a)(ix) above, and the $200,000 cash payment
shall be paid upon closing of such transaction which would result in any such
Change of Control.
(c) For purposes of his entitlement to the Consulting Fees described in
Paragraph (a) or (b) above, performance by Harlan of any of the following
activities shall constitute the performance of Consulting Services: having
contact with a doctor or his advisor in connection with a proposed or potential
transaction; preparing or reviewing a letter of intent, confidentiality
agreement or any other document in connection with a proposed or potential
transaction; preparing or reviewing a pro forma financial projection in
connection with a proposed or potential transaction; providing any written or
oral advice to any designated representative of Apple in connection with a
proposed or potential transaction; reviewing any documents in connection with a
proposed or potential transaction or performing in connection with a proposed or
potential transaction any services requested by any designated representatives
of Apple.
3. Apple agrees with respect to the options evidenced by the option
agreement attached hereto as Exhibit A that:
(a) Such options to the extent not fully exercisable at the Effective Date
shall become exercisable over time as if Harlan had remained an
employee of Apple.
(b) Such options to the extent that they would terminate for any reason
other than by passage of time shall terminate only by reason of the
10th anniversary of the date of grant of such options having been
reached.
4. During the term of this Agreement, Harlan may request and receive from
Apple draws against his Consulting Fees. The total amount of such draws shall
not exceed $200,000 at any time during the term of this Agreement. Harlan will
request such draws in writing, delivered to the address for notices shown in
Paragraph 17 below. Apple will have 10 business days following the receipt of
such notice to deliver to Harlan such draws in good funds to such accounts as
Harlan may specify in his draw request. Any draws requested and received by
Harlan will bear interest at LIBOR, plus 2%. Harlan agrees to repay Apple all
draws requested and received pursuant to this paragraph 4, including accrued and
unpaid interest at the rate specified above. The Consulting Fees shall be
debited against such draws requested and received thereby reducing the amount of
such draws and accrued interest that Harlan may be required to return to Apple.
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Harlan's obligation to repay any portion of draws and accrued interest shall be
the personal liability of Harlan and secured by amounts due to Harlan from Apple
pursuant to this Agreement.
5. Upon the occurrence of a "Change of Control" of Apple, Apple or its
successor shall pay Harlan an amount equal to the difference between $601,000
and all amounts previously paid, including any outstanding draws and accrued
interest, to Harlan pursuant to this Agreement and this Agreement shall
terminate. For purposes of this Paragraph 5, "Change of Control" means the
occurrence of any of the following events: (a) any Person becomes an Acquiring
Person; (b) at any time the then Continuing Directors cease to constitute a
majority of the members of the Board; (c) a merger of Apple with or into, or a
sale by Apple of its properties and assets substantially as an entirety to,
another Person occurs and, immediately after that occurrence, any Person, other
than an Exempt Person, together with all Affiliates and Associates of such
Person, shall be the Beneficial Owner of twenty-five percent (25%) or more of
the total voting power of the then outstanding Voting Shares of the Person
surviving that transaction (in the case of a merger or consolidation) or the
Person acquiring those properties and assets substantially as an entirety. For
purposes of the preceding definition of "Change of Control", the following
terms shall have the following meanings.
(i) "Acquiring Person" means any Person who or which, together with all
Affiliates and Associates of such Person, is or are the Beneficial
Owner of twenty-five percent (25%) or more of the shares of Common
Stock then outstanding, but does not include any Exempt Person,
provided, however, that a Person shall not be or become an Acquiring
Person if such Person, together with its Affiliates and Associates,
shall become the Beneficial Owner of twenty-five percent (25%) or more
of the shares of Common Stock then outstanding solely as a result of a
reduction in the number of shares of Common Stock outstanding due to
the repurchase of Common stock by Apple, unless and until such time as
such Person or any Affiliate or Associate of such Person shall purchase
or otherwise become the Beneficial Owner of additional shares of Common
Stock constituting one percent (1%) or more of the then outstanding
shares of Common Stock or any other Person (or Persons) who is (or
collectively are) the Beneficial Owner of shares of Common Stock
constituting one percent (1%) or more of the then outstanding shares of
Common Stock shall become an Affiliate or Associate of such Person,
unless, in either such case, such Person, together with all Affiliates
and Associates of such Person, is not then the Beneficial Owner of
twenty-five percent (25%) or more of the shares of Common Stock then
outstanding.
(ii) "Affiliate" has the meaning ascribed to that term in the Securities
Exchange Act of 1934 Rule 12b-2.
(iii) "Associate" means, with reference to any Person, (a) any
corporation, firm, partnership, association, unincorporated
organization or other entity (other than Apple or a subsidiary of
Apple) of which that Person is an officer or general partner (or
officer or general partner of a general partner) or is, directly or
indirectly, the Beneficial Owner of 10% or more of any class of its
equity securities, (b) any trust or other estate in which that Person
has a substantial beneficial interest or for or of which the Person
serves as trustee or in a similar fiduciary capacity, (c) any
relative or spouse of that Person, or any relative of that spouse,
who has the same home as that Person and (d) any stockholder, partner
or owner of any equity in such Person.
(iv) "Board" means the board of directors of Apple.
(v) "Continuing Director" means at any time any individual who then (a)
is a member of the Board and was a member of the Board as of the
Effective Date or whose nomination for his first election, or that
first election, to the Board following that date was recommended or
approved by a majority of the then Continuing Directors (acting
separately or as a part of any action taken by the Board or any
committee thereof) and (b) is not an Acquiring Person, an Affiliate or
Associate of an Acquiring Person or a nominee or representative of an
Acquiring Person or of any such Affiliate or Associate.
(vi) "Exempt Person" means (a)(1) Apple, any subsidiary of Apple, any
employee benefit plan of Apple or of any subsidiary of Apple and (2)
any Person organized, appointed or established by
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Apple for or pursuant to the terms of any such plan or for the purpose
of funding any such plan or funding other employee benefits for
employees of Apple or any subsidiary of Apple and (b) Harlan, any
Affiliate or Associate of Harlan or any group (as that term is used in
the Securities Exchange Act of 1934 Rule 13d-5(b)) of which Harlan or
any Affiliate or Associate of Harlan is a member.
(vii) "Person" means any natural person, sole proprietorship,
corporation, partnership of any kind having a separate legal status,
limited liability company, business trust, unincorporated
organization or association, mutual company, joint stock company,
joint venture, estate, trust, union or employee organization or
governmental authority.
(viii) "Voting Shares" means: (a) in the case of any corporation, stock
of that corporation of the class or classes having general voting
power under ordinary circumstances to elect a majority of that
corporation's board of directors; and (b) in the case of any other
entity, equity interests of the class or classes having general
voting power under ordinary circumstances equivalent to the Voting
Shares of a corporation.
6. Unless sooner terminated pursuant to other provisions hereof, Apple
agrees to retain the services of Harlan pursuant to this Agreement, and Harlan
agrees to provide such services to this Agreement until both parties agree in
writing to terminate this Agreement. Notwithstanding the provisions of the
preceding sentence, Apple shall have the right to terminate this Agreement and
Harlan's services hereunder at any time for only the following reasons:
(a) Upon Harlan's death:
(b) Upon Harlan's becoming incapacitated by accident, sickness, or other
circumstances which render him mentally or physically incapable of
performing the services required of him hereunder for a period of at
least 120 consecutive days; or
(c) For cause, which for purposes of this Agreement shall mean only
Harlan's final conviction of a felony crime that involved moral
turpitude arising out of action taken by Harlan with an intention to
injure materially (and which does injure materially) Apple.
(d) Upon the payment to Harlan of $601,000 pursuant to paragraph 2(a) of
this Agreement.
If Apple desires to terminate Harlan's services hereunder at any time prior to
the termination of this Agreement as provided above, it shall do so by giving
written notice to Harlan that it has elected to terminate Harlan's services
hereunder and stating the effective date and reason for such termination;
provided that no such action shall alter or amend any other provisions hereof or
rights arising hereunder. In the event that Harlan's services are terminated
hereunder prior to the expiration of the term of this Agreement, no further
compensation shall be payable hereunder except that in the event of a
termination of this Agreement pursuant to Paragraph 6(a) or (b) an amount equal
to the difference between $601,000 and the amount theretofore paid to Harlan
pursuant to this Agreement shall be made to Harlan (or his estate in the event
of his death) in a single lump sum payment within 30 days of the event described
in Paragraph 6(a) or (b) as applicable, after deducting any outstanding draws
and accrued interest.
7. (a) All reasonable out-of-pocket expenses incurred by Harlan in the
performance of his services hereunder and properly accounted for shall be borne
by Apple. If not paid directly by Apple, Apple shall reimburse Harlan for the
cost of such expenses in accordance with customary Apple practice. Harlan shall
seek and obtain approval from Apple for any out-of-pocket expense which exceeds
$500.
(b) During the term of this Agreement, Apple will make available to Harlan
medical and dental insurance which is comparable to the insurance provided to
Apple executives. Harlan will pay Apple 100% of the cost of such insurance,
limited to $5,000 per year within 10 business days of receipt of an invoice for
same.
8. Apple agrees that it will offer Harlan the opportunity to perform
Consulting Services pursuant to this Agreement with respect to:
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(a) Each practice affiliation opportunity granted by any source prior to
or during the term of this Agreement that Apple pursues during the
course of this Agreement.
(b) Each new practice development opportunity to be presented to a
resident, recent graduate or other doctor seeking to develop a new
practice by Apple;
(c) Each associate or transition opportunity with respect to any practice
considered by Apple;
(d) Each satellite or new office development opportunity with respect to
any practice considered by Apple;
(e) Each transaction for the issuance, amendment, modification,
adjustment, expansion or change to any of Apple's existing or future
credit facilities, loans, or other evidences of debt;
(f) Each offering of equity securities of any kind;
(g) Each filing of a Shelf Registration Statement (original or amended);
and
(h) Each proposed transaction or series of transactions that would, if
consummated, result in a Change of Control (as defined in this
Agreement)
Apple further agrees that Harlan shall be entitled to a Consulting Fee in
respect of each such opportunity once Harlan has performed any Consulting
Service in connection with a proposed or potential transaction, regardless of
the amount of Consulting Services performed by Harlan so long as Apple
ultimately consummates the transaction. Apple agrees and covenants that it will
use its best efforts to provide Harlan transaction opportunities for each month
during the term of this Agreement that will generate for Harlan a minimum
Consulting Fee of $150,000.00 per quarter pursuant to subparagraphs 2(a)(i)-(x)
of this Agreement, and further agrees that should it fail, for any reason, to
provide Harlan the opportunity to provide Consulting Services on each
transaction that comes within the scope of any subparagraphs (a) through (g) of
this Paragraph 8 in any two consecutive months, then Apple shall immediately be
in default of this Agreement and shall immediately pay Harlan an amount equal to
the difference between $601,000 and all amounts previously paid, including any
outstanding draws and accrued interest, to Harlan pursuant to this Agreement.
9. Apple, its officers and directors agree not to make disparaging or
negative comments concerning Harlan's job performance or character. Apple agrees
that any violation of the covenant described in this paragraph 9 shall cause
Apple to pay Harlan an amount equal to the difference between $601,000 and all
amounts previously paid, including outstanding draws and accrued interest, to
Harlan pursuant to this Agreement unless Apple promptly after written notice is
received from Harlan that Harlan believes a violation of this paragraph 9 has
occurred, retracts such comment or otherwise takes steps to correct such
violation.
10. Should any payments made by Apple to or for the benefit of Harlan
pursuant to this Agreement or resulting from or in connection with his prior
employment with Apple, singly, in any combination or in the aggregate, be
determined or alleged to be subject to an excise or similar purpose tax pursuant
to Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"),
or any successor or other comparable federal, state or local tax law by reason
of being a "parachute payment" (within the meaning of Section 280G of the
Code), Apple shall pay to Harlan such additional compensation as is necessary
(after taking into account all federal, state and local taxes payable by Harlan
as a result of the receipt of such additional compensation) to place Harlan in
the same after-tax position (including federal, state and local taxes) he would
have been in had no such excise or similar purpose tax (or interest or penalties
thereon) been paid or incurred. Apple hereby agrees to pay such additional
compensation within the earlier to occur of (i) five (5) business days after
Harlan notifies Apple that Harlan intends to file a tax return taking the
position that such excise or similar purpose tax is due and payable in reliance
on a written opinion of Harlan's tax counsel (such tax counsel to be chosen
solely by Harlan) that it is more likely than not that such excise tax is due
and payable or (ii) twenty-four (24) hours of any notice of or action by Apple
that it intends to take the position that such excise tax is due and payable.
The reasonable costs of obtaining the tax counsel opinion referred to in clause
(i) of the preceding sentence shall be borne by Apple and Apple shall
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not be responsible for the cost of more than one tax counsel pursuant to this
paragraph 10. If Harlan intends to make any payment with respect to any such
excise or similar purpose tax as a result of an adjustment to Harlan's tax
liability by any federal, state or local tax authority, Apple will pay such
additional compensation by delivering its cashier's check payable in such amount
to Harlan within five (5) business days after Harlan notifies Apple of his
intention to make such payment. Without limiting the obligation of Apple
hereunder, Harlan agrees, in the event Harlan makes any payment pursuant to the
preceding sentence, to negotiate with Apple in good faith with respect to
procedures reasonably requested by Apple which would afford Apple the ability to
contest the imposition of such excise or similar purpose tax; provided, however,
that Harlan will not be required to afford Apple any right to contest the
applicability of any such excise or similar purpose tax unless it was determined
that Apple had a good faith basis to contest same, after consulting with its tax
counsel and providing Harlan a written opinion of such tax counsel of its basis
to contest same.
11. If at any time during the term hereof or afterwards: (i) there should
exist a dispute or conflict between Harlan and Apple or another person or entity
as to the validity, interpretation, or application of any term or condition
hereof, or as to Harlan's entitlement to any benefit intended to be bestowed
hereby, which is not resolved to the satisfaction of Harlan, (ii) Harlan must
(a) defend the validity of this Agreement, (b) contest any determination by
Apple concerning the amounts payable (or reimbursable) by Apple to Harlan, or
(c) determine in any tax year of Harlan the tax consequences to Harlan of any
amounts payable (or reimbursable) under Paragraph 10, or (iii) Harlan must
prepare responses to an Internal Revenue Service ("IRS") audit, of, or
otherwise defend, his personal income tax return for any year the subject of any
such audit, or an adverse determination, administrative proceedings or civil
litigation arising therefrom that is occasioned by or related to an audit by the
IRS of Apple's income tax returns, then Apple hereby unconditionally agrees:
(a) On written demand of Apple by Harlan, to provide sums sufficient to
advance and pay on a current basis (either by paying directly or by
reimbursing Harlan) not less than thirty (30) days after a written
request therefor is submitted by Harlan, Harlan's reasonable out of
pocket costs and expenses (including attorney's fees, expenses of
investigation, travel, lodging, copying, delivery services and
disbursements for the fees and expenses of experts, etc.) incurred by
Harlan in connection with any such matter.
(b) Harlan shall be entitled, upon application to any court of competent
jurisdiction, to the entry of a mandatory injunction without the
necessity of posting any bond with respect thereto which compels Apple
to pay or advance such costs and expenses on a current basis; and
(c) Apple's obligations under this Paragraph 11 will not be affected if
Harlan is not the prevailing party in the final resolution of any such
matter, except if Apple is the prevailing party Harlan shall be
responsible for his own legal fee.
12. Apple agrees to pay all legal and other fees, costs and expenses
incurred by Harlan in connection with the termination of his prior employment
with Apple and the negotiation and implementation of this Agreement, limited to
$5,000.
13. Harlan acknowledges that Apple's business is highly competitive and
that Apple's methods, strategies, books, records, and documents, Apple's
technical information concerning its products, equipment, services, and
processes, procurement procedures and pricing techniques, and the names of and
other information (such as credit and financial data) concerning Apple's
customers, business affiliates, affairs, and operations all comprise
confidential business information and/or trade secrets ("Confidential
Information") of Apple which are valuable, special, and unique assets of Apple
which Apple uses in its business to obtain a competitive advantage over its
competitors which do not know or use this information. Harlan further
acknowledges that protection of Apple's Confidential Information against
unauthorized disclosure and use is of critical importance to Apple in
maintaining its competitive position. Accordingly, Harlan hereby agrees that,
notwithstanding any other provisions of this Agreement other than those
contained in the following sentences, he will not at any time during the term of
this Agreement, and for one (1) year
6
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thereafter, make any unauthorized disclosure of any Confidential Information of
Apple or make any unauthorized use thereof. However, Harlan's obligations under
this paragraph shall not extend to:
(a) Information which is or becomes a part of the public domain or is
available to the public by publication or otherwise without disclosure
by Harlan;
(b) Information which was within Harlan's knowledge or in his possession
prior to his employment by Apple;
(c) Information which, either prior or subsequent to Apple's disclosure to
Harlan, was disclosed to Harlan, without an obligation of
confidentiality, by a third party who did not acquire such information,
directly or indirectly from Harlan, Apple, or from any third party who
is under an obligation of confidentiality; or
(d) Any disclosure of Confidential Information by Harlan which is required
by law, including deposition or trial testimony by Harlan pursuant to
subpoena. If Harlan is requested or required (by oral questions,
interrogatories, requests for information or documents, subpoena, civil
investigative demand, or similar process) to disclose any Confidential
Information, if reasonable possible under the circumstances as
determined in good faith by Harlan, Harlan will promptly notify Apple
of such request or requirements so that Apple may seek an appropriate
protective order or waive compliance with the provisions of this
Paragraph 13.
Money damages would not be sufficient remedy for any breach of this Paragraph
concerning Confidential Information by Harlan, and Apple shall be entitled to
seek specific performance and injunctive relief as remedies for such breach or
threatened breach, as well as reasonable and necessary attorneys' fees, experts'
fees, and costs incurred in connection with such breach or threatened breach.
Such remedies shall not be deemed exclusive remedies for such a breach by Harlan
but shall be in addition to all remedies available at law or in equity to Apple,
including the recovery of damages from Harlan. For purposes of this Paragraph,
Apple shall be construed to include any parent, subsidiary, or other affiliate
of Apple. This Paragraph 13 shall survive the termination of this Agreement for
a period of one year.
14. Harlan recognized that in each of the highly competitive businesses in which
Apple is engaged, personal contact is of primary importance in securing new
orthodontic practices and in retaining the accounts and goodwill of present
practices and protecting the business of Apple. Harlan, therefore, agrees that
during the term of this Agreement, Harlan will not: (i) accept employment or
render service to any person that is engaged in the orthodontic practice
management business or (ii) enter into or take part in or lend Harlan's name,
counsel or assistance to any business, either as proprietor, principal,
investor, partner, director, officer, employee, consultant, advisor, agent,
independent contractor, or in any other capacity whatsoever, for any purpose
that is engaged in the orthodontic practice management business. If the
provisions of this Paragraph 14 are violated in any material respect resulting
in material detriment to Apple, Apple shall be entitled, upon application to any
court of proper jurisdiction, to a temporary restraining order or preliminary
injunction (without the necessity of posting any bond with respect thereto) to
restrain and enjoin Harlan from that violation. If the provisions of this
Paragraph 14 should ever be deemed to exceed the time, geographic or
occupational limitations permitted by the applicable law, Harlan and Apple agree
that such provisions shall be and are hereby reformed to the maximum time,
geographic or occupational limitations permitted by the applicable law. This
Paragraph 14 shall survive the termination of this Agreement for a period of one
year.
15. Apple shall, without further remuneration to Harlan, own, be entitled to
possession of, and have the right to use, publish, and disclose any results,
reports, product or data developed by Harlan during the course of his services
hereunder, but identification of Harlan with such results, reports, or data
shall not be made without Harlan's express consent.
16. Harlan is engaged by Apple only for the purposes and to the extent set
forth in this Agreement, and his relationship to Apple hereunder is that of an
independent contractor. Nothing in this Agreement is intended to create an
employer/employee relationship between Apple or Harlan or to allow Apple to
exercise control or direction over the manner and method by which Harlan
performs the services which are the subject
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matter of this Agreement. Harlan shall be responsible for payment of all income,
self-employment, or other taxes attributable to all compensation paid hereunder
by Apple to Harlan, and Harlan agrees to hold Apple harmless for withholding or
payment of such taxes.
17. For purposes of this Agreement, notices and all other communications
provided for herein shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by United States, registered or
certified mail, return receipt requested, postage prepaid, if addressed as
follows:
If to Apple, to: Apple Orthodontix, Inc.
2777 Allen Parkway, Suite 700
Houston, Texas 77019
Attention: Chief Executive
If to Harlan, to: Mr. Michael W. Harlan
12111 Pinerock Lane
Houston, Texas 77024
or such other addresses as either party may furnish to the other in writing, in
accordance herewith, except that notices of changes of address shall be
effective only upon receipt.
18. Time is of the essence of this Agreement. Overdue payments under this
Agreement shall accrue interest at a rate of 10% per annum through the date of
full and complete payment. Any failure by Apple to pay any amounts due under
this Agreement that continues for more than 10 business days after written
notice (written notice includes the submission to Apple by Harlan of an invoice
for Consulting Services and reasonable out-of-pocket expenses) shall constitute
a material breach by Apple of the Agreement, and Apple shall be immediately pay
Harlan an amount equal to the difference between $601,000 and all amounts
previously paid to Harlan pursuant to this Agreement. Any draw requested
pursuant to Paragraph 4 of this Agreement, plus accrued interest thereon, shall
constitute a payment due under this Agreement.
19. Harlan shall be indemnified by Apple both with respect to his prior
employment with Apple and his engagement pursuant to this Agreement to the
maximum extent permitted by the laws of Delaware, the state of Apple's
incorporation, and the laws of the state of incorporation of any subsidiary of
Apple of which Harlan is or at any time was a director, officer, employee or
consultant as same may be in effect from time to time. This Paragraph 19 shall
survive the termination of this Agreement for a period of six years.
20. Harlan waives and releases all rights, claims, charges, demands and
causes of action against Apple, its predecessors, successors, parent companies,
subsidiaries and affiliates, and its officers, directors, employees, owners,
shareholders and agents, of any kind or character, both past and present, known
or unknown, including but not limited to those arising under the Age
Discrimination in Employment Act of 1967, Title VII of the Civil Rights Act of
1964, and the Employee Retirement Income Security Act of 1974, all as amended,
and any other state or federal statute, regulation or the common law (contract,
tort or other), which relate to Harlan's employment with Apple prior to August
, 1998 or termination of such employment, including but not limited to any
alleged discriminatory or retaliatory employment practices, any matter relating
to or arising under Harlan's Employment Agreement with Apple dated December 9,
1996 or any other matter. Apple understands and agrees that the foregoing waiver
and release shall not serve to waive or release any rights or claims that may
arise after the date this Agreement is executed whether relating to this
Agreement or otherwise. Apple waives and releases all rights, claims, charges,
demands and causes of Action against Harlan of any kind or character, both past
and present, known or unknown, arising under any state or federal statute,
regulation or the common law (contract, tort or other), which relate to Harlan's
employment or termination of such employment any matter relating to Harlan's
Employment Agreement with Apple dated December 9, 1997, or any other matter.
Harlan understands that the foregoing waiver and release shall not serve to
waive or release any rights or claims that may arise after the date this
Agreement is executed whether relating to this Agreement or otherwise.
21. This Agreement is entered into under and shall be governed for all
purposes by the laws of the State of Texas.
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22. No failure by either party hereto at any time to give notice of any
breach by the other party of, or to require compliance with, any condition or
provision of this Agreement shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same time at any prior or subsequent time.
23. If a court of competent jurisdiction determines that any provision of
this Agreement is invalid or unenforceable, than the invalidity or
unenforceability of that provision shall not affect the validity or
enforceability of any other provision of this Agreement, and all other
provisions shall remain in full force and effect.
24. This Agreement and the rights and obligations of the parties hereunder
are personal, and neither this Agreement nor any right, benefit, or obligation
of either party hereto shall be subject to voluntary or involuntary assignment,
alienation, or transfer, whether by operation of law or otherwise, without the
prior written consent of the other party.
25. This Agreement represents the entire agreement between the parties
hereto with respect to the matters covered herein and may not be changed,
altered, or modified in any respect except by an instrument in writing signed by
both the parties hereto. Except as specifically provided herein, this Agreement
replaces and supersedes any and all agreements (including but not limited to
that Employment Agreement dated December 9, 1997, as it was amended from time to
time) entered into or existing between Harlan and Apple prior to the Effective
Date.
IN WITNESS WHEREOF, the parties have executed this Agreement on the 11th
day of August, 1998, by their respective signatures below, effective as of the
Effective Date.
APPLE ORTHODONTIX, INC.
By: JOHN G. VONDRAK
John G. Vondrak, Chairman of
Board and Chief Executive Officer
MICHAEL W. HARLAN
Michael W. Harlan
9
EXHIBIT 10.6
PROMISSORY NOTE
$500,000.00 (U.S.) September 8, 1998
FOR VALUE RECEIVED, and intending to be legally bound, the undersigned
John G. Vondrak, a Texas resident having his home address at 2111 Welch, A 216,
Houston, TX 77019 (Referred to herein as "Maker"), promises to pay to the order
of APPLE ORTHODONTIX, INC., a Delaware corporation whose corporate headquarters
are located at 2777 Allen Parkway, Suite 700, Houston, Texas, or its assignee(s)
or transferee(s) ("Payee") in lawful money of the United States of America, on
such terms and at such times as are set forth herein, the principal sum of FIVE
HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000.00), or so much thereof as may be
outstanding hereunder prior to maturity, together with interest at the annual
rates specified below, on any and all principal amounts remaining unpaid
hereunder and from time to time outstanding from the date hereof until such
principal amounts are paid.
The unpaid principal amount of this Note shall bear interest from the date
hereof until paid at a rate per annum equal to the lesser of (i) eight and
one-half percent (8.50%) , or (ii) the Highest Lawful Rate (as hereinafter
defined).
Principal and interest shall be due and payable in full on September 9,
2000, unless the maturity of this Note is accelerated to an earlier date.
The Maker reserves the right to prepay this Note, in whole or in part, at
any time, without penalty or notice. All prepayments hereunder, whether
designated as payments of principal or interest, shall be applied first to
accrued and unpaid interest, if any, and then to principal.
If any of the following shall occur, then the holder of this Note may, at
its option, declare all of the indebtedness evidenced by this Note to be
forthwith due and payable and, in addition, exercise all rights and remedies
otherwise permitted under applicable law: any payment, whether of principal,
interest or other amounts, provided for hereunder shall not be paid when due,
and such default in payment shall continue for a period of fifteen days
following receipt by Maker of written notice from Payee of non-payment; or shall
admit their inability to pay his debts as they mature, or shall make an
assignment for the benefit of its creditors; or proceedings in bankruptcy, or
for reorganization of Maker, or for the readjustment of any of their debts under
the United States Bankruptcy Code, as amended, or any proceeding under any other
laws, whether state or federal, for the relief of debtors, now or hereafter
existing, shall be commenced against or by Maker; or a receiver or trustee shall
be appointed for Maker, or for any substantial part of their assets.
All signers and endorsers of this Note are to be regarded as principals as
to their respective joint and several liability to any holder hereof, and Maker
and each of the guarantors, sureties and endorsers hereof, to the fullest extent
permitted by applicable law, hereby expressly and severally waive grace, demand,
presentment for payment, notice of dishonor, notice of nonpayment, protest and
notice of protest, notice of intent to accelerate, notice of acceleration of the
indebtedness due hereunder, any other notice of any kind with respect to this
Note, and
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<PAGE>
diligence in collecting this Note or enforcing any security rights of any holder
hereof under any document securing this Note, and agree (i) that any holder of
this Note may, at any time, and from time to time, extend the date of maturity
of all or any part hereof or renew this Note, or accept partial payments
hereunder, or rearrange the indebtedness evidenced hereby, in each case without
notifying or obtaining the consent of Maker or any such other principal hereof,
each of whom shall remain fully obligated for the payment hereof; (ii) that it
will not be necessary for any holder hereof, in order to enforce payment of this
Note, first to institute or exhaust its remedies against Maker or any other
party liable therefor or to enforce its rights against any security for this
Note; and (iii) to any substitution, exchange or release of any security
hereafter given for this Note, or the release of any party primarily or
secondarily liable hereon, or any other circumstance which might otherwise
constitute a defense available to, or a discharge of, Maker or any guarantor,
surety or endorser with respect to its obligations in respect of this Note.
As of the date hereof, this Note is secured by a security interest in
250,000 shares of Class A or B Common Stock of Apple Orthodontix, Inc. pursuant
to a stock pledge agreement.
To the fullest extent permitted by applicable law, if this Note is
collected by suit or legal proceedings or through the probate court or
bankruptcy proceedings, Maker agrees to pay to the holder hereof the reasonable
costs and reasonable attorney's fees incurred in the collection hereof.
No modification or waiver of any of the provisions of this Note shall be
effective unless in writing, signed by the holder hereof, and only to the extent
set forth therein; and no waiver shall be effective except in the specific
instance for which given; and no failure by the holder of this Note to exercise,
and no delay in exercising, any right or remedy hereunder or under any other
document, instrument or agreement shall constitute a waiver thereof on the part
of any holder; nor shall any single or partial exercise of any right or remedy
hereunder or under any other document, instrument or agreement preclude any
other or further exercise thereof or the exercise of any other right or remedy.
It is the intention of the parties hereto to conform strictly to
applicable usury laws regarding the use, forbearance or detention of the
indebtedness evidenced by this Note whether such laws are now or hereafter in
effect, including the laws of the United States of America or any other
jurisdiction whose laws are applicable, and including any subsequent revisions
to or judicial interpretations of those laws, in each case to the extent they
are applicable to this Note (the "Applicable Usury Laws"). Accordingly, if any
acceleration of the maturity of this Note or any payment by Maker or any other
person or entity produces a rate in excess of the Highest Lawful Rate or results
in Maker or such other person or entity being deemed to have paid any interest
in excess of the Maximum Amount, as hereinafter defined, or if any holder hereof
shall for any reason receive any unearned interest in violation of any
Applicable Usury Laws, or if any transaction contemplated hereby would otherwise
be usurious under any Applicable Usury Laws, then, in that event,
notwithstanding any other provision of this Note or any other agreement or
instrument, it is agreed as follows: (i) the provisions of this paragraph shall
govern and control; (ii) the aggregate of all interest under Applicable Usury
Laws that is contracted for, taken, charged, collected, reserved or received
under this Note or otherwise shall under no circumstances exceed the Maximum
Amount, and any amount that would be excessive interest
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<PAGE>
shall be applied to the reduction of the principal amount owing in respect of
this Note and not to the payment of interest, or if such excessive amount
exceeds the principal amount owing in respect of this Note, any excess shall be
promptly refunded to the Maker or such other person or entity by the holder
hereof; (iii) neither Maker nor any other person or entity shall be obligated to
pay the amount of such interest to the extent that it is in excess of the
Maximum Amount; and (iv) the effective rate of interest on this Note shall be
ipso facto reduced to the Highest Lawful Rate, as hereinafter defined, and the
provisions of this Note immediately shall be deemed reformed, without the
necessity of the execution of any new document or instrument, so as to comply
with all Applicable Usury Laws. All sums paid, or agreed to be paid, to any
holder hereof for the use, forbearance or detention of the indebtedness of the
Maker evidenced by this Note shall, to the fullest extent permitted by the
Applicable Usury Laws, be amortized, pro rated, allocated and spread throughout
the full term of the indebtedness evidenced by this Note. As used herein, the
term "Maximum Amount" means the maximum nonusurious amount of interest which may
be lawfully contracted for, taken, charged, collected, reserved or received by
the holder hereof in connection with the indebtedness evidenced by this Note
under all Applicable Usury Laws, and the term "Highest Lawful Rate" means the
maximum rate of interest, if any, that may be contracted for, taken, charged,
collected, reserved or received under all Applicable Usury Laws on the principal
balance of this Note from time to time outstanding.
THIS NOTE SHALL BE SUBJECT TO AND CONSTRUED AND ENFORCED IN ACCORDANCE
WITH THE INTERNAL LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO ANY
CONFLICTS OF LAWS PRINCIPLES.
IN WITNESS WHEREOF, each of the undersigned has caused this Note to be
executed in Austin, Texas on the date first above appearing.
JOHN G. VONDRAK
John G. Vondrak, Individually
Page 3 of 3
EXHIBIT 10.7
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT, dated and effective as of September 9, 1998,
by and between John G. Vondrak., an individual residing in Houston, Texas (the
"Pledgor"), and Apple Orthodontix, Inc., a Delaware corporation (the "Pledgee"),
WITNESSETH:
WHEREAS, the Pledgor has executed and delivered to the Pledgee a secured
promissory note in the original principal amount of $500,000.00 (the "Note")
(all obligations of Pledgor to Pledgee, pursuant to the Note, referred to
collectively as the "Obligations");
As a further inducement to Pledgee to make the loan to the Pledgor evidenced by
the Note, the Pledgor has agreed to execute this Agreement and, pursuant hereto,
to pledge the Pledged Stock, as defined in this Agreement, as security for the
prompt satisfaction of all Obligations.
NOW, THEREFORE, in consideration of the foregoing, and intending to be legally
bound hereby, the parties agree as follows:
SECTION 1. The term "Pledged Stock" shall mean the shares described in
Appendix 1 hereto, together with all certificates, options, rights, or other
distributions issued as an addition to, in substitution or in exchange for, or
on account of, any such shares, and all proceeds of all of the foregoing, now or
here-after owned or acquired by the Pledgor.
SECTION 2. (a) As security for the prompt satisfaction of the Obligations,
the Pledgor hereby pledges to the Pledgee the Pledged Stock and grants the
Pledgee a lien thereon and a security interest therein.
(b) If the Pledgor shall become entitled to receive or shall receive, in
connection with any of the Pledged Stock, any:
(i) Stock certificate, including, but without limitation, any
certificate representing a stock dividend or in connection with any
increase or reduction of capital, reclassification, merger, consolidation,
sale of assets, combination of shares, stock split, spin-off or split-off;
(ii) Option, warrant, or right, whether as an addition to or in
substitution or in exchange for any of the Pledged Stock, or otherwise;
(iii) Dividend or distribution payable in property, including
securities issued by other than the issuer of any of the Pledged Stock; or
(iv) Dividends or distributions of any sort (other than cash
dividends specified in Section 2(d));
<PAGE>
then, in any such event, the Pledgor shall accept the same as the Pledgee's
agent, in trust for the Pledgee, and shall deliver them forthwith to the Pledgee
in the exact form received with, as applicable, the Pledgor's endorsement when
necessary, or appropriate stock powers duly executed in blank, to be held by the
Pledgee, subject to the terms hereof, as part of the Pledged Stock.
(c) At any time after the occurrence of an Event of Default (as
hereinafter defined), Pledgee may have any or all of the Pledged Stock
registered in its name or that of its nominee, and the Pledgor hereby covenants
that, upon the Pledgee's request after such occurrence, the Pledgor will cause
the issuer or transfer agent of the Pledged Stock to effect such registration.
Immediately and without further notice, upon the occurrence of an Event of
Default, whether or not the Pledged Stock is then or thereafter registered in
the name of the Pledgee or its nominee, the Pledgee or its nominee shall have
(to the extent permissible under applicable law), with respect to the Pledged
Stock, the right to exercise all voting rights and all other corporate rights
and all conversion, exchange, subscription or other rights, privileges or
options pertaining thereto as if it were the absolute owner thereof, including,
without limitation, the right to exchange any or all of the Pledged Stock upon
the merger, consolidation, reorganization, recapitalization or other
readjustment of the issuer thereof, or upon the exercise by such issuer of any
right, privilege, or option pertaining to any of the Pledged Stock, and, in
connection therewith, to deliver any of the Pledged Stock to any committee,
depository, transfer agent, registrar or other designated agency upon such terms
and conditions as it may determine, all without liability except to account for
property actually received by it; but the Pledgee shall have no duty to exercise
any of the aforesaid rights, privileges or options and shall not be responsible
for any failure to do so or delay in so doing. An "Event of Default" shall occur
if and when the full amount of any of the Obligations is not paid when due
(whether as a result of acceleration of indebtedness or otherwise) and such
non-payment continues for a period of 15 days of receipt by Pledgor of written
notice from Pledgee of such non-payment, or any of the Obligations in any
respect (other than with regard to making payments when due) is not performed
when due to be performed, and Pledgor fails to fully perform such other
Obligations within 30 days of notice from Pledgee of such non-performance.
(d) Unless an Event of Default shall have occurred, the Pledgor shall be
entitled to receive for its own use cash dividends on the Pledged Stock paid out
of the earned surplus of the issuer of such Pledged Stock. Upon the occurrence
of an Event of Default, the Pledgee may require any such cash dividends to be
delivered to the Pledgee as additional security hereunder or applied toward the
satisfaction of the Obligations. Unless an Event of Default shall have occurred,
Pledgor shall have full voting rights in respect of the Pledged Stock.
(e) Upon the occurrence of an Event of Default, the Pledgee may, without
demand of performance or other demand, or advertisement but with ten days notice
in which to cure the Default (and the notice specified below of time and place
of public or private sale) to or upon the Pledgor or any other person (all of
which are, to the extent permitted by law, hereby expressly waived), forthwith
realize upon the Pledged Stock or any part thereof, and may forthwith sell or
otherwise dispose of and deliver the Pledged Stock or any part thereof or
interest therein, or agree to do so, in one or more parcels at public or private
sale or sales, at any exchange, broker's board or at any of the Pledgee's
offices or elsewhere, at such prices and on such terms (including,
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<PAGE>
but without limitation, a requirement that any purchaser of all of any part of
the Pledged Stock purchase the shares constituting the Pledged Stock for
investment and without any intention to make distribution thereof) as it may
deem best, for cash or on credit, or for future delivery without assumption of
any credit risk, with the right to the Pledgee or any purchaser to purchaser
upon any such sale the whole or any part of the Pledged Stock free of any right
or equity of redemption in the Pledgor.
(f) The proceeds of any such disposition or other action by the Pledgee
shall be applied as follows:
(i) First, to the actual and reasonable costs and expenses incurred
in connection therewith or incidental thereto or to the care of
safe-keeping of any of the Pledged Stock or in any way relating to the
rights of the Pledgee hereunder, including reasonable attorneys' fees and
legal expenses;
(ii) Second, to the satisfaction of the Obligations;
(iii) Third, to the payment of any other amounts required by
applicable law (including, without limitation, Section 9-504(1)(c) of the
Uniform Commercial Code); and
(iv) Fourth, to the Pledgor to the extent of any surplus proceeds.
(g) Upon the occurrence of a default, the Pledgee need not give more than
twenty days' notice of the time after which a private sale may take place, which
notice the Pledgor hereby deems reasonable.
SECTION 3. The Pledgor represents and warrants that:
(a) Pledgor has full power, capacity and authority to enter into this
Agreement, to pledge the Pledged Stock for the purposes described in paragraph
2(a), and to carry out the transactions contemplated by this Agreement;
(b) Pledgor is the legal and beneficial owner of all of the Pledged Stock;
(c) All of the shares of the Pledged Stock are owned by the Pledgor free
of any pledge, mortgage, hypothecation, lien, charge, encumbrance or security
interest in such shares or the proceeds thereof, except for those granted
hereunder;
(d) Upon delivery of the Pledged Stock to the Pledgee or its agent, this
Agreement shall create a valid first lien upon and perfected security interest
in the Pledged Stock and the proceeds thereof, subject to no prior security
interest, lien charge or encumbrance.
SECTION 4. (a) The Pledgor hereby covenants that, until all of the
Obligations have been satisfied in full, Pledgor will not sell, convey, or
otherwise dispose of any of the Pledged Stock or any interest therein or create,
incur, or permit to exist any pledge, mortgage, lien, charge, encumbrance or any
security interest whatsoever in or with respect to any of the Pledged Stock
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<PAGE>
or the proceeds thereof, other than that created hereby, except for bona fide
sales where the proceeds are applied towards the satisfaction of the
Obligations.
(b) The Pledgor warrants and will, at Pledgor's own expense, defend the
Pledgee's right, title, special property and security interest in and to the
Pledged Stock against the claims of any person, firm, corporation or other
entity.
SECTION 5. The Pledgor recognizes that, in the event the Pledgee exercises
its right to sell the Pledged Stock pursuant to the terms hereof, the Pledgee
may be unable to effect a public sale of all or a part of the Pledged Stock and
may be compelled to resort to one or more private sales to a restricted group of
purchasers who will be obligated to agree, among other things, to acquire the
Pledged Stock for their own account, for investment and not with a view to the
distribution or resale thereof. The Pledgor acknowledges that any such private
sales may be at prices and on terms less favorable to the Pledgee than those of
public sales, and agrees that such private sales shall be deemed to have been
made in a commercially reasonable manner and that the Pledgee has no obligation
to delay sale of any Pledged Stock to permit the issuer thereof to register it
for public sale under the Securities Act of 1933, as amended. As long as any
private sale is conducted in a manner that is commercially reasonable and not in
violation of this Agreement, Pledgor waives any and all claims or rights to
assert a release from personal liability for any deficiency judgment if such
sale does not yield a price high enough to satisfy all Obligations.
SECTION 6. The Pledgor shall at any time, and from time to time, upon the
written request of the Pledgee, execute and deliver such further documents and
do such further acts and things as the Pledgee may reasonably request to effect
the purposes of this Agreement, including, without limitation, delivering to the
Pledgee upon the occurrence of an Event of Default irrevocable proxies with
respect to the Pledged Stock in form reasonably satisfactory to the Pledgee.
Until receipt thereof, this Agreement shall constitute the Pledgor's proxy to
the Pledgee or its nominee, which proxy is coupled with an interest and is
irrevocable during the term hereof, to vote all shares of Pledged Stock then
registered in the Pledgor's name to the extent permitted under applicable law.
SECTION 7. Upon the satisfaction in full of all Obligations and the
satisfaction of all additional costs and expenses of the Pledgee as provided
herein, this Agreement shall terminate and the Pledgee shall deliver to the
Pledgor, at the Pledgor's expense, such of the Pledged Stock as shall not have
been sold or otherwise applied pursuant to this Agreement.
SECTION 8. (a) Beyond the exercise of reasonable care to assure the safe
custody of the Pledged Stock while held hereunder, the Pledgee shall have no
duty or liability to preserve rights pertaining thereto and shall be relieved of
all responsibility for the Pledged Stock upon surrendering it or tendering
surrender of it to the Pledgor.
(b) No course of dealing between the Pledgor and the Pledgee, nor any
failure to exercise, nor any delay in exercising, any right, power or privilege
of the Pledgee hereunder shall operate as a waiver thereof; nor shall any single
or partial exercise of any right, power or privilege hereunder or thereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege.
4
<PAGE>
(c) The rights and remedies provided herein are cumulative and are in
addition to and not exclusive of any rights or remedies provided by law,
including, but without limitation, the rights and remedies of a secured party
under the Uniform Commercial Code.
(d) The provisions of this Agreement are severable, and if any clause or
provision shall be held invalid or unenforceable in whole or in part in any
jurisdiction, then such invalidity or unenforceability shall affect only such
clause or provision or part thereof in such jurisdiction and shall not in any
manner affect such clause or provision in any other jurisdiction or any other
clause or provision in this Agreement in any jurisdiction.
SECTION 9. In the event that the Market Value (as hereinafter defined) of
the Pledged Stock exceeds an amount equal to 1.5 times the dollar amount of the
then remaining Obligations (the "Coverage Amount"), from time to time upon
Pledgor's written request Pledgee will promptly take such actions as will cause
to be released from the lien and security interest of this Agreement such number
of shares of Pledged Stock as will most nearly result in the Market Value of the
remaining shares of Pledged Stock still subject to this Agreement being equal
to, but not less than, the Coverage Amount. In the event the Market Value of the
Pledged Stock is less than 125% of the Coverage Amount, from time to time upon
Pledgee's written request Pledgor shall pledge to and deposit with Pledgee such
number of shares of Class A or B Common Stock of Pledgee as will cause the
Market Value of the Pledged Stock to most nearly equal the Coverage Amount (or,
in the alternative, Pledgor may prepay such portion of the indebtedness
represented by the Note as will cause the Market Value of the Pledged Stock to
be not less than the Coverage Amount). As used herein, the term "Market Value"
of Pledged Stock means the product of the number of shares of Pledged Stock
times the arithmetic average of the last reported sales prices per share of
Pledgee's Class A or B Common Stock on the American Stock Exchange (or any other
principal stock exchange on which such stock is listed or principal market in
which it is traded) as reported in THE WALL STREET JOURNAL for the twenty
consecutive trading days ending on (and including) the fifth trading day prior
to the date any notice hereunder is given.
SECTION 10. Any notice required or permitted by this Agreement shall be
given by first class U.S. mail, telegram or hand delivery to the parties at the
following addresses:
If to the Pledgor:
John G. Vondrak
2111 Welch Street, Unit A 216
Houston, TX 77019
If to the Pledgee:
Apple Orthodontix, Inc.
2777 Allen Parkway, Suite 700
Houston, Texas 77019
Attention: James Bobbitt
5
<PAGE>
SECTION 11. This Agreement shall inure to the benefit of and shall be
binding upon the successors and assigns of the parties hereto.
SECTION 12. EXCEPT TO THE EXTENT THAT THE VALIDITY AND PERFECTION OR THE
PERFECTION AND THE EFFECT OF PERFECTION OR NON-PERFECTION OF THE SECURITY
INTEREST CREATED HEREBY, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR
COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF
TEXAS, THIS AGREEMENT SHALL BE SUBJECT TO AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO
ANY CONFLICTS OF LAWS PRINCIPLES.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the date and year first above written.
PLEDGOR:
JOHN G. VONDRAK
John G. Vondrak
PLEDGEE:
APPLE ORTHODONTIX, INC.,
a Delaware Corporation
By: A. STONE DOUGLASS
6
<PAGE>
APPENDIX 1
NUMBER OF SHARES
OF CLASS A OR B COMMON
ISSUER STOCK PLEDGED SHARE CERTIFICATE NUMBER(S)
Apple Orthodonitix, Inc. 250,000
7
EXHIBIT 10.8
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment (the "Amendment"), to that certain Employment Agreement
(the "Agreement") entered into on February __, 1997 by and between Apple
Orthodontix, Inc., a Delaware corporation (the "Company"), and John G.
Vondrak, D.D.S. (the "Employee").
RECITALS
Company and Employee have previously entered into the Agreement which
reflects the agreement of parties concerning the employment of Employee by
Company.
Section 9(E) of the Agreement provides that the Agreement may be amended
by written agreement executed and delivered by the parties.
Each of Employee and Company desire to amend the Agreement by this
Amendment.
NOW, THEREFORE, in consideration of the foregoing and mutual provisions
contained herein, and for other and good valuable consideration, the parties
hereto agree that the Agreement shall be amended effective as of September 10,
1998.
1. By amending Section 5(A)(iii) to read as follows:
2. If the Company otherwise terminates the Employee's Employment, the Company
shall pay Employee all the amounts specified by Section 5(A)(ii) above.
3. In the event Employee's employment is terminated by the Company, it is the
intention of the parties to negotiate and enter into a mutually acceptable
consulting arrangement upon termination, pursuant to which Employee would
provide requested services to the business development activities of the
Company for a period of thirty-six months and to be paid an amount to be
commensurate with the value of services rendered. The aggregate amount of
consulting fees to be paid to Employee pursuant to his consulting agreement
shall be $865,000. Upon such aggregate amount being paid to Employee,
Employee shall have no further obligation to provide consulting services to
Employer and shall have no further right to receive consulting fees from
Employer. Employer shall covenant that it will use its best efforts to
provide Employee transaction opportunities for each month during the term of
this consultant agreement that will generate for Employee a minimum
consulting fee of $72,081 per quarter. Further, upon a Change of Control, as
defined in the Employee's Employment Agreement, the Employer or its successor
shall pay the Employee an amount equal to the difference between $865,000 and
all amounts previously paid, including any outstanding draws and accrued
interest, pursuant to the consulting agreement if any such agreement is
effective.
<PAGE>
4. References to "Chief Executive Officer" in Section 2(A) shall be deleted and
the title "Chairman of the Board" shall be substituted therefor. Employee
agrees that no breach of the Agreement has occurred because of the foregoing
change in responsibilities of Employee.
5. The Company agrees to loan to Employee $500,000 pursuant to the form of
promissory note and stock pledge agreement attached hereto as Annex A.
6. Except as otherwise expressly modified by the Amendment, all terms and
provisions of the Agreement shall remain unchanged and hereby are ratified
and confirmed and shall be and shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed and delivered this
Amendment to the Agreement as of the day and year indicated above.
APPLE ORTHODONTIX, INC.
A. STONE DOUGLASS
By: A. Stone Douglass
CEO and President
EMPLOYEE
JOHN G. VONDRAK, D.D.S.
John G. Vondrak, D.D.S.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,413,193
<SECURITIES> 0
<RECEIVABLES> 11,201,477
<ALLOWANCES> (202,783)
<INVENTORY> 0
<CURRENT-ASSETS> 15,612,031
<PP&E> 9,006,022
<DEPRECIATION> (1,234,062)
<TOTAL-ASSETS> 84,058,160
<CURRENT-LIABILITIES> 9,447,270
<BONDS> 0
0
0
<COMMON> 13,944
<OTHER-SE> 40,863,833
<TOTAL-LIABILITY-AND-EQUITY> 84,058,160
<SALES> 0
<TOTAL-REVENUES> 36,197,167
<CGS> 0
<TOTAL-COSTS> 34,501,241
<OTHER-EXPENSES> 57,641
<LOSS-PROVISION> (46,933)
<INTEREST-EXPENSE> 84,931
<INCOME-PRETAX> 1,621,703
<INCOME-TAX> 616,200
<INCOME-CONTINUING> 1,005,503
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,005,503
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
