<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1997.
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
ORTHALLIANCE, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 8741 95-4632134
(State or other jurisdiction (Primary Standard Industrial (I.R.S. employer
of incorporation or Classification Code Number) identification no.)
organization)
</TABLE>
23848 HAWTHORNE BOULEVARD, SUITE 200, TORRANCE, CALIFORNIA 90505
(310) 791-5656
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
SAM WESTOVER
CHIEF EXECUTIVE OFFICER
ORTHALLIANCE, INC.
23848 HAWTHORNE BOULEVARD, SUITE 200
TORRANCE, CALIFORNIA 90505
(310) 791-5656
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES OF ALL CORRESPONDENCE TO:
PAUL A. QUIROS, ESQ.
NELSON MULLINS RILEY & SCARBOROUGH, L.L.P.
FIRST UNION PLAZA, SUITE 1400
999 PEACHTREE STREET, N.E.
ATLANTA, GEORGIA 30309
(404) 817-6000
(404) 817-6050 (FAX)
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
==============================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Common Stock, $.001 par value.... $30,000,000 $9,091.00
==============================================================================================================
</TABLE>
(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457(o).
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 17, 1997
PROSPECTUS
SHARES
[ORTHALLIANCE LOGO]
CLASS A COMMON STOCK
---------------------
This Prospectus covers the offer and sale of up to shares of Class
A Common Stock, par value $.001 per share ("Common Stock"), of OrthAlliance,
Inc. ("OrthAlliance" or the "Company"), which OrthAlliance may issue from time
to time in connection with the future direct and indirect acquisitions of other
businesses, properties or securities in business combination transactions in
accordance with Rule 415(a)(1)(viii) of Regulation C under the Securities Act of
1933, as amended (the "Securities Act"), or as otherwise permitted under the
Securities Act.
OrthAlliance expects that the terms upon which it may issue the shares in
business combination transactions will be determined through negotiations with
the securityholders or principal owners of the businesses whose securities or
assets are to be acquired. OrthAlliance expects that the shares issued will be
valued at prices reasonably related to market prices for the Common Stock
prevailing either at the time an acquisition agreement is executed or at the
time an acquisition is consummated.
This Prospectus will be furnished to securityholders of the businesses,
properties or securities to be acquired. This Prospectus will only be used in
connection with the acquisition of businesses, properties or securities in
business combination transactions that would be exempt from registration but for
the possibility of integration with other transactions. If an acquisition of a
business or properties or securities in a business combination transaction is
not exempt from registration even if integration is not taken into account, then
the offerees of Common Stock in such acquisition will be furnished with copies
of this Prospectus as amended by a post-effective amendment to the Registration
Statement on Form S-4 of which this Prospectus is a part.
Persons receiving Common Stock in connection with such acquisitions may be
contractually required to hold all or some portion of the Common Stock for some
period of time. In addition, pursuant to the provisions of Rule 145 under the
Securities Act, the volume limitations and certain other requirements of Rule
144 under the Securities Act will apply to resales of those shares by affiliates
of the businesses the Company acquires for a period of two years. See "Plan of
Distribution."
If an acquisition has a material financial effect upon the Company, the
Company will file a current report on Form 8-K, or if it is not eligible to
incorporate such a report by reference, a post-effective amendment to the
Registration Statement of which this Prospectus forms a part, after the
acquisition and prior to the consummation of additional acquisitions utilizing
this Prospectus, containing financial and other information about the
acquisition that would be material to subsequent acquirors of Common Stock
offered hereby, including pro forma information for the Company and historical
financial information about the acquired company. The Company will also file a
current report on Form 8-K, or if it is not eligible to incorporate such a
report by reference, a post-effective amendment to the Registration Statement of
which this Prospectus forms a part, if an acquisition does not by itself have a
material effect upon OrthAlliance, but when aggregated with other acquisitions
(for which such information has not been filed) since the date of the Company's
most recent audited financial statements, would have such a material effect.
As of June , 1997, shares of Common Stock were issued and
outstanding. In addition, OrthAlliance filed a Registration Statement on Form
S-1 (Registration No. 333-27143) on May 14, 1997 and Pre-Effective Amendment No.
1 to Registration Statement on Form S-1 on June 11, 1997, (the "IPO Registration
Statement"), with respect to an initial public offering of Common Stock (the
"IPO"). The IPO Registration Statement has not yet been declared effective. The
Company will make application for the Common Stock to be listed for trading on
The Nasdaq Stock Market's National Market (the "Nasdaq National Market") under
the symbol "ORAL."
All expenses of this offering (this "Offering") will be paid by
OrthAlliance. No underwriting discounts or commissions will be paid in
connection with the issuance of shares by OrthAlliance in business combination
transactions, although finder's fees may be paid with respect to specific
acquisitions. Any person receiving a finder's fee may be deemed to be an
Underwriter within the meaning of the Securities Act.
---------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 8.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
, 1997
<PAGE> 3
[MAP SHOWING LOCATIONS OF FOUNDING PRACTICES.]
2
<PAGE> 4
PROSPECTUS SUMMARY
Simultaneously with and as a condition to the closing of the IPO,
OrthAlliance will acquire certain operating assets of 59 separate orthodontic
practices (collectively, the "Founding Practices") in exchange for cash and
shares of Common Stock and will enter into long-term management or consulting
services agreements with the Founding Practices (the "Combination
Transactions"). The number of shares of Common Stock issued in connection with
the Combination Transactions will depend on the initial public offering price of
the Common Stock in the IPO.
As a result of the merger of Premier Orthodontic Group, Inc. ("Premier")
and US Orthodontic Care, Inc. ("USOC") with and into OrthAlliance, effective
prior to the closing of the IPO (the "Merger"), OrthAlliance succeeds to the
rights of Premier and USOC under agreements with the Founding Practices. See
"The Company." The term "Allied Practice" includes each of the Founding
Practices and any orthodontic practice with which the Company enters into
long-term management or consulting services agreements in the future. Unless
otherwise indicated by the context, references herein to practice management
services, agreements or rights include consulting and other similar arrangements
which the Company will enter into with certain Allied Practices to comply with
applicable regulations regarding practice management in certain states. As used
herein, the term "Allied Orthodontists" refers to orthodontists affiliated with
an Allied Practice.
THE COMPANY
OrthAlliance was recently organized to create a leading provider of
practice management services to orthodontic practices in the United States.
After the closing of the IPO, the Company will manage the business aspects of
the Allied Practices (subject to applicable state laws), thereby allowing Allied
Orthodontists to focus on delivering cost-effective, high quality patient care,
and will provide capital for the development and growth of such practices. The
Company will affiliate with Allied Practices pursuant to long-term management
services agreements and will generate revenues by providing management,
marketing and development services to Allied Practices. The Company intends to
aggressively expand its network of Allied Practices by acquiring certain
operating assets or stock of and entering into long-term management services
agreements with additional practices throughout the United States (herein
sometimes referred to as the "affiliation" with other practices.)
The Company has entered into definitive agreements, to be consummated
simultaneously with the closing of the IPO, to acquire the stock or certain
operating assets of and enter into long-term management services agreements with
59 Founding Practices, which include 87 orthodontists operating 156 offices
located in 17 states. Management believes that the Company has distinguished
itself from its competitors by affiliating with the Founding Practices, which
management believes are leading practices in their markets. The Founding
Practices were selected based on a variety of factors, including size,
profitability, historical growth and reputation for high quality care, both
among local consumers of orthodontic services and within the orthodontic
services industry. For the year ended December 31, 1996, the Founding Practices
had average revenues of approximately $1,039,000, compared to average practice
revenues for the orthodontic industry as a whole, estimated by the Company to be
approximately $545,000.
The United States orthodontic industry is highly fragmented, with over 90%
of the approximately 9,000 practicing orthodontists in the United States
operating as sole practitioners. Annual gross revenues for the industry are
approximately $3.5 billion, which have grown at an average rate of 7.5% per year
in recent years. Management believes that less than 2% of the orthodontists
currently practicing in the United States are affiliated with publicly held
practice management companies.
3
<PAGE> 5
Management believes that the Company's operating strategy will enable
Allied Practices to compete more effectively with and realize greater
profitability than traditional orthodontic practices, thereby inducing
additional orthodontists to affiliate with the Company. Key elements of the
Company's operating strategy are:
- Emphasizing quality patient care by (i) relieving the Allied
Orthodontists from various time-consuming administrative
responsibilities, (ii) affiliating with high quality practices
conducted by orthodontists who have completed accredited graduate
orthodontic training programs, and (iii) recommending practice
standards, procedures and protocols under the direction of the
Company's Board of Advisors, composed of the Allied Orthodontists in
the Founding Practices;
- Capitalizing on the best demonstrated practices of Allied
Orthodontists through identification and promotion of successful
practice-level strategies including, but not limited to, treatment,
delivery of patient care, marketing, financing and cost control
strategies;
- Achieving operating efficiencies and economies of scale through (i)
the implementation of national purchasing discounts for professional
and clerical supplies and equipment, (ii) the reduction of certain
expenses common to all Allied Practices, including, but not limited
to, insurance and employee benefits, and (iii) work flow and patient
flow enhancements and programs; and
- Increasing market penetration and expansion through (i) local
marketing programs, supported by demographic and economic analysis,
and (ii) patient payment plans designed to enhance the affordability
of orthodontic services.
The Company also intends to implement an aggressive growth strategy focused
on (i) affiliating with additional orthodontic practices that fit the
OrthAlliance model of high quality and strong financial performance; (ii)
expanding Allied Practices by providing capital, support and consultation for
satellite office expansion; (iii) assisting the Allied Practices with their
internal growth by increasing gross revenues through increased patient volume;
and (iv) expanding profit margins through operational efficiencies.
THE OFFERING
Common Stock offered by the
Company.................. shares of Common Stock to be issued by
the Company in connection with the acquisition of
businesses, properties or securities in business
combination transactions.
Common Stock to be
outstanding after the
Offering................. shares(1)
Class B Common Stock to be
outstanding after the
Offering................. shares
Class B Common Stock....... In connection with the Merger, shares of Class
B Common Stock will be issued to stockholders
of OrthAlliance. Holders of Class B Common Stock
are entitled to one vote per share and such shares
shall be voted with the Common Stock on all matters
presented to the holders of Common Stock. The
shares of Class B Common Stock are not
transferable, except to the holder's spouse,
parents, siblings, lineal descendants, a trust for
the benefit of any such person or as determined by
will or the laws of descent. See "Description of
Capital Stock."
Conversion of Class B
Common Stock............... Each share of Class B Common Stock shall
automatically convert into Common Stock (i) at the
ratio of shares of Common Stock for each
4
<PAGE> 6
share of Class B Common Stock upon the attainment
of certain average closing price calculations for
the Common Stock, as determined on the Nasdaq
National Market, or other over-the-counter market
or an exchange, as then applicable (the "Conversion
Prices"), or (ii) if not converted pursuant to
subparagraph (i), at the ratio of one share of
Common Stock for each share of Class B Common Stock
upon the anniversary of the effective date of
the IPO (the "Effective Date"). The shares of Class
B Common Stock convertible pursuant to subparagraph
(i) above will convert in five increments of up to
shares of Class B Common Stock (20% of the
total number of shares of Class B Common Stock
issued) upon the attainment of each of the five
specified Conversion Prices. At each automatic
conversion, each holder of Class B Common Stock
will be deemed to have converted a pro rata share
of such Class B Common Stock then outstanding. The
Conversion Prices shall be established at premiums
to the initial public offering price in the IPO.
Each Conversion Price will be deemed to have been
achieved at the end of the trading day on which the
average closing price of the Common Stock for the
preceding consecutive trading days exceeds such
Conversion Price. The closing prices will be those
reported on the Nasdaq National Market, or such
other reported over-the-counter market or an
exchange, as applicable. The initial Conversion
Price is equal to 150% of the price to public in
the IPO, and each of the subsequent Conversion
Prices is equal to 120% of the preceding Conversion
Price. Therefore, if the price to public in the IPO
is the mid-point of the estimated initial public
offering price range ($ ), the five Conversion
Prices at which up to shares of the
outstanding Class B Common Stock shall be
automatically converted to Common Stock are $ ,
$ , $ , $ and $ , respectively. In
the event that there are any shares of Class B
Common Stock outstanding on the anniversary of
the Effective Date, all such shares shall
automatically convert into an equal number of
shares of Common Stock. The holders of the Class B
Common Stock may convert each share of Class B
Common Stock into one share of Common Stock at any
time prior to the anniversary of the Effective
Date.
Nasdaq Symbol.............. ORAL
- ---------------
(1) Includes (i) shares of Common Stock issued by OrthAlliance in connection
with the Merger, (ii) shares of Common Stock to be issued in connection
with the Combination Transactions, and (iii) shares of Common Stock to
be issued in the IPO, but excludes shares of Common Stock issuable
pursuant to the grant of options for the purchase of Common Stock under the
Company's stock option plans or upon the exercise of outstanding warrants to
purchase shares of Common Stock. See "Management -- Stock Plans," "Certain
Transactions" and "Description of Capital Stock -- Warrants."
5
<PAGE> 7
The preceding summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes the completion of the Merger and the IPO. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
Certain industry information used in this Prospectus is derived from the
1995 Journal of Clinical Orthodontists Orthodontic Practice Study ("1995 JCO
Study") and relates to 1994 unless otherwise indicated. Comparable information
for 1995 and 1996 is not expected to be available until the release of the 1997
JCO Study in late 1997 or early 1998. The information compiled in the 1995 JCO
Study relates to orthodontists who have completed accredited graduate
orthodontic training programs and does not include general dentists who also
perform certain orthodontic services.
6
<PAGE> 8
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The summary pro forma combined financial information is based upon the
historical combined financial statements of the Founding Practices and the
historical financial statements of the Company and gives effect to the following
as of January 1, 1996 (with respect to the statement of operations data for the
year ended December 31, 1996 and the three months ended March 31, 1997, and as
of March 31, 1997 (with respect to the balance sheet data): (i) the Merger; (ii)
the Combination Transactions; and (iii) a provision for federal and state income
taxes as if the Company had been a C corporation during the periods presented
but does not give effect to the IPO unless otherwise indicated. This information
is derived from the unaudited pro forma combined financial statements of the
Company and the related notes thereto included elsewhere in this Prospectus. The
unaudited pro forma financial information does not purport to represent the
financial position or the operating results that would have been achieved had
the Merger and Combination Transactions occurred on the dates indicated or
project the financial position or results of operations for any future date or
period.
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<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
1996 MARCH 31, 1997
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PRO FORMA(1) PRO FORMA(1)
------------- --------------
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PRO FORMA STATEMENT OF OPERATIONS DATA(2):
Net revenue(3).............................................. $ 45,690 $ 11,287
Direct expenses:
Salaries, wages and benefits.............................. 17,208 4,758
Orthodontic supplies and lab.............................. 5,248 956
Rent...................................................... 4,202 1,082
Advertising and marketing................................. 1,421 347
---------- ----------
Total direct expenses............................. 28,079 7,143
General and administrative.................................. 9,707 2,426
Depreciation and amortization............................... 872 177
---------- ----------
Operating income.................................. 7,032 1,541
Interest income (expense), net.............................. -- 11
Gain on sale of assets...................................... 122 5
---------- ----------
Income before provision for income taxes.................... 7,154 1,557
Provision for income taxes........................ 2,719 592
---------- ----------
Net income........................................ $ 4,435 $ 965
========== ==========
Net income per share.............................. $ $
========== ==========
Number of shares used in net income per share calculation...
========== ==========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997(1)
-----------------------------
PRO FORMA
PRO FORMA(2) AS ADJUSTED(4)
------------ --------------
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BALANCE SHEET DATA:
Working capital............................................. $ 5,011 $
Total assets................................................ 13,202
Long-term debt, less current portion........................ 1,000
Stockholders' equity........................................ 6,867
</TABLE>
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(1) See unaudited pro forma combined financial statements and the notes thereto
included elsewhere in this Prospectus for a discussion of the assumptions
made and adjustments applied in preparation of this information.
(2) There is no historical presentation for OrthAlliance as it incurred no
expense and generated no revenues for the year ended December 31, 1996 or
the three months ended March 31, 1997.
(3) Represents pro forma revenue calculated by applying the terms of the
management services and consulting agreements to the historical operating
results of the individual Founding Practices. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview"
and "Business -- Agreements with Allied Practices and Allied
Orthodontists."
(4) As adjusted gives effect to the IPO and the application of the estimated net
proceeds therefrom.
7
<PAGE> 9
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information contained in this
Prospectus, the following risk factors should be considered carefully in
evaluating the Company and its business before purchasing shares of Common Stock
offered hereby. This Prospectus contains forward-looking statements that involve
risks and uncertainties. Actual results could differ from those discussed in the
forward-looking statements as a result of certain factors, including those set
forth below and elsewhere in this Prospectus.
Absence of Combined Operating History. OrthAlliance was founded in October
1996 and has conducted no operations and generated no revenues to date. As a
result of the Merger, OrthAlliance succeeds to the rights of Premier and USOC
under agreements to acquire certain operating assets or stock of and enter into
long-term management services agreements with the Founding Practices. The
Combination Transactions involve the assumption of certain legal liabilities,
some or all of which could have a material adverse effect on the Company's
business, financial condition and results of operations. The Founding Practices
have been operating as separate, independent entities and there can be no
assurance that management will be able to operate the Company successfully,
manage the Founding Practices' operations, achieve any cost savings as a result
of the Combination Transactions or institute the necessary systems and
procedures to manage the Company on a profitable basis. The combined historical
financial results of the Founding Practices cover periods when the Founding
Practices were not under common control or management and, therefore, may not be
indicative of the Company's future financial or operating results. The Company
may experience delays, complications and expenses in implementing, integrating
and operating such systems, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, the management group has been assembled recently and there can be no
assurance that such persons will be able to effectively oversee the
implementation of the Company's operating, growth, acquisition and business
strategies. The inability of the Company to successfully integrate or operate
the Founding Practices could have a material adverse effect on the Company's
business, financial condition and results of operations and make it unlikely
that the Company's acquisition program will be successful. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Management" and "Certain Transactions."
Dependence on Allied Orthodontists. The Company receives fees for services
provided to Allied Practices under management services agreements, but does not
employ orthodontists or control or own the practices of its Allied
Orthodontists. The Company's revenue is dependent on revenue generated by the
Allied Practices, which in turn is largely dependent on the efforts of the
Allied Orthodontists and, therefore, the performance of Allied Orthodontists is
essential to the Company's success. The long-term agreements with Allied
Practices have 20 year terms, subject to prior termination by either party for,
among other things, a material default by the other party or a change of control
(as defined therein) applicable to the Company. Any material loss of revenue by
the Company's Allied Orthodontists or termination of such long-term agreements
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Agreements with Allied
Practices and Allied Orthodontists."
Risks Related to Additional Affiliations and Growth Strategy. One of the
Company's primary business strategies is to increase revenues and expand the
markets it serves beyond the Founding Practices by acquiring certain operating
assets or stock of and entering into long-term management services agreements
with additional orthodontic practices. Competition for such affiliations has
increased significantly in recent years and, as a result, there may be fewer
candidates available for affiliation with the Company. There can be no assurance
that the Company will be able to identify additional practices or contract with
such practices on favorable terms. Further, such arrangements involve a number
of risks, including diversion of management's attention, dependence on
retaining, hiring and training key personnel, and risks associated with the
assumption of certain legal liabilities, some or all of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, there can be no assurance that the Founding
Practices or other Allied Practices will achieve anticipated revenues and
earnings. To the extent that the Company is unable to enter into affiliations
with additional orthodontic practices, its ability to expand its operations and
increase its revenues to the degree desired would be reduced significantly and
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Operating Strategy" and
" -- Growth Strategy."
8
<PAGE> 10
Risks Related to Affiliation Financing. The Company intends to finance
future affiliations with cash and the issuance of shares of Common Stock as
consideration. In the event that the Common Stock does not maintain a sufficient
market value, or potential acquisition candidates are unwilling to accept Common
Stock as partial consideration for their practices, the Company may be required
to use its cash resources, if available, to initiate and maintain its
acquisition program. If the Company lacks sufficient cash resources to pursue
acquisitions, its growth could be limited unless it is able to obtain additional
capital through debt or equity financing. There can be no assurance that the
Company will be able to obtain such financing if and when it is needed or that,
if available, such financing can be obtained on favorable terms. The inability
to obtain such financing could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Growth
Strategy."
Ability to Continue Internal Growth. Certain of the Founding Practices
have experienced significant growth in the past, principally through growth of
existing orthodontic offices and the opening of new offices. There can be no
assurance that the Company will be able to expand its market presence in its
current locations or successfully enter other markets by providing financial
resources to the Allied Practices required for opening new orthodontic offices.
Such offices may incur substantial costs, delays or other operational or
financial problems. The ability of the Company to continue its growth will
depend on a number of factors, including the availability of working capital to
support such growth, existing and emerging competition and the Company's ability
to maintain profitability while facing pricing pressures and rising overhead
costs. The Company must also manage costs in a changing regulatory environment,
adapt its infrastructure and systems to accommodate growth, and recruit and
train additional qualified personnel. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "-- Operating Strategy" and " -- Growth Strategy."
Government Regulation. The orthodontic industry and orthodontic practices
are regulated extensively at the state and federal levels. The Company will not
control the practice of orthodontics by its Allied Orthodontists as required by
certain regulatory requirements directly applicable to the orthodontists and
their practices. The laws of many states prohibit non-orthodontic entities (such
as OrthAlliance) from practicing orthodontics, owning all or certain assets of
an orthodontic practice, employing orthodontists or controlling the content of
an orthodontist's advertisements. The laws of many states also prohibit
orthodontists from paying any portion of fees received for orthodontic services
in consideration for the referral of a patient. In addition, many states impose
limits on the tasks that may be delegated by an orthodontist to other staff
members. There can be no assurance that any review of the Company's business
relationships by regulatory authorities or the courts will not result in
determinations that could adversely affect the operations of the Company or that
the regulatory environment will not change to restrict the Company's existing or
future operations. These laws and their interpretations vary from state to state
and are enforced by regulatory authorities with broad discretion. There can be
no assurance that the legality of the Company's long-term management services
agreements will not be successfully challenged or that enforceability of the
provisions thereof will not be limited. See "Business -- Agreements with Allied
Practices and Allied Orthodontists." The laws and regulations of certain states
in which the Company may seek to expand may require the Company to change the
form of relationships entered into with orthodontists in a manner which may
restrict the Company's operations in those states or may prevent the Company
from acquiring the assets of or managing or providing consulting services to
orthodontic practices in those states. In addition, there can be no assurance
that the laws and regulations of states in which the Founding Practices
presently maintain operations will not change or be interpreted in the future to
either restrict or adversely affect the Company's relationships with Allied
Orthodontists in those states. See "Business -- Government Regulation."
Health Care Reform. The United States Congress has considered various
health care reform proposals, including comprehensive revisions to the current
health care system. It is uncertain what legislative proposals will be adopted
in the future or what actions federal or state legislatures or third-party
payors may take in anticipation of or in response to any health care reform
proposals or legislation. Health care reform legislation adopted by Congress
could have a material adverse effect on the operations of the Company, and
changes in the health care industry, such as the growth of managed care
organizations and provider networks, may result in lower payment levels for the
services of the Allied Orthodontists.
9
<PAGE> 11
Dependence on Enforceability of Operative Agreements. To effect the
consummation of the Combination Transactions, the Company required the Founding
Practices and certain of their orthodontists to execute three agreements
(collectively, the "Operative Agreements"): (i) an asset purchase and sale
agreement, stock purchase and sale agreement, or agreement and plan of
reorganization by and between the Founding Practice and OrthAlliance
(collectively, the "Acquisition Agreements"); (ii) a management services or
consulting and business services agreement by and between the Founding Practice
and OrthAlliance; and (iii) employment agreements by and between the Founding
Practice and certain of its orthodontists. The consummation of the Combination
Transactions and the subsequent viability of the Company are dependent on the
initial and continuing enforceability of the Operative Agreements. While
OrthAlliance has attempted to structure the Operative Agreements in accordance
with applicable law, there can be no assurance that the enforceability of
certain non-compete and other provisions will not be successfully challenged.
Further, because each of the employment agreements is between the Allied
Orthodontist and the Allied Practice, there can be no assurance that the parties
thereto will not terminate or amend the terms and conditions of such employment
agreements. See "Business -- Agreements with Allied Practices and Allied
Orthodontists."
Dependence on Key Personnel. The success of the Company is dependent upon
the continued services of the Company's senior management, including Sam
Westover, Chief Executive Officer, Robert S. Chilton, Chief Financial Officer
and P. Craig Hethcox, Chief Operating Officer. The loss of the services of
Messrs. Westover, Chilton or Hethcox or other Company senior management could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management."
Competition. The business of providing orthodontic services is highly
competitive in each market in which the Company operates. Each of the Company's
Allied Orthodontists faces competition from other orthodontists or general
dentists in the communities served, some of whom have more established practices
in the market. The Company is aware of several other companies currently
developing, consolidating and managing orthodontic practices throughout much of
the United States, and the Company may encounter substantial competition from
those entities, as well as new market entrants. Other competitors involved in
managing multiple practices may have greater marketing, financial and other
resources and more established operations than the Company. The Company expects
that the level of competition with regional or national management concerns will
remain high in the future, which could limit the Company's ability to maintain
or increase its market share or maintain or increase gross margins, either of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Competition."
Risk of Providing Orthodontic Services. Each of the Allied Orthodontists
of the Allied Practices provides orthodontic services to the public and may be
exposed to the risk of professional liability and other claims. Several Allied
Orthodontists treat patients complaining of or diagnosed with temporomandibular
joint syndrome ("TMJ"). TMJ consists of a poorly understood set of disorders
largely of unknown origins which cause jaw and facial pain, headaches, earaches,
clicking sounds and restricted jaw movement. Future litigation concerning the
failure to properly diagnose or treat TMJ could materially adversely affect the
Company. Failure to recognize periodontal disease may also serve as the basis
for lawsuits against the Company and/or the Allied Orthodontists. Claims
relating to orthodontic treatment, TMJ-related claims and claims for failure to
diagnose periodontal disease, if successful, could result in substantial damage
awards to the claimants which may exceed the limits of any applicable insurance
coverage. Further, there can be no assurance that claims not covered by the
Company's insurance (e.g., claims for punitive damages) will not arise. The
Company will not control the practice of orthodontics by its Allied
Orthodontists or the compliance with regulatory and other requirements directly
applicable to the Allied Orthodontists and the Allied Practices. Although the
Company intends to acquire liability insurance for itself (with limits and
retention amounts to be negotiated), and to be named as an additional insured
party on the liability insurance policies of the Allied Orthodontists (where
permitted by applicable state law), successful malpractice claims against the
Company or the Allied Orthodontists could have a material adverse effect on the
Company's business, financial condition and results of operations. Claims
against the Company, the Allied Practices and/or the Allied Orthodontists,
regardless of their merit or eventual outcome, may also have a material adverse
effect on the Company's ability to attract patients to Allied Practices or
expand its business. Further, because insurance policies must be renewed
annually, there can be no assurance that the Company, the
10
<PAGE> 12
Allied Practices and/or the Allied Orthodontists, will be able to obtain
liability insurance coverage in the future on acceptable terms, if at all. See
"Business -- Litigation and Insurance."
Substantial Proceeds of IPO Payable to Affiliates. Approximately $14.0
million of the net proceeds of the IPO will be used to pay the cash portion of
the purchase price of the Acquisition Agreements in the Combination
Transactions. In addition, approximately $3.8 million of the net proceeds from
the IPO will be used to repay indebtedness assumed by the Company in connection
with the Merger and the Combination Transactions. See "The Company."
Control by Existing Management and Stockholders. Following the completion
of the Combination Transactions and the IPO, OrthAlliance's management estimates
that the Allied Orthodontists, the officers and directors of the Company and
entities affiliated with such persons will beneficially own approximately %
of the then outstanding shares of Common Stock and Class B Common Stock and are
likely to exercise substantial control over the Company's affairs. These
stockholders acting together will be able to elect the Board of Directors of the
Company and approve or disapprove any matter submitted to a vote of
stockholders, including amendments to the Company's Certificate of Incorporation
(the "Certificate"), mergers, share exchanges, the sale of all or substantially
all of the Company's assets, going private transactions or other fundamental
corporate transactions. See "Principal Stockholders" and "Description of Capital
Stock."
In addition, certain Allied Orthodontists, officers and directors of the
Company will own an aggregate of shares of the Class B Common Stock, which
is entitled to one vote per share and is entitled to vote with the Common Stock
on all matters submitted to a vote of the Company's stockholders. The Class B
Common Stock will automatically convert into shares of Common Stock at a ratio
of shares of Common Stock for each share of Class B Common Stock upon the
attainment of the Conversion Prices. Attainment of each of the Conversion Prices
would result in conversion of the Class B Common Stock into shares of
Common Stock, further increasing the holders' of such shares control over the
Company's affairs. In the event all of the Class B Common Stock is converted
into the maximum number of shares of Common Stock possible, through the
achievement of all of the Conversion Prices on or before the anniversary of
the Effective Date, the Allied Orthodontists, the officers and directors of the
Company and entities affiliated with such persons would beneficially own
approximately % of the then outstanding shares of Common Stock. If the
Conversion Prices are not achieved prior to , 200 , all outstanding
shares of Class B Common Stock will convert to shares of Common Stock at a ratio
of one share for one share on such date. See "Description of Capital
Stock -- Common Stock and Class B Common Stock."
Shares Eligible for Future Sale. All of the shares of Common Stock being
sold in the IPO will be freely tradeable unless acquired by affiliates of the
Company. The market price of the Common Stock could be adversely affected by the
sale of substantial amounts of Common Stock of the Company in the public market
following the IPO. Upon the closing of the IPO, the owners of the Founding
Practices will receive, in the aggregate, shares of Common Stock as a
portion of the consideration for the affiliation of their orthodontic practices
with the Company. The shares received by the owners of the Founding
Practices were not offered in the IPO; however, holders of such shares have
certain incidental registration rights pursuant to the Acquisition Agreements
between OrthAlliance and the Founding Practices, whereby the Company must use
its reasonable efforts to register such shares under certain circumstances
during the twenty-four months following the closing of the Combination
Transactions. See "Description of Capital Stock -- Registration Rights." Certain
other stockholders of OrthAlliance will hold, in the aggregate, an additional
shares of Common Stock. See "Certain Transactions." None of these
shares were acquired in transactions registered under the Securities
Act and, accordingly, such shares may not be sold except in transactions
registered under the Securities Act or pursuant to an exemption from
registration thereunder.
The Company, all of the owners of the Founding Practices, and the executive
officers, directors and 5% or greater shareholders of the Company are restricted
from offering or selling shares of Common Stock for a period of 365 days (the
"Lock-up Period") after the Effective Date without the prior written consent of
J.C. Bradford &
11
<PAGE> 13
Co., except that the Company may issue shares of Common Stock in connection with
acquisitions or upon the exercise of options granted under the Company's stock
option plans. After the Lock-up Period, all of such shares may be sold in
accordance with Rule 144 promulgated under the Securities Act of 1933, as
amended (the "Securities Act"), subject to the volume, holding period and other
limitations of Rule 144.
The shares of Common Stock issuable pursuant to this Offering
generally will be freely tradable upon issuance to persons not deemed to be
affiliates of the Company, unless the Company contractually restricts the sale
or other transfer of such shares. The Company anticipates that the agreements
entered into in connection with its future acquisitions may restrict the resale
of all or a portion of the shares issued in those transactions for varying
periods of time.
No Prior Public Market; Possible Volatility of Stock Price. Prior to the
IPO, there has been no public market for the Common Stock. The Company will file
an application for the Common Stock to be approved for quotation on the Nasdaq
National Market, however, there can be no assurance that, following the IPO or
this Offering, a regular trading market for the Common Stock will develop or be
sustained. The market price of the Common Stock could be subject to significant
fluctuations in response to variations in quarterly operating results and other
factors. In addition, the stock market in recent years has experienced extreme
price and volume fluctuations that often have been unrelated or disproportionate
to the operating performance of companies. Factors such as actual or anticipated
operating results, growth rates, changes in estimates by analysts, market
conditions in the industry, announcements by competitors, regulatory actions and
general economic conditions will vary over time. As a result of the foregoing,
the Company's operating results and prospects periodically may be below the
expectations of public market analysts and investors. Any such event would
likely result in a material adverse effect on the price of the Common Stock.
Absence of Dividends. The Company has never paid any cash dividends and
does not anticipate paying cash dividends on its Common Stock or Class B Common
Stock in the foreseeable future. See "Dividend Policy."
Anti-takeover Effect of Certain Provisions. Certain provisions of
OrthAlliance's Certificate, Bylaws and the Delaware General Corporation Law
("DGCL") could delay or impede the removal of incumbent directors and could make
a merger, tender offer or proxy contest involving the Company more difficult, or
could discourage a third party from attempting to acquire control of the
Company, even if such events would benefit the interests of the stockholders. In
particular, OrthAlliance's Certificate provides for a "staggered" Board of
Directors in three classes, which could have the effect of delaying a change in
control of the Company. In addition, although OrthAlliance has no current plans
to issue any preferred stock, the Certificate authorizes the Board of Directors
to issue "blank check" preferred stock of the Company, in one or more series,
without stockholder approval of the issuance and upon such terms and conditions,
and having such rights, privileges and preferences, as the Board of Directors
may determine. See "Description of Capital Stock -- Preferred Stock" and
"Certain Provisions of the Certificate, Bylaws and Delaware Law." Certain of the
Company's senior management personnel have entered into employment agreements
with the Company which contain "change in control" provisions. The "change in
control" provisions may hinder, delay, deter or prevent a tender offer, proxy
contest or other attempted takeover because the covered employees would be able
to terminate their employment (with adequate justification required in certain
circumstances), be paid a severance equal to three times their existing base
compensation, maximum possible cash bonus and any accrued salary, benefits or
reimbursements and thereafter would be free to compete with the Company. See
"Management -- Employment Agreements." The Service Agreements entered into with
the Allied Orthodontists provide that said agreements may be terminated by the
Allied Practices pursuant to a change of control, defined therein, which does
not include transactions approved by the Company's Board of Directors.
OrthAlliance is also subject to Section 203 of the DGCL which prohibits a
publicly held Delaware corporation from engaging in a "business combination" (as
defined in Section 203 of the DGCL) with an "interested stockholder" (defined in
Section 203 of the DGCL, generally, as a person owning 15% or more of the
Company's outstanding voting stock) for a period of three years after the date
of the transaction in which such person became an interested stockholder, unless
certain conditions are met.
12
<PAGE> 14
THE COMPANY
OrthAlliance was organized to create a leading provider of practice
management services to orthodontic practices in the United States. Premier and
USOC, predecessors to OrthAlliance, were formed in 1996 independently of each
other to acquire certain operating assets or stock of and to enter into
long-term management services agreements with orthodontic practices. The
management of Premier and USOC determined to combine the two companies to form
the Company. Prior to the closing of the IPO, Premier and USOC will be merged
with and into OrthAlliance (previously defined as the Merger), and pursuant
thereto the Company will succeed to the rights of Premier and USOC under the
Acquisition Agreements with the Founding Practices.
Simultaneous with and as a condition to the closing of the IPO,
OrthAlliance will acquire certain stock or operating assets of the 59 separate
Founding Practices in exchange for cash and shares of Common Stock and will
enter into long-term management services agreements with the Founding Practices
(previously defined as the Combination Transactions). The aggregate
consideration paid by the Company to the Founding Practices is approximately
$84.9 million, composed of shares of Common Stock (valued at
$ per share, the mid-point of the estimated initial public offering
price range) and, approximately $14.0 million in cash, all of which is payable
at the closing of the Combination Transactions. The aggregate consideration to
be paid for the Founding Practices will not change; however, the actual number
of shares of Common Stock issued to the Founding Practices in the Combination
Transactions will depend upon the initial public in the IPO offering price of
the Common Stock in the IPO. In the event the price to the public in the IPO is
higher than the mid-point of the range, the aggregate number of shares will be
reduced accordingly, and in the event the price to the public in the IPO is
lower, the aggregate number of shares will be increased accordingly. Cash
proceeds from the IPO will be used to pay the cash portion of the consideration.
See "Certain Transactions," "Risk Factors -- Control by Existing Management and
Stockholders" and "-- Substantial Proceeds of IPO Payable to Affiliates,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Shares Eligible for Future Sale" and the unaudited pro forma
combined financial statements and the notes thereto.
The Company maintains its principal executive office at 23848 Hawthorne
Boulevard, Suite 200, Torrance, California 90505, and its telephone number is
(310) 791-5656.
DIVIDEND POLICY
As a newly formed corporation, the Company has never declared or paid
dividends on its Common Stock or Class B Common Stock. Prior to the Combination
Transactions, the Founding Practices, some of which are sole proprietorships, C
corporations or S corporations, made distributions of earnings to their owners
and stockholders, as applicable. The Company expects that future earnings, if
any, will be retained for the growth and development of the Company's business
and, accordingly, the Company does not anticipate that any dividends will be
declared or paid on the Common Stock for the foreseeable future. The
declaration, payment and amount of future dividends, if any, will depend upon
the future earnings, results of operations, financial position and capital
requirements of the Company, among other factors. The Company may borrow funds
under credit agreements which may limit the ability of the Company to pay
dividends. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
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<PAGE> 15
CAPITALIZATION
The following table sets forth the current portion of long-term debt and
the total capitalization of the Company as of March 31, 1997 (i) on a pro forma
basis to reflect the Merger and Combination Transactions and (ii) on a pro forma
as adjusted basis to give effect to the Merger, Combination Transactions, the
sale of the shares of Common Stock in connection with the IPO
(assuming an IPO price of $ per share) and the application of the net proceeds
therefrom. The Company had no developmental activities in 1996 or for the three
months ended March 31, 1997; therefore, no historical financial statements are
presented in the table below. This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the OrthAlliance financial statements and notes thereto and the
unaudited combined pro forma financial statements and the notes thereto included
in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
-----------------------------
PRO FORMA
PRO FORMA(1) AS ADJUSTED(2)
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................... $ 2,796 $
======= ========
Long-term debt, less current portion........................ 1,000
------- --------
Stockholders' equity:
Preferred Stock $ par value; shares
authorized(3); no shares issued and outstanding, pro
forma or as adjusted.................................. -- --
Class A Common Stock, $.001 par value;
shares authorized(3), one share issued and
outstanding at March 31, 1997(3); issued
and outstanding pro forma; issued and
outstanding as adjusted(4).......................... --
Class B Common Stock, $.001 par value;
shares authorized(3), no shares issued and
outstanding at March 31, 1997; issued and
outstanding pro forma and as adjusted(4)............ --
Additional paid-in capital............................. 11,128
Accumulated deficit.................................... (4,261)
------- --------
Total Stockholders' equity........................ 6,867
------- --------
Total capitalization......................... $ 7,867 $
======= ========
</TABLE>
- ---------------
(1) See unaudited pro forma combined financial statements included elsewhere in
this Prospectus for a discussion of the assumptions made and adjustments
applied in preparation of this information.
(2) Gives effect to the sale of shares of Common Stock offered by the
Company in the IPO at an IPO price of $ per share and the application
of the estimated net proceeds therefrom.
(3) Reflects an amendment to the Company's Certificate filed subsequent to March
31, 1997 to increase the authorized capital stock and to designate classes
of common stock.
(4) Does not include shares of Common Stock issuable upon the exercise
of outstanding options for the purchase of Common Stock granted under the
Company's stock option plans or the exercise of warrants to purchase Common
Stock. See "Management -- Stock Plans" and "Description of Capital Stock --
Warrants."
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<PAGE> 16
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The selected pro forma combined financial information is based upon the
historical combined financial statements of the Founding Practices and the
historical financial statements of the Company and gives effect to the following
as of January 1, 1996 (with respect to the statement of operations data for the
year ended December 31, 1996 and the three months ended March 31, 1997), and as
of March 31, 1997 (with respect to the balance sheet data): (i) the Merger; (ii)
the Combination Transactions, and (iii) a provision for federal and state income
taxes as if the Company had been a C corporation during the periods presented
but does not give effect to the IPO unless otherwise indicated. This information
is derived from the unaudited pro forma combined financial statements of the
Company and the related notes thereto included elsewhere in this Prospectus. The
unaudited pro forma financial information does not purport to represent the
financial position or the operating results that would have been achieved had
the Merger and Combination Transactions occurred on the dates indicated or
project the financial position or results of operations for any future date or
period.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------- -------------
PRO FORMA(1) PRO FORMA(1)
------------- -------------
<S> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA(2):
Net revenue(3).............................................. $45,690 $11,287
Direct expenses:
Salaries, wages and benefits.............................. 17,208 4,758
Orthodontic supplies and lab.............................. 5,248 956
Rent...................................................... 4,202 1,082
Advertising and marketing................................. 1,421 347
------- -------
Total direct expenses............................. 28,079 7,143
General and administrative.................................. 9,707 2,426
Depreciation and amortization............................... 872 177
------- -------
Operating income.................................. 7,032 1,541
Interest income (expense), net.............................. -- 11
Gain on sale of assets...................................... 122 5
------- -------
Income before provision for income taxes.................... 7,154 1,557
Provision for income taxes........................ 2,719 592
------- -------
Net income........................................ $ 4,435 $ 965
======= =======
Net income per share.............................. $ $
======= =======
Number of shares used in net income per share calculation...
======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997(1)
-----------------------------
PRO FORMA
PRO FORMA(2) AS ADJUSTED(4)
------------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 5,011 $
Total assets................................................ 13,202
Long-term debt, less current portion........................ 1,000
Stockholders' equity........................................ 6,867
</TABLE>
- ---------------
(1) See unaudited pro forma combined financial statements and the notes thereto
included elsewhere in this Prospectus for a discussion of the assumptions
made and adjustments applied in preparation of this information.
(2) There is no historical presentation for OrthAlliance as it incurred no
expense and generated no revenues for the year ended December 31, 1996 or
the three months ended March 31, 1997.
(3) Represents pro forma revenue calculated by applying the terms of the
management services and consulting agreements to the historical operating
results of the individual Founding Practices. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview"
and "Business -- Agreements with Allied Practices and Allied Orthodontists."
(4) As adjusted gives effect to the IPO and the application of the estimated net
proceeds therefrom.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Such statements are only predictions, and the actual
events or results may differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Risk Factors,"
as well as those discussed elsewhere in this Prospectus. The historical results
set forth in this discussion and analysis are not indicative of trends with
respect to any actual or projected future financial performance of the Company.
The following should be read in conjunction with the financial statements and
related notes thereto appearing elsewhere in this Prospectus.
OVERVIEW
OrthAlliance has conducted no significant operations to date but will
acquire as a result of the Combination Transactions certain operating assets
and, in some cases, liabilities of the Founding Practices. In addition,
OrthAlliance will enter into either a service agreement ("Service Agreement") or
a consulting and business services agreement ("Consulting Agreement") with each
of the Founding Practices (the Service Agreements and Consulting Agreements are
referred to herein collectively as "Management Agreements"). Under the Service
Agreements, the Company will provide practice management services to the
Founding Practices in exchange for certain management fees. Under the Consulting
Agreements, which allow the Company and the Founding Practice to comply with
certain state law restrictions on practice management, the Company will provide
consulting services in exchange for similar fees.
The Company's revenue will consist of the sum of its fees under the
Management Agreements and the reimbursement of operating expenses of the Allied
Practices paid by the Company. In general, the Management Agreements provide for
the payment of management fees to the Company based on a negotiated percentage
of the adjusted patient revenues of the Allied Practices. Adjusted patient
revenue is defined for purposes of the Management Agreements as all fees and
charges recorded by the Allied Practices for professional orthodontic services,
adjusted to reflect uncollectible accounts and other discounts, allowances or
activities that do not generate collectible fees. Patient revenue is recognized
as orthodontic services are performed, with approximately 20% being recognized
at the time of initial treatment. The balance of the contract revenue is
realized evenly over the remaining treatment period. The 20% estimated revenue
at the initial treatment date is based on the estimated costs incurred by the
practice at that time as compared to the total costs of providing the contracted
services. Additionally, the 20% estimated cost at the initial treatment date is
consistent with industry standards and includes the estimated costs of diagnosis
and treatment plan development, initial treatment by orthodontic personnel,
orthodontic supplies, and associated administrative services. The specific fees
paid by each Allied Practice to the Company are based on numerous factors,
including but not limited to the practice's profitability, future growth
potential, revenues, and other factors that the Company may deem appropriate. In
addition, the Management Agreements are structured so that the Company and the
Allied Practices share the benefits of increased Allied Practice profits
resulting from improved operating efficiencies. In exchange for its management
fees, the Company manages the business aspects of the Allied Practices and
provides capital for their development and growth.
Pursuant to the Management Agreements, the Company is obligated to pay the
operating expenses of each Allied Practice, except for the salaries of the
orthodontists and, in certain states, other professional staff. The Company is
reimbursed for such expenditures by each Allied Practice. The Company will also
incur personnel and administrative expenses in connection with maintaining
corporate offices, from which the Company will provide management,
administrative, marketing, development and acquisition services.
In accordance with Staff Accounting Bulletin ("SAB") No. 48, "Transfers of
Nonmonetary Assets by Promoters or Shareholders," published by the Securities
and Exchange Commission (the "Commission"), the acquisition of the assets and
assumption of certain liabilities of all of the Founding Practices pursuant to
the Combination Transactions are accounted for by the Company at the
transferors' historical cost basis, with the shares of Common Stock to be issued
in those transactions being valued at the historical cost of the nonmonetary
16
<PAGE> 18
assets acquired net of liabilities assumed. The cash consideration will be
reflected as a dividend by the Company to the owners of the Founding Practices.
It is currently anticipated that the Company's future acquisitions of certain of
the assets and liabilities of Allied Practices may result in subsequent annual
noncash amortization charges for intangible assets in the Company's statements
of operations.
The Company intends to implement an aggressive growth strategy focused on
(i) affiliating with additional orthodontic practices that fit the OrthAlliance
model of high quality and strong financial performance; (ii) expanding Allied
Practices by providing capital, support and consultation for satellite office
expansion; (iii) assisting the Allied Practices with their internal growth by
increasing gross revenues through increased patient volume; and (iv) expanding
profit margins through operational efficiencies.
RESULTS OF OPERATIONS
Historical
The Company has conducted no significant operations to date and will not
conduct significant operations until the Combination Transactions and the IPO
are completed. OrthAlliance has incurred and will continue to incur various
legal, accounting, travel, personnel and marketing costs in connection with the
Combination Transactions and the IPO. From inception through March 31, 1997,
USOC and Premier incurred development costs of $3.6 million and $593,000,
respectively. OrthAlliance did not incur development costs during this period.
See the financial statements, the unaudited pro forma combined financial
statements and the notes related thereto.
Pro Forma
Revenues. It is anticipated that substantially all the Company's revenues
will consist of the sum of the fees received pursuant to the Management
Agreements and the reimbursed operating expenses of the Allied Practices. The
revenues included in the unaudited pro forma combined financial statements are
calculated by applying the terms of the Management Agreements to the historical
financial results of the Founding Practices for the year ended December 31, 1996
and the three months ended March 31, 1997, assuming the Combination Transactions
had been completed as of January 1, 1996. Giving effect to the terms of the
Management Agreements and assuming the Combination Transactions had occurred on
January 1, 1996, the pro forma revenues of the Company for the year ended
December 31, 1996 and the three months ended March 31, 1997 would have been
$45.7 million and $11.3 million, respectively.
Direct Expenses. The pro forma direct expenses for the year ended December
31, 1996 are based on the expenses incurred by USOC, Premier and the Founding
Practices as a group for the period from corporate inception, in the case of
USOC and Premier, and from January 1, 1996, in the case of the Founding
Practices, through December 31, 1996. The pro forma direct expenses for the
three months ended March 31, 1997 are based on the expenses incurred by USOC,
Premier and the Founding Practices as a group for the three months ended March
31, 1997. A pro forma adjustment has been made to reflect the incremental costs
of the Company providing management services to the Allied Practices in the
first year of operations, including contractual management salaries. The total
pro forma direct expenses do not reflect cost savings that may result from the
Combination Transactions.
Provision for income taxes. Pro forma income taxes assume the Company had
operated as a tax paying entity for the year ended December 31, 1996 and for the
three months ended March 31, 1997, subject to an effective combined state and
federal income tax rate of 38% for the period.
The Company and the Allied Practices are not subject to significant
seasonal variations in operating results. However, the third quarter
traditionally represents a larger number of treatment starts and the fourth
quarter, interrupted by holidays, generally represents fewer office treatments.
LIQUIDITY AND CAPITAL RESOURCES
If the Combination Transactions had occurred on March 31, 1997, the Company
would have had pro forma working capital of approximately $5.0 million.
17
<PAGE> 19
The Company anticipates the primary uses of capital will include
affiliation with orthodontic practices, development of satellite orthodontic
offices of Allied Practices and funding working capital needs of the Company and
the Allied Practices. The cost of developing satellite offices will vary by
geographic location; however, it is currently anticipated to be approximately
$250,000 per office. In addition, in the event any of the Allied Practices lack
sufficient funds to pay its current expenses, the Company, pursuant to the
Management Agreements, is required to advance funds to such Allied Practice for
the purpose of paying such expenses. Any such advances will be made in the form
of loans to the Allied Practices to be repaid upon such terms as mutually
agreed. As part of its growth strategy, the Company intends to enter into
additional affiliations with orthodontic practices that will involve the payment
of cash and Common Stock.
Management believes that the proceeds of the IPO, after application of the
use of proceeds therefrom, combined with the Company's anticipated cash flow
from operations will be sufficient to fund the planned capital needs and ongoing
operations of the Company for the foreseeable future. The Company intends to
establish a credit facility to supplement its anticipated cash flow from
operations and the net proceeds from the IPO.
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BUSINESS
GENERAL
OrthAlliance was recently organized to create a leading provider of
practice management services to orthodontic practices in the United States. The
Company will manage the business aspects of the Allied Practices (subject to
applicable state law), thereby allowing Allied Orthodontists to focus on
delivering cost-effective, high quality patient care, and will provide capital
for the development and growth of such practices. The Company will affiliate
with Allied Practices pursuant to long-term agreements and will generate
revenues by providing management, marketing and development services to Allied
Practices. The Company intends to aggressively expand its network of Allied
Practices by acquiring certain operating assets of and entering into long-term
management services agreements with additional orthodontic practices throughout
the United States.
The Founding Practices and Their Allied Orthodontists. The Company has
entered into definitive agreements, to be consummated simultaneously with the
closing of the IPO, to acquire certain operating assets of and enter into
long-term management services agreements with 59 Founding Practices, which
include 87 orthodontists operating 156 offices located in 17 states. Management
believes that the Company has distinguished itself from its competitors by
affiliating with the Founding Practices, which management believes are leading
practices in their markets. The Founding Practices were selected based on a
variety of factors, including size, profitability, historical growth and
reputation for high quality care, among local consumers of orthodontic services
and within the orthodontic services industry. Management intends to capitalize
on the reputations and relationships of the Founding Practices and their Allied
Orthodontists to assist the Company in affiliating with additional orthodontic
practices. For the year ended December 31, 1996, the Founding Practices had
average revenues of approximately $1,039,000, compared to average practice
revenues for the orthodontic industry as a whole, estimated by the Company to be
approximately $545,000.
Management believes that the Company's management, marketing, recruiting
and growth strategies, as applied to the Founding Practices, will maximize the
Company's revenues. Each Allied Orthodontist of the Founding Practices will
initially be a member of the Company's Board of Advisors, highlighting the
expertise of the Allied Orthodontists of the Founding Practices. The Board of
Advisors will advise management on a broad range of issues, including treatment,
risk management, quality assurance, credentialing, managed care, product
evaluation, professional resources and marketing. The members of the Board of
Advisors will also recommend professional standards for both treatment quality
and delivery of patient care, and provide a peer review process.
Services of the Company. Pursuant to the OrthAlliance model, the Company
provides fee-based management services to its Allied Practices thereby allowing
Allied Orthodontists to concentrate on providing cost effective, high quality
patient care. The Company does not practice orthodontics or dentistry, but
generally acquires certain operating assets of an orthodontic practice, employs
the employees (except orthodontists, and where applicable law requires,
hygienists and dental assistants), and enters into long-term Management
Agreements with the Allied Practices. Where state law allows and upon request by
an Allied Practice, the Company may lease equipment or office space to the
Allied Practices and employ orthodontic assistants for the Allied Practices.
The Company will generate revenues by providing management services to the
Allied Practices, including billing and collections, cash management,
purchasing, inventory management, payroll processing, employee benefits
administration, advertising and marketing, financial reporting and analysis,
productivity reporting and analysis, training, associate orthodontist recruiting
and capital for satellite office development and acquisitions. Management
believes, based on its experience with the Founding Practices and data available
to it, that the Company's emphasis on high quality patient care and its
business, marketing, technological and practice-growth support systems will
appeal to orthodontists inclined to affiliate with the Company.
THE ORTHODONTIC INDUSTRY
Orthodontics, the art and science of correcting the misalignment of teeth,
historically has been one of the most profitable specialties in dentistry. The
field of orthodontics has evolved greatly since the turn of the century, a
process which management believes will continue. Orthodontic research and
education have aided the
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development of new materials and techniques of orthodontic treatment, including
the use of computers to help solve complex cases. In 1994, orthodontists in the
United States conducted examinations of nearly 2.5 million potential new
patients and initiated treatment for approximately 1.5 million patients. The
typical orthodontist initiated treatment for approximately 170 patients in 1994
and maintained approximately 380 active cases.
The primary target market for orthodontic treatment is children ages 8 to
18. In 1994, approximately 80%, or 1.2 million, of all patients treated were
children. The U.S. Census Bureau estimates that as of July 1, 1996, there were
approximately 37.6 million children and adolescents between the ages of 10 and
19. Management believes that as many as 50% of these children and adolescents
could benefit from orthodontic treatment, presenting an attractive opportunity
for the Company. In addition to the traditional juvenile market, the adult
market has been a rapidly growing market for orthodontic services. Management
believes the market for adults has grown rapidly over the last 15 years as a
result of several factors. Adults today are more conscious about their
appearance, which may be improved by orthodontic treatment they may not have
received as children. Moreover, many adults today are more willing to undergo
orthodontic treatment in light of the development of new orthodontic materials
and techniques that allow the orthodontist largely to conceal the bands and
brackets used during treatment because they match the color of the teeth. Based
on statistics obtained from the 1995 JCO Study, management believes that the
adult market for orthodontic services remains untapped, as the number of adults
who need or want orthodontic treatment substantially exceeds the number of
patients currently seeking treatment. In 1994, standard case fees averaged
approximately $3,500 for children and $3,800 for adults.
Currently, there are approximately 9,000 practicing orthodontists in the
United States, nearly all of whom have graduated from accredited graduate
programs of orthodontics. The industry is highly fragmented, with approximately
90% of the practicing orthodontists acting as sole practitioners and the balance
practicing in multiple-doctor practices (generally two orthodontists) or in
groups affiliated with competitors of the Company. The training and
qualification of an orthodontist is extremely rigorous. Generally, a dentist
must graduate in the top 10% of his or her class at an accredited graduate
school of dentistry, pass national and state board examinations, and complete an
accredited graduate orthodontic program to become an orthodontist. These
programs typically are structured as two- or three-year programs. Each year
about 200 new orthodontists graduate from accredited orthodontic programs.
OPERATING STRATEGY
Management believes that the Company's operating strategy will enable
Allied Practices to compete more effectively and realize significantly greater
profitability than other orthodontic practices, thereby providing an inducement
for additional orthodontists to affiliate with the Company. Key elements of the
Company's operating strategy include:
Emphasizing Quality Patient Care. Management believes that the services
and support it provides its Allied Orthodontists will positively impact the
level of patient care by increasing the Allied Orthodontists' time to
concentrate on patient care. The primary hindrances to consistent delivery of
quality patient care are (i) the discrepancy in qualifications among practicing
orthodontists and (ii) the amount of time each orthodontist spends on patient
care. The qualifications of providers of orthodontic services vary from general
dentists who have taken weekend courses in orthodontics to graduates of
accredited three-year programs. Nearly all Allied Orthodontists affiliated with
the Founding Practices are graduates of accredited orthodontic programs. In
addition, the Company will establish clinical care advisory committees
consisting of Allied Orthodontists who will meet periodically to formulate
quality assurance programs, to perform peer review studies, and to consult with
each other on current treatments, techniques and issues. Furthermore, recent
orthodontic graduates recruited by the Company will be required (in most cases)
to complete a mentoring program pursuant to which such graduates will provide
treatment under the supervision and guidance of an experienced Allied
Orthodontist for a period of time to refine their skills before assuming primary
responsibility for patient care at a satellite office of an Allied Practice.
Capitalizing on the Best Demonstrated Practices of Allied
Orthodontists. The Company believes that one of its most valuable practice
management services will be its ability to identify practice-level strategies
that have proven successful for individual Allied Practices and share this
information among other Allied Practices. Management will routinely evaluate the
policies and procedures of the Allied Practices, including such critical
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areas as treatment quality, delivery of patient care, practice-building,
marketing, patient financing programs and expense control. The Company will
provide Allied Orthodontists with comparative operating and financial data that
will enable Allied Orthodontists to detect areas of their practices that could
be improved. The Company will provide its own analysis of such operating and
financial data and recommend changes to improve performance. The Company expects
that a primary means of identifying and implementing solutions to particular
practice issues will be to consult with Allied Practices that have had
demonstrated success in a certain area. The Company generally will seek to
facilitate communication among Allied Practices through periodic conferences and
meetings and, ultimately, through a proprietary intranet system.
Achieving Operating Efficiencies and Economies of Scale. The Company
intends to implement a variety of operating procedures and systems to improve
the productivity and profitability of each orthodontic practice which becomes an
Allied Practice and to achieve economies of scale. The Company will implement
centralized payroll processing, inventory control and national group purchasing
contracts. The Company plans to implement appropriate credit and collection
policies which will accommodate specific needs of the target market of each
Allied Practice. Management believes that patient flow and work flow could be
enhanced by physical improvements in designs to facilities, which should result
in an increase in the number of patients seen and an increase in employee and
orthodontist productivity. If such physical improvement in design is supported
by an adequate return on investment, the Allied Practice and the Company may
undertake such design changes. Operating efficiencies and economies will be
instituted on a per market or per Allied Practice need basis after thorough
analysis, including review of work flow, patient flow, aged accounts receivable
history, facilities, employee work load and productivity, and employee and
patient satisfaction surveys.
Increasing the Affordability of Orthodontic Care through Flexible Payment
Plans. The Company will assist Allied Practices in developing and implementing
payment plans designed to make orthodontic services more affordable to
prospective patients, thereby making orthodontic services available to a larger
segment of the population in their respective markets. Many of the Founding
Practices have historically received a down payment of approximately 20% of the
total cost of services, which is typical in the orthodontics industry and is
based on the costs incurred by an orthodontic practice at the time treatment is
initiated. Recognizing that orthodontic services are largely discretionary and
that a significant down payment is often a deterrent to prospective patients,
the Company believes that flexible payment plans are an effective means of
increasing patient volume. Management believes that the markets in which Allied
Practices are located are different and payment plans should be tailored to
respond to the various market demands and opportunities. The Company will make
general recommendations to all Allied Practices with respect to instituting
flexible payment plans and will develop and implement market-tailored plans upon
the request of individual Allied Practices. In addition, the Company will
provide the working capital necessary for the Allied Practices to implement
flexible payment plans which may result in the reduction or elimination of down
payments.
Stimulating Demand in Local Markets Through Aggressive Marketing. In
consultation with and upon approval of the Allied Practices, the Company intends
to develop and implement aggressive and innovative marketing plans to augment
each Allied Practice's referral and other marketing systems currently in place.
Management believes that the orthodontic industry has not taken advantage of the
gains that can be achieved through strategic direct marketing and intends to,
upon request of an Allied Practice, implement aggressive direct marketing
campaigns. In addition, certain of the Founding Practices have developed
referral systems with local dentists, to achieve above-average practice revenues
and growth. Upon the request of an Allied Practice and in appropriate markets,
the Company will attempt to reach potential patients through print, local
television and radio advertising.
GROWTH STRATEGY
Management believes the continued growth of the Founding Practices and the
financial support for the development of new Allied Practices are key components
of the future success of the Company. To increase the Company's revenues and
profits and gain market share, management intends to initiate an aggressive
growth
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strategy designed to increase the number of Allied Practices and Allied
Orthodontists over time. Management's expansion strategy includes:
Affiliations with Orthodontic Practices. Management believes that the
Company's target market for affiliations includes approximately half of the
orthodontic practices in the United States (approximately 4,500 practices),
because these practices fit the OrthAlliance model of high quality and
opportunity for revenue and earnings growth. Management believes that
affiliation will be an attractive option for many orthodontists because the
Company intends to (i) provide the capital to open and integrate new orthodontic
offices into existing Allied Practices, (ii) identify and recruit qualified
associate orthodontists for the Allied Practices, (iii) design and offer
business and clinical systems for each Allied Practice, (iv) with the approval
of the Allied Orthodontist, hire the necessary business and non-orthodontic
personnel for each new Allied Practice, (v) help increase each Allied Practice's
market share and the number of new patients seen by recommending successful
marketing and advertising strategies, and (vi) reduce the time Allied
Orthodontists spend on administrative and business related tasks, allowing them
to focus on delivering quality patient care.
Developing Orthodontic Satellite Offices. Where management determines
market demand will support practice expansion, the Company will assist Allied
Practices in developing satellite offices to be integrated into Allied Practices
to increase market share and revenues. The Company intends to provide capital
for practice expansion, market research, site selection, office design and
marketing support for satellite office development. Management believes the
Company's recruiting strategy complements growth through the addition of
satellite offices. Experienced associate orthodontists and recently graduated
orthodontists, who have completed a mentoring program, would be well suited to
assume primary responsibility for patient care at newly-established satellite
offices. See "-- Allied Practice Operations and Locations."
Internal Growth through Improved Operating Efficiencies. A fundamental
element of management's growth strategy is internal Allied Practice growth
through improving each practice's operating efficiencies. The Company intends to
offer a variety of operating procedures and systems to improve the productivity
and profitability of the Allied Practices. The Company's operating systems and
strategies, together with its recruiting, training, marketing and business
management services should allow Allied Orthodontists to focus their attention
on providing patient care, resulting in increased patient flow and enhanced
revenues. The Company plans to implement payroll processing, employee benefits
administration, financial reporting and analysis, inventory management and
national group purchasing discounted contracts and intends to implement
appropriate credit and collection policies which accommodate specific needs of
the general target markets of each Allied Practice. Operating efficiencies and
economies will be instituted on a per Allied Practice basis after thorough
analysis, including review of work flow, patient flow, aged accounts receivable
history, facilities, employee work load and productivity, employee satisfaction
and patient satisfaction.
ALLIED PRACTICE OPERATIONS AND LOCATIONS
Payment Plan; Case Fees. At the initial orthodontic treatment, the patient
signs a contract outlining the terms of the treatment, including the anticipated
length of treatment and the total fees. The number of required monthly payments
is estimated at the beginning of the case and generally corresponds to the
anticipated number of months of treatment. Depending on the patient's credit
history, the down payment will range from a substantial down payment to no down
payment. Patients are typically required to pay equal monthly installments
although each Allied Practice will offer a payment plan tailored to its market
and patients.
If the treatment period exceeds the period originally estimated by the
orthodontist, the patient and the Allied Orthodontist will determine whether
payment for additional treatment will be required. If the treatment is completed
prior to the scheduled completion date, the patient is required to pay the
remaining balance of the contract. If a patient terminates the treatment prior
to the completion of the treatment period, the patient is required to pay the
balance due for services rendered to date.
Other payment plans with lower monthly payments are available for patients
who have insurance coverage for the treatment. Approximately 40% of the patients
treated at the Allied Practices have some form of orthodontic insurance
coverage. Payments for patients with insurance may be lower, depending upon the
amount
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of the fee paid on behalf of the patient by insurance policies. For patients
with insurance coverage, the portion of the fee not covered by insurance is paid
by the patient and is not waived or discounted by the Allied Practice.
Information Systems ("IS"). The Company plans to implement a comprehensive
IS strategy over the next several years. The Company will implement a
communications and data transmission program utilizing a proprietary intranet
system and commercially available integration technology. Typically, an
orthodontic practice utilizes two types of systems. The first system is the
accounting and general ledger system and the second is the production system.
The accounting and general ledger system will be implemented promptly upon the
Allied Practice's affiliation with the Company. The production system, which
provides patient and practice management functions, will take more time to
implement. While it is the Company's stated objective to protect the computer
system and applications investment of each Allied Practice, management intends
to use a combination of integration and interface technologies to tie together
the disparate systems.
Purchasing. The Company plans to coordinate quantity discounts of
equipment, office furniture, inventory and supplies for the Allied Practices in
order to reduce per unit costs. In addition, the Company will negotiate
arrangements with other suppliers, such as casualty insurance carriers, that
should provide cost savings to the Allied Practices.
Locations. Upon consummation of the Combination Transactions, the Company
will provide management services to the following locations:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF
STATE ORTHODONTISTS(1) OFFICES CITIES
- ----- ---------------- --------- ---------
<S> <C> <C> <C>
Alabama............................................ 3 3 3
Arizona............................................ 2 2 1
California......................................... 15 21 17
Florida............................................ 19 34 27
Georgia............................................ 18 37 26
Indiana............................................ 9 19 17
Kentucky........................................... 2 6 6
Michigan........................................... 1 2 2
Minnesota.......................................... 2 2 2
Mississippi........................................ 2 6 6
North Carolina..................................... 1 1 1
Pennsylvania....................................... 2 3 3
South Carolina..................................... 3 5 5
Tennessee.......................................... 2 3 3
Texas.............................................. 4 8 8
Utah............................................... 2 2 2
Virginia........................................... 2 2 2
-- --- ---
Total.................................... 89 156 131
== === ===
</TABLE>
- ---------------
(1) Two of the orthodontists have offices in two different states.
AGREEMENTS WITH ALLIED PRACTICES AND ALLIED ORTHODONTISTS
Each Allied Practice has entered into three material agreements in
connection with the Combination Transactions: (i) an Acquisition Agreement,
which may be in the form of a purchase and sale agreement whereby Premier or
USOC agrees to acquire certain of the assets or stock of the Allied Practice, or
an agreement and plan of reorganization, whereby the Allied Practice merges with
and into Premier or USOC; (ii) either a Service Agreement or a Consulting
Agreement (depending upon the applicable regulatory requirements), whereby
either Premier or USOC, as the case may be, agrees to provide management or
consulting services to the Allied Practice; and (iii) an Employment Agreement
between the Allied Practice and each related Allied Orthodontist who is an
equity holder in the Allied Practice or who provides orthodontic services
through such practice for
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more than ten days each month. Each of these agreements, with the exception of
the Employment Agreements, will be assumed by the Company in connection with the
Combination Transactions.
Acquisition Agreements. The Company, by succeeding to the rights and
obligations of Premier and USOC in the Combination Transactions, will acquire
certain operating assets or stock of each Allied Practice pursuant to the
Acquisition Agreements in the form of one of the following: an asset purchase
and sale agreement, an agreement and plan of reorganization or a stock purchase
and sale agreement. Each asset purchase and sale agreement generally provides
for the sale by the Allied Practice of its equipment, licenses (to the extent
assignable by law), inventory, accounts receivable, furniture and other personal
property, or some combination thereof based on applicable state laws or
regulations, in exchange for consideration based on the Allied Practice's
adjusted patient revenue (defined below), up to 20% of which is generally
payable in cash, with the remainder payable in shares of Common Stock. Each
stock purchase and sale agreement generally provides for the exchange of the
stock of the Allied Practice by its shareholders and the payment of
consideration to its shareholders, which consideration is generally the same as
the consideration being paid pursuant to the asset purchase and sale agreements.
"Adjusted patient revenue" generally means all fees and charges recorded by the
Allied Practice for professional orthodontic or dental services, adjusted to
reflect uncollectible accounts, professional courtesies, and other discounts,
allowances or activities that do not generate collectible fees.
Each agreement and plan of reorganization generally provides for the merger
of the Allied Practice with and into USOC or Premier, as the case may be, the
cancellation or retirement of each share of stock in the Allied Practice, and
the payment of consideration to the shareholders of the Allied Practice, which
consideration is generally the same as the consideration being paid pursuant to
the asset purchase and sale agreements. Each of the Acquisition Agreements
provides for certain incidental registration rights with respect to the shares
of Common Stock paid to the Allied Practice or the Allied Orthodontist, as the
case may be. See "Description of Capital Stock -- Registration Rights."
Service Agreements. The parties to each Service Agreement include the
Company, as successor through the Merger, and the Allied Practice, which
typically is a professional corporation or association owned by the related
Allied Orthodontist. Each Service Agreement generally requires the Company to
perform the following services for the Allied Practices: provide and maintain
specified furnishings and equipment; provide necessary employees (except
orthodontists and, where applicable law requires, hygienists and dental
assistants); establish appropriate business systems; purchase and maintain
inventory; perform payroll and accounting functions; provide billing and
collection services with respect to patients, insurance companies, and
third-party payors; arrange all legal services not related to malpractice
litigation; design and execute a marketing plan; advise with respect to new
office locations; and manage and organize the Allied Practice's files and
records, including patient records where permitted by applicable law. In the
event that the Allied Practice lacks sufficient funds to pay its current
expenses, the Company is also required to advance funds to the Allied Practice
for the purpose of paying such expenses. Any such advances will be made in the
form of loans to the Allied Practice to be repaid upon such terms as mutually
agreed.
In exchange for performing the services described above, the Company
generally receives a service fee equal to a negotiated percentage of the Allied
Practice's adjusted patient revenue. In certain cases, the Allied Practice may
also be required to pay an additional fee based on a percentage of any reduction
in the Allied Practice's annual overhead. The fees paid by each Allied Practice
are based on numerous factors, including but not limited to the practice's
profitability, future growth potential, revenues, and other factors that the
Company may deem significant.
The term of each Service Agreement is 20 years, subject to prior
termination by either party in the event the other party becomes subject to
voluntary or involuntary bankruptcy proceedings or materially breaches the
agreement, subject to a cure period. In addition, the Allied Practices may
terminate the Service Agreements upon the occurrence of a change of control (as
defined therein). A transaction approved by the Company's Board of Directors is
not a change of control transaction. Upon the expiration or termination of the
Service Agreement, the Allied Practice may, and in certain circumstances must,
repurchase for cash (at book value) certain assets, including all equipment, and
assume certain liabilities of the Company related to the Allied Practice.
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Each Service Agreement is generally not assignable by either party thereto
without the written consent of the other party; however, the Company may assign
the Service Agreement without the Allied Practice's consent to any entity under
common control with the Company. The Company and the Allied Practice agree to
indemnify each other for costs and expenses incurred by such other party that
are caused directly or indirectly by, as the case may be, the Company's or the
Allied Practice's intentional or negligent acts or omissions. In the case of the
Allied Practice's obligation to indemnify the Company, such obligation also
applies to intentional or negligent acts and omissions occurring prior to the
date of the Service Agreement.
Consulting Agreements. The parties to each Consulting Agreement include
the Company, as successor through the Merger, and the Allied Practice. Certain
provisions of the Consulting Agreement are substantially similar to the Service
Agreement, including provisions relating to the Company's obligation to loan
funds to the Allied Practice in the event the Allied Practice is unable to pay
its current expenses, termination of the Consulting Agreement, repurchase of
assets and assumption of liabilities by the Allied Practice upon expiration or
termination, assignment, and indemnification.
The services provided by the Company to the Allied Practice under each
Consulting Agreement generally include consulting with respect to equipment and
office needs; preparing staffing models appropriate for an Allied Practice;
advising and training with respect to business systems; purchasing and
maintaining inventory; advising with respect to and providing or arranging
accounting and bookkeeping services; advising with respect to developing a
marketing plan; assessing the financial feasibility of establishing new offices;
providing billing and collection services; and assisting the Allied Practice in
organizing and developing filing and recording systems.
In exchange for such services, the Company receives a consulting fee equal
to either a fixed amount that provides for annual increases during the term of
the Consulting Agreement, or a negotiated percentage of the Allied Practice's
adjusted patient revenue. The fees paid by each Allied Practice are based on
numerous factors, including but not limited to the practice's profitability,
future growth potential, revenues, and other factors that the Company may deem
significant.
Pursuant to both the Service Agreements and Consulting Agreements, the
Company's Allied Orthodontists maintain full control over and ownership of their
orthodontic practices, determine which personnel will be affiliated with the
Allied Practices and set their own standards of practice to promote quality
orthodontic care. The Company does not engage in the practice of orthodontics or
dentistry. Each Allied Orthodontist is responsible for compliance of his or her
Allied Practice with state and local regulations applicable to the practice of
orthodontics and with licensing or certification requirements. In addition, each
Allied Orthodontist acquires and pays for malpractice insurance coverage.
Employment Agreements. Each Allied Orthodontist who is or becomes an
equity holder in an Allied Practice or who provides orthodontic services through
an Allied Practice for more than 10 days a month is required to execute an
employment agreement with the Allied Practice. Each employment agreement
generally provides that the Allied Orthodontist will perform professional
services for the Allied Practice for a period of five years, subject to prior
termination, (i) for cause by the Allied Practice (which generally means death,
incapacity, willful misconduct, conviction for a felony, or chronic alcoholism
or drug addiction), (ii) by the Allied Orthodontist in the event of a material
breach by the Allied Practice, and (iii) by the Allied Orthodontist in the event
of the Company's bankruptcy. The Allied Orthodontist agrees that following
termination or expiration of the employment agreement, he or she will not
compete for a period of two years in the market in which the Allied Practice
operates an office and will limit the methods of advertising in the area in
which an Allied Practice is located.
GOVERNMENT REGULATION
General. The field of orthodontics is highly regulated, and there can be
no assurance that the regulatory environment in which the Company operates will
not change significantly in the future. In general, regulation of healthcare
companies is increasing. Every state imposes licensing requirements on
individual orthodontists and on facilities operated by and services rendered by
orthodontists. In addition, federal and state laws regulate health maintenance
organizations and other managed care organizations for which orthodontists may
be providers. In
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connection with the entry into new markets, the Company, Allied Practices and
Allied Orthodontists may become subject to compliance with additional
regulations.
The operations of the Allied Practices must meet federal, state and local
regulatory standards in the areas of safety and health. Historically, compliance
with those standards has not had any material adverse effect on the operations
of the Founding Practices. Based on its familiarity with the historical
operations of the Founding Practices and the activities of the Company's Allied
Orthodontists, management believes that the Allied Practices are in compliance
in all material respects with all applicable federal, state and local laws and
regulations relating to safety and health.
State Legislation. The laws of several states prohibit orthodontists from
splitting fees with non-orthodontists. Furthermore, many states prohibit
nonorthodontic entities from practicing orthodontics, employing orthodontists,
or in some circumstances, employing orthodontic assistants. The laws of some
states prohibit advertising orthodontic services under a trade or corporate name
and require that all advertising be in the name of the orthodontist. A number of
states also regulate the content of advertisement of orthodontic services and
the use of promotional gift items. A number of states limit the ability of a
non-licensed dentist or non-orthodontist to own equipment or offices used in an
orthodontic practice. Some of these states allow leasing of equipment and office
space to an orthodontic practice, under a bona-fide lease, if the equipment and
office remain in the complete care and custody of the orthodontist. Management
believes, based on its familiarity with the historical operations of the
Founding Practices, the activities of the Company's Allied Orthodontists and
applicable regulations, that the Company's current and planned activities do not
constitute the prohibited practices contemplated by these statutes and
regulations. There can be no assurance, however, that future interpretations of
such laws, or the enactment of more stringent laws, will not require structural
and organizational modifications of the Company's initial relationships with its
Allied Orthodontists or the operation of the Allied Practices. In addition,
statutes in some states could restrict expansion of Company operations in those
jurisdictions. The Company either enters into a Service Agreement or Consulting
Agreement depending upon applicable state regulations.
Regulatory Compliance. The Company monitors developments in laws and
regulations relating to the practice of orthodontics and dentistry. The Company
may be required to modify its agreements, operations and marketing strategies
from time to time in response to changes in the business and regulatory
environment. The Company intends to structure all of its agreements, operations
and marketing in accordance with applicable law, although there can be no
assurance that its arrangements will not be successfully challenged or that
required changes may not materially affect the Company's business, financial
condition and results of operations.
COMPETITION
The Company anticipates facing substantial competition from other entities
as OrthAlliance seeks to affiliate with additional orthodontic practices. The
Company is aware of at least four practice management companies that are focused
in the area of orthodontics. Additional entities may enter this market and
compete with the Company. Certain of these competitors have greater financial or
other resources than the Company.
The business of providing orthodontic services is highly competitive in
each market in which the Founding Practices and other practices operate.
Founding Practices compete with orthodontists who maintain single offices or
operate a single satellite office, as well as with orthodontists that maintain
group practices or operate in multiple offices. Founding Practices also compete
with general dentists and pedodontists who provide certain orthodontic services,
some of whom have more established practices. The provision of orthodontic
services by such dentists and pedodontists has increased in recent years. There
can be no assurance that the Company or the Allied Practices will be able to
compete effectively within their markets.
EMPLOYEES
Upon completion of the Combination Transactions and the Merger,
OrthAlliance will employ an aggregate of approximately 565 full-time employees.
None of the Company's employees are represented by a collective bargaining
agreement. OrthAlliance considers its relationship with its employees to be
good.
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PROPERTIES
The Company leases approximately 1,700 square feet of office space in
Torrance, California for its headquarters and approximately 500 square feet of
office space in its Atlanta, Georgia office.
INTELLECTUAL PROPERTY
OrthAlliance has applied for federal registration of the service mark
"OrthAlliance." Management intends to utilize the service mark, as allowed by
applicable law, in the Company's marketing and advertising campaigns in order to
associate the name OrthAlliance with a reputation for nationwide quality
orthodontic care.
LITIGATION AND INSURANCE
The Company does not have any pending litigation that if adversely
determined would have a material adverse effect on the Company. The Allied
Practices provide orthodontic services to the public and are exposed to the risk
of professional liability and other claims. Such claims, if successful, could
result in substantial damage awards to the claimants that may exceed the limits
of any applicable insurance coverage. Although the Company does not control the
practice of orthodontics by the Allied Practices, it could be asserted that the
Company should be held liable for malpractice of an Allied Orthodontist.
The Company maintains liability insurance for itself and it is anticipated
that, where permitted by applicable law, the Company will be named as an
additional insured under the policies of the Allied Practices. There can be no
assurance that any claims against the Company or any of the Allied Practices
will not be successful, or if successful, will not exceed the limits of
available insurance coverage or that such coverage will continue to be available
at acceptable rates.
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<PAGE> 29
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Sam Westover.................................... 41 President, Chief Executive Officer and
Director
Robert S. Chilton............................... 39 Chief Financial Officer
P. Craig Hethcox................................ 45 Chief Operating Officer
Paul H. Hayase.................................. 42 Senior Vice President -- Human Resources,
General Counsel and Secretary
Randall K. Bennett, D.D.S....................... 41 Director
Douglas D. Durbin, D.M.D., M.S.D................ 42 Director(1)
Randall A. Schmidt, D.D.S., M.S.D............... 40 Director(1)
W. Dennis Summers............................... 48 Director(1)
Jonathan E. Wilfong............................. 48 Chairman of the Board of Directors and
Consultant
</TABLE>
- ---------------
(1) Drs. Durbin and Schmidt and Mr. Summers will be elected to serve as
Directors immediately preceding consummation of the Combination
Transactions.
Sam Westover has served as a Director, President and Chief Executive
Officer of OrthAlliance since October 1996. From August 1993 until July 1996,
Mr. Westover served as President and Chief Executive Officer of Systemed Inc., a
pharmacy benefit management company, where he also served as a Director from
July 1992 until February 1997. From January 1993 until August 1993, Mr. Westover
served as Senior Vice President, Chief Financial Officer and Treasurer of
Wellpoint Health Networks Inc., a health insurance company. Prior to joining
Wellpoint, Mr. Westover served as Chief Financial Officer and Senior Vice
President, Corporate Financial Services of Blue Cross of California, a position
to which he was named in May 1990.
Robert S. Chilton has served as Chief Financial Officer of OrthAlliance
since May 1997. From April 1994 until May 1997, Mr. Chilton served as Vice
President/Controller of E & S Ring Management Corporation, a real estate
management firm. Mr. Chilton was Controller of Karl Storz Endoscopy-America,
Inc., a medical device manufacturer and distributor, from October 1987 until
April 1994. Mr. Chilton is a certified public accountant, and from February 1985
to October 1987 was employed by KPMG Peat Marwick.
P. Craig Hethcox will become Chief Operating Officer of OrthAlliance upon
the consummation of the Combination Transactions. From January 1997 to the date
of the Merger, Mr. Hethcox has served as Chief Executive Officer of USOC. From
July 1994 to December 1996, he served as Chief Operating Officer for Equimed,
Inc., where he directed the corporate operations for sixty-five ophthalmology,
oncology and surgical center entities. From 1988 to June 1994, Mr. Hethcox
served as Vice President of Operations for Medical Care America, where he was
responsible for the operations of the then largest practice management company
with surgical centers. Mr. Hethcox also held senior management positions with
Medical Corporation of America, Inc., and Omni Eye Services, Inc., both
ophthalmology practice management operations, and was Chief Executive Officer of
Lakeside Community Hospital.
Paul H. Hayase has served as Senior Vice President -- Human Resources,
General Counsel and Secretary of OrthAlliance since October 1996. From August
1995 until January 1997, Mr. Hayase served as Vice President -- Human Resources,
General Counsel and Secretary of Systemed Inc. Mr. Hayase served as Senior
Counsel of Ralphs Grocery Company, a supermarket chain in California, from
November 1993 to August 1995. From January 1985 to November 1993, Mr. Hayase
served as Senior Vice President, General Counsel of Knapp Communications
Corporation, a magazine publishing company.
Randall K. Bennett, D.D.S. has served as a Director of OrthAlliance since
its inception. He has practiced orthodontics in Salt Lake City, Utah since 1989.
He practiced in Beverly Hills, California from 1988 to 1989.
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<PAGE> 30
Dr. Bennett graduated from Loma Linda University in 1988 with an M.S. degree in
orthodontics and from the University of Alberta in 1981 with a D.D.S. degree.
Douglas D. Durbin, D.M.D. has agreed to serve and will be elected a
Director of OrthAlliance immediately preceding the consummation of the
Combination Transactions. Dr. Durbin has served as President of The Kentucky
Center for Orthodontics and Dento-Facial Orthopedics, a Founding Practice, since
1983, and manages six practice locations and 20 employees. Dr. Durbin is a
member of the American Association of Orthodontists, the American Dental
Association and the Kentucky Association of Orthodontists, a Diplomate of the
American Board of Orthodontics and has served as Secretary, Treasurer, and
President of the Bluegrass Dental Society. Dr. Durbin graduated from the
University of Kentucky College of Dentistry with a D.M.D. degree in 1978. He
received his M.S.D. and Certificate in Orthodontics from the University of
Kentucky College of Dentistry in 1983.
W. Dennis Summers has agreed to serve and will be elected a Director of
OrthAlliance immediately preceding the consummation of the Combination
Transactions. Since 1984, Mr. Summers has served as a principal of Roberts, Isaf
& Summers, P.C. (and its predecessor by merger), a law firm located in Atlanta,
Georgia. Mr. Summers specializes in corporate and business matters.
Randall A. Schmidt, D.D.S., M.S.D. has agreed to serve and will be elected
a Director of OrthAlliance immediately preceding the consummation of the
Combination Transactions. Dr. Schmidt has been in the practice of orthodontics
since 1983 in northwest Indiana, where he is a co-owner of Orthodontic
Affiliates, P.C., a Founding Practice. As the Vice-President and
Secretary/Treasurer of Orthodontic Affiliates, P.C., Dr. Schmidt has been
involved in the management and growth of this four-doctor orthodontic practice
with eight offices and 40 employees. Dr. Schmidt is a member of the American
Association of Orthodontists, American Dental Association and the Indiana
Society of Orthodontists. Dr. Schmidt graduated from Indiana University in 1981
with a D.D.S. degree. He received his M.S.D. and Certificate in Orthodontics
from Indiana University in 1983.
Jonathan E. Wilfong has served as Chairman of the Board of Directors of
OrthAlliance since May 1997. Mr. Wilfong has served as an executive consultant
to OrthAlliance since its inception and has served as consultant to USOC since
June 1996. Mr. Wilfong is the founder and a principal of Newfound Capital
Associates, an investment banking advisory firm founded in 1996 that specializes
in advising high growth businesses on capital formation strategies and
acquisition transactions. Mr. Wilfong is a Certified Public Accountant, and from
1983 to 1996 was a partner with Price Waterhouse LLP in Atlanta, Georgia and
Greenville, South Carolina.
BOARD OF DIRECTORS
The Company's Board of Directors is divided into three classes which
consist, as nearly as practicable, of one-third of the total number of directors
serving on the Board of Directors. The Board of Directors will have up to nine
members and is currently composed of three members and immediately prior to
consummation of the Combined Transactions will increase to six members, as named
herein. The members of each class serve staggered three-year terms following the
initial terms of such classes. The initial terms of Class I, Class II and Class
III directors expire at the annual stockholders' meetings in 1998, 1999 and
2000, respectively. Dr. Durbin and Mr. Summers will be members of Class I; Dr.
Bennett is and Dr. Schmidt will be a member of Class II; and Messrs. Westover
and Wilfong are members of Class III.
BOARD COMMITTEES
The Board of Directors has established an Executive Committee, a Nominating
Committee, an Audit Committee and a Compensation Committee. Messrs. Westover and
Wilfong and Drs. Bennett and Durbin will serve on the Executive Committee. Mr.
Wilfong and Dr. Bennett will each serve on the Audit Committee and the
Compensation Committee. Messrs. Summers, Westover and Wilfong will serve on the
Nominating Committee. The Executive Committee is authorized by the Board of
Directors to take all action which may be delegated by the Board of Directors
under the DGCL. The Nominating Committee recommends candidates for election to
the Company's Board of Directors, examines the performance of incumbent
Directors and makes recommendations concerning the retention of such Directors.
The Audit Committee recommends the annual appointment of the Company's auditors,
with whom the Audit Committee reviews the scope of audit and non-audit
assignments and
29
<PAGE> 31
related fees, accounting principles used by the Company in financial reporting
and the adequacy of the Company's internal control procedures. The 1997 Employee
Stock Plan and the 1997 Non-Employee Director Stock Plan are administered by the
Compensation Committee. The Compensation Committee also has the responsibility
for reviewing and approving salaries, bonuses, and other compensation and
benefits of executive officers, and advising management regarding benefits and
other terms and conditions of compensation.
DIRECTOR COMPENSATION
Members of the Board of Directors are reimbursed for their out-of-pocket
expenses for each meeting attended but otherwise serve without cash
compensation. The Company has adopted the 1997 Non-Employee Director Stock Plan,
pursuant to which each non-employee director (the "Outside Directors") receives
an automatic grant to purchase 5,000 shares of Common Stock upon his or her
election to the Board and, if serving as an Outside Director following the
annual meeting each year, an additional grant for the purchase of 5,000 shares
of Common Stock. See "-- Stock Plans -- 1997 Non-Employee Director Stock Option
Plan."
EXECUTIVE COMPENSATION
OrthAlliance was incorporated in October 1996 and did not conduct any
operations prior to that time. The Company anticipates that during fiscal 1997
its President and Chief Executive Officer and the three other most highly
compensated executive officers who are anticipated to receive annualized
compensation in excess of $100,000 will be, respectively, Messrs. Westover,
Hethcox, Hayase and Chilton. Their expected annualized base salaries for 1997
are $250,000, $185,000, $165,000 and $135,000, respectively. See "-- Employment
Agreements."
EMPLOYMENT AGREEMENTS
Prior to the Merger, the Company will enter into employment agreements with
Messrs. Westover, Hethcox and Hayase providing for annual base salaries of
$250,000, $185,000 and $165,000, respectively, with each person being eligible
for a cash bonus of up to 30% of his base salary. Additionally, the agreements
provide for the grant of options for the purchase of Common Stock to each of
Messrs. Westover, Hethcox and Hayase for 300,000, 100,000 and 75,000 shares of
Common Stock, respectively, and such options will vest (i) 20% on the closing of
the IPO and (ii) 20% on the anniversary of such date for each of the next four
years. These options expire ten years from the date of grant. Each employment
agreement contains a provision that if the employee is terminated within a
twelve-month period following a change in control of the Company (as defined
therein), the Company will pay such person three times the sum of (i) his annual
base compensation, (ii) the maximum possible cash bonus for such year, and (iii)
any accrued salary, benefits or reimbursements.
The Company has entered into a letter agreement with Mr. Chilton providing
for an annual base salary of $135,000, and a cash bonus of up to 30% of his
annualized base salary. Additionally, the Company has granted Mr. Chilton an
option for the purchase of 50,000 shares of Common Stock, with a vesting
schedule consistent with the vesting schedule for Messrs. Westover, Hethcox and
Hayase discussed above.
All options for the purchase of Common Stock granted to management
personnel discussed herein have an exercise price equal to the price of the
Common Stock to the public in the IPO.
STOCK PLANS
OrthAlliance has adopted the 1997 Employee Stock Plan and the 1997
Non-Employee Director Stock Plan (together, the "Stock Plans"). The Company
intends to register the shares of Common Stock issuable upon exercise of options
granted under the Stock Plans and, upon registration, such shares will be
eligible for resale in the public market, subject to applicable rules and
regulations of the Securities Act.
1997 Employee Stock Plan. The Board of Directors has adopted and the
stockholder has approved the Company's 1997 Employee Stock Plan (the "Employee
Plan"). Awards under the Employee Plan are to be determined by the Compensation
Committee and granted to officers and employees of the Company in the form
30
<PAGE> 32
of non-qualified or incentive stock options. The Employee Plan may be terminated
by the Board of Directors at any time.
A total of 1,000,000 shares of Common Stock are reserved for issuance
pursuant to the Employee Plan, subject to anti-dilution provisions. As of May
14, 1997, options for the purchase of 600,000 shares of Common Stock had been
granted to certain officers of the Company at an exercise price equal to the
price to the public in the IPO, which options vest 20% upon the closing of the
IPO with the balance vesting 20% on the first through fourth anniversary dates
of the Effective Date. These options expire ten years from the date of grant.
See "Management -- Employment Agreements."
1997 Non-Employee Director Stock Option Plan. The Board of Directors has
adopted and the stockholder has approved the 1997 Non-Employee Director Stock
Option Plan (the "Non-Employee Director Plan"). Awards under this plan are to be
granted to non-employee directors ("Outside Directors") of the Company. The plan
is intended to allow Outside Directors receiving grants to be Non-Employee
Directors, as defined in Rule 16b-3 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), with respect to the Company's Stock Plans and,
accordingly, is intended to be self-governing with respect to the Outside
Directors.
A total of 200,000 shares of Common Stock are reserved for issuance to the
Outside Directors pursuant to the Non-Employee Director Plan. Each person who is
elected or appointed as an Outside Director will be automatically granted an
option to purchase 5,000 shares of Common Stock at the time of his or her
election or appointment. Commencing in 1998, each person who continues to serve
as an Outside Director following the annual meeting each year will receive an
option to purchase 5,000 shares of Common Stock. Options issued to Outside
Directors pursuant to this plan will be non-qualified stock options, and will
expire ten years from the date of grant. The exercise price of such options
shall be equal to the average closing bid price for the 10 trading days before
the Company's annual meeting of stockholders for the annual grants and for the
10 trading days before election for the initial grants. Options issued to
Outside Directors become exercisable on the first anniversary of the date of
grant.
Administration of the Stock Plans. The Employee Plan is administered by
the Compensation Committee of the Board of Directors. The Non-Employee Director
Plan is intended to be self-governing. With respect to the Employee Plan, the
Compensation Committee determines the persons to whom, and the times at which,
awards are granted, the types of awards granted, certain amendments to the plan
(as permitted) and all other related terms and conditions of the awards, subject
to the terms, conditions and limitations set forth therein. Under the Employee
Plan, the Compensation Committee must consist of at least two directors, and
with respect to grants of options or awards to any persons subject to Section 16
of the Exchange Act, the Compensation Committee must consist of at least two
directors who are Non-Employee Directors under Rule 16b-3.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law (the "DGCL"), a
corporation may indemnify any of its directors and officers against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with a threatened,
pending or completed action, suit or proceeding brought against such officer or
director by reason of the fact that he or she is or was a director or officer
(i) if any such person acted in good faith and in a manner reasonably believed
to be in or not opposed to the best interests of the corporation and (ii) in
connection with any criminal action or proceeding if such person had no
reasonable cause to believe such conduct was unlawful. In actions brought by or
in the right of the corporation, however, Section 145 provides that no
indemnification may be made in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable for negligence or misconduct
in the performance of such person's duty to the corporation unless, and only to
the extent that, the Court of Chancery of the State of Delaware or the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in review of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
The Company's Certificate provides that no director of the Company shall be
liable for breach of fiduciary duty as a director except for (i) any breach of
the director's duty of loyalty to the Company or its stockholders;
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<PAGE> 33
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of the law; (iii) for willful or negligent violations of
certain provisions of the DGCL imposing certain requirements with respect to
stock repurchases, redemptions and dividends; or (iv) any transaction from which
the director derived an improper personal benefit. Pursuant to the Company's
Certificate and Bylaws, the Company is obligated to indemnify each of its
directors and officers to the fullest extent permitted by the DGCL. In addition,
the Bylaws obligate the Company to purchase and maintain insurance on behalf of
any director or officer of the Company against any liability asserted against
and incurred by such director or officer, whether or not the Company would have
the power to indemnify such officer or director against such liability under the
provisions of the DGCL.
COMPENSATION COMMITTEE INTERLOCKS
The Company had no Compensation Committee prior to May 1997. Prior thereto,
the Board of Directors of the Company, and of USOC and Premier, respectively,
determined executive compensation. No executive officer of the Company serves as
a member of a compensation committee or as a director of any entity of which any
of the Company's directors serve as an executive officer.
CERTAIN TRANSACTIONS
The terms of the Merger require that USOC and Premier will be merged with
and into OrthAlliance with each outstanding share of USOC's and Premier's
capital stock and warrants for the purchase of common stock converting into
shares of Common Stock and warrants for the purchase of
shares of common stock, respectively, of OrthAlliance. The directors, executive
officers and five percent or greater beneficial owners of the Company will
receive total consideration pursuant to the Merger (excluding any consideration
that may be received indirectly through POV LLC, as described below) as follows:
Mr. Westover, shares of Common Stock; Mr. Hayase, shares of
Common Stock; Dr. Bennett, shares of Common Stock; Dr. Durbin,
shares of Common Stock; Dr. Schmidt, shares of Common Stock;
Mr. Wilfong shares of Common Stock; and Dr. Robert N. Pickron,
shares of Common Stock.
Simultaneous with and as a condition to the closing of the IPO,
OrthAlliance will close the Combination Transactions pursuant to which it will
acquire certain stock and operating assets of the 59 separate Founding Practices
in exchange for cash and shares of Common Stock and enter into Management
Agreements with the Founding Practices. The aggregate consideration to be paid
by OrthAlliance to the Founding Practices is approximately $84.9 million,
consisting of shares of Common Stock (valued at $ per share,
the mid-point of the estimated initial public offering price range) and
approximately $14.0 million in cash, all of which is payable upon closing of the
Combination Transactions. The aggregate consideration to be paid for the
Founding Practices will not change; however, the actual number of shares of
Common Stock issued to the Founding Practices will increase or decrease
depending upon the public offering price of the Common Stock in the IPO. The
exact number of shares will be determined by dividing $70.9 million by the price
to the public in the IPO. The cash portion of the consideration will be paid
from proceeds received by the Company in the IPO. Drs. Bennett, Durbin and
Schmidt, all of whom are or will be directors of the Company, and Dr. Pickron, a
beneficial owner of more than 5% of the Common Stock following completion of the
Merger, the Combination Transactions and the Offering, will receive ,
, and shares of Common Stock, respectively, and
$ , $ , $ and $ in cash, respectively, as a
result of the Combination Transactions. The consideration that the Company has
agreed to pay each of the Founding Practices of Drs. Pickron, Durbin, Schmidt
and Bennett under the affiliation agreements was calculated in the same manner
as the consideration for each of the other Founding Practices.
In January 1997, Premier Orthodontic Ventures, LLC, a limited liability
company ("POV LLC"), loaned approximately $1 million to Premier, and in
connection with the Merger, the promissory note evidencing this debt obligation
(the "Premier Note") will become the obligation of OrthAlliance. POV LLC will
receive, out of proceeds of the IPO, an aggregate of approximately $1.06
million, which includes repayment of the principal amount of the Premier Note
and accrued interest of approximately $50,000. In addition, POV LLC owns 72% of
the outstanding common stock of Premier. Dr. Bennett and Messrs. Westover,
Hayase and J. Dalton Gerlach, a
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<PAGE> 34
Senior Vice President - Development of the Company, own Class A membership
interests in POV LLC of 33.3%, 44.4%, 11.1% and 11.1%, respectively. Mr. Gerlach
owns approximately 19% of the Class B membership interests in POV LLC. In
consideration of the redemption of their membership interests in POV LLC, each
Class B member will receive his invested amount (which is approximately $1.0
million in the aggregate) plus interest at 6% and a number of shares of Common
Stock equal to two times such member's invested amount. The Class A members will
be entitled to a pro rata distribution of the remaining assets of POV LLC after
the interests of the Class B members have been redeemed.
POV LLC entered into certain letter agreements with each of Messrs.
Westover, Hayase and Gerlach which provide that OrthAlliance as the successor to
Premier must pay such persons consulting fees of $233,960, $140,376 and
$147,897, respectively, upon the closing of the IPO. See "Use of Proceeds."
USOC entered into a consulting agreement with Newfound Capital Associates
("Newfound") and Newfound's President, Mr. Wilfong. OrthAlliance succeeds to the
rights and obligations of USOC under the consulting agreement through the
Merger. In addition, Mr. Wilfong entered into a separate consulting agreement
with OrthAlliance. Mr. Wilfong agreed to provide financial and general business
services to the Company, and the Company has agreed to pay Mr. Wilfong
consulting fees of $300,000 for such services, of which $250,000 is payable upon
completion of the IPO and will be paid from proceeds received in the IPO.
Pursuant to these consulting agreements and in addition to the consulting fee,
the Company issued to Mr. Wilfong (i) shares of Common Stock, and (ii)
warrants to purchase 318,750 shares of Common Stock with an exercise price per
share equal to the IPO price with respect to 150,000 shares and equal to the IPO
price net of the underwriting discount with respect to 168,750 shares of Common
Stock, exercisable for a five-year term commencing on the Effective Date. Mr.
Wilfong will continue to provide consulting services to the Company until the
earlier of the termination of the consulting agreements on September 30, 1997 or
the occurrence of other specified events. Pursuant to the terms of the stock
purchase warrants, Mr. Wilfong has certain incidental registration rights for
the registration of the shares of Common Stock underlying the warrants. See
"Description of Capital Stock -- Registration Rights."
USOC entered into a consulting agreement with Premier Management, Inc.
("PMI") and PMI's President, Robert D. Garces. The Company succeeds to the
rights and obligations of USOC under the consulting agreement through the
Merger. Under his consulting agreement, Mr. Garces has agreed to provide
financial and general business services to the Company, and the Company has
agreed to pay Mr. Garces a consulting fee of $100,000 for such services, payable
upon completion of the IPO and from the proceeds of the IPO. In addition to the
consulting fee, the Company issued to Mr. Garces (i) shares of Common
Stock, and (ii) a warrant to purchase 56,250 shares of Common Stock with an
exercise price equal to the IPO price net of the underwriting discount,
exercisable for a five-year term commencing on the Effective Date. Mr. Garces
will continue to provide services until the earlier of the termination of the
consulting agreement on September 30, 1997 or the occurrence of other specified
events. Pursuant to the terms of the stock purchase warrant, Mr. Garces has
certain incidental registration rights for the registration of the shares of
Common Stock underlying the warrants. See "Description of Capital
Stock -- Registration Rights."
USOC entered into an employment agreement with Mr. Hethcox providing for
the payment of $18,000 per month and the issuance of warrants to purchase 50,000
shares of USOC's common stock. Mr. Hethcox has received $108,000 in 1997.
OrthAlliance will assume through the Merger the obligation of USOC to Mr.
Hethcox and will issue replacement warrants to purchase 50,000 shares of Common
Stock at an exercise price of $0.01 a share, exercisable for a five-year term
commencing on the Effective Date.
Certain of the Allied Orthodontists, including Dr. Schmidt, will receive
stock purchase warrants for referring other Allied Orthodontists to the Company.
Dr. Schmidt will receive a warrant to purchase 31,600 shares of Common Stock
with an exercise price per share equal to the IPO price, exercisable for a
five-year term commencing on the Effective Date.
At the direction of the Company's executive officers, certain Allied
Orthodontists may be paid fees for: (i) preparing educational and seminar
materials for the Company, (ii) consulting with other Allied Orthodontists on
matters requested by management, (iii) identifying and performing due diligence
on additional orthodontic practices which may affiliate with the Company, and
(iv) other matters requested from time to time by
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<PAGE> 35
management in the normal course of operating the Company's business. It is not
presently known by management which Allied Orthodontists will be requested to
perform such services in the future and, therefore, management does not know the
amount of fees or the Allied Orthodontists to whom such fees may be paid.
Dr. Pickron received cash compensation from USOC in 1996 totalling $150,000
for serving as its Chief Executive Officer.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock and Class B Common Stock as of June , 1997,
reflecting the consummation of the IPO, by (i) each person who is known by the
Company to be the beneficial owner of more than five percent (5%) of the
outstanding shares of the Common Stock or Class B Common Stock, (ii) each
director and executive officer of the Company and (iii) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES OF PERCENT OF
SHARES OF PERCENT OF CLASS B CLASS B
COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME OWNED(1)(2) OWNED OWNED OWNED
- ---- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sam Westover(3).......................... %
Robert S. Chilton(4).....................
P. Craig Hethcox(5)......................
Paul H. Hayase(6)........................
Dr. Randall K. Bennett...................
Dr. Douglas D. Durbin....................
Dr. Randall A. Schmidt...................
W. Dennis Summers........................
Jonathan E. Wilfong(7)...................
Dr. Robert N. Pickron(8).................
All directors and executive officers as a
group (9 persons)......................
</TABLE>
- ---------------
* Less than one percent of the outstanding Common Stock.
(1) Unless otherwise indicated, each of the stockholders listed has sole voting
and investment power with respect to the shares of Common Stock or Class B
Common Stock beneficially owned by such stockholder. Shares of Common Stock
subject to options or warrants exercisable within 60 days are deemed
outstanding for computing the percentage of ownership of the option holder.
The address of all persons listed, except Mr. Wilfong and Dr. Pickron, is
23848 Hawthorne Boulevard, Suite 200, Torrance, California 90505, unless
otherwise indicated.
(2) Reflects the consummation of the Merger.
(3) Includes 60,000 shares of Common Stock subject to options that are
exercisable within 60 days.
(4) Includes 10,000 shares of Common Stock subject to options that are
exercisable within 60 days.
(5) Includes 20,000 shares of Common Stock subject to options and 50,000 shares
of Common Stock subject to warrants that are currently exercisable or are
exercisable within 60 days.
(6) Includes 15,000 shares subject to options that are exercisable within 60
days.
(7) The business address of Mr. Wilfong is 536 Manor Ridge Drive, N.W., Atlanta,
Georgia 30305. Includes 318,750 shares subject to warrants that are
exercisable within 60 days.
(8) The business address of Dr. Pickron is 3294 Medlock Bridge Road, Building A,
Norcross, Georgia 30092. Includes an aggregate of shares held in
separate trusts by a third party trustee for the benefit of each of Dr.
Pickron's children, and shares held by Dr. Pickron's spouse. Dr.
Pickron disclaims beneficial ownership of the shares held in such
trusts.
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<PAGE> 36
DESCRIPTION OF CAPITAL STOCK
The following summary is based upon OrthAlliance's Certificate and Bylaws,
which are included as exhibits to the Registration Statement of which this
Prospectus forms a part. The following discussion is qualified in its entirety
by reference to such exhibits.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Pursuant to the Certificate, the Company has authority to issue
shares of capital stock, consisting of shares of Common Stock, par value
$.001 per share, shares of Class B Common Stock, par value $.001 per
share, and the Board of Directors of the Company has authority (without action
by the stockholders) to issue shares of preferred stock, par value
$ per share, in one or more classes or series and to determine the voting
rights, preferences as to dividends and in liquidation, and conversion and other
rights of each such series (the "Preferred Stock"). As of , 1997,
there were shares of Common Stock and shares of Class B Common Stock
issued and outstanding. The Company has no current plans to issue any shares of
Preferred Stock. Upon completion of the Merger, the Company will have
approximately holders of record of the Company's Common Stock.
The rights of the holders of Common Stock and Class B Common Stock
discussed below are subject to such rights as the Board of Directors may
hereafter confer on the holders of Preferred Stock; accordingly, rights
conferred on holders of Preferred Stock that may be issued in the future under
the Certificate may have a material adverse effect on the rights of holders of
Common Stock and Class B Common Stock.
COMMON STOCK AND CLASS B COMMON STOCK
The Common Stock and the Class B Common Stock and the rights, powers and
limitations thereof are identical, except as described below.
Voting Rights. Each holder of shares of Common Stock and Class B Common
Stock shall be entitled to attend all special and annual meetings of the
stockholders of the Company and, share-for-share and without regard to class,
together with the holders of all other classes of stock entitled to attend such
meetings, to cast one vote for each outstanding share of Common Stock so held
upon any matter properly considered and acted upon by the stockholders, voting
together as a single class, except as otherwise required by law.
Liquidation Rights. In the event of any dissolution, liquidation, or
winding up of the Company, whether voluntary or involuntary, the holders of the
Common Stock and holders of any class or series of stock entitled to participate
therewith as to the distribution of assets including the Class B Common Stock,
shall become entitled to participate in the distribution of any assets of the
Company remaining after the Company shall have paid, or provided for payment of,
all debts and liabilities of the Company and after the Company shall have paid,
or set aside for payment, to the holders of any class of stock having preference
over the Common Stock and the Class B Common Stock in the event of dissolution,
liquidation or winding up, the full preferential amounts, if any, to which they
are entitled.
Dividends. Dividends may be paid on the Common Stock and the Class B
Common Stock and on any class or series of stock entitled to participate
therewith as to dividends, but only when and as declared by the Board of
Directors. Holders of Common Stock and Class B Common Stock will participate as
one class with respect to any dividends declared and paid on the Common Stock.
Other Rights. The Certificate does not give holders of Common Stock
preemptive or other subscription or conversion rights. Shares of Class B Common
Stock are subject to the conversion provisions described below. The shares of
Class B Common Stock are not transferable, except to a holder's spouse, parents,
siblings, lineal descendants, a trust for the benefit of any such persons or as
determined by will or the laws of descent.
Conversion Rights of Class B Common Stock. Each share of Class B Common
Stock shall automatically convert into Common Stock (i) at the ratio of
shares of Common Stock for each share of Class B Common Stock upon the
attainment of the Conversion Prices or (ii) if not converted pursuant to
subparagraph (i), on a one-for-one basis upon the anniversary of the
Effective Date. The shares of Class B Common Stock convertible
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<PAGE> 37
pursuant to subparagraph (i) above will convert in five increments of up to
shares of Class B Common Stock (20% of the total number of shares of Class
B Common Stock issued) upon the attainment of each of the five specified
Conversion Prices. Upon each such conversion, each holder of Class B Common
Stock will be deemed to have converted a pro rata share of such Class B Common
Stock then outstanding. The Conversion Prices shall be established at premiums
to the initial public offering price in the IPO, and will be deemed to have been
achieved at the end of the trading day on which the average closing price of the
Common Stock for the preceding consecutive trading days exceeds such
Conversion Price. The closing prices will be those reported on the Nasdaq
National Market, or such other reported over-the-counter market or an exchange,
as applicable. The initial Conversion Price is equal to 150% of the price to
public in the IPO, and each of the subsequent Conversion Prices is equal to 120%
of the preceding Conversion Price. Therefore, assuming the price to public in
the IPO is the mid-point of the estimated initial public offering price range
($ ), the five Conversion Prices at which up to shares of the
outstanding Class B Common Stock shall be automatically converted to Common
Stock are $ , $ , $ , $ and $ , respectively. Upon each
conversion, all fractional shares shall be paid in cash based upon the
consecutive trading day average closing price. In the event that there are any
shares of Class B Common Stock outstanding on the anniversary of the
Effective Date, all such shares shall automatically convert into an equal number
of shares of Common Stock. The holders of the Class B Common Stock may convert
each share of Class B Common Stock into one share of Common Stock at any time
prior to the anniversary of the Effective Date.
PREFERRED STOCK
The Certificate authorizes the Board of Directors, from time to time and
without any stockholder action or approval, to provide for the issuance of up to
shares of Preferred Stock, in one or more series, and to fix the relative
rights and preferences of the shares, including voting powers, dividend rights,
liquidation preferences, redemption rights and conversion privileges. As of the
date hereof, the Board of Directors has not provided for the issuance of any
series of such Preferred Stock, and there are no agreements or understandings
for the issuance of any such Preferred Stock. Because of its broad discretion
with respect to the creation and issuance of Preferred Stock without stockholder
approval, the Board of Directors could adversely affect the voting power of the
holders of Common Stock and Class B Common Stock and, by issuing shares of
Preferred Stock with certain voting, conversion and/or redemption rights, could
discourage any attempt to obtain control of the Company.
WARRANTS
Warrants for the purchase of 515,000 shares of Common Stock have been
issued and are outstanding or will be issued pursuant to the Merger. The
exercise price per share pursuant to each of the warrants is equal to (i) the
initial public offering price in the IPO, (ii) the initial public offering price
in the IPO net of underwriting discount, or (iii) $0.01 per share. For a more
detailed discussion of such warrants, see "Certain Transactions."
REGISTRATION RIGHTS
The Founding Practices have contracted to receive shares of Common Stock
upon the closing of the Combination Transactions pursuant to the terms and
conditions of the acquisition agreements between OrthAlliance and each Founding
Practice. Such agreements set forth certain incidental registration rights for
the Founding Practices, whereby the Company is obligated to use reasonable
efforts to register shares issued as consideration to a Founding Practice if the
Company initiates a public offering and files a registration statement in
connection therewith anytime within 24 months of the closing of the acquisition
of the operating assets or capital stock of the Founding Practice; provided,
however, that such registration rights are subject to any terms, conditions or
limitations required by any underwriter retained by the Company in connection
with such underwritten public offering, and such registration rights may not be
exercised in connection with a registration statement filed by the Company in
connection with the registration of shares issued pursuant to (i) an employee
stock purchase or option plan or (ii) any acquisition or proposed acquisition by
the Company. Each Founding Practice shall bear its proportionate share of
underwriters' commissions and discounts, and shall bear the costs and fees of
attorneys and accountants it retains.
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<PAGE> 38
The holders of shares of Common Stock issued upon the exercise of the
warrants issued to Mr. Wilfong, Mr. Garces and J. C. Bradford & Co. (the
"Bradford Warrant") have associated incidental registration rights pursuant to
which the Company is obligated to use reasonable efforts to register such shares
if the Company initiates a public offering and files a registration statement in
connection therewith after the date of this Prospectus, excluding the
registration of shares issued pursuant to (i) an employee stock purchase or
option plan or (ii) any acquisition or proposed acquisition by the Company. The
fees and costs of any registration of Common Stock issued pursuant to the
exercise of the Bradford Warrant will be borne by the Company.
CERTAIN PROVISIONS OF THE CERTIFICATE, BYLAWS AND DELAWARE LAW
Classification of Board of Directors. The Certificate and the Bylaws of
the Company divide the Board of Directors into three classes, designated Class
I, Class II and Class III, respectively, each class to be as nearly equal in
number as possible. The term of Class I, Class II and Class III directors will
expire at the 1998, 1999 and 2000 annual meetings of stockholders, respectively,
and in all cases directors elected will serve until their respective successors
are elected and qualified. At each annual meeting of stockholders, directors
will be elected to succeed those in the class whose terms then expire, with each
director so elected to serve for a term expiring at the third succeeding annual
meeting of stockholders after such director's election, and until the director's
successor is elected and qualified. Thus, directors elected stand for election
only once in three years.
Additional Directorships, Vacancies and Removal of Directors. The Bylaws
of the Company provide that the Board of Directors shall consist of up to nine
members. The Certificate and the Bylaws authorize the Board of Directors to
create additional directorships and abolish any vacant directorships.
Newly-created directorships and vacancies may be filled by a majority of
directors then in office to hold office until the next annual meeting of
stockholders, and until their successors shall be elected and qualified. In
addition, in accordance with the DGCL provisions pertaining to a company whose
Board of Directors is classified, the Company's Certificate and Bylaws provide
that directors may be removed only for cause by vote of the holders of a
majority of the shares entitled to vote at an election of directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Bylaws require an advance notice procedure for the nomination,
other than by or at the direction of the Board of Directors or the Nominating
Committee thereof, of candidates for election as directors (the "Nomination
Procedure"), as well as for other stockholder proposals to be considered at
annual stockholders' meetings. Notice to the Company from a stockholder who
proposes to nominate a person at a meeting for election as a director generally
must be given not less than 120 nor more than 150 days prior to the anniversary
of the date notice of the annual meeting of stockholders was given in the
preceding year and must contain: (i) the name and record address of the
stockholder who intends to make the nomination; (ii) the name, age and residence
address of the nominee; (iii) the principal occupation or employment of the
nominee; (iv) the class, series and number of shares held of record,
beneficially and by proxy, by the stockholder and the nominee as of the record
date of such meeting (if such record date is publicly available) and as of the
date of such notice; and (v) such other information relating to the nominee
proposed by such stockholder as is required to be included if the Company is
then subject to Regulation 14A under the Securities Exchange Act of 1934,
including the written consent of each nominee to be named in the proxy statement
and to serve as a director of the Company if so elected. The presiding officer
of the meeting may refuse to acknowledge the nomination of any person not made
in compliance with the Nomination Procedure. Similar advance notice must be
given of any other proposed business which a stockholder proposes to bring
before an annual meeting of stockholders. Such notice must contain (i) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (ii) the name and record
address of the stockholder proposing such business, (iii) the class, series and
number of shares of the Company's stock which are held of record, beneficially
and by proxy by the stockholder as of the record date of such meeting (if such
record date is publicly available) and as of the date of such notice, (iv) a
description of all arrangements or understandings between the stockholder and
any other person or persons (naming such person or persons) in connection with
the proposing of such business by the stockholder, and (v) any material interest
of the stockholder in such business. The purpose of requiring advance notice is
to afford the Board of Directors an opportunity to consider the qualifications
of the proposed nominees or the merits of other stockholder proposals and, to
the extent deemed necessary or desirable by the Board of Directors, to inform
stockholders about those
37
<PAGE> 39
matters. Although the advance notice provisions do not give the Board of
Directors any power to approve or disapprove of stockholder nominations or
proposals for action by the Company, they may have the effect of precluding a
contest for the election of directors or the consideration of stockholder
proposals if the procedures established by the Bylaws are not followed and the
effect of discouraging or deterring a third party from conducting a solicitation
of proxies to elect its own slate of directors or to approve its own proposals,
without regard to whether consideration of such nominees or proposals might be
harmful or beneficial to the Company and its stockholders.
Statutory Business Combination Provision. Section 203 of the DGCL prevents
an "interested stockholder" (defined in Section 203, generally, as a person
owning 15% or more of a corporation's outstanding voting stock) from engaging in
a "business combination" (as defined in Section 203) with a publicly-held
Delaware corporation for three years following the date such person became an
interested stockholder unless (i) before such person became an interested
stockholder, the board of directors of the corporation approved the transaction
in which the interested stockholder became an interested stockholder or approved
the business combination; (ii) upon consummation of the transaction that
resulted in the interested stockholder's becoming an interested stockholder, the
interested stockholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer);
or (iii) following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of directors of
the corporation and authorized at a meeting of stockholders by the affirmative
vote of the holders of two-thirds of the outstanding voting stock of the
corporation not owned by the interested stockholder.
Anti-takeover Effects. The foregoing provisions of the Certificate and
Bylaws and DGCL could discourage potential acquisition proposals and could delay
or prevent a change in control of the Company. These provisions are intended to
enhance the continuity and stability of the Board of Directors and the policies
formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change in control of the
Company. These provisions are also designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal and to discourage certain tactics
that may be used in proxy fights. However, such provisions may discourage third
parties from making tender offers for the Company's shares. As a result, the
market price of the Common Stock may not benefit from any premium that might
occur in anticipation of a potential or actual change in control. Such
provisions also may have the effect of preventing changes in the management of
the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is
.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the IPO, there has not been any public market for securities of
the Company. No prediction can be made as to the effect, if any, that market
sales of shares of Common Stock or the availability of shares of Common Stock
for sale will have on the market price prevailing from time to time. Sales of
substantial amounts of Common Stock of the Company in the public market after
the restrictions described below lapse could adversely affect the prevailing
market price and the ability of the Company to raise equity capital in the
future.
Upon completion of the IPO, the Company will have shares of
Common Stock and shares of Class B Common Stock outstanding. Of these
shares, the shares of Common Stock ( shares if the
Underwriters' over-allotment option is exercised in full) sold in the IPO will
be freely tradeable without restriction or limitation under the Securities Act,
except for shares purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act (which may generally be sold only
in compliance with Rule 144).
The Founding Practices have contracted to receive shares of
Common Stock upon the closing of the Combination Transactions in consideration
for certain assets of the Founding Practices and entering into
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<PAGE> 40
Management Agreements. Such shares have incidental registration rights pursuant
to the purchase and sale agreements between the Founding Practices and
OrthAlliance, whereby the Company is obligated to use reasonable efforts to
register shares issued as consideration to a Founding Practice if the Company
undertakes a public offering and files a registration statement in connection
therewith any time within 24 months of the closing of the acquisition of the
operating assets of the Founding Practice; provided, however, that such
registration rights are subject to any terms, conditions and limitations
required by any underwriter retained by the Company in connection with such
underwritten public offering, and such registration rights may not be exercised
in connection with registration statements filed by the Company in connection
with the registration of shares issued pursuant to (i) employee stock purchase
or option plans or (ii) any acquisition or proposed acquisition by the Company.
The shares of Common Stock received by the Founding Practices, the
remaining issued and outstanding shares of Common Stock and the issued
and outstanding shares of Class B Common Stock are deemed "restricted shares"
under Rule 144 since they were originally issued and sold by the Company in
private transactions in reliance upon exemptions from the registration
provisions of the Securities Act. The holders of restricted shares will not be
eligible to sell such shares pursuant to Rule 144 until the expiration of one
year from the date such restricted shares were acquired. Additional restrictions
on transferability apply to shares of Class B Common Stock. See "Description of
Capital Stock -- Common Stock."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons deemed to be affiliates, whose
restricted shares have been fully paid for and held for at least one year from
the date of issuance by the Company may sell such securities in brokers'
transactions or directly to market makers, provided the number of shares sold in
any three-month period does not exceed the greater of 1% of the then outstanding
shares of Common Stock ( shares based on the number of shares to be
outstanding after the IPO) or the average weekly trading volume of the Common
Stock in the public market during the four calendar weeks preceding the filing
of the seller's Form 144. Sales under Rule 144 are also subject to the
availability of current public information concerning the Company. After two
years have elapsed from the date of issuance of restricted shares by the
Company, such shares generally may be sold without limitation by persons who
have not been affiliates of the Company for at least three months. Rule 144 also
provides that affiliates who are selling restricted shares for which they have
fully paid must nonetheless comply with the above restrictions applicable to
restricted shares, notwithstanding the holding period.
All of the Founding Practices and the Company's officers, directors and
five percent (5%) or greater stockholders have agreed to enter into lock-up
agreements (the "Lock-up Agreements") generally providing that for a period of
365 days after the Effective Date, they will not, except for the exercise of
stock options pursuant to the Stock Plans, directly or indirectly, offer, sell,
loan, pledge or otherwise dispose of, or grant any options or other rights with
respect to, any shares of Common Stock or any securities that are convertible
into or exchangeable or exercisable for Common Stock owned by them without the
prior written consent of J.C. Bradford & Co. Similarly, the Company has agreed
generally that, for a period of 365 days after the Effective Date, it will not,
directly or indirectly, issue, offer, sell, grant options to purchase or
otherwise dispose of any of its equity securities or any other securities
convertible into or exchangeable or exercisable for its Common Stock or any
other equity security, except that the Company may grant stock options under the
Stock Plans and issue shares of Common Stock upon the exercise of options
previously granted.
In addition to the restricted shares outstanding upon completion of the IPO
and the Combination Transactions, all of the approximately shares of
Common Stock which may be acquired upon the exercise of vested stock options
within 365 days following the Effective Date (collectively, the "Option Shares")
are subject to the Lock-up Agreements but may be eligible for resale following
the expiration of the Lock-up Agreements (subject, in the case of affiliates, to
certain limitations) pursuant to Rule 701 under the Securities Act or a Form S-8
registration statement to be filed by the Company under the Securities Act. See
"Management -- Stock Plans." In addition, all of the approximately shares
of Common Stock that may be acquired upon the exercise of warrants (including
the Bradford Warrant) will be deemed restricted securities and may be eligible
for resale pursuant to Rule 144. Shares issuable upon the exercise of such
warrants have associated incidental registration rights pursuant to which the
Company is obligated to use reasonable efforts to register such shares if the
Company undertakes an underwritten public offering and files a registration
statement in connection therewith
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<PAGE> 41
after the Effective Date, excluding the registration of shares issued pursuant
to (i) an employee stock purchase or option plan or (ii) any acquisition or
proposed acquisition by the Company.
The Company intends to file a registration statement on Form S-8 to
register all shares of Common Stock issuable under the Company's stock option
plans, as soon as practicable after the Effective Date, and the Company's Form
S-8 is expected to become effective immediately upon filing. Shares covered by
such registration statement will be eligible for sale in the public market after
the effective date of such registration statement and following the expiration
of the Lock-up Agreements, subject to Rule 144 limitations applicable to
affiliates of the Company. See "Management -- Stock Plans."
The shares of Common Stock issuable pursuant to this Offering will be
freely tradable after their issuance by persons not affiliated with the Company
unless the Company contractually restricts their sale. The Company anticipates
that the agreements entered into in connection with its future acquisitions may
restrict the resale of all or a portion of the shares issued in those
transactions for varying periods of time.
PLAN OF DISTRIBUTION
THE COMPANY
This Prospectus covers the offer and sale of up to shares of
Common Stock, which the Company may issue from time to time in connection with
the future direct and indirect acquisitions of other businesses, properties or
securities in business combination transactions in accordance with Rule
415(a)(1)(viii) of Regulation C under the Securities Act or as otherwise
permitted under the Securities Act.
The Company expects that the terms upon which it may issue the shares of
Common Stock will be determined through negotiations with the securityholders or
principal owners of the businesses whose securities or assets are acquired. It
is expected that the shares that are issued will be valued at prices reasonably
related to market prices for the Common Stock prevailing either at the time an
acquisition agreement is executed or at the time an acquisition is consummated.
GENERAL
All expenses of this Offering will be paid by the Company. No underwriting
discounts or commissions will be paid in connection with the issuance of shares
of Common Stock by the Company in business combination transactions, although
finder's fees may be paid with respect to specific acquisitions. Any person
receiving a finder's fee may be deemed to be an Underwriter within the meaning
of the Securities Act.
The Company will apply for the listing of the shares of Common Stock
offered hereunder on the Nasdaq National Market, but such shares may be subject
to certain contractual holding period restrictions.
40
<PAGE> 42
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
stock are being passed upon for the Company by Nelson Mullins Riley &
Scarborough, L.L.P., Atlanta, Georgia, special securities counsel to the
Company.
EXPERTS
The financial statements of Premier Orthodontic Group, Inc., US Orthodontic
Care, Inc. and OrthAlliance, Inc. as of December 31, 1996 included in this
Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement, on Form
S-1 (together with all exhibits, schedules and amendments relating thereto, the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus, which is a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock, reference is hereby made to the
Registration Statement and the exhibits and schedules filed as a part thereof.
Statements contained in this Prospectus concerning the provisions or contents of
any contract, agreement or any other document referred to herein are not
necessarily complete. With respect to each such contract, agreement or document
filed as an exhibit to the Registration Statement, reference is made to such
exhibit for a more complete description of the matters involved, and each
statement shall be deemed qualified in its entirety by such reference to the
copy of the applicable document filed with the Commission. The Registration
Statement, including the exhibits and schedules thereto, may be inspected
without charge at the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
following Regional Offices of the Commission: New York Regional Office, 7 World
Trade Center, 13th Floor, New York, New York 10048; and Chicago Regional Office,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the
Registration Statement and the exhibits and schedules thereto can be obtained
from the Public Reference Section of the Commission upon payment of prescribed
fees. The Registration Statement, including the exhibits and schedules thereto,
is also available on the Commission's Web site at http://www.sec.gov. In
addition, the Company will make application for the Common Stock to be listed
for trading on the Nasdaq National Market. Upon listing, periodic reports, proxy
material and other information concerning the Company, when filed, may be
inspected at the offices of the Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by the Company's independent public
accountants.
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<PAGE> 43
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Pro Forma Combined Financial Statements........... F-2
Unaudited Pro Forma Combined Balance Sheet as of March 31,
1997................................................... F-3
Unaudited Pro Forma Combined Statement of Operations for
the Three Months Ended March 31, 1997.................. F-4
Unaudited Pro Forma Combined Statement of Operations for
the Year Ended December 31, 1996....................... F-5
Notes to Unaudited Pro Forma Combined Financial
Statements............................................. F-6
OrthAlliance, Inc.
Report of Independent Public Accountants.................. F-8
Balance Sheets as of December 31, 1996 and March 31,
1997................................................... F-9
Statements of Stockholders' Equity For the Period From
Inception (October 21, 1996) to December 31, 1996 and
for the Three Months Ended March 31, 1997.............. F-10
Notes to Financial Statements............................. F-11
US Orthodontic Care, Inc.
Report of Independent Public Accountants.................. F-13
Balance Sheets as of December 31, 1996 and March 31,
1997................................................... F-14
Statements of Operations For the Period From Inception
(February 7, 1996) to December 31, 1996 and for the
Three Months Ended March 31, 1997...................... F-15
Statements of Shareholders' (Deficit) Equity For the
Period From Inception (February 7, 1996) to December
31, 1996 and for the Three Months Ended March 31,
1997................................................... F-16
Statements of Cash Flows For the Period From Inception
(February 7, 1996) to December 31, 1996 and for the
Three Months Ended March 31, 1997...................... F-17
Notes to Financial Statements............................. F-18
Premier Orthodontic Group, Inc.
Report of Independent Public Accountants.................. F-23
Balance Sheets as of December 31, 1996 and March 31,
1997................................................... F-24
Statements of Operations For the Period From Inception
(November 26, 1996) to December 31, 1996 and for the
Three Months Ended March 31, 1997...................... F-25
Statements of Changes in Owners'/Stockholders' Deficit For
the Period From Inception (November 26, 1996) to
December 31, 1996 and for the Three Months Ended March
31, 1997............................................... F-26
Statements of Cash Flows For the Period From Inception
(November 26, 1996) to December 31, 1996 and for the
Three Months Ended March 31, 1997...................... F-27
Notes to Financial Statements............................. F-28
</TABLE>
F-1
<PAGE> 44
ORTHALLIANCE, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Simultaneously with and as a condition to the closing of an initial public
offering (the "IPO"), OrthAlliance, Inc. ("OrthAlliance") will acquire certain
operating assets of separate orthodontic practices (collectively, the "Founding
Practices") in exchange for cash and shares of Class A common stock, $.001 par
value per share (the "Common Stock") and enter into long-term management or
consulting services agreements with the Founding Practices (the "Combination
Transactions"). The number of shares of Common Stock issued in the Combination
Transactions will depend on the IPO price of the Common Stock. As a result of
the merger of Premier Orthodontic Group, Inc. ("Premier") and US Orthodontic
Care, Inc. ("USOC") with and into OrthAlliance, effective prior to the closing
of the IPO (the "Merger"), OrthAlliance succeeds to the rights of Premier and
USOC under agreements with the Founding Practices.
The following unaudited pro forma combined financial statements give effect
to the Merger and the Combination Transactions, and are based upon the
historical financial statements of OrthAlliance, Premier, USOC, and the Founding
Practices as a group.
The Unaudited Pro Forma Combined Statement of Operations for the three
months ended March 31, 1997 and the year ended December 31, 1996 gives effect to
the Merger and the Combination Transactions as if such events had occurred on
January 1, 1997. The Unaudited Pro Forma Combined Balance Sheet gives effect as
if such events had occurred on March 31, 1997. The unaudited pro forma combined
financial statements should be read in conjunction with other financial
information, including the financial statements of USOC, Premier and
OrthAlliance, included elsewhere in this Prospectus.
The Company will not employ orthodontists or control the practice of
orthodontics. As the Company will not be acquiring the future patient revenues
earned by the Founding Practices, the Combination Transactions are not deemed to
be business combinations. In accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 48, "Transfers of Nonmonetary Assets
by Promoters or Shareholders," the Combination Transactions will be accounted
for at the historical cost basis with the shares of common stock to be issued in
those transactions being valued at the historical cost of the nonmonetary assets
acquired net of liabilities assumed.
The unaudited pro forma combined financial statements are presented for
illustrative purposes only and are not necessarily indicative of the operating
results or financial position that would have been achieved if the Combination
Transactions had been consummated on the dates indicated, nor are they
necessarily indicative of the future operating results of the Company. The
unaudited pro forma combined financial information does not give effect to: (1)
cost savings or integration which may result from the Combination Transactions;
(2) acquisitions of practices which would have occurred during the year; or (3)
the IPO (including net proceeds and cash payments to the Founding Practices)
which will occur simultaneously with the Combination Transactions.
F-2
<PAGE> 45
ORTHALLIANCE, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED PRO
FOUNDING PRO FORMA FORMA
ORTHALLIANCE USOC PREMIER PRACTICES ADJUSTMENTS COMBINED
------------ ------ ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............. $ -- $ 315 $ 896 $ 3,815 $ (3,815)(1) $ 1,211
Patient receivables, net.............. -- -- -- 4,172 -- 4,172
Unbilled patient receivables, net..... -- -- -- 3,265 -- 3,265
Deferred income taxes................. -- -- -- -- 1,250(2) 1,250
Other current assets.................. -- 2 -- 2,079 (1,633)(1) 448
------ ------ ----- ------- -------- -------
Total current assets........... -- 317 896 13,331 (4,198) 10,346
Property, equipment and improvements,
net................................. -- 30 24 5,577 (2,780)(1) 2,851
Other assets.......................... -- -- 5 1,118 (1,118)(1) 5
------ ------ ----- ------- -------- -------
Total assets................... $ -- $ 347 $ 925 $20,026 $ (8,096) $13,202
====== ====== ===== ======= ======== =======
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Amounts drawn in excess of cash....... $ -- $ -- $ -- $ 216 $ (216)(1) $ --
Accounts payable and other current
liabilities......................... -- 303 518 719 (541)(1) 999
Patient prepayments................... -- -- -- 1,325 -- 1,325
Deferred income taxes................. -- -- -- -- 215(2) 215
Current portion of long-term debt..... -- -- -- 1,848 948(1) 2,796
------ ------ ----- ------- -------- -------
Total current liabilities...... -- 303 518 4,108 406 5,335
Long-term debt, less current
portion............................. -- -- 1,000 3,130 (3,130)(1) 1,000
------ ------ ----- ------- -------- -------
Total liabilities.............. -- 303 1,518 7,238 (2,724) 6,335
------ ------ ----- ------- -------- -------
STOCKHOLDERS' EQUITY
OrthAlliance, Inc.:
Class A Common Stock
$ par value; shares
authorized, one share issued
and outstanding and issued
and outstanding pro forma...... -- -- -- -- -- --
Class B Common Stock
$ par value; shares
authorized, no shares issued
and outstanding and issued
and outstanding pro forma...... -- -- -- -- -- --
Additional paid-in capital.......... -- -- -- -- 6,381(1) 10,538
1,035(2)
3,122(3)
Warrants............................ -- -- -- -- 590(3) 590
Accumulated deficit................. -- -- -- -- (4,261)(3) (4,261)
US Orthodontic Care, Inc.:
Common Stock; no par value,
10,000,000 shares authorized,
2,471,714 shares issued and
outstanding....................... -- -- -- -- -- --
Additional paid-in capital.......... -- 3,122 -- -- (3,122)(3) --
Warrants............................ -- 590 -- -- (590)(3) --
Accumulated deficit................. -- (3,668) -- -- 3,668(3) --
Premier Orthodontic Group, Inc.:
Accumulated deficit................. -- -- (593) -- 593(3) --
Combined Founding Practices' Equity... -- -- -- 12,788 (12,788)(1) --
------ ------ ----- ------- -------- -------
Total stockholders' equity..... -- 44 (593) 12,788 (5,372) 6,867
------ ------ ----- ------- -------- -------
Total liabilities and
stockholders' equity......... $ -- $ 347 $ 925 $20,026 $ (8,096) $13,202
====== ====== ===== ======= ======== =======
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-3
<PAGE> 46
ORTHALLIANCE, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED PRO
FOUNDING PRO FORMA FORMA
ORTHALLIANCE USOC PREMIER PRACTICES ADJUSTMENTS COMBINED
------------ ------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Management service revenue.... $ -- $ -- $ -- $ -- $ 11,287(7) $11,287
Patient service revenue....... -- -- -- 15,603 (15,603)(8) --
Orthodontist compensation..... -- -- -- (6,828) 6,828(8) --
------- ------- ------- ------- -------- -------
Net revenue........... -- -- -- 8,775 2,512 11,287
EXPENSE
Direct expenses:
Salaries, wages and
benefits................. -- 395 212 4,100 51(4) 4,758
Orthodontic supplies and
lab...................... -- -- -- 956 -- 956
Rent....................... -- -- -- 1,076 6(4) 1,082
Advertising and
marketing................ -- -- -- 320 27(4) 347
------- ------- ------- ------- -------- -------
Total direct
expenses............ -- 395 212 6,452 84 7,143
General and administrative.... -- 148 130 2,148 -- 2,426
Depreciation and
amortization............... -- -- -- 175 2(4) 177
------- ------- ------- ------- -------- -------
Operating (loss)
income.............. -- (543) (342) -- 2,426 1,541
Other income (expense):
Interest income (expense),
net...................... -- 7 4 (102) 102(6) 11
Other income............... -- -- -- (38) 38(6) --
Gain on sale of assets..... -- -- -- 5 -- 5
------- ------- ------- ------- -------- -------
Income (loss) before
provision for income
taxes............... -- (536) (338) (135) 2,566 1,557
Provision for income taxes...... -- -- -- -- 592(10) 592
------- ------- ------- ------- -------- -------
Net income (loss)............... $ -- $ (536) $ (338) $ (135) $ 1,974 $ 965
======= ======= ======= ======= ======== =======
Net income per share............ $
=======
Number of shares used in net
income per share
calculation(11)...............
=======
</TABLE>
See the accompanying notes to unaudited pro forma combined financial statements.
F-4
<PAGE> 47
ORTHALLIANCE, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED PRO
FOUNDING PRO FORMA FORMA
ORTHALLIANCE USOC PREMIER PRACTICES ADJUSTMENTS COMBINED
------------ ------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Management service revenue.... $ -- $ -- $ -- $ -- $ 45,690(7) $45,690
Patient service revenue....... -- -- -- 61,327 (61,327)(8) --
Orthodontist compensation..... -- -- -- (25,554) 25,554(8) --
------- ------- ------- ------- -------- -------
Net revenue........... -- -- -- 35,773 9,917 45,690
EXPENSE
Direct expenses:
Salaries, wages and
benefits................. -- 1,878 240 15,299 871(4) 17,208
(1,080)(9)
Orthodontic supplies and
lab...................... -- -- -- 5,248 -- 5,248
Rent....................... -- -- -- 4,178 24(4) 4,202
Advertising and
marketing................ -- -- -- 1,313 108(4) 1,421
------- ------- ------- ------- -------- -------
Total direct
expenses............ -- 1,878 240 26,038 (77) 28,079
General and administrative.... -- 804 15 8,873 15(4) 9,707
Depreciation and
amortization............... -- -- -- 862 10(4) 872
------- ------- ------- ------- -------- -------
Operating (loss)
income.............. -- (2,682) (255) -- 9,969 7,032
Other income (expense):
Interest income (expense),
net...................... -- -- -- (347) 347(6) --
Postponed offering costs... -- (450) -- -- 450(5) --
Other income............... -- -- -- 114 (114)(6) --
Gain on sale of assets..... -- -- -- 122 -- 122
------- ------- ------- ------- -------- -------
Income (loss) before
provision for income
taxes............... -- (3,132) (255) (111) 10,652 7,154
Provision for income taxes...... -- -- -- -- 2,719(10) 2,719
------- ------- ------- ------- -------- -------
Net income (loss)............... $ -- $(3,132) $ (255) $ (111) $ 7,933 $ 4,435
======= ======= ======= ======= ======== =======
Net income per share............ $
=======
Number of shares used in net
income per share
calculation(11)...............
=======
</TABLE>
See the accompanying notes to unaudited pro forma combined financial statements.
F-5
<PAGE> 48
ORTHALLIANCE, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following is a summary of the adjustments reflected in the unaudited
combined pro forma financial statements:
(1) Reflects the issuance of shares of Common Stock of the Company
in exchange for substantially all of the operating assets of the
Founding Practices, and to remove certain assets, liabilities and
owners' equity not purchased/assumed as part of the Combination
Transactions, based on an assumed IPO price of $ . The Founding
Practices will receive up to twenty percent of their practice asset
values in cash and the remainder in Common Stock. The assets purchased
and liabilities assumed from the Founding Practices reflected herein
are as follows:
<TABLE>
<S> <C>
Patient receivables, net of allowances................ $ 7,437
Other current assets.................................. 446
Property, plant and improvements, net................. 2,797
Accounts payable and other current liabilities........ 178
Patient prepayments................................... 1,325
Current portion of long-term debt..................... 2,796
</TABLE>
This entry excludes cash to be paid to the Founding Practices of
approximately $14,000 for the purchase of the practices' assets which
will be paid out of the proceeds of the IPO.
(2) Reflects the establishment of deferred income taxes for the Company
after the Combination Transactions.
(3) Reflects the transfer of stockholders' equity and the accumulated
deficit of USOC and Premier to OrthAlliance as part of the Merger.
(4) Reflects the incremental costs associated with the Company providing
management services to the Founding Practices in the first year of
operations. Pro forma salaries, wages and benefits includes $1,909
related to management of OrthAlliance for the twelve months ended
December 31, 1996 and $477 for the three months ended March 31, 1997.
Historical amounts for USOC include $250 of compensation expense
related to warrants for the purchase of Common Stock issued to an
officer in the first quarter of 1997.
(5) Eliminates one-time postponed offering costs of USOC. USOC incurred
costs associated with a proposed initial public offering in 1996.
Because this offering did not occur, USOC expensed those items.
(6) Removes income and expense items of the Founding Practices which would
not have been activities of the Company had the Combination
Transactions occurred as of the first day of the periods presented.
(7) Reflects management service fees of the Company calculated in
accordance with the management service agreements anticipated to be
entered into with the Founding Practices, as applied to the historical
operating results of the individual Founding Practices for the periods
indicated. Management service revenue includes management fees and the
reimbursed operating expenses of the Allied Practices. See
"Managements Discussion and Analysis -- Overview."
(8) Eliminates patient service revenue and orthodontist compensation at
the Founding Practice level.
(9) Reflects the elimination of a one-time compensation expense related to
issuances of common stock of USOC to the founders.
(10) Reflects federal and state income taxes using a 38% tax rate, assuming
the Company is a C corporation after the Combination Transactions.
F-6
<PAGE> 49
ORTHALLIANCE, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(11) The number of shares of Common Stock used in the pro forma net income
per share calculation are determined as follows:
<TABLE>
<CAPTION>
<S> <C>
Shares to be issued to effect the Merger....................
Shares to be issued in the Combination Transactions.........
Shares to be issued in the IPO..............................
Shares that would be outstanding if outstanding options were
exercised and the proceeds were used to repurchase shares
at the IPO price..........................................
-----------
TOTAL.............................................
===========
</TABLE>
F-7
<PAGE> 50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To OrthAlliance, Inc.:
We have audited the accompanying balance sheet of ORTHALLIANCE, INC. (a
development-stage enterprise, a Delaware corporation, and formerly Premier
Orthodontic Holdings, Inc.) as of December 31, 1996 and the related statement of
stockholders equity for the period from inception (October 21, 1996) to December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of OrthAlliance, Inc. as of
December 31, 1996 and its operations from inception (October 21, 1996) to
December 31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 2, 1997
F-8
<PAGE> 51
ORTHALLIANCE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS...................................................... $0 $0
== ==
LIABILITIES................................................. $0 $0
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS EQUITY:
Common stock, .001 par value; 3,000 shares authorized and
1 share issued and outstanding at December 31, 1996 and
March 31, 1997......................................... 0 0
Additional paid-in capital................................ 0 0
-- --
Total liabilities and stockholders' equity........ $0 $0
== ==
</TABLE>
The accompanying notes are an integral part of these statements.
F-9
<PAGE> 52
ORTHALLIANCE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS EQUITY
FOR THE PERIOD FROM INCEPTION (OCTOBER 21, 1996) TO MARCH 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN STOCKHOLDERS'
STOCK CAPITAL EQUITY
------ ---------- -------------
<S> <C> <C> <C>
INITIAL INVESTED CAPITAL (OCTOBER 21, 1996)................. 0 $0 $0
Subscription receivable................................... 0 0 0
-- -- --
STOCKHOLDERS EQUITY AT DECEMBER 31, 1996 and March 31, 1997
(unaudited)............................................... 0 $0 $0
== == ==
</TABLE>
The accompanying notes are an integral part of these statements.
F-10
<PAGE> 53
ORTHALLIANCE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
IS UNAUDITED)
1. BUSINESS AND ORGANIZATION
OrthAlliance, Inc. (the "Company") (formerly known as Premier Orthodontic
Holdings, Inc.) was formed to create a leading provider of practice management
services to orthodontic practices in the United States. As a result of a planned
merger of US Orthodontic Care, Inc. ("USOC") and Premier Orthodontic Group, Inc.
("Premier") with and into the Company, the Company will succeed to the rights of
USOC and Premier in connection with management or consulting services agreements
and with respect to the purchase and sale agreements or agreements and plans of
reorganization that USOC and Premier has with certain orthodontic practices. As
a result, the Company has entered into definitive agreements to acquire,
simultaneous with an initial public offering (the "IPO"), the assets and certain
liabilities of the founding orthodontic practices. The Company will affiliate
with orthodontic practices pursuant to long-term management services or
consulting agreements and will generate revenue by providing management,
marketing, and development services to these practices. The Company has had no
operations to date, and the financial statements have been prepared on the basis
that the proposed transaction will occur, although no assurance can be made that
the proposed transaction will be completed or that the Company will be
successful in completing planned future acquisitions. The Company intends to
expand through the acquisition of management rights to practices throughout the
United States. In order to expand, the Company will need further acquisition
financing in the form of debt or equity financing. There can be no assurance
that such financing will be available.
Pursuant to the merger agreement between USOC, Premier, and the Company,
respectively, all of the outstanding stock of USOC and Premier will be converted
to common stock of the Company.
As of December 31, 1996, the Company will receive $.01 per share for the
one share of stock issued in 1996. This amount has been recorded as a
subscription receivable in the accompanying statement of stockholders equity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM UNAUDITED FINANCIAL INFORMATION
The financial statements as of and for the three months ended March 31,
1997 are unaudited; however, in the opinion of management, all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the unaudited financial statements for this interim period have
been included. The results of interim periods are not necessarily indicative of
the results to be obtained for a full year.
ACCOUNTING PRONOUNCEMENTS
The Company anticipates that the Emerging Issues Task Force of the
Financial Accounting Standards Board will be evaluating certain matters relating
to the physician practice management industry. The Company expects this
evaluation will include a review of accounting for business combinations. The
Company is unable to predict the impact, if any, that this review may have on
the Company's acquisition strategy, allocation of purchase price related to
acquisitions, and amortization life assigned to intangible assets.
3. COMMITMENTS AND CONTINGENCIES
The Company will be subject to certain government regulation at the federal
and state levels. In compliance with certain regulatory requirements, the
Company will not control the practice of orthodontics. There can be no assurance
that the legality of any long-term management services agreements that will be
entered into will not be successfully challenged. There also can be no assurance
that the laws and regulations of states in which the
F-11
<PAGE> 54
ORTHALLIANCE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company will maintain operations will not change or be interpreted in the future
to restrict or further restrict the Company's relationships with orthodontists.
The Company's orthodontists may be subject to legal liability suits while
under management or consulting services agreements with the Company. The Company
will not control the orthodontists; however, the Company intends to acquire
liability insurance for itself.
F-12
<PAGE> 55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To US Orthodontic Care, Inc.:
We have audited the accompanying balance sheet of US ORTHODONTIC CARE, INC.
(a development-stage enterprise and a Georgia corporation) as of December 31,
1996 and the related statements of operations, shareholders' deficit, and cash
flows for the period from inception (February 7, 1996) to December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of US Orthodontic Care, Inc. as
of December 31, 1996 and the results of its operations and its cash flows for
the period from inception (February 7, 1996) to December 31, 1996 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 4, 1997
F-13
<PAGE> 56
US ORTHODONTIC CARE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 59,940 $ 315,163
Other current assets...................................... 2,250 2,250
----------- -----------
Total current assets.............................. 62,190 317,413
----------- -----------
PROPERTY AND EQUIPMENT, at cost............................. 29,441 34,281
Less accumulated depreciation............................. (2,786) (4,300)
----------- -----------
Property and equipment, net....................... 26,655 29,981
----------- -----------
Total assets...................................... $ 88,845 $ 347,394
=========== ===========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 847,203 $ 303,312
Accrued salaries.......................................... 100,000 0
Due to related party...................................... 173,754 0
----------- -----------
Total current liabilities......................... 1,120,957 303,312
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' (DEFICIT) EQUITY:
Common stock; no par value; 10,000,000 shares authorized,
2,195,214 and 2,471,714 shares issued and outstanding
at December 31, 1996 and March 31, 1997,
respectively........................................... 0 0
Additional paid-in capital................................ 1,760,000 3,122,250
Warrants.................................................. 339,750 589,750
Deficit accumulated during the development stage.......... (3,131,862) (3,667,918)
----------- -----------
Total shareholders' (deficit) equity.............. (1,032,112) 44,082
----------- -----------
Total liabilities and shareholders' (deficit)
equity.......................................... $ 88,845 $ 347,394
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-14
<PAGE> 57
US ORTHODONTIC CARE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION FOR THE THREE
(FEBRUARY 7, MONTHS
1996) TO ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
REVENUES.................................................... $ 0 $ 0
EXPENSES:
Salaries, wages, and benefits............................. (1,878,205) (395,465)
General and administrative................................ (1,253,657) (147,350)
----------- -----------
Total expenses.................................... (3,131,862) (542,815)
----------- -----------
OTHER INCOME (EXPENSE), NET................................. 0 6,759
----------- -----------
NET LOSS.................................................... $(3,131,862) $ (536,056)
=========== ===========
NET LOSS PER COMMON SHARE................................... $ (1.52) $ (.22)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING........................................ 2,060,981 2,434,552
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-15
<PAGE> 58
US ORTHODONTIC CARE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE PERIOD FROM INCEPTION (FEBRUARY 7, 1996) TO MARCH 31, 1997
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING THE SHAREHOLDERS'
------------------ PAID IN DEVELOPMENT (DEFICIT)
SHARES AMOUNT CAPITAL STAGE WARRANTS EQUITY
--------- ------ ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 7, 1996... 0 $0 $ 0 $ 0 $ 0 $ 0
Common stock issued to
Incorporator............. 1,576,714 0 400,000 0 0 400,000
Common stock issued to
directors and
consultants.............. 495,000 0 742,500 0 0 742,500
Common stock issued to
investors................ 123,500 0 617,500 0 0 617,500
Warrants granted to
consultants.............. 0 0 0 0 339,750 339,750
Net loss.................... 0 0 0 (3,131,862) 0 (3,131,862)
--------- -- ---------- ----------- -------- -----------
BALANCE AT DECEMBER 31,
1996........................ 2,195,214 0 1,760,000 (3,131,862) 339,750 (1,032,112)
Common Stock issued to
investors................ 276,500 0 1,362,250 0 0 1,362,250
Warrants granted to
officer.................. 0 0 0 0 250,000 250,000
Net loss.................... 0 0 0 (536,056) 0 (536,056)
--------- -- ---------- ----------- -------- -----------
BALANCE AT MARCH 31, 1997
(unaudited)................. 2,471,714 $0 $3,122,250 $(3,667,918) $589,750 $ 44,082
========= == ========== =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-16
<PAGE> 59
US ORTHODONTIC CARE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION
(FEBRUARY 7, FOR THE THREE
1996) TO MONTHS ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------------ --------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(3,131,862) $ (536,056)
----------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 2,786 1,514
Compensation expense related to stock grants and
warrants............................................. 1,080,000 250,000
Changes in assets and liabilities:
Other assets......................................... (2,250) 0
Accounts payable..................................... 847,203 (543,891)
Accrued salaries..................................... 100,000 (100,000)
Due to Incorporator.................................. 173,754 (173,754)
----------- -----------
Total adjustments................................. 2,201,493 (566,131)
----------- -----------
Net cash used in operating activities............. (930,369) (1,102,187)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (29,441) (4,840)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued to Incorporator....................... 400,000 0
Common stock issued to investors.......................... 617,500 1,362,250
Warrants granted to consultants........................... 2,250 0
----------- -----------
Net cash provided by financing activities......... 1,019,750 1,362,250
----------- -----------
NET CHANGE IN CASH.......................................... 59,940 255,223
CASH, beginning of period................................... 0 59,940
----------- -----------
CASH, end of period......................................... $ 59,940 $ 315,163
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-17
<PAGE> 60
US ORTHODONTIC CARE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 IS UNAUDITED UNLESS INDICATED)
1. BUSINESS AND ORGANIZATION
US Orthodontic Care, Inc. ("USOC" or the "Company") was incorporated as a
Georgia corporation on February 7, 1996 to effect the combination of the
operations of orthodontic practice entities. USOC did not have significant
operations from February 7, 1996 to March 31, 1996. USOC plans to combine with
Premier Orthodontic Group, Inc. ("Premier") under a newly formed holding
company, OrthAlliance, Inc. ("OrthAlliance"). Although USOC has not conducted
any operations to date, other than the initial capitalization and expenses
incurred in connection with the combination of the operations of orthodontic
practice entities and a proposed initial public offering (the "IPO"), it has
entered into agreements to acquire, simultaneous with and as a condition to the
consummation of the IPO, certain assets and liabilities of established
orthodontic practices ("Founding Practices"). These agreements and the rights
thereto are being acquired by OrthAlliance pursuant to the merger of USOC and
Premier with and into OrthAlliance. The financial statements have been prepared
on the basis that the proposed transaction will occur, although no assurance can
be made that the proposed transaction will be completed or that OrthAlliance
will be successful in completing planned future acquisitions of orthodontic
practices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Deferred Issuance Costs
The Company incurred costs associated with a proposed initial public
offering of $450,000 in 1996. As this offering did not occur, the Company
expensed those items.
Property and Equipment
Property and equipment are stated at cost, less accumulated deprecation.
Depreciation is provided using the straight-line method over the assets'
estimated useful lives of five to seven years.
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ---------
<S> <C> <C>
Computer equipment............................. $15,932 $20,772
Furniture and fixtures......................... 13,509 13,509
------- -------
29,441 34,281
Less accumulated depreciation................ (2,786) (4,300)
------- -------
$26,655 $29,981
======= =======
</TABLE>
Fair Value of Financial Instruments
The carrying values of cash and accounts payable approximate their fair
values principally because of the short-term maturities of these instruments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-18
<PAGE> 61
US ORTHODONTIC CARE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Revenue from managing the practices on a national basis will be recognized
on a monthly basis as the services are provided. Each practice will pay a
management fee as specified in the management or consulting services agreement
contract based on a percentage of annual patient service revenues on an accrual
basis.
Per Share Data
Net loss per share is calculated using the weighted average number of
common shares outstanding during the period. The net loss per share for the
period from inception (February 7, 1996) to December 31, 1996 and for the three
months ended March 31, 1997 was based on the weighted average number of common
shares outstanding. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletins ("SAB"), common stock and common stock equivalents issued
at prices below the expected public offering price during the twelve month
period prior to the filing of the registration statement must be included in the
calculation as if they were outstanding for all periods presented prior to the
IPO, regardless of whether they are antidilutive. Therefore, the effect of the
shares and options issued twelve months prior to the IPO is included in the
weighted average number of common and common equivalent shares outstanding.
Interim Unaudited Financial Information
The financial statements as of and for the three months ended March 31,
1997 are unaudited; however, in the opinion of management, all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the unaudited financial statements for this interim period has
been included. The results of interim periods are not necessarily indicative of
the results to be obtained for a full year.
Accounting Pronouncements
The Company anticipates that the Emerging Issues Task Force of the
Financial Accounting Standards Board will be evaluating certain matters relating
to the physician practice management industry. The Company expects this
evaluation will include a review of accounting for business combinations. The
Company is unable to predict the impact, if any, that this review may have on
the Company's acquisition strategy, allocation of purchase price related to
acquisitions, and amortization life assigned to intangible assets.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." At December 31, 1996 and March 31,
1997, the Company had no significant long-lived assets. Under SFAS No. 121, the
Company will analyze intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. If this review indicates that the carrying amount of the asset may
not be recoverable, as determined based on the undiscounted cash flows of the
operations acquired over the remaining amortization period, the carrying value
of the asset will be reduced to fair value. Among the factors that the Company
will continually evaluate are unfavorable changes in each orthodontic group's
relative market share and local market competitive environment, current period
and forecasted operating and cash flow levels of the orthodontic group and the
impact on the management fee earned by the Company, and legal factors governing
the practice of orthodontics.
3. SHAREHOLDERS' (DEFICIT) EQUITY
In April 1996, 1,576,714 shares of common stock were issued at a total
price of $400,000 to Dr. Robert N. Pickron (the "Incorporator"). Management
believes that the $.2537 per share received in consideration for those shares
represented the fair value of the shares at that date. On June 10, 1996, an
additional 495,000 shares were issued to certain consultants of the Company in
consideration for services provided to that date. Management
F-19
<PAGE> 62
US ORTHODONTIC CARE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
believes that the fair value of the shares issued at that date, as calculated
for compensation expense, was $1.50 per share. The fair value of these shares
was recorded as compensation expense of $742,500 and is included in salaries,
wages and benefits in the accompanying statement of operations.
On October 23, 1996, USOC offered 400,000 shares of common stock to
affiliates of anticipated Founding Practices and other accredited investors
through a private placement memorandum ("PPM") at a price of $5 per share. As of
December 31, 1996, 123,500 shares were issued under the PPM for net proceeds of
$617,500.
On February 4, 1997, the Company offered the shares not sold in the PPM
discussed above (276,500 shares) at $5 per share through a second PPM to
affiliates of anticipated Founding Practices and other accredited investors.
4. INCOME TAXES
As reflected in the accompanying statements of operations, the Company
incurred a loss from operations during the period from inception (February 7,
1996) to December 31, 1996 and for the three months ended March 31, 1997. Due to
the limited operations of the Company since its inception and the pending IPO, a
valuation allowance has been recorded to fully reserve for the deferred tax
benefits generated from tax deferred issuance costs. There is no significant
difference in the tax and book bases of the Company's assets or liabilities that
would give rise to deferred tax balances.
5. RELATED-PARTY TRANSACTIONS
The Incorporator of USOC funded expenses of USOC from the date of inception
through December 31, 1996, as only a portion of the funds provided from the PPM
was available for use prior to year-end. Of the amount funded by the
Incorporator, $173,754 is included in a current liability on the accompanying
balance sheet as of December 31, 1996 and was reimbursed by USOC after December
31, 1996. The remaining amount funded by the Incorporator ($400,000) was used to
purchase common stock and is included in additional paid-in capital on the
accompanying balance sheet.
6. WARRANTS
At December 31, 1996, the Company has warrants outstanding to directors and
consultants of the Company to purchase 225,000 shares of common stock at the
initial public offering price. The warrants expire five years from the effective
date of the IPO. The fair market value of these warrants of $337,500 was
recorded as salaries, wages and benefits in the accompanying statement of
operations for the period from inception (February 7, 1996) to December 31,
1996.
As of March 31, 1997, warrants for the purchase of 50,000 shares of common
stock were granted to an officer with an exercise price per share equal to $.01.
The Company recorded compensation expense of $250,000 on the warrants in the
first quarter of 1997.
OrthAlliance has agreed to issue warrants for the purchase of 90,000 shares
of common stock to certain Founding Practices. The exercise price per share will
be equal to the initial public offering price.
7. COMMITMENTS AND CONTINGENCIES
OrthAlliance will establish a stock option plan for employees prior to the
IPO. All options issued under this plan will be accounted for in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and any required compensation expense on these options will be
recorded at the date of grant. The Company will provide the pro forma disclosure
of net income and earnings per share in the
F-20
<PAGE> 63
US ORTHODONTIC CARE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
notes to the financial statements as if the fair value-based method of
accounting had been applied to awards as required by SFAS No. 123, "Accounting
for Stock-Based Compensation."
The Company has granted warrants to purchase shares of common stock to
certain interested parties as part of the IPO. Additionally, the Company has
agreed to pay approximately $400,000 to certain consultants upon successful
completion of the IPO.
OrthAlliance will be subject to certain government regulation at the
federal and state levels. In compliance with certain regulatory requirements,
OrthAlliance will not control the practice of orthodontists. Long-term
management and consulting services agreements may be challenged by certain
states as to their legality. There also can be no assurance that the laws and
regulations of states in which OrthAlliance will maintain operations will not
change or be interpreted in the future to restrict OrthAlliance's relationships
with orthodontists.
8. PLANNED ACQUISITIONS OF FOUNDING PRACTICES
OrthAlliance plans to complete the transfer of certain assets of the
Founding Practices (the "Transfers") concurrently with the IPO. The Founding
Practices will receive shares of common stock and cash as consideration in the
Transfers. Additionally the selling orthodontists' professional corporations,
professional associations, or other entities (collectively, the "PCs") will
enter into 20-year management or consulting services agreements with
OrthAlliance. The orthodontists will be employed by the PCs; therefore,
OrthAlliance will not employ orthodontists or control the practice of
orthodontics. OrthAlliance will receive a management fee for the services
provided. This management fee is based on the profitability of the individual
practices and is based on a percentage of annual accrual patient service revenue
or a flat fee with annual incremental increases. Each of the Founding Practices
is considered a promoter as defined in rule 1-02 of Regulation S-X.
As OrthAlliance will not be acquiring the future patient service revenues
earned by the individual orthodontic practices, the Transfers are not deemed to
be business combinations. In accordance with the SAB No. 48, "Transfers of
Nonmonetary Assets by Promoters or Shareholders," the acquired nonmonetary
assets and assumed liabilities will be accounted for on the historical cost
basis of the Founding Practices.
The selling orthodontists will generally retain the liabilities of their
respective practices although certain liabilities will be assumed by
OrthAlliance. Certain capital lease obligations will be assumed by OrthAlliance.
The management service revenues that will be earned by OrthAlliance,
subsequent to the Transfers and execution of the management agreements are based
on various arrangements. In general, the resulting fee will be based on the
accrual patient service revenue of the practice. OrthAlliance's standard form of
management agreement will be applied to all practices operating in locations
where it is not prohibited by law or governmental regulation. In those instances
where this contract may not be permitted, an alternative form of consulting and
business services agreement will be used.
Patient service revenues are derived from orthodontic care provided to
patients under contract terms agreed to by the patient or other responsible
parties. The contracts vary by practice and by patient, and service generally
extends over an 18- to 24-month period. Revenue is recognized as the services
are performed, with approximately 20% being recognized at the time of initial
treatment. The balance of the contract revenue is realized evenly over the
remaining contract period. The 20% estimated cost at the initial treatment date
is based on the estimated costs incurred by the practice at that time as
compared to the total costs of providing the contracted services. Additionally,
the 20% estimated revenue at the initial treatment date is consistent with
industry standards and includes the estimated costs of diagnosis and treatment
plan development, initial treatment by orthodontic personnel, orthodontic
supplies, and associated administrative services. For the year ended December
31, 1996 and for the three months ended March 31, 1997, the Founding Practices
had audited accrual patient service revenue of approximately $42,400,000 and
$10,605,000, respectively.
F-21
<PAGE> 64
US ORTHODONTIC CARE, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The difference in the timing of the recognition of patient service revenues
and cash collections results in (i) unbilled receivables in instances where
recognition of revenues precedes the patient's payment plan and (ii) patient
prepayments when payments are made on a more accelerated basis than revenues are
earned.
F-22
<PAGE> 65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Premier Orthodontic Group, Inc.:
We have audited the accompanying balance sheet of PREMIER ORTHODONTIC
GROUP, INC. (a development-stage enterprise and a Delaware corporation) as of
December 31, 1996 and the related statement of operations, owners' deficit, and
cash flows for the period from inception (November 26, 1996) to December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Premier Orthodontic Group,
Inc. as of December 31, 1996 and the results of its operations and its cash
flows for the period from inception (November 26, 1996) to December 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 11, 1997
F-23
<PAGE> 66
PREMIER ORTHODONTIC GROUP, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 0 $ 895,889
--------- ---------
PROPERTY AND EQUIPMENT, at cost............................. 4,971 24,953
Less accumulated depreciation............................. (166) (415)
--------- ---------
Property and equipment, net............................ 4,805 24,538
OTHER ASSETS................................................ 0 4,620
--------- ---------
Total assets...................................... $ 4,805 $ 925,047
========= =========
LIABILITIES AND OWNERS'/STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................. $ 20,241 $ 137,463
Accrued consulting fees................................... 239,735 380,985
--------- ---------
Total current liabilities......................... 259,976 518,448
NOTE PAYABLE................................................ 0 1,000,000
COMMITMENTS AND CONTINGENCIES
OWNERS'/STOCKHOLDERS' DEFICIT, $.001 par value; 3,000 shares
authorized; 100 shares issued and outstanding at March 31,
1997...................................................... (255,171) (593,401)
--------- ---------
Total liabilities and owners'/stockholders'
deficit......................................... $ 4,805 $ 925,047
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE> 67
PREMIER ORTHODONTIC GROUP, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION FOR THE THREE
(NOVEMBER 26, MONTHS
1996) TO ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
REVENUES.................................................... $ 0 $ 0
----------- -----------
EXPENSES:
Consulting fees........................................... 239,735 211,755
General and administrative................................ 15,436 129,945
----------- -----------
Total expenses.................................... 255,171 341,700
----------- -----------
OTHER INCOME (EXPENSE), NET................................. 0 3,470
----------- -----------
NET LOSS.................................................... $ 255,171 $ 338,230
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE> 68
PREMIER ORTHODONTIC GROUP, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF CHANGES IN OWNERS'/STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (NOVEMBER 26, 1996) TO MARCH 31, 1997
<TABLE>
<S> <C>
INITIAL INVESTED CAPITAL (NOVEMBER 26, 1996)................ $ 0
Net loss.................................................. (255,171)
---------
OWNERS' DEFICIT AT DECEMBER 31, 1996........................ (255,171)
---------
Net loss.................................................. $(338,230)
---------
OWNERS'/STOCKHOLDERS' DEFICIT AT MARCH 31, 1997
(unaudited)............................................... $(593,401)
=========
</TABLE>
The accompanying notes are an integral part of this statement.
F-26
<PAGE> 69
PREMIER ORTHODONTIC GROUP, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION
(NOVEMBER 26, FOR THE THREE
1996) TO MONTHS ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(255,171) $(338,230)
--------- ---------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation........................................... 166 249
Changes in assets and liabilities:
Other assets......................................... 0 (4,620)
Accounts payable and accrued liabilities............. 20,241 117,222
Accrued consulting fees.............................. 239,735 141,250
--------- ---------
Total adjustments................................. 260,142 254,101
--------- ---------
Net cash provided by (used) in operating
activities...................................... 4,971 (84,129)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (4,971) (19,982)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable................................ 0 1,000,000
--------- ---------
NET CHANGE IN CASH.......................................... 0 895,889
CASH, beginning of period................................... 0 0
--------- ---------
CASH, end of period......................................... $ 0 $ 895,889
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE> 70
PREMIER ORTHODONTIC GROUP, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 IS UNAUDITED UNLESS INDICATED)
1. BUSINESS AND ORGANIZATION
Premier Orthodontic Group, Inc., a Delaware corporation ("Premier" or the
"Company"), was incorporated on January 30, 1997. Premier Orthodontic Ventures,
LLC ("Premier LLC"), formed on November 26, 1996, incurred certain expenses on
behalf of the Company from November 26, 1996 to January 30, 1997. Upon the
incorporation of the Company on January 30, 1997, the Company reimbursed the
expenses incurred by Premier LLC on behalf of the Company from the proceeds of
the loan discussed in Note 7. The accompanying financial statements have been
prepared based on the expenses incurred by Premier LLC on behalf of the Company
from November 26, 1996 to December 31, 1996. The Company was incorporated to
effect the combination of the operations of orthodontic entities. Premier plans
to combine with US Orthodontic Care, Inc. under a newly formed holding company,
OrthAlliance, Inc. ("OrthAlliance"). Although Premier has not conducted any
operations to date, other than the initial capitalization and expenses incurred
in connection with the combination of the operations of orthodontic entities and
a proposed public offering (the "IPO"), it has entered into agreements to
acquire, simultaneous with and as a condition to the consummation of the IPO,
certain assets and liabilities of established orthodontic practices ("Founding
Practices"). These agreements and the rights thereto are being acquired by
OrthAlliance pursuant to the merger of USOC and Premier with and into
OrthAlliance. The financial statements have been prepared on the basis that the
proposed transaction will occur, although no assurance can be made that the
proposed transaction will be completed or that OrthAlliance will be successful
in completing planned future acquisitions of orthodontic practices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property and Equipment
Property and equipment are stated at cost, less accumulated deprecation.
Depreciation is provided using the straight-line method over the assets'
estimated useful lives of five to seven years.
The detail of property and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ---------
<S> <C> <C>
Computer equipment.......................................... $4,971 $18,625
Furniture and Equipment..................................... 0 6,328
Less accumulated depreciation............................. (166) (415)
------ -------
$4,805 $24,538
====== =======
</TABLE>
Fair Value of Financial Instruments
The carrying values of financial instruments approximate their fair values
principally because of the short-term maturities of these instruments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-28
<PAGE> 71
PREMIER ORTHODONTIC GROUP, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Revenue from managing the practices on a national basis will be recognized
on a monthly basis as the services are provided. Each practice will pay a
management fee as specified in the management or consulting services agreement
based generally on a percentage of annual patient service revenues on an accrual
basis.
Per Share Data
Net loss per share is calculated using the weighted average number of
common and common equivalent shares outstanding during the period. The net loss
per share for the period from inception (November 26, 1996) to December 31, 1996
and for the three months ended March 31, 1997 was based on the weighted average
number of common shares outstanding. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletins ("SAB"), common stock and common stock
equivalents issued at prices below the expected public offering price during the
twelve month period prior to the filing of the registration statement must be
included in the calculation as if they were outstanding for all periods
presented prior to the IPO, regardless of whether they are antidilutive.
Therefore, the effect of the shares and options issued twelve months prior to
the IPO is included in the weighted average number of common and common
equivalent shares outstanding.
INTERIM UNAUDITED FINANCIAL INFORMATION
The financial statements as of and for the three months ended March 31,
1997 are unaudited; however, in the opinion of management, all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the unaudited financial statements for this interim period has
been included. The results of interim periods are not necessarily indicative of
the results to be obtained for a full year.
Accounting Pronouncements
The Company anticipates that the Emerging Issues Task Force of the
Financial Accounting Standards Board will be evaluating certain matters relating
to the physician practice management industry. The Company expects this
evaluation will include a review of accounting for business combinations. The
Company is unable to predict the impact, if any, that this review may have on
the Company's acquisition strategy, allocation of purchase price related to
acquisitions, and amortization life assigned to intangible assets.
On November 26, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." At December 31, 1996 and March 31,
1997, the Company had no significant long-lived assets. Under SFAS No. 121, the
Company will analyze intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. If this review indicates that the carrying amount of the asset may
not be recoverable, as determined based on the undiscounted cash flows of the
operations acquired over the remaining amortization period, the carrying value
of the asset will be reduced to fair value. Among the factors that the Company
will continually evaluate are unfavorable changes in each orthodontic group's
relative market share and local market competitive environment, current period
and forecasted operating and cash flow levels of the orthodontic group and the
impact on the management fee earned by the Company, and legal factors governing
the practice of orthodontics.
3. INCOME TAXES
As reflected in the accompanying statement of operations, the Company
incurred a loss from operations during the period from inception (November 26,
1996) to December 31, 1996 and for the three months ended March 31, 1997. Due to
the limited operations of the Company since its inception and the pending IPO, a
valuation allowance has been recorded to fully reserve for the deferred tax
benefits generated from tax deferred
F-29
<PAGE> 72
PREMIER ORTHODONTIC GROUP, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
issuance costs. There is no significant difference in the tax and book bases of
the Company's assets or liabilities that would give rise to deferred tax
balances.
4. RELATED-PARTY TRANSACTIONS
The incorporators of Premier funded expenses of Premier from the date of
inception through the end of the year. Of the amount funded by the founders,
$17,630 is reflected as a current liability on the accompanying balance sheet as
of December 31, 1996 and was reimbursed by Premier after year-end.
5. COMMITMENTS AND CONTINGENCIES
The Company has agreed to pay certain consultants approximately $500,000
upon successful completion of the IPO.
OrthAlliance will be subject to certain government regulation at the
federal and state levels. In compliance with certain regulatory requirements,
OrthAlliance will not control the practice of orthodontists. Long-term service
and consulting services agreement may be challenged by certain states as to
their legality. There also can be no assurance that the laws and regulations of
states in which OrthAlliance will maintain operations will not change or be
interpreted in the future to restrict OrthAlliance's relationships with
orthodontists.
6. PLANNED TRANSFERS OF ASSETS OF FOUNDING PRACTICES
OrthAlliance plans to complete the transfer of certain assets of the
Founding Practices (the "Transfer") concurrently with the IPO. The Founding
Practices will receive shares of common stock and cash as consideration in the
Transfers. Additionally, the selling orthodontists' professional corporations,
professional associations, or other entities (collectively, the "PCs") will
enter into 20-year management or consulting services agreements with
OrthAlliance. The orthodontists will be employed by the PCs; therefore,
OrthAlliance will not employ orthodontists or control the practice of
orthodontics. OrthAlliance will receive a management fee for the services
provided. This management fee is based on the profitability of the individual
practices and is based on a percentage of annual accrual patient service revenue
or a flat fee with annual incremental increases. Each of the founding practices
is considered a promoter as defined in rule 1-02 of Regulation S-X.
As OrthAlliance will not be acquiring the future patient service revenues
earned by the individual orthodontic practices, the Transfers are not deemed to
be business combinations. In accordance with the SAB No. 48, "Transfers of
Nonmonetary Assets by Promoters of Shareholders," the acquired nonmonetary
assets and assumed liabilities will be accounted for on the historical cost
basis of the Founding Practices.
The selling orthodontists will generally retain the liabilities of their
respective practices although certain liabilities will be assumed by
OrthAlliance. Certain capital lease obligations will be assumed by OrthAlliance.
The management service revenues that will be earned by OrthAlliance,
subsequent to the Transfers and execution of the management agreements are based
on various arrangements. In general, the resulting fee will be based on the
accrual patient service revenue of the practice. OrthAlliance's standard form of
management agreement will be applied to all practices operating in locations
where it is not prohibited by law or governmental regulation. In those instances
where this contract may not be permitted, an alternative form of consulting and
business services agreement will be used.
Patient service revenues are derived from orthodontic care provided to
patients under contract terms agreed to by the patient or other responsible
parties. The contracts vary by practice and by patient, and service generally
extends over an 18- to 24-month period. Revenue is recognized as the services
are performed, with approximately 20% being recognized at the time of initial
treatment. The balance of the contract revenue is realized evenly over the
remaining contract period. The 20% estimated cost at the initial treatment date
is based on the estimated costs
F-30
<PAGE> 73
PREMIER ORTHODONTIC GROUP, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
incurred by the practice at that time as compared to the total costs of
providing the contracted services. Additionally, the 20% estimated revenue at
the initial treatment date is consistent with industry standards and includes
the estimated costs of diagnosis and treatment plan development, initial
treatment by orthodontic personnel, orthodontic supplies, and associated
administrative services. For the year ended December 31, 1996 and for the three
months ended March 31, 1997, the Founding Practices had audited accrual patient
service revenue of approximately $18,927,000 and $4,998,000, respectively.
The difference in the timing of the recognition of patient service revenues
and cash collections results in (i) unbilled receivables in instances where
recognition of revenues precedes the patient's payment plan and (ii) patient
prepayments when payments are made on a more accelerated basis than revenues are
earned.
7. SUBSEQUENT EVENTS
In January 1997, Premier LLC loaned the Company $1,000,000. The Company
will pay the total amount of the loan to Premier LLC of $1,000,000 in cash, plus
accrued interest at prime plus 1% from the proceeds of the IPO.
F-31
<PAGE> 74
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY THE SHARES OF COMMON STOCK OFFERED HEREBY BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 4
Risk Factors.......................... 9
The Company........................... 14
Dividend Policy....................... 15
Capitalization........................ 16
Selected Financial Data............... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 21
Management............................ 30
Certain Transactions.................. 34
Principal Stockholders................ 36
Description of Capital Stock.......... 37
Shares Eligible for Future Sale....... 40
Plan of Distribution.................. 42
Legal Matters......................... 43
Experts............................... 43
Additional Information................ 43
Index to Financial Statements......... F-1
</TABLE>
======================================================
SHARES
[ORTHALLIANCE LOGO]
COMMON STOCK
-------------------
PROSPECTUS
-------------------
, 1997
======================================================
<PAGE> 75
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law (the "DGCL"), a
corporation may indemnify any of its directors and officers against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with a threatened,
pending or completed action, suit or proceeding brought against him by reason of
the fact that he is or was a director or officer (i) if any such person acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation and (ii) in connection with any criminal
action or proceeding if such person had no reasonable cause to believe such
conduct was unlawful. In actions brought by or in the right of the corporation,
however, Section 145 provides that no indemnification may be made in respect of
any claim, issue or matter as to which such person shall have been adjudged to
be liable for negligence or misconduct in the performance of such person's duty
to the corporation unless, and only to the extent that, the Court of Chancery of
the State of Delaware or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in review of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
The Certificate provides that no director of the Company shall be liable
for breach of fiduciary duty as a director except for (i) any breach of the
director's duty of loyalty to the Company or its stockholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law; (iii) for willful or negligent violations of certain
provisions of the DGCL imposing certain requirements with respect to stock
repurchases, redemptions and dividends; or (iv) any transaction from which the
director derived an improper personal benefit. Pursuant to the Company's
Certificate and Bylaws, the Company is obligated to indemnify each of its
directors and officers to the fullest extent permitted by the DGCL. In addition,
the Bylaws obligate the Company to purchase and maintain insurance on behalf of
any director or officer of the Company against any liability asserted against
and incurred by such director or officer, whether or not the Company would have
the power to indemnify such officer or director against such liability under the
provisions of the DGCL.
The Company intends to obtain insurance which provides general coverage for
its directors and executive officers in amounts to be determined. In addition,
the Company intends to obtain insurance coverage for its directors and executive
officers in amounts to be determined with respect to the IPO.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
2.1 * -- Agreement and Plan of Merger between OrthAlliance, USOC and
Premier dated , 1997.
2.2 -- Form of Purchase and Sale Agreement between OrthAlliance and
Founding Practices.
2.3 -- Form of Agreement and Plan of Reorganization between
OrthAlliance and Founding Practices.
2.4 * -- Form of Stock Purchase and Sale Agreement between
OrthAlliance and Allied Orthodontists.
3.1 * -- Amended and Restated Certificate of Incorporation of the
Company.
3.2 * -- Amended and Restated Bylaws of the Company.
4.1 * -- Form of certificate evidencing ownership of Common Stock of
the Company.
5.1 * -- Opinion of Nelson Mullins Riley & Scarborough, L.L.P.
regarding legality.
10.1 -- Form of Service Agreement between OrthAlliance and Founding
Practices.
10.2 -- Form of Consulting and Business Service Agreement between
OrthAlliance and Founding Practices.
10.3 * -- 1997 Non-Employee Director Stock Option Plan.
</TABLE>
II-1
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.4 * -- 1997 Employee Stock Option Plan.
10.5 * -- Employment Agreement between the Company and Sam Westover.
10.6 * -- Consulting Agreement between the Company and Jonathan
Wilfong.
10.7 * -- Employment Agreement between the Company and Craig Hethcox.
10.8 -- Form of Employment Agreement between Allied Orthodontist and
practice ownership entity.
10.9 -- Letter Agreement dated April 18, 1997 between the Company
and Robert S. Chilton.
21.1 * -- List of subsidiaries of OrthAlliance.
23.1 * -- Consent of Nelson Mullins Riley & Scarborough, L.L.P.
(contained in Exhibit 5.1 hereto).
23.2 -- Consent of Arthur Andersen LLP Independent Public
Accountants.
24.1 -- Power of Attorney (included in signature page)
27.1 -- Financial Data Schedule (for SEC use only).
99.1 * -- Consent of Drs. Durbin and Schmidt and Mr. Summers to serve
as directors.
</TABLE>
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedules
All schedules are omitted since the required information is not present in
amounts sufficient to require submission of the schedule, or because the
information required is included in the financial statements and notes hereto.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
3. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in
II-2
<PAGE> 77
the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
4. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
5. Prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
6. Every prospectus: (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
7. The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
8. The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of
and included in the registration statement when it become effective.
II-3
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Torrance,
State of California, on June 17, 1997.
OrthAlliance, Inc.
By: /s/ SAM WESTOVER
------------------------------------
Sam Westover
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated. Each person whose signature to this
Registration Statement appears below hereby constitutes and appoints Sam
Westover and Jonathan E. Wilfong, and each of them, as his true and lawful
attorney-in-fact and agent, with full power of substitution, to sign on his or
her behalf individually and in any and all capacities and to perform any acts
necessary to be done in order to file all amendments and post-effective
amendments to this Registration Statement and any registration statement
relating to the same Offering as this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act, and any
and all instruments or documents filed as part of or in connection with this
Registration Statement, the amendments thereto or a related registration
statement pursuant to Rule 462(b), and each of the undersigned does hereby
ratify and confirm all that said attorney-in-fact and agent, or his substitutes,
may do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ SAM WESTOVER Chief Executive Officer, June 17, 1997
- ----------------------------------------------------- President and Director
Sam Westover (principal executive officer)
/s/ ROBERT S. CHILTON Chief Financial Officer June 17, 1997
- ----------------------------------------------------- (principal financial and
Robert S. Chilton accounting officer)
/s/ JONATHAN E. WILFONG Director June 17, 1997
- -----------------------------------------------------
Jonathan E. Wilfong
Director June 17, 1997
- -----------------------------------------------------
Randall K. Bennett, D.D.S.
</TABLE>
II-4
<PAGE> 79
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<C> <C> <S> <C>
2.1* -- Agreement and Plan of Merger between OrthAlliance, USOC and
Premier dated , 1997. ................
2.2 -- Form of Purchase and Sale Agreement between OrthAlliance and
Founding Practices. ........................................
2.3 -- Form of Agreement and Plan of Reorganization between
OrthAlliance and Founding Practices. .......................
2.4* -- Form of Stock Purchase and Sale Agreement between
OrthAlliance and Allied Orthodontists. .....................
3.1* -- Amended and Restated Certificate of Incorporation of the
Company. ...................................................
3.2* -- Amended and Restated Bylaws of the Company. ................
4.1* -- Form of certificate evidencing ownership of Common Stock of
the Company. ...............................................
5.1* -- Opinion of Nelson Mullins Riley & Scarborough, L.L.P.
regarding legality. ........................................
10.1 -- Form of Service Agreement between OrthAlliance and Founding
Practices. .................................................
10.2 -- Form of Consulting and Business Service Agreement between
OrthAlliance and Founding Practices. .......................
10.3* -- 1997 Non-Employee Director Stock Option Plan. ..............
10.4* -- 1997 Employee Stock Option Plan. ...........................
10.5* -- Employment Agreement between the Company and Sam
Westover. ..................................................
10.6* -- Consulting Agreement between the Company and Jonathan
Wilfong. ...................................................
10.7* -- Employment Agreement between the Company and Craig
Hethcox. ...................................................
10.8 -- Form of Employment Agreement between Allied Orthodontist and
practice ownership entity. .................................
10.9 -- Letter Agreement dated April 18, 1997 between the Company
and Robert S. Chilton. .....................................
21.1* -- List of subsidiaries of OrthAlliance. ......................
23.1* -- Consent of Nelson Mullins Riley & Scarborough, L.L.P.
(contained in Exhibit 5.1 hereto). .........................
23.2 -- Consent of Arthur Andersen L.L.P. Independent Public
Accountants. ...............................................
24.1 -- Power of Attorney (included in signature page)..............
27.1 -- Financial Data Schedule (for SEC use only)..................
99.1* -- Consent of Drs. Durbin and Schmidt and Mr. Summers to serve
as directors. ..............................................
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 2.2
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (this "Agreement") is made and entered
into as of this _____ day of ____________, 1997, by and between Premier
Orthodontic Group, Inc., a Delaware corporation, and its successors and assigns
(hereinafter referred to as "Purchaser") and _________________________________,
a Florida ________________________ (hereinafter referred to as "Seller").
W I T N E S S E T H
WHEREAS, Seller owns and operates an orthodontic practice with offices
located in the facilities identified in Exhibit "A" (collectively, the "Center")
and furnishes orthodontic and other dental care to the general public through
the services of the orthodontist(s) and dentist(s) affiliated with the Seller to
provide patient care at the Center (the "Orthodontist(s)"); and
WHEREAS, Seller wishes to sell all of its right, title and interest in
and to all of the assets used in connection with the orthodontic practice
conducted at the Center (except for the right to employ the Orthodontist(s)) to
Purchaser and Purchaser wishes to buy all of Seller's right, title and interest
in and to such assets, subject to and upon the terms and conditions herein set
forth.
NOW, THEREFORE, in consideration of Ten Dollars ($10.00), the premises
and the mutual covenants herein contained, and other good and valuable
consideration, the receipt, adequacy, and sufficiency of which are hereby
acknowledged, Seller and Purchaser hereby agree as follows:
SECTION 1. PURCHASE AND SALE OF ASSETS AND CLOSING.
1.01 PURCHASE. Upon the terms and conditions set forth herein,
Seller shall sell to Purchaser and Purchaser shall purchase from Seller all of
Seller's right, title and interest in and to:
(a) Seller's leasehold interest in and to that certain
facility comprising the Center, and all dental and other equipment or furniture
leased by Seller (the "Leasehold Interest"); provided, however, that (i) Seller
shall have the option of excluding from the conveyance contemplated hereby
Seller's leasehold interest in such dental and other equipment (including any
leased automobiles) or furniture and (ii) in the event that any Leasehold
Interests in and to dental and other equipment and furniture leased by Seller
are not assignable, such Leasehold Interest(s) shall not be assigned to
Purchaser; provided, further, that any leasehold expense incurred by Seller on
Leasehold Interests retained by Seller shall be considered a Center Expense (as
defined in that certain Service Agreement dated of even date herewith by
<PAGE> 2
and between Seller and Purchaser) for the purpose of determining the
Service Fee to be paid to Purchaser only to the extent that any
provisions in the operative lease documents or instruments, including
but not limited to lease expense and term, are reasonable and customary
and do not exceed the fair market rent for the leased dental and other
equipment (including any leased automobiles) or furniture. Any
Leasehold Interests to be retained by Seller or which are nonassignable
shall be identified by Seller at Closing (as hereinafter defined) to
Purchaser's satisfaction.
(b) All of Seller's licenses, permits, equipment, tools,
furniture, furnishings, fixtures, inventory, supplies, technology,
prepaid items, petty cash, accounts receivable, notes receivable,
files, records (other than patient records), patient lists, supplier
lists and all other personal property located at the Center or used in
connection with the business of the Center as a going concern and with
the operation of the Center located thereon, reasonably required to
operate a licensed and certified orthodontic practice in Florida,
including without limitation all of those items of personal property
set forth and described in Exhibit "B" attached hereto (such personal
property is hereinafter referred to as the "Personal Property") (the
Leasehold Interest and the Personal Property are sometimes hereinafter
collectively referred to as the "Assets").
1.02 TRANSFER. Seller shall execute and deliver such instruments of
conveyance, sale, assignment or transfer, and shall take or cause to be taken
such further action as the Purchaser or its counsel shall request at any time or
from time to time to vest, confirm or evidence in the Purchaser good and
marketable title to all of the Assets intended to be conveyed, sold,
transferred, assigned and delivered to the Purchaser hereby under this
Agreement, free and clear of all liens, claims and encumbrances, except the
Permitted Exceptions (as hereinafter defined).
1.03 CLOSING DATE. The sale, transfer and delivery of the Assets
pursuant to the terms of this Agreement and the delivery of the Purchase Price
(as hereinafter defined) shall take place as soon as all appropriate conditions
as set forth herein have been fulfilled, but in no event later than October 15,
1997, at the offices of Nelson Mullins Riley & Scarborough, L.L.P., First Union
Plaza, Suite 1400, 999 Peachtree Street, Atlanta, Georgia 30309, or at such
other place and date as Purchaser and Seller shall agree. The date on which the
last of all payments and deliveries occurs is the "Closing Date", and such
payments and deliveries constitute the "Closing." The parties hereto shall use
their reasonable best efforts to satisfy all appropriate conditions as soon as
possible.
2
<PAGE> 3
SECTION 2. PURCHASE PRICE AND EXPENSES.
2.01 PURCHASE PRICE. Purchaser hereby agrees to pay to Seller for
the Assets of the Center at least one hundred percent (100%) of the Center's
1996 Adjusted Gross Revenues (as hereinafter defined), with the actual amount to
be determined upon completion of an initial public offering of Purchaser's
common stock (the "IPO") (as finally determined, the "Purchase Price"), which
final Purchase Price shall be the Seller's proportional interest in the sum of
the value of all of the orthodontic entities included in the IPO, which sum
shall constitute 62% of the total market capitalization of Purchaser without
giving effect to the IPO. The valuation for determining the final Purchase Price
of each orthodontic entity included in the IPO shall be based on the adjusted
gross revenues and operating results of each such orthodontic entity for the
trailing twelve-month period used in preparation of Purchaser's registration
statement on Form S-1 with respect to the IPO. The Purchase Price shall be paid
as follows:
(a) Up to a maximum of 20% of the Purchase Price shall be
paid in cash or immediately available funds at Closing; and
(b) The remainder of the Purchase Price to be paid to
Seller in stock of Purchaser to be valued at the time of the IPO, which
IPO shall occur simultaneously with the Closing.
As used herein, the term "1996 Adjusted Gross Revenue" shall be determined in
accordance with generally accepted accounting principles and shall mean all fees
and charges recorded or booked in fiscal year 1996 by or on behalf of the Seller
as a result of professional orthodontic services personally furnished to
patients by the Orthodontist(s) and those under the Orthodontist's supervision
and other fees or income generated in their capacity as professionals after any
adjustments for uncollectible accounts, professional courtesies and other
activities that do not generate a collectible fee.
2.02 COSTS AND EXPENSES. Each party to this Agreement shall pay its
fees, costs and expenses and those of its agents, accountants, lawyers and
investment advisors, whether or not the transactions contemplated hereby are
consummated in accordance with the terms of this Agreement.
SECTION 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER.
Seller hereby represents, warrants and covenants to Purchaser as
follows, and acknowledges and confirms that Purchaser is relying upon such
representations, warranties and covenants in connection with the execution,
3
<PAGE> 4
delivery and performance of this Agreement, notwithstanding any investigation
made by Purchaser or on its behalf:
3.01 ORGANIZATION OF SELLER. Seller is a ________________________
formed and in existence under the laws of the State of Florida and Seller has
the power and authority to own its property and to carry on its business as and
where such business is now conducted.
3.02 TITLE TO ASSETS. Seller has good and marketable title to the
Assets at the Center, and the right to sell, transfer, assign and deliver the
Assets at the Center to Purchaser, free and clear of all liens, encumbrances,
claims, security interests, pledges, agreements and rights of others, except for
the Permitted Exceptions (as hereinafter defined), and upon transfer of the
Assets at the Center to Purchaser, Purchaser will hold good and marketable title
to the Assets at the Center free and clear of all liens, claims, encumbrances,
and rights of third parties whatsoever, except for the Permitted Exceptions.
3.03 AUTHORIZATION AND BINDING EFFECT. This Agreement and each of
the agreements and instruments contemplated hereby has been duly and validly
authorized, executed and delivered by the Seller and constitutes the legal,
valid and binding obligations of the Seller, enforceable in accordance with its
terms. All corporate actions and proceedings required for the execution and
delivery of this Agreement, and for the consummation of the transactions
contemplated hereby, have been duly taken.
3.04 NO CONFLICTS. The execution, delivery and performance by the
Seller of this Agreement or any agreements required hereby to be executed by
Seller, will not (i) constitute a violation of, conflict with or constitute a
default under any term or provision of the Seller's formation documents, (ii) to
the best of Seller's knowledge, constitute a violation of any statute,
ordinance, judgment, order, decree, regulation or rule of any court,
governmental authority or arbitrator or any license, permit or franchise
applicable or relating to the Center or (iii) result in the creation of any lien
upon the Center pursuant to the provisions of any of the foregoing.
3.05 CONDITION OF ASSETS. Upon Closing, the Assets at the Center,
including the Personal Property, will be in good condition comparable to the
condition existing on the date of this Agreement, ordinary wear and tear
excepted. Seller shall not remove any Personal Property from the Center prior to
the Closing, except for the purpose of repair or replacement or in the ordinary
course of business, and any such Personal Property or its replacement, as the
case may be, shall be included in this transaction. Seller shall keep all
insurance policies or renewals thereof affecting or covering the Center in full
force and effect up to and
4
<PAGE> 5
including the date of Closing unless the reason for such policies ceases or such
policies are replaced in the ordinary course of business.
3.06 TAXES. Except as set forth on Exhibit "C", Seller has timely
filed or caused to be timely filed all federal income tax returns and all other
federal, state, county, local or city tax returns which are required to be
filed, and has paid or caused to be paid all taxes shown on said returns or on
any tax assessment received by them (including, without limitation, real and
personal property taxes) to the extent that such taxes have become due. No
events have occurred which could impose on Purchaser any transferee liability
for any taxes, penalties, or interest due or to become due from Seller.
3.07 CLAIMS AND LEGAL ACTIONS. Except as set forth on Exhibit "C",
there is no claim, legal action, counterclaim, suit, arbitration, governmental
investigation or other legal, administrative or tax proceeding, nor any order,
decree or judgment, in progress, pending, or threatened against or relating to
Seller, the Center, or the business or operations of the Seller, nor does Seller
know or have reason to be aware of any basis for the same.
3.08 MAINTENANCE OF BUSINESS OPERATIONS AND EMPLOYEES. Seller shall
use its best efforts to preserve and maintain the Center's business operations
intact, and use its best efforts to keep available to Purchaser the services of
the Center's employees, to preserve and maintain the Personal Property and to
preserve to the extent possible the goodwill of the Center's business. Prior to
the Closing Date, Seller shall not (i) except in the usual and ordinary course
of business of Seller consistent with past practice, incur any indebtedness or
other liabilities, guarantee any indebtedness or sell any assets of the Center,
or (ii) increase the compensation payable to any employee, stockholder, member
or doctor other than normal merit and cost of living increases granted in the
ordinary course of business, (iii) enter into any employment agreements or adopt
any employee benefit plan or increase the benefits or obligations of Seller or
the Center under any employee benefit plan, (iv) permit any of the Assets to be
subjected to any new mortgage, pledge, security interest, lien, claim,
encumbrance, or restriction of any kind, or (v) discharge or satisfy any claims,
liabilities or obligations of the Center other than in the usual course of
business.
3.09 CONSENTS. Except as set forth on Exhibit "C", there are no
persons whose consent is necessary for Seller to consummate the transactions
contemplated by this Agreement. Each party hereto agrees to cooperate with each
other party to obtain the consents, approvals and authorizations of third
parties and governmental authorities that any such party reasonably determines
to be necessary to consummate the transactions contemplated by this Agreement.
5
<PAGE> 6
3.10 NO MANAGEMENT CONTRACT OR LEASE. Except for any lease
agreement(s) between Seller and Seller's landlord(s), which lease agreement(s)
shall be assigned by Seller to Purchaser at Closing to the extent assignable and
copies of which lease agreement(s) have been provided to Purchaser by Seller,
there will be no management contracts or leases for the Center at the time of
Closing.
3.11 ACCURACY OF INFORMATION. No representations, warranties or
covenants by Seller, nor any statement, list or certificate furnished or to be
furnished to Purchaser pursuant hereto, or in connection with the transactions
contemplated hereby, contains or will contain any untrue statement of fact or
omits or will omit to state a fact necessary to make the statements contained
therein not misleading in light of the circumstances under which they were made.
3.12 NOTICE AS TO CHANGES. Seller will promptly advise Purchaser in
writing of the occurrence of any events of which Seller becomes aware after the
date of this Agreement and prior to Closing relating to any of the matters which
are the subject of the covenants, representations and warranties contained
herein.
3.13 BULK SALES. Seller shall comply with any and all applicable
bulk sales laws.
3.14 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The warranties,
representations and covenants of the Seller contained in this Agreement shall be
true and correct as of the Closing Date with the same force and effect as if
given and made on and as of the date and time of Closing, and such
representations, warranties and covenants shall survive the Closing and the
consummation of the transactions contemplated by this Agreement for the period
of three (3) years.
SECTION 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER.
Purchaser hereby represents, warrants and covenants to Seller as
follows, and acknowledges and confirms that Seller is relying upon such
representations, warranties and covenants in connection with the execution,
delivery and performance of this Agreement, notwithstanding any investigation
made by Seller or on its behalf:
4.01 ORGANIZATION OF PURCHASER. Purchaser is a corporation
organized and in existence under the laws of the State of Delaware and has all
requisite corporate power and authority to enter into this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated
hereby.
4.02 AUTHORIZATIONS AND BINDING EFFECT. This Agreement has been
duly and validly authorized, executed and delivered by Purchaser and constitutes
the legal,
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valid and binding obligation of Purchaser, enforceable in accordance with its
terms. All other corporate proceedings required by the Articles of Incorporation
or the Bylaws of Purchaser or otherwise for the execution and delivery of this
Agreement, and for the consummation of the transactions contemplated hereby,
have been duly taken.
4.03 NO VIOLATION. The execution, delivery and performance by the
Purchaser of this Agreement or any agreements required hereby to be executed by
Purchaser, will not (i) constitute a violation of, conflict with or constitute a
default under any term or provision of the Purchaser's Articles of Incorporation
or bylaws, each as amended, (ii) to the best of Purchaser's knowledge,
constitute a violation of any statute, ordinance, judgment, order, decree,
regulation or rule of any court, governmental authority or arbitrator or any
license, permit or franchise applicable or relating to the Center or (iii)
result in the creation of any lien upon the Purchaser's assets pursuant to the
provisions of any of the foregoing.
4.04 ACCURACY OF INFORMATION. No representations, warranties or
covenants by Purchaser or the members, officers or directors of the Purchaser,
nor any statement, list or certificate furnished or to be furnished to the
Seller pursuant hereto, or in connection with the transactions contemplated
hereby, contains or will contain any untrue statement of fact or omits or will
omit to state a fact necessary to make the statements contained therein not
misleading in light of the circumstances under which they were made.
4.05 CLAIMS AND LEGAL ACTIONS. There is no claim, legal action,
counterclaim, suit, arbitration, governmental investigation or other legal,
administrative or tax proceeding, nor any order, decree or judgment, in
progress, pending, or threatened against or relating to Purchaser or the
business or operations of the Purchaser, nor does Purchaser know or have reason
to be aware of any basis for the same.
4.06 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The
warranties and representations of the Purchaser contained in this Agreement
shall be true and correct as of the Closing with the same force and effect as if
given and made on and as of the date and time of Closing, and such
representations and warranties shall survive the Closing and the consummation of
the transactions contemplated by this Agreement for the period of three (3)
years.
4.07 NOTICE AS TO CHANGES. Purchaser shall promptly advise Seller
in writing of the occurrence of any events of which Purchaser becomes aware
after the date of this Agreement and prior to Closing relating to any of the
matters which are the subject of the covenants, representations and warranties
contained herein. In the event Purchaser withdraws or abandons the registration
statement for the
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<PAGE> 8
IPO prior to October 15, 1997, then Purchaser shall immediately notify Seller in
writing within five (5) business days of such abandonment or withdrawal.
SECTION 5. CONVEYANCES.
At Closing, the Personal Property shall be conveyed by general
assignment and bill of sale. The Leasehold Interest shall be assigned to
Purchaser pursuant to assignment agreements. In advance of the Closing Date,
appropriate forms of such bill of sale and assignment agreements shall be
prepared by Purchaser's counsel in conformity with this Agreement and shall be
submitted to Seller for its approval, which shall not be unreasonably withheld.
Good and marketable title to the Assets at the Center including the Personal
Property shall be conveyed from Seller to Purchaser free and clear of all liens,
claims, charges, encumbrances, restrictions, assessments (including, without
limitation, any assessments payable in installments, all of which installments
have not been paid), encroachments, leases and easements, of any kind, subject
only to taxes for the current year, and those other liens, claims, charges,
encumbrances or objections, if any, set forth in Exhibit "D" attached hereto and
by reference made a part hereof (such other liens, claims, charges, encumbrances
or objections are hereinafter referred to as "Permitted Exceptions"). Subject to
the Permitted Exceptions, Seller shall have satisfied or canceled of record all
debt or security instruments which create a lien on the Personal Property,
including, without limitation, any mortgage, indenture, security agreement, or
deed to secure debt outstanding on any portion of such Personal Property.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER.
The obligations of Purchaser to perform this Agreement are subject to
the satisfaction of the following conditions, each of which may be waived by
Purchaser:
6.01 ACCURACY OF REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF
OBLIGATIONS. At Closing, Seller shall certify to Purchaser that (i) the
representations and warranties of Seller herein contained are true and correct
as of the Closing Date with the same effect as though made on the Closing Date
(except for changes permitted or contemplated by the terms of this Agreement or
except to the extent that such changes expressly relate to an earlier date); and
(ii) Seller has performed all obligations and complied with all covenants
required by this Agreement to be performed or complied with by Seller prior to
the Closing Date.
6.02 DELIVERIES. Seller hereby agrees to, and shall, deliver or
cause to be delivered to the Purchaser at the Closing the following, each of
which shall be in form and substance satisfactory to the Purchaser:
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<PAGE> 9
(a) BILL OF SALE. A General Assignment and Bill of Sale
for all of Seller's right, title and interest in and to the Personal
Property and fixtures located in the Center, including those items
described in Exhibit "B" attached hereto and by this reference made a
part hereof;
(b) OTHER INSTRUMENTS. Such other endorsements,
assignments and instruments of transfer and conveyance as may be
necessary to vest in the Purchaser good and marketable title to the
assets and business to be sold hereunder and as shall be reasonably
requested by Purchaser; and
(c) CERTIFICATES REGARDING AUTHORITY AND OTHER MATTERS.
Certificates or affidavits of Seller in form and substance satisfactory
to Purchaser regarding the authority and power of the Seller to
complete the transactions provided for herein, and the accuracy of
Seller's representations, and warranties and covenants contained
herein.
6.03 AUTHORIZATION OF AGREEMENT BY SELLER. All actions necessary to
authorize the execution, delivery and performance of this Agreement and all
documents contemplated herein and therein shall have been duly and validly taken
by the officers of the Seller, and Seller shall have full power and right to
consummate the transactions contemplated hereby or thereby on the terms provided
herein or therein. Seller shall provide Purchaser at Closing with a certified
resolution approving the execution of this Agreement and the transactions
contemplated hereby.
6.04 NO INJUNCTION OR RESTRAINING ORDER. No injunction, restraining
order or other order of any federal or state court in the United States that
prevents the consummation of the transactions contemplated hereby shall be
pending or shall have been issued and remain in effect.
6.05 GOVERNMENTAL CONSENTS, APPROVALS AND AUTHORIZATIONS. All
consents, authorizations, orders or approvals of, and filings or registrations
with, any governmental commission, board or other regulatory body that are
required for or in connection with the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby shall have been
obtained or made.
6.06 INSPECTION AND SURVEY. Purchaser and/or its agents (including
accountants, lawyers and investment bankers) shall have conducted, completed and
be satisfied with (i) a physical plant inspection of the Center and an
inspection of the Personal Property, and (ii) an inspection of the Center's
business and legal and financial books and records, including any leases for
office space, furniture or equipment. Seller shall make such items available to
Purchaser and/or its agents at
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<PAGE> 10
reasonable times and in such a manner so as not to unreasonably disrupt the
Center's normal business.
6.07 MATERIAL ADVERSE CHANGE. There shall have been no material
adverse change after the date of the most recent financials in the results of
operations, business, assets, properties, liabilities, financial position or
affairs of the Center or the Seller, which in the good faith judgment of the
Purchaser has had, or will have a materially adverse effect on the Center or the
Center's business.
6.08 PUBLIC OFFERING OR FIRM UNDERWRITING. Purchaser shall have
completed a public offering for the sale of at least $10,000,000 of the stock of
Purchaser.
6.09 CASUALTY LOSSES. On or prior to the time of Closing, the
Center shall not have sustained any loss, whether or not insured, by reason of
physical damage to the Center caused by fire, flood, accident, explosions or
other calamity which would adversely affect the carrying on of its business in
the normal and regular course.
6.10 ACCOUNTING TREATMENT. Purchaser shall have received approval
from its auditors and an indication of no objection from the Securities and
Exchange Commission ("SEC") as to Purchaser's and the Center's, along with other
orthodontic practices, "roll-up" accounting treatment, on terms acceptable to
Purchaser.
6.11 EMPLOYMENT AGREEMENT. Seller shall enter into a five (5) year
employment agreement with any Orthodontist(s) who have an equity interest in
Seller or deliver patient care at the Center(s) on average more than ten (10)
days per month the Center(s), as employee(s) to the Center(s) after the
consummation of the transactions contemplated hereby, which employment
agreements shall contain a non-competition agreement with respect to Purchaser.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER.
The obligations of Seller to perform this Agreement are subject to the
satisfaction of the following conditions, each of which may be waived by Seller:
7.01 ACCURACY OF REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF
OBLIGATIONS. At Closing, Purchaser shall certify to Seller that (i) the
representations and warranties of the Purchaser herein contained are true and
correct as of the Closing Date with the same effect as though made on the
Closing Date (except for changes permitted or contemplated by the terms of this
Agreement or except to the extent that they expressly relate to an earlier
date); and (ii) Purchaser has performed all obligations and complied with all
covenants required by this Agreement to be performed or complied with by it
prior to the Closing Date.
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<PAGE> 11
7.02 DELIVERY OF THE PURCHASE PRICE. Purchaser shall have delivered
to Seller the Purchase Price, as described in Section 2.01.
7.03 GOVERNMENTAL CONSENTS, APPROVALS AND AUTHORIZATIONS. All
consents, authorizations, orders or approvals of, and filings or registrations
with, any governmental commission, board or other regulatory body that are
required for or in connection with the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby shall have been
obtained or made.
7.04 NO INJUNCTION OR RESTRAINING ORDER. No injunction, restraining
order or other order of any federal or state court in the United States that
prevents the consummation of the transactions contemplated hereby shall be
pending or shall have been issued and remain in effect.
7.05 INITIAL PUBLIC OFFERING. Purchaser shall have completed the
IPO on or before October 15, 1997.
SECTION 8. PRORATIONS AND ADJUSTMENTS.
The following items shall be adjusted based on the Closing Date on a
pro rata basis between Seller and Purchaser at the time of the Closing or after
the Closing as agreed upon by Purchaser and Seller:
(a) Personal property ad valorem taxes for the 12 month period
succeeding the applicable tax bill due date;
(b) Charges for electricity, gas, water and sewer and other
utilities to be based on projections from most recent invoices
or on recent meter readings; and
(c) Such other items as may be agreed upon by Seller and
Purchaser.
SECTION 9. FEDERAL SECURITIES LAWS.
9.01 INVESTMENT REPRESENTATION. Seller acknowledges that the shares
of stock of Purchaser to be delivered to the Seller at the Closing pursuant to
this Agreement have not been and will not be registered under the Securities Act
of 1933 ("1933 Act") and may not be sold, transferred, pledged or otherwise
disposed of in the absence of an effective registration statement covering the
shares under the 1933 Act and applicable state securities laws, or unless an
exemption from such registration is available and a legal opinion to that effect
is delivered to and accepted by the Purchaser. The stock to be acquired by the
Seller pursuant to this Agreement is being acquired solely for Seller's own
account, for
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investment purposes only and with no present intention of distributing, selling
or otherwise disposing of it in connection with a distribution.
9.02 COMPLIANCE WITH LAW. Seller represents and warrants that none
of the shares of Purchaser stock issued to Seller will be offered, sold,
assigned, pledged, hypothecated, transferred or otherwise disposed of, except
after full compliance with all of the applicable provisions of the 1933 Act and
the rules and regulations of the SEC and applicable state securities laws and
regulations. All certificates evidencing shares of Purchaser stock issued
hereunder shall bear the following restrictive legend, as well as any legend
required by the securities or blue sky laws of the state where Purchaser
resides:
THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE
SECURITIES LAWS OF ANY JURISDICTION AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AFTER RECEIPT
OF AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT AN EXEMPTION
FROM REGISTRATION IS AVAILABLE UNDER APPLICABLE SECURITIES LAWS.
9.03 INVESTMENT RISK. Seller is able to bear the economic risk of
an investment in Purchaser stock acquired pursuant to this Agreement and can
afford to sustain a total loss of such investment and has such knowledge and
experience in financial and business matters that Seller represents and warrants
that it is capable of evaluating the merits and risks of the proposed investment
and therefore has the capacity to protect Seller's interests in connection with
the acquisition of Purchaser stock. Seller or their representatives have had an
adequate opportunity to ask questions and receive answers from Purchaser
concerning any and all matters relating to Purchaser and the transaction
described herein.
9.04 ACCREDITED INVESTOR STATUS. Seller represents and warrants
that he is an "accredited investor" as defined in Rule 501(a) under the 1933
Act.
9.05 PIGGYBACK REGISTRATION RIGHTS. Purchaser has no obligation to
register the shares of Purchaser stock that Seller will receive under this
Agreement. Provided, however, in the event Purchaser, at any time within 24
months after the Closing, contemplates and undertakes a public offering of its
shares of Common Stock and the filing of a registration statement with the SEC
in connection therewith, Purchaser shall notify the Seller in writing of the
proposed offering and of any material terms and conditions of the offering known
to Purchaser. Purchaser shall use all reasonable efforts to have included in
such registration statement all or
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any portion of the shares distributed to Seller hereunder, subject, however, to
such terms, conditions and limitations (including but not limited to the number
of shares that Seller may offer to sell in such registration statement) as any
underwriter retained by Purchaser in connection with such offering may require,
and provided that the public offering and sale of such shares is not restricted
by any legend or other condition imposed by any state securities commissioner.
Seller shall take all such action and execute all such documents including, but
not limited to, the execution and delivery of an underwriting agreement in form
and substance in all material respects the same as the underwriting agreement to
be signed by Purchaser, as may be requested by Purchaser. The cost of such
public offering shall be borne by Purchaser, except that Seller shall pay its
proportionate share of underwriters' commissions and discounts and the costs and
fees of any attorneys, accountants and other persons retained by Seller in
connection with the offering. The provisions of this Section 9.05 shall not
apply to registration statements filed in connection with employee stock
purchase and option programs by Purchaser or in connection with actual or
proposed acquisitions by Purchaser. Seller shall notify Purchaser of its
election to exercise its rights herein specified in writing within thirty (30)
days after the aforesaid written notice to the Seller by Purchaser."
SECTION 10. BROKERS.
Seller shall pay any real estate broker(s) or finder(s) employed by
Seller. Seller shall indemnify and hold harmless Purchaser for any and all
claims and expenses arising from Seller's employment of a broker or finder.
Purchaser shall pay any real estate broker(s) or finder(s) employed by
Purchaser. Purchaser shall indemnify and hold harmless Seller for any and all
claims and expenses arising from Purchaser's employment of a broker or finder.
SECTION 11. ASSUMED LIABILITIES.
Except as specifically provided in this Agreement, Purchaser shall
assume no liabilities, obligations or indebtedness of Seller or the Center
whether express or implied, contingent or absolute, disputed or final, nor shall
anything herein be construed to the contrary.
SECTION 12. TERMINATION.
12.01 RIGHT OF TERMINATION. This Agreement and the transactions
contemplated by this Agreement may be terminated at any time prior to the
Closing Date:
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(a) By the mutual consent of the Purchaser and the
Seller.
(b) By the Purchaser in the event that the conditions set
forth in Sections 3 and 6 of this Agreement shall not have been
satisfied or waived by the Closing.
(c) By the Seller in the event that the conditions set
forth in Sections 4 and 7 of this Agreement shall not have been
satisfied or waived by the Closing.
(d) By either party upon written notice after October 15,
1997.
(e) By the Seller upon receipt of the Purchaser's notice
of withdrawal or abandonment of the registration statement for the IPO
by October 15, 1997 referred to in Section 4.07 hereof.
12.02 NOTICE OF TERMINATION. Notice of termination of this Agreement
shall be given by the party so terminating to the other parties hereto, in
accordance with the provisions of Section 14 of this Agreement.
12.03 EFFECT OF TERMINATION. In the event that this Agreement is
terminated pursuant to this Section 12, this Agreement shall be void and have no
further force and effect, without any liability on the part of any of the
parties hereto (or their respective members, stockholders, directors or
officers, if any).
SECTION 13. DESCRIPTIVE HEADINGS.
The descriptive headings of this Agreement are for convenience only and
shall not control or affect the meaning or construction of any provision of this
Agreement.
SECTION 14. NOTICES.
All notices and other communications hereunder shall be in writing and
shall be deemed given if (a) delivered by hand, (b) mailed by registered or
certified mail (return receipt requested), (c) telecopied and immediately
confirmed, or (d) sent by overnight delivery, to the parties at the following
addresses (or at such other addresses for a party as shall be specified by like
notice) and shall be deemed given on the date on which so hand-delivered or so
telecopied, on the third business day following the date on which so mailed, if
deposited in a regularly-maintained receptacle for United States mail, or on the
first business day following the date on which sent by overnight delivery:
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If to Purchaser:
Premier Orthodontic Group, Inc.
23848 Hawthorne Boulevard, Suite 200
Torrance, California 90505
Attn: Mr. Sam Westover, Chief Executive Officer
Telecopier: (310) 791-5660
Telephone: (310) 791-5657
With a copy to:
Nelson Mullins Riley & Scarborough, L.L.P.
First Union Plaza, Suite 1400
999 Peachtree Street
Atlanta, Georgia 30309
Attn: Paul A. Quiros, Esq.
Telecopier: (404) 817-6050
Telephone: (404) 817-6103
If to Seller:
-------------------------------
Attention:
---------------------
-------------------------------
-------------------------------
Telephone:
---------------------
Telecopier:
---------------------
SECTION 15. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall become effective
when one or more counterparts have been signed by each of the parties and
delivered to the other parties.
SECTION 16. GOVERNING LAW.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Florida without regard for its
principles of conflicts of laws.
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SECTION 17. ASSIGNABILITY.
This Agreement shall not be assignable by the Seller without the prior
written consent of the Purchaser. This Agreement shall be assignable by
Purchaser to (i) any person, firm or corporation that controls or is under
common control with Purchaser, (ii) US Orthodontic Care, Inc. ("USOC") or any
person, firm or corporation that controls or is under common control with USOC,
or (iii) any entity that results from a merger or other combination between
Purchaser and USOC ("Newco") and any person, firm or corporation that controls
or is under common control with Newco.
SECTION 18. WAIVERS AND AMENDMENTS.
Any term or provision of this Agreement may be waived at any time by
the party that is entitled to the benefits thereof, and any term or provision of
this Agreement may be amended or supplemented at any time by the mutual consent
of Purchaser and Seller, except that any waiver of any term or condition, or any
amendment or supplementation, of this Agreement must be in writing. A waiver of
any breach or failure to enforce any of the terms or conditions of this
Agreement shall not in any way affect, limit or waive a party's rights hereunder
at any time to enforce strict compliance thereafter with every term or condition
of this Agreement.
SECTION 19. THIRD PARTY RIGHTS.
Notwithstanding any other provision of this Agreement, this Agreement
shall not create any rights or benefits on behalf of any employee of Seller,
third party or other person, and this Agreement shall be effective only as
between the parties hereto, their successors and permitted assigns.
SECTION 20. ENTIRE AGREEMENT.
This Agreement (including the Exhibits, agreements, documents and
instruments referred to herein) constitutes the entire agreement, and supersedes
all other prior agreements and understandings, both written and oral, among the
parties, or any of them with respect to the subject matter hereof.
SECTION 21. SEVERABILITY.
In the event that any one or more of the provisions contained in this
Agreement shall be declared invalid, void or unenforceable, the remainder of the
provisions of this Agreement shall remain in full force and effect.
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SECTION 22. EXHIBITS.
The parties shall have until Closing to agree upon all information to
be filed as a part of the Exhibits to this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first set forth above.
SELLER:
----------------------------------
By:
------------------------------
Name:
--------------------------
Title:
------------------------
PURCHASER:
PREMIER ORTHODONTIC GROUP, INC.
By:
------------------------------
Name:
--------------------------
Title:
------------------------
17
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EXHIBIT 2.3
AGREEMENT AND PLAN OF REORGANIZATION
by and among
PREMIER ORTHODONTIC GROUP, INC.
--------------------, D.M.D.
--------------------, D.M.D.
and
---------------------------, INC.
DATED ------------------, 1997
THIS AGREEMENT IS SUBJECT TO ARBITRATION.
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<PAGE> 2
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
executed as of the _____ day of ____________, 1997, is by and among PREMIER
ORTHODONTIC GROUP, INC., a Delaware corporation ("Premier");
____________________________________, a ______________________ (the "Company"),
and _____________________ D.M.D. and _____________________ D.M.D., residents of
the State of ______________________ (individually "Shareholder" and collectively
"Shareholders").
WITNESSETH:
WHEREAS, the Company owns certain assets used to operate an orthodontic
practice in ______________________________;
WHEREAS, Shareholders are the only shareholders of the Company;
WHEREAS, Premier is engaged in the business of acquiring the assets of
and managing [providing consulting services with respect to] orthodontic
practices to the extent permitted by applicable law; and
WHEREAS, the Boards of Directors of each of the Company and Premier
have determined that a business combination between the parties is in the best
interests of their respective companies and stockholders and accordingly have
agreed to effect the Merger (as hereinafter defined) upon the terms and
conditions set forth herein;
WHEREAS, it is intended that for federal income tax purposes the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
NOW THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, and for other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
SECTION 1. THE MERGER
The closing of the transactions contemplated hereby (the "Closing")
will take place as soon as practicable following the satisfaction or waiver of
the conditions to the obligations of the parties to effect the Merger, but in no
event shall the Closing be held later than October 15, 1997 (such date of
Closing being referred to herein as the "Closing Date"). The place of Closing
shall be at such place as the parties may mutually agree.
1.1 MERGER OF THE COMPANY INTO PREMIER. On the Closing Date, the
Company shall be merged with and into Premier in accordance with this Agreement
and the separate corporate existence of the Company shall thereupon cease (the
"Merger"). The Merger shall be based on the respective representations,
warranties and agreements of the parties hereto, and shall be subject to the
terms and conditions herein stated. The Merger is intended to be a "tax-free
reorganization" pursuant to Section 368(a)(1)(A) of the Code and the parties
hereto shall not report the transaction in a manner inconsistent therewith or
otherwise take any action that would prevent the Merger from qualifying as such;
provided, however, that the actual tax effect of the transactions contemplated
by this Agreement is not a condition precedent to the closing of the
transactions contemplated hereby and no party hereto makes or has made any
representation, warranty or covenant to any other party hereto as to such
qualification. Premier shall be the surviving corporation in the Merger (in such
capacity, hereinafter referred to as the "Surviving Corporation") and shall be
governed by the laws of the State of Delaware, and the separate corporate
existence of Surviving Corporation with all its rights, privileges, powers,
immunities, purposes and franchises shall continue unaffected by the Merger,
except as set forth herein. The Merger shall have the effects specified pursuant
to the laws of the State of Delaware.
1.2 MERGER CERTIFICATES. If all conditions to the Merger set forth
herein have been fulfilled or waived in accordance herewith and this Agreement
shall not have been terminated pursuant to the terms hereof, the parties hereto
shall cause to be properly executed and filed on the Closing Date Articles of
Merger meeting the requirements of the laws of the State of
________________________. The Merger shall become effective on the Closing Date
(such effective date being referred to herein as the "Effective Date").
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1.3 ARTICLES OF INCORPORATION OF SURVIVING CORPORATION. At the
Effective Date, the Articles of Incorporation of Premier shall be the Articles
of Incorporation of the Surviving Corporation.
1.4 BYLAWS OF THE SURVIVING CORPORATION. The Bylaws of Premier on
the Closing Date shall be the Bylaws of the Surviving Corporation, unless and
until duly amended in accordance with their terms.
1.5 DIRECTORS OF THE SURVIVING CORPORATION. The persons who are
irectors of Premier immediately prior to the Effective Date shall, from and
after the Closing Date, be the directors of the Surviving Corporation until
their successors have been duly elected or appointed and qualified or until
their earlier death, resignation or removal in accordance with the Surviving
Corporation's Articles of Incorporation and Bylaws.
1.6 OFFICERS OF THE SURVIVING CORPORATION. The persons who are
officers of Premier immediately prior to the Effective Date shall, from and
after the Effective Date, be the officers of the Surviving Corporation and shall
hold their same respective office(s) until their earlier death, resignation or
removal.
1.7 CONVERSION OF COMPANY COMMON STOCK. The manner of converting
shares of the Company in the Merger shall be as follows:
(a) As a result of the Merger and without any
action on the part of the holder thereof, all shares of Company common stock
issued and outstanding on the Effective Date shall cease to be outstanding and
shall be canceled and retired and shall cease to exist, and each holder of a
certificate representing any such shares of Company common stock shall
thereafter cease to have any rights with respect to such shares of Company
common stock, except the right, subject to Section 1.8(c), to receive, without
interest, the consideration specified in Annex I attached hereto (in the
aggregate, the "Merger Consideration").
(b) Each share of Company common stock held in
the Company's treasury, if any, on the Closing Date, by virtue of the Merger,
shall cease to be outstanding and shall be canceled and retired without payment
of any consideration therefor and shall cease to exist.
1.8 EXCHANGE OF CERTIFICATES REPRESENTING SHARES OF COMPANY COMMON
STOCK.
(a) On the Closing Date, (i) the Shareholders,
as the holders of all outstanding certificates representing shares of Company
common stock, shall, upon surrender of such certificates, be entitled to receive
the Merger Consideration and (ii) until the certificates representing Company
common stock have been surrendered by Shareholders and replaced by certificates
representing Premier common stock, the certificates for Company common stock
shall, for all purposes, be deemed to evidence ownership of Premier common stock
in such share amounts as will be issued pursuant to Annex I.
(b) The Shareholders shall deliver to Premier on
the Closing Date the certificates representing Company common stock owned by
them, duly endorsed in blank by the Shareholders, or accompanied by blank stock
powers, and with all necessary transfer tax and other revenue stamps (if any),
acquired at the Shareholders' expense. The Shareholders agree to cure any
deficiencies with respect to the endorsement of the certificates or other
documents of conveyance with respect to such Company common stock or with
respect to the stock powers accompanying any Company Common Stock. Simultaneous
with such delivery on the Closing Date, the Shareholders shall receive in
exchange therefor a certificate representing that number of shares of Premier
common stock and the amount of any cash such Shareholder is entitled to receive
pursuant to Sections 1.7 and 1.8(c) hereof.
(c) Notwithstanding Section 1.7 or any other
provision of this Section 1.8, no fractional shares of Premier common stock will
be issued.
1.9 SUBSEQUENT ACTIONS. If, at any time after the Effective Date,
the Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of the Company acquired or to be acquired by the Surviving
Corporation as a result of, or in connection with, the Merger or otherwise to
carry out this Agreement, and to effect the cancellation of all outstanding
shares of Company common
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stock in return for the consideration set forth in this Agreement, the officers
and directors of the Surviving Corporation shall be authorized to execute and
deliver, in the name and on behalf of the Company, and each Shareholder or
otherwise, to carry out all such deeds, bills of sale, assignments and
assurances and to take and do, in the name and on behalf of the Company or
otherwise, all such other actions and things as may be necessary or desirable to
vest, perfect or confirm any and all right, title and interest in, to and under
such rights, properties or assets in the Surviving Corporation or otherwise to
carry out this Agreement.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
SHAREHOLDERS.
The Company and the Shareholders, jointly and severally, hereby
represent and warrant to Premier that the following statements are current and
complete as of the date of this Agreement and will be correct and complete as
of the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement, except as set forth in the
disclosure Exhibits accompanying this Section 2) and the Effective Date. The
disclosure Exhibits will be arranged in paragraphs corresponding to the
paragraphs contained in this Section.
2.1 CORPORATE EXISTENCE; GOOD STANDING. The Company is a
[professional association] duly organized, validly existing and in good standing
under the laws of the State of ________________. The Company has all necessary
corporate powers to own all of its assets and to carry on its business as such
business is now being conducted. The Company does not own stock directly or
indirectly, in any other corporation, association or business organization, nor
is the Company a party to any joint venture or partnership, other than as set
forth on Exhibit 2.1. The Shareholders are the sole shareholders of the Company
and own all outstanding shares of capital stock free of all security interests,
claims, encumbrances and liens in the amounts set forth on Exhibit 2.1. Each
share of Company common stock has been legally and validly issued and fully paid
and nonassessable. No shares of capital stock of the Company are owned by the
Company in treasury. There are no outstanding (a) bonds, debentures, notes or
other obligations the holders of which have the right to vote with the
stockholders of the Company on any matter (except as set forth in Exhibit 2.1),
(b) securities of the Company convertible into equity interests in the Company,
or (c) commitments, options, rights or warrants to issue any such equity
interests in the Company, to issue securities of the Company convertible into
such equity interests, or to redeem any securities of the Company. No shares of
capital stock of the Company have been issued or disposed of in violation of the
preemptive rights, rights of first refusal or similar rights of any of the
Company's shareholders. The Company is not required to qualify to do business as
a foreign corporation in any other state or jurisdiction by reason of its
business, properties or activities in or relating to such other state or
jurisdiction. The Company does not have any assets, employees or offices in any
state other than_______________________.
2.2 POWER AND AUTHORITY FOR TRANSACTIONS. The Company has the
corporate power to execute, deliver and perform this Agreement and all
agreements and other documents executed and delivered by it pursuant to this
Agreement or to be executed and delivered on the Closing Date, and has taken all
action required by law, its Articles of Incorporation, its Bylaws or otherwise,
to authorize the execution, delivery and performance of this Agreement and such
related documents. Each Shareholder has the legal capacity to enter into and
perform this Agreement and the other agreements to be executed and delivered in
connection herewith. The Company has obtained (or will obtain as of the Closing
Date) the approval of its shareholders necessary to the consummation of the
transactions contemplated herein. This Agreement and all agreements and
documents executed and delivered in connection herewith have been, or will be as
of the Closing Date, duly executed and delivered by the Company and the
Shareholders, as appropriate, and constitute or will constitute the legal, valid
and binding obligations of the Company and the Shareholders, enforceable against
the Company and the Shareholders in accordance with their respective terms,
except as may be limited by applicable bankruptcy, insolvency or similar laws
affecting creditors' rights generally or the availability of equitable remedies.
The execution and delivery of this Agreement, and the agreements executed and
delivered pursuant to this Agreement or to be executed and delivered on the
Closing Date, do not, and, subject to the receipt of consents described on
Exhibit 2.5, the consummation of the actions contemplated hereby will not,
violate any provision of the Articles of Incorporation or Bylaws of the Company
or any provisions of, or result in the acceleration of, any obligation under any
mortgage, lien, lease, agreement, rent, instrument, order, arbitration award,
judgment or decree to which the Company or any Shareholder is a party or by
which the Company or any Shareholder is bound, or violate any material
restrictions of any kind to which the Company is subject, or result in any lien
or encumbrance on any of the Company's assets.
2.3 PERMITS, LICENSES AND GOVERNMENTAL AUTHORIZATIONS. All
building or other permits, certificates of occupancy, concessions, grants,
franchises, licenses, certificates of need and other governmental authorizations
and approvals required to
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be maintained by the Company, the Shareholders and each licensed employee of the
Company have been duly obtained and are in full force and effect unless such
failure to obtain would not have a material adverse effect on the Company. There
are no proceedings pending or, to the knowledge of the Company and the
Shareholders, threatened, which may result in the revocation, cancellation or
suspension, or any adverse modification, of any thereof.
2.4 CORPORATE RECORDS. True and correct copies of the Articles of
Incorporation, Bylaws and all amendments thereto of the Company have been
delivered to Premier, and the books of account of the Company have been kept
accurately in the ordinary course of business and the revenues, expenses, assets
and liabilities of the Company have been properly recorded in such books.
2.5 CONSENTS. Except as set forth on Exhibit 2.5, no consent,
authorization, permit, license or filing with any governmental authority, any
lender, lessor, any manufacturer or supplier or any other person or entity is
required to authorize, or is required in connection with, the execution,
delivery and performance of this Agreement and the agreements and documents
contemplated hereby on the part of the Company or the Shareholders.
2.6 THE COMPANY'S FINANCIAL INFORMATION. The Company has
heretofore furnished Premier with copies of financial information ("Financial
Statements") about the Company as set forth on Exhibit 2.6 attached hereto,
including the unaudited Balance Sheet ("Balance Sheet") as of December 31, 1996
("Balance Sheet Date"). Such financial statements have been prepared consistent
with past practices, reflect all liabilities of the Company, including all
contingent liabilities of the Company, as of their respective dates, and present
fairly the financial position of the Company as of such dates and the results of
operations and cash flows for the period or periods reflected therein; provided,
however, that such Financial Statements are subject to post year end adjustments
(which will not be material individually or in the aggregate).
2.7 LEASES. Exhibit 2.7 attached hereto sets forth a list of all
leases pursuant to which the Company leases, as lessor or lessee, real or
personal property used in operating the business of the Company or otherwise.
Such leases listed on Exhibit 2.7 are valid and enforceable in accordance with
their respective terms unless such validity or unenforceability will have no
material negative impact on the Company. There is not under any such lease any
existing default by the Company, as lessor or lessee, or any condition or event
of which the Company or any Shareholder has knowledge which with notice or lapse
of time, or both, would constitute a default.
2.8 CONDITION OF ASSETS. All of the plants, structures and
equipment used by the Company in its business are in good condition and repair
subject to normal wear and tear and conform with all applicable ordinances,
regulations and other laws, and the Company and the Shareholders have no
knowledge of any latent defects therein.
2.9 TITLE TO AND ENCUMBRANCES ON PROPERTY. An inventory list of
all interests in personal property and real estate leasehold interests owned by
the Company is set forth on Exhibit 2.9 (the "Property"). The Company has good,
valid and marketable title to the Property free and clear of any liens, claims,
charges, exceptions or encumbrances, except for those, if any, which are set
forth in Exhibit 2.9 attached hereto or those which were disposed of in the
ordinary course of business prior to the Closing Date. The real estate leasehold
interest and personal property described on Exhibit 2.7 and Exhibit 2.9
constitute the only real and personal property used in the conduct of the
Company's business, except as otherwise disclosed in Exhibit 2.9. Upon
consummation of the transactions contemplated hereby, such interest in the
Property shall be free and clear of all liens, security interests, claims and
encumbrances and evidence of such releases of liens and claims shall be provided
to Premier on the Closing Date.
2.10 INVENTORIES. All inventories of the Company used in the
conduct of its business are reflected on the Balance Sheet in accordance with
generally accepted accounting principles consistently applied. The items of the
Company's inventory have been acquired in the ordinary course of its business,
are adequate for the reasonable requirements of its business, and may be used
for their intended purposes. Except as otherwise noted in the Balance Sheet,
substantially all of the inventory owned or used by the Company is in good,
current, standard and merchantable condition and is not obsolete or defective.
2.11 INTELLECTUAL PROPERTY RIGHTS; NAMES. Except as set forth on
Exhibit 2.11, the Company has no right, title or interest in or to patents,
patent rights, corporate names, assumed names, manufacturing processes, trade
names, trademarks, service marks, inventions, specialized treatment protocols,
copyrights, formulas and trade secrets or similar items and such items are the
only such items necessary for the conduct of its business. Set forth in Exhibit
2.11 is a listing of all names of all
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predecessor companies of the Company, including the names of any entities from
whom the Company previously acquired significant assets. Except for
off-the-shelf software licenses and except as set forth on Exhibit 2.11, the
Company is not a licensee in respect of any patents, trademarks, service marks,
trade names, copyrights or applications therefor, or manufacturing processes,
formulas or trade secrets or similar items and no such licenses are necessary
for the conduct of its business. No claim is or, to the best of Company's or
Shareholders' knowledge, is pending to the effect that the present or past
operations of the Company infringe upon or conflict with the asserted rights of
others to any patents, patent rights, manufacturing processes, trade names,
trademarks, service marks, inventions, licenses, specialized treatment
protocols, copyrights, formulas, know-how and trade secrets. To the best of
Company's and Shareholders' knowledge, the Company has the sole and exclusive
right to use all such proprietary rights without infringing or violating the
rights of any third parties and no consents of any third parties are required
for the use thereof by the Surviving Corporation. Any corporate, assumed, or
trade names utilizing the name of Shareholder may be changed at the option of
the Company prior to Closing and Premier shall acquire no interest therein.
2.12 DIRECTORS AND OFFICERS; PAYROLL INFORMATION; EMPLOYEES. Set
forth on Exhibit 2.12 attached hereto is a true and complete list, as of the
date of this Agreement of: (a) the name of each director and officer of the
Company and the offices held by each, (b) the most recent payroll report of the
Company, showing all current employees of the Company and their current levels
of compensation, (c) promised increases in compensation of employees of the
Company that have not yet been effected, (d) oral or written employment
agreements or independent contractor agreements (and all amendments thereto) to
which the Company is a party, copies of which have been delivered to Premier,
and (e) all employee manuals, materials, policies, procedures and work-related
rules, copies of which have been delivered to Premier. The Company is in
compliance with all applicable laws, rules, regulations and ordinances
respecting employment and employment practices. The Company has not engaged in
any unfair labor practice. To the best of Company's and Shareholders' knowledge,
there are no unfair labor practices charges or complaints pending or threatened
against the Company, and the Company has never been a party to any agreement
with any union, labor organization or collective bargaining unit.
2.13 LEGAL PROCEEDINGS. Neither the Company nor any Shareholder nor
outstanding shares of the Company's stock nor any of the Company's assets is
subject to any pending, nor does the Company or any Shareholder have knowledge
of any threatened litigation, governmental investigation, condemnation or other
proceeding against or relating to or affecting the Company, any Shareholder, the
outstanding shares of the Company's stock, any of the assets of the Company, the
operations, business or prospects of the Company or the transactions
contemplated by this Agreement, and, to the knowledge of the Company and the
Shareholders, no basis for any such action exists, nor is there any legal
impediment of which the Company or any Shareholder has knowledge to the
continued operation of its business in the ordinary course, subject to consents
set forth on Exhibit 2.5.
2.14 CONTRACTS. The Company has delivered to Premier true copies of
all written, and disclosed to Premier, all oral, outstanding contracts,
obligations and commitments of the Company, excluding patient contracts (the
"Contracts"), all of which are listed or incorporated by reference on Exhibit
2.7 (in the case of leases) and Exhibit 2.14 (in the case of Contracts other
than leases) attached hereto. Except as otherwise indicated on such Exhibits, to
the best of Company's and Shareholders' knowledge, all of such Contracts are
valid, binding and enforceable in accordance with their terms and are in full
force and effect, and no defenses, offsets or counterclaims have been asserted
or may be made by any party thereto, subject to applicable bankruptcy,
insolvency, reorganization or other laws affecting the rights of creditors
generally, or to equitable principles. Except as indicated on such Exhibits,
there is not under any such Contract any existing default by the Company, or any
condition or event of which the Company or any Shareholder has knowledge which
with notice or lapse of time, or both, would constitute a default. The Company
and the Shareholders have no knowledge of any default by any other party to such
Contracts. Neither the Company nor the Shareholders have received notice of the
intention of any party to any Contract to cancel or terminate any Contract and
have no reason to believe that any amendment or change to any Contract is
contemplated by any party thereto. Other than those contracts, obligations and
commitments of the Company listed on Exhibit 2.7 and Exhibit 2.14 and any
patient contracts, the Company is not a party to any material written or oral
agreement, contract, lease or arrangement, including any:
(a) Contract related to the assets of the Company not
made in the ordinary course of business other than this Agreement;
(b) Employment, consulting or compensation agreement or
arrangement;
(c) Labor or collective bargaining agreement;
(d) Lease agreement with respect to any property, whether
as lessor or lessee;
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(e) Deed, bill of sale or other document evidencing an
interest in or agreement to purchase or sell real or personal property;
(f) Contract for the purchase of materials, supplies or
equipment (i) which is in excess of the requirements of its business now booked
or for normal operating inventories, or (ii) which is not terminable upon notice
of thirty (30) days or less;
(g) Agreement for the purchase from a supplier of all or
substantially all of the requirements of the Company of a particular product or
service;
(h) Loan agreement or other contract for money borrowed
or lent or to be borrowed or lent to another;
(i) Contracts containing non-competition covenants; or
(j) Other contracts or agreements that involve either an
unperformed commitment in excess of $1,000 or that cannot be performed in the
ordinary course of business within thirty (30) days after the date hereof or
terminated by the Company without payment of any penalty or other expense.
2.15 SUBSEQUENT EVENTS. Except as disclosed on Exhibit 2.15, the
Company has not, since the Balance Sheet Date:
(a) Incurred any material obligation or liability
(absolute, accrued, contingent or otherwise) or entered into any contract,
lease, license or commitment, except for this Agreement, other than in the
ordinary course of business or incurred any indebtedness;
(b) Discharged or satisfied any material lien or
encumbrance, or paid or satisfied any material obligation or liability
(absolute, accrued, contingent or otherwise) other than (i) liabilities shown or
reflected on the Balance Sheet or (ii) liabilities incurred since the Balance
Sheet Date in the ordinary course of business;
(c) Formed or acquired or disposed of any interest in any
corporation, partnership, joint venture or other entity;
(d) Made any payments to or loaned any money to any
person or entity other than in the ordinary course of business consistent with
past practices;
(e) Lost or terminated any employee, patient, customer or
supplier that has, individually or in the aggregate, a material adverse effect
on its business;
(f) Increased or established any reserve for taxes or any
other liability on its books or otherwise provided therefor;
(g) Mortgaged, pledged or subjected to any lien, charge
or other encumbrance any of the assets of the Company, tangible or intangible;
(h) Sold or contracted to sell or transferred or
contracted to transfer any of the assets used in the conduct of the Company's
business or canceled any debts or claims or waived any rights, except in the
ordinary course of business consistent with past practices;
(i) Except in the ordinary course of business consistent
with past practices, granted any increase in the rates of pay of employees,
consultants or agents, or by means of any bonus or pension plan, contract or
other commitment, increased the compensation of any officer, employee,
consultant or agent;
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(j) Authorized or incurred any capital expenditures in
excess of Five Thousand Dollars ($5,000);
(k) Except for this Agreement and any other agreement
executed and delivered pursuant to this Agreement, entered into any material
transaction other than as permitted hereunder;
(l) Redeemed, purchased, sold or issued any stock, bonds
or other securities to persons other than the Shareholders;
(m) Experienced damage, destruction or loss (whether or
not covered by insurance) materially and adversely affecting any of its
properties, assets or business, or experienced any other material adverse change
in its financial condition, assets, prospects, liabilities or business;
(n) Declared or paid a distribution, payment or dividend
of any kind on the capital stock of the Company;
(o) Repurchased, approved any repurchase or agreed to
repurchase any of the Company's capital stock; or
(p) Suffered any material adverse change in the business
of the Company or to the assets of the Company.
2.16 ACCOUNTS RECEIVABLE/PAYABLE. The Balance Sheet reflects the
amount, as of the Balance Sheet Date of the Company's (i) accounts receivable,
net of allowances for uncollectible and doubtful amounts ("Accounts
Receivable"), and (ii) current accounts payable and current accrued liabilities
(other than the current portion of long-term debt) ("Accounts Payable"). Exhibit
2.16 contains a true and accurate (i) list of all Accounts Receivable, and (ii)
list of all Accounts Payable and (iii) statement of the working capital
("Working Capital") of the Company as of the Balance Sheet Date. The Company
maintains its accounting records in sufficient detail to substantiate the
accounts receivable reflected on the Balance Sheet and has given and will give
to Premier full and complete access to those records, including the right to
make copies therefrom. Since the Balance Sheet Date, the Company has not changed
any principle or practice with respect to the recordation of accounts receivable
or the calculation of reserves therefor, or any material collection, discount or
write-off policy or procedure. Accounts Receivable are not recorded in amounts
estimated to be net of contractual allowances related to third-party payor
arrangements. The Company is in substantial compliance with the terms and
conditions of such third-party payor arrangements, and the reserves established
by the Company are adequate to cover any liability resulting from lack of
compliance.
2.17 TAXES. The Company has filed all tax returns required to be
filed by it, and made all payments of taxes, including any interest, penalty or
addition thereto, required to be made by it, with respect to income taxes, real
and personal property taxes, sales taxes, use taxes, employment taxes, excise
taxes and other taxes due and payable on or before the date of this Agreement.
To the best of Company's and Shareholders' knowledge, all such tax returns are
complete and accurate in all respects and properly reflect the relevant taxes
for the periods covered thereby. The Company has no tax liability, except for
real and personal property taxes and license fees for the current period not yet
due and payable and sales, use, employment and similar taxes for periods as to
which such taxes have not yet become due and payable. The unpaid taxes of the
Company did not, as of the Balance Sheet Date, exceed the reserve for taxes
(rather than any reserve for deferred taxes established to reflect timing
differences between book and income tax income) set forth on the face of the
Balance Sheet (rather than in any notes thereto), as adjusted for the passage of
time through the Closing Date (in accordance with the past custom and practice
of the Company). The Company and the Shareholders have not received any notice
that any tax deficiency or delinquency has been asserted against the Company. To
the best of Company's and Shareholders' knowledge, there are no audits relating
to taxes of the Company threatened, pending or in process. The Company is not
currently the beneficiary of any waiver of any statute of limitations in respect
of taxes nor of any extension of time within which to file any tax return or to
pay any tax assessment or deficiency. There are no liens or encumbrances
relating to taxes on, or to the best of Company's and Shareholders' knowledge,
or threatened against any of the assets of the Company. To the best of Company's
and Shareholders'
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knowledge, the Company has withheld and paid all taxes required by law to have
been withheld and paid by it. Neither the Company nor any predecessor of the
Company is or has been a party to any tax allocation or sharing agreement or a
member of an affiliated group of corporations filing a consolidated federal
income tax return. The Company has delivered to Premier correct and complete
copies of the Company's three most recently filed annual state and federal
income tax returns, together with all examination reports and statements of
deficiencies assessed against or agreed to by the Company during the three
calendar year period preceding the date of this Agreement. The Company has
neither made any payments, is obligated to make any payments, or is a party to
any agreement that under any circumstance could obligate it to make any payments
that will not be deductible under Code section 280G.
2.18 COMMISSIONS AND FEES. There are no claims for brokerage
commissions or finder's or similar fees in connection with the transactions
contemplated by this Agreement which may be now or hereafter asserted against
Premier, the Company or the Shareholders resulting from any action taken by the
Company or the Shareholders or their respective agents or employees, or any of
them.
2.19 LIABILITIES; DEBT. Except to the extent reflected or reserved
against on the Balance Sheet, the Company did not have, as of the Balance Sheet
Date, and has not incurred since that date and will not have incurred as of the
Closing Date, any liabilities or obligations of any nature, whether accrued,
absolute, contingent or otherwise, and whether due or to become due, other than
those incurred in the ordinary course of business. The Company and the
Shareholders do not know, or have reasonable grounds to know, of any basis for
the assertion against the Company as of the Balance Sheet Date, of any claim or
liability of any nature in any amount not fully reflected or reserved against on
the Balance Sheet, or of any claim or liability of any nature arising since that
date other than those incurred in the ordinary course of business or
contemplated by this Agreement. All indebtedness of the Company (including
without limitation, indebtedness for borrowed money, guaranties and capital
lease obligations) is described on Exhibit 2.19 attached hereto.
2.20 INSURANCE POLICIES. The Company and each Shareholder of the
Company carries property, liability, malpractice, workers' compensation and such
other types of insurance as is customary in the industry. Valid and enforceable
policies in such amounts are outstanding and duly in force and will remain duly
in force through the Closing Date. All such policies are described in Exhibit
2.20 attached hereto and true and correct copies have been delivered to Premier.
Neither the Company nor any Shareholder has received notice or other
communication from the issuer of any such insurance policy canceling or amending
such policy or threatening to do so. Neither the Company nor any Shareholder of
the Company has any outstanding claims, settlements or premiums owed against any
insurance policy.
2.21 EMPLOYEE BENEFIT PLANS. Except as set forth on Exhibit 2.21
attached hereto, the Company has neither established, nor maintains, nor is
obligated to make contributions to or under or otherwise participate in, (a) any
bonus or other type of compensation or employment plan, program, agreement,
policy, commitment, contract or arrangement (whether or not set forth in a
written document); (b) any pension, profit-sharing, retirement or other plan,
program or arrangement; or (c) any other employee benefit plan, fund or program,
including, but not limited to, those described in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). To the best of
Company's and Shareholders' knowledge, all such plans listed on Exhibit 2.21
(individually "Company Plan," and collectively "Company Plans") have been
operated and administered in all material respects in accordance with all
applicable laws, rules and regulations, including without limitation, ERISA, the
Internal Revenue Code of 1986, as amended, Title VII of the Civil Rights Act of
1964, as amended, the Equal Pay Act of 1967, as amended, the Age Discrimination
in Employment Act of 1967, as amended, and the related rules and regulations
adopted by those federal agencies responsible for the administration of such
laws. To the best of Company's and Shareholders' knowledge, no act or failure to
act by the Company has resulted in a "prohibited transaction" (as defined in
ERISA) with respect to the Company Plans. No "reportable event" (as defined in
ERISA) has occurred with respect to any of the Company Plans. The Company has
not previously made, is not currently making, and is not obligated in any way to
make, any contributions to any multi-employer plan within the meaning of the
Multi-Employer Pension Plan Amendments
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Act of 1980. With respect to each Company Plan, either (i) the value of plan
assets (including commitments under insurance contracts) is at least equal to
the value of plan liabilities or (ii) the value of plan liabilities in excess of
plan assets is disclosed on the Balance Sheet, all as of the Closing Date.
2.22 ADVERSE AGREEMENTS. The Company is not, and will not be as of
the Closing Date, a party to any agreement or instrument or subject to any
charter or other corporate restriction or any judgment, order, writ, injunction,
decree, rule or regulation that materially and adversely affects the condition
(financial or otherwise), operations, assets, liabilities, business or prospects
of the Company.
2.23 COMPLIANCE WITH LAWS IN GENERAL. The Company, the Shareholders
and Company's licensed employees have complied with all applicable laws, rules,
regulations and licensing requirements, including, without limitation, the
Federal Environmental Protection Act, the Occupational Safety and Health Act,
the Americans with Disabilities Act and any environmental laws and medical waste
laws, and there exist no violations by the Company, any Shareholder or any
licensed employee of the Company of any federal, state or local law or
regulation unless the failure to do so would have no material negative impact
upon the Company. Neither the Company nor any Shareholder has received any
notice of a violation of any federal, state and local laws, regulations and
ordinances relating to the operations of the business and assets of the Company
and no notice of any pending inspection or violation of any such law, regulation
or ordinance has been received by the Company or any Shareholder unless such
notice or violation would have no material negative impact upon the Company.
2.24 MEDICARE AND MEDICAID PROGRAMS. The Company, each Shareholder
and each licensed employee of the Company is qualified for participation in the
Medicare and Medicaid programs and is party to provider agreements for such
programs which are in full force and effect with no defaults having occurred
thereunder. The Company, each Shareholder and each licensed employee of the
Company has timely filed all claims or other reports required to be filed with
respect to the purchase of services by third-party payors, and all such claims
or reports are complete and accurate, and has no liability to any payor with
respect thereto. To the best of Company's and Shareholders' knowledge, there are
no pending appeals, overpayment determinations, adjustments, challenges, audit,
litigation or notices of intent to open Medicare or Medicaid claim
determinations or other reports required to be filed by the Company, each
Shareholder and each licensed employee of the Company. Neither the Company, nor
any Shareholder, nor to the best of Company's and Shareholder's knowledge, any
licensed employee of the Company has been convicted of, or pled guilty or nolo
contenders to, patient abuse or negligence, or any other Medicare or Medicaid
program related offense and none has committed any offense which may serve as
the basis for suspension or exclusion from the Medicare and Medicaid programs.
2.25 FRAUD AND ABUSE. The Company, the Shareholders and all persons
and entities providing professional services for the Company's business have
not, to the knowledge of the Company and the Shareholders, engaged in any
activities which are prohibited under ss. 1320a-7b or ss. 1395nn of Title 42 of
the United States Code or the regulations promulgated thereunder, or related
state or local statutes or regulations, or which are prohibited by rules of
professional conduct, including, but not limited to, the following: (a)
knowingly and willfully making or causing to be made a false statement or
representation of a material fact in any application for any benefit or payment;
(b) knowingly and willfully making or causing to be made any false statement or
representation of a material fact for use in determining rights to any benefit
or payment; (c) any failure by a claimant to disclose knowledge of the
occurrence of any event affecting the initial or continued right to any benefit
or payment on its own behalf or on behalf of another, with the intent to
fraudulently secure such benefit or payment; and (d) knowingly and willfully
soliciting or receiving any remuneration (including any kickback, bribe or
rebate) directly or indirectly, overtly or covertly, in cash or in kind, or
offering to pay or receive such remuneration (i) in return for referring an
individual to a person for the furnishing or arranging for the furnishing of any
item or service for which payment may be made in whole or in part by Medicare or
Medicaid, or (ii) in return for purchasing, leasing or ordering or arranging
for, or recommending, purchasing, leasing or ordering any good, facility,
service or item for which payment may be made in whole or in part by Medicare or
Medicaid, or (e) referring a patient for designated health services to or
providing designated health services to a patient upon referral from an entity
or person with which the orthodontist or an immediate family
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member has a financial relationship, and to which no exception under ss.1395nn
of Title 42 of the United States Code applies.
2.26 NO UNTRUE REPRESENTATIONS. No representation or warranty by
the Company or any Shareholder in this Agreement, and no Exhibit or certificate
issued or executed by, or information furnished by, officers or directors of the
Company or any Shareholder and furnished or to be furnished to Premier pursuant
hereto, or in connection with the transactions contemplated hereby, contains or
will contain any untrue statement of a material fact, or omits or will omit to
state a material fact necessary to make the statements or facts contained
therein not misleading.
2.27 DISTRIBUTIONS AND REPURCHASES. No distribution, payment or
dividend of any kind has been declared or paid by the Company on any of its
capital stock since the Balance Sheet Date. No repurchase of any of the
Company's capital stock has been approved, effected or is pending, or is
contemplated by the Board of Directors of the Company.
2.28 BANKING RELATIONS. Set forth in Exhibit 2.28 is a complete and
accurate list of all arrangements that the Company has with any bank or other
financial institution, indicating with respect to each relationship the type of
arrangement maintained (such as checking account, borrowing arrangements, safe
deposit box, etc.) and the person or persons authorized in respect thereof.
2.29 OWNERSHIP INTERESTS OF INTERESTED PERSONS; COMPETITORS. To the
best of Company's and Shareholders' knowledge, no officer, employee, director or
stockholder of the Company, or their respective spouses, children or affiliates,
owns directly or indirectly, on an individual or joint basis, any interest in,
has a compensation or other financial arrangement with, or serves as an officer
or director of, any customer or supplier or competitor of the Company or any
organization that has a material contract or arrangement with the Company. To
the best of Company's and Shareholders' knowledge, neither the Company, nor any
of its directors, officers, employees, consultants or the Shareholders nor any
affiliate of such person is, or within the last three (3) years was, a party to
any contract, lease, agreement or arrangement, including, but not limited to,
any joint venture or consulting agreement with any orthodontist, dentist,
hospital, pharmacy, or other person or entity which is in a position to make or
influence referrals to, or otherwise generate business for, the Company or to
provide services, lease space, lease equipment or engage in any other venture or
activity with the Company.
2.30 PAYORS. Exhibit 2.31 sets forth a true, complete and correct
list of the names and addresses of each payor of the Company's services which
accounted for more than ten percent (10%) of revenues of the Company in the
preceding fiscal year. To the best of Company's and Shareholders' knowledge, the
Company has good relations with all such payors and other material payors of the
Company and none of such payors has notified the Company that it intends to
discontinue its relationship with the Company or to deny any claims submitted to
such payor for payment.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PREMIER.
Premier hereby represents and warrants to the Company and the
Shareholders that the following statements are current and complete as of the
date of this Agreement and will be correct and complete as of the Closing Date
(as though made then and as though the Closing Date were substituted for the
date of this Agreement, except as set forth in the disclosure Exhibits
accompanying this Section 3) and the Effective Date. The disclosure Exhibits
will be arranged in paragraphs corresponding to the paragraphs contained in this
Section.
3.1 CORPORATE EXISTENCE; GOOD STANDING. Premier is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. Premier is, or will be at Closing, duly qualified to do
business and is in good standing in the states where its ownership or leasing of
property or the conduct of its business requires it to be so qualified and in
which the failure to be duly qualified would have a material adverse effect upon
Premier, and has the corporate power and authority to carry on its business as
now conducted
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and to own, lease and operate its assets, properties and business. Premier has
in effect all federal, state, local and foreign governmental authorizations
necessary for it to own or lease its properties and assets and to carry on its
business as it is now being conducted, the absence of which, either individual
or in the aggregate, would have a material adverse effect on the business,
operations, or financial condition of Premier.
3.2 CONSENTS, POWER AND AUTHORITY. Premier has corporate power to
execute, deliver and perform this Agreement and all agreements and other
documents executed and delivered by it pursuant to this Agreement, and has taken
all actions required by law, its Certificate and Articles of Incorporation, its
Bylaws or otherwise, to authorize the execution, delivery and performance of
this Agreement and such related documents. This Agreement and all agreements and
documents executed and delivered in connection herewith have been, or will be as
of the Closing Date, duly executed and delivered by Premier as appropriate, and
constitute or will constitute the legal, valid and binding obligations of
Premier enforceable against Premier in accordance with their respective terms,
except as may be limited by applicable bankruptcy, insolvency or similar laws
affecting creditors' rights generally or the availability of equitable remedies.
The execution and delivery of this Agreement and the agreements related hereto
executed and delivered pursuant to this Agreement do not and, subject to the
receipt of consents to assignments of leases and other contracts where required
and the receipt of regulatory approvals where required, the consummation of the
transactions contemplated hereby will not violate, any provision of the
Certificate of Incorporation or Bylaws of Premier or any provisions of, or
result in the acceleration of, any obligation under any mortgage, lien, lease,
agreement instrument, order, arbitration award, judgment or decree to which
Premier is a party or by which it is bound.
3.3 COMMISSIONS AND FEES. Premier has not incurred any obligation
for any finder's, broker's or agent's fees in connection with the transactions
contemplated hereby.
3.4 CAPITAL STOCK. The issuance and delivery by Premier of shares
of the common stock of Premier in connection with the Merger will be as of the
Closing Date duly authorized by all necessary corporate action on the part of
Premier. The shares of Premier common stock to be issued in connection with the
Merger, when issued in accordance with the terms of this Agreement, will be
validly issued, fully paid and nonassessable.
3.5 LEGAL PROCEEDINGS. Except as set forth on Exhibit 3.6, there
are no actions, suits or proceedings instituted or pending, or to Premier's
knowledge, threatened against Premier or any of its subsidiaries, or against any
property, asset, interest, or right of any of them, that are reasonably expected
to have either individually or in the aggregate a material adverse effect on the
business, operations, assets or condition (financial or otherwise) of Premier or
its subsidiaries on a consolidated basis taken as a whole or that are reasonably
expected to impede the consummation of the transactions contemplated by this
Agreement. Premier is not a party to any agreement or instrument nor subject to
any charter or other corporate restriction or any judgment, order, writ,
injunction, decree, rule, regulation, code or ordinance that might impede the
consummation of the transactions contemplated by this Agreement.
SECTION 4. Covenants of the Company and the Shareholders.
The Company and the Shareholders, jointly and severally, agree that
between the date hereof and the Closing Date:
4.1 CONSUMMATION OF AGREEMENT. The Company and the Shareholders
shall use their best efforts to cause the consummation of the transactions
contemplated hereby in accordance with their terms and conditions.
4.2 BUSINESS OPERATIONS. Except as specifically contemplated by
this Agreement, the Company and the Shareholders shall operate the Company's
business in the ordinary course. The Company shall not enter into any lease,
contract, indebtedness, commitment, purchase or sale or acquire or dispose of
any capital asset except in the ordinary course of business. The Company and the
Shareholders shall use their best efforts to preserve
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the business and assets of the Company intact and shall not take any action that
would have an adverse effect on the business or assets of the Company, including
without limitation, any action the primary purpose or effect of which is to
generate or preserve cash; provided that the Company may continue to operate in
the ordinary course of business. The Company and the Shareholders shall use
their best efforts to preserve intact the relationships with payors, customers,
suppliers, patients and others having significant business relations with the
Company. The Company shall collect its receivables and pay its trade payables in
the ordinary course of business. The Company shall not introduce any new method
of management, operations or accounting. On the Closing Date, the Company shall
not be engaged in the practice of orthodontics and shall not provide orthodontic
services.
4.3 ACCESS AND NOTICE. The Company and the Shareholders shall
permit Premier and its authorized representatives reasonable access to, and make
available for reasonable inspection, all of the assets and business of the
Company and all of its assets, including employees, customers and suppliers and
permit Premier and its authorized representatives to inspect and make copies of
all documents, records and information with respect to the business or assets of
the Company as Premier or its representatives may request. The Company and the
Shareholders shall promptly notify Premier in writing of (a) any notice or
communication relating to a default or event that, with notice or lapse of time
or both, could become a default, under any contract, commitment or obligation to
which the Company is a party, and (b) any material adverse change in the
Company's business, financial condition or the conditions of its assets.
4.4 APPROVALS OF THIRD PARTIES AND PERMITS AND CONSENTS. The
Company and the Shareholders shall use their best efforts to secure all
necessary approvals and consents of third parties to the consummation of the
transactions contemplated hereby, including consents described on Exhibit 2.5.
4.5 ACQUISITION PROPOSAL. The Company and the Shareholders shall
not, and shall use their best efforts to cause the Company's employees, agents
and representatives not to, initiate, solicit or encourage, directly or
indirectly, any inquiries or the making or implementation of any proposal or
offer, including without limitation, any proposal or offer to the Shareholders,
with respect to a merger, acquisition, consolidation or similar transaction
involving, or the purchase of all or any significant portion of the assets or
any equity securities of the Company or engage in any negotiations concerning,
or provide any confidential information or data to, or have any discussions
with, any person relating to such proposal or offer, and the Company and the
Shareholders will immediately cease any such activities, discussions or
negotiations heretofore conducted with respect to any of the foregoing.
4.6 FUNDING OF ACCRUED EMPLOYEE BENEFITS. The Company hereby
covenants and agrees that it will take whatever steps are necessary to pay or
fund completely for any accrued benefits, where applicable, or vested accrued
benefits for which the Company or any entity might have liability arising from
any salary, wage, benefit, bonus, vacation pay, sick leave, insurance,
employment tax or similar liability of the Company to any employee or other
person or entity (including, without limitation, any Company Plan and any
liability under employment contracts with the Company) allocable to services
performed prior to the Closing Date. The Company acknowledges that the purpose
and intent of this covenant is to assure that Premier shall have no liability,
directly or indirectly, at any time after the Closing Date with respect to any
of the Company's employees or similar persons or entities, including, without
limitation, any Company Plan.
4.7 EMPLOYEE MATTERS. The Company shall not, without the prior
written approval of Premier, except as required by law, increase the cash
compensation of any Shareholder or other employee or an independent contractor
of the Company, adopt, amend or terminate any compensation plan, employment
agreement, independent contractor agreement, employee policies and procedures or
employee benefit plan, take any action that could deplete the assets of any
employee benefit plan, or fail to pay any premium or contribution due or file
any report with respect to any employee benefit plan, or take any other actions
with respect to its employees or employee matters which might have an adverse
effect upon the Company, its business, assets or prospects.
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4.8 DISTRIBUTIONS AND REPURCHASES. No distribution, payment or
dividend of any kind will be declared or paid by the Company, nor will any
repurchase of any of the Company's capital stock be approved or effected.
4.9 REQUIREMENTS TO EFFECT MERGER. The Company and each
Shareholder shall use their best efforts to take, or cause to be taken, all
actions necessary to effect the Merger under applicable law, including without
limitation the filing with the appropriate government officials of all necessary
documents in form approved by counsel for the parties to this Agreement.
4.10 ACCOUNTING AND TAX MATTERS. The Company will not change in any
material respect the accounting methods or practices followed by the Company
(including any material change in any assumption underlying, or any method of
calculating, any bad debt, contingency or other reserve), except as may be
required by generally accepted accounting principles. The Company will not make
any material tax election except in the ordinary course of business consistent
with past practice, change any material tax election already made, adopt any tax
accounting method except in the ordinary course of business consistent with past
practice, change any tax accounting method, enter into any closing agreement,
settle any tax claim or assessment or consent to any tax claim or assessment or
any waiver of the statute of limitations for any such claim or assessment. The
Company will duly, accurately and timely (with regard to any extensions of time)
file all returns, information statements and other documents relating to taxes
of the Company required to be filed by it, and pay all taxes required to be paid
by it, on or before the Closing Date.
4.11 CONVERSION TRANSACTION. Prior to the Merger, the Shareholders
and the Company shall file with the Secretary of State of __________________ an
amendment to and/or a restatement of the Company's Articles of Incorporation and
shall take such other action as may be necessary to convert itself into a
general business corporation in accordance with all applicable laws, rules and
regulations. Shareholders shall form a new professional entity (the "New
Corporation") on or before Closing under which it shall conduct its orthodontic
practice and which new entity shall own any assets of the orthodontic practice
required by applicable law to be owned by the orthodontic practice.
SECTION 5. COVENANTS OF PREMIER.
Premier agrees that between the date hereof and the Closing Date:
5.1 CONSUMMATION OF AGREEMENT. Premier shall use its best efforts
to cause the consummation of the transactions contemplated hereby in accordance
with their terms and provisions. Premier will use its best efforts to take, or
cause to be taken, all actions necessary to effect the Merger under applicable
law, including without limitation the filing with the appropriate government
officials of all necessary documents in form approved by counsel for the parties
to this Agreement.
5.2 APPROVALS OF THIRD PARTIES AND PERMITS AND CONSENTS. Premier
shall use its best efforts to secure all necessary approvals and consents of
third parties to the consummation of the transactions contemplated hereby.
SECTION 6. PREMIER CONDITIONS PRECEDENT.
The obligations of Premier hereunder are subject to the fulfillment at
or prior to the Closing Date of each of the following conditions:
6.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company and the Shareholders contained herein shall have been
true and correct in all respects when initially made and shall be true and
correct in all respects as of the Closing Date.
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6.2 COVENANTS AND CONDITIONS. The Company and the Shareholders
shall have performed and complied with all covenants and conditions required by
this Agreement to be performed and complied with by the Company and the
Shareholders prior to the Closing Date.
6.3 PROCEEDINGS. No action, proceeding or order by any court or
governmental body shall have been threatened orally or in writing, asserted,
instituted or entered to restrain or prohibit the carrying out of the
transactions contemplated hereby.
6.4 NO MATERIAL ADVERSE CHANGE. No material adverse change in the
condition (financial or otherwise), operations, assets, liabilities, business or
prospects of the Company shall have occurred since the Balance Sheet Date.
6.5 DUE DILIGENCE REVIEW. By the Closing Date, Premier shall have
completed a due diligence review of the business, operations and financial
statements of the Company, the results of which shall be satisfactory to Premier
in its sole discretion.
6.6 APPROVAL BY THE BOARD OF DIRECTORS. This Agreement and the
transactions contemplated hereby shall have been approved by the Board of
Directors of Premier or a committee thereof.
6.7 SERVICE AGREEMENT. On or before the Closing Date, the New
Corporation shall execute and deliver to Premier a Service Agreement (the
"Service Agreement")[Consulting and Business Services Agreement (the "Consulting
Agreement")], in substantially the form attached hereto as Exhibit 6.7, pursuant
to which Premier will provide management [consulting] services to the New
Corporation.
6.8 EMPLOYMENT ARRANGEMENTS. Prior to the Closing Date, the
Company will terminate, and will cause each licensed employee that has a written
existing employment agreement with the Company to terminate his or her
employment agreement with the Company, and execute a separation and release
agreement ("Separation and Release Agreement"). Each Shareholder of the Company
will execute an employment agreement (the "Employment Agreements") with the New
Corporation, each in form and substance attached hereto as Exhibit 6.8.
6.9 CONSENTS AND APPROVALS. The Company and the Shareholders shall
have obtained all necessary government and other third-party approvals and
consents.
6.10 CLOSING DELIVERIES. Premier shall have received all documents,
duly executed in form satisfactory to Premier and its counsel, referred to in
Section 8.1.
6.11 DEBT AND RECEIVABLES. There shall be no indebtedness,
receivables or payables between the Company and its Shareholders or affiliates
and the Company shall not have any liabilities, including indebtedness,
guaranties and capital leases that are not approved by Premier.
6.12 DISSENTING SHARES. No holder of the Company's common stock
shall have demanded appraisal for the shares of Company common stock held by
such holder in accordance with ________________ law.
6.13 PUBLIC OFFERING OR FIRM UNDERWRITING. Premier shall have
completed on or before October 15, 1997, an initial public offering (the "IPO")
for the sale of at least $10,000,000 of the common stock of Premier.
6.14 NO CHANGE IN WORKING CAPITAL. There shall have been no
material change in the Working Capital of the Company.
SECTION 7. THE COMPANY'S AND THE SHAREHOLDER'S CONDITIONS PRECEDENT.
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The obligations of the Company and the Shareholders hereunder are
subject to fulfillment at or prior to the Closing Date of each of the following
conditions:
7.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Premier contained herein shall have been true and correct in all
respects when initially made and shall be true and correct in all respects as of
the Closing Date.
7.2 COVENANTS AND CONDITIONS. Premier shall have performed and
complied with all covenants and conditions required by this Agreement to be
performed and complied with by Premier prior to the Closing Date.
7.3 PROCEEDINGS. No action, proceeding or order by any court or
governmental body shall have been threatened orally or in writing, asserted,
instituted or entered to restrain or prohibit the carrying out of the
transactions contemplated hereby.
7.4 CLOSING DELIVERIES. The Company shall have received all
documents, duly executed in form satisfactory to the Company and its counsel,
referred to in Section 8.2.
7.5 INITIAL PUBLIC OFFERING. Premier shall have completed the IPO
on or before October 15, 1997.
SECTION 8. CLOSING DELIVERIES.
8.1 DELIVERIES OF THE COMPANY AND THE SHAREHOLDERS. At or prior to
the Closing, the Company and the Shareholders shall deliver to Premier the
following, all of which shall be in a form satisfactory to counsel to Premier:
(a) an executed original Service Agreement
[Consulting Agreement] and executed originals of all documents required by that
agreement;
(b) executed original Separation and Release
Agreements;
(c) a copy of the resolutions of the Board of
Directors of the Company authorizing the execution, delivery and performance of
this Agreement and all related documents and agreements each certified by the
Secretary as being true and correct copies of the original thereof;
(d) a copy of the resolutions of the New
Corporation authorizing the execution, delivery and performance of the Service
[Consulting] Agreement and all Employment Agreements, each certified by the
authorized representative of the New Corporation as being true and correct
copies of the original thereof;
(e) certificates of the President of the Company
and of each Shareholder, dated as of the Closing Date, (i) as to the truth and
correctness of the representations and warranties of the Company and each
Shareholder contained herein; (ii) as to the performance of and compliance by
the Company and each Shareholder with all covenants contained herein; and (iii)
certifying that all conditions precedent of the Company and each Shareholder to
the Closing have been satisfied;
(f) a certificate of the Secretary of the
Company certifying as to the incumbency of the directors and officers of the
Company and as to the signatures of such directors and officers who have
executed documents delivered at the Closing on behalf of the Company;
(g) if applicable, a certificate of the
Secretary of the New Corporation certifying as to the incumbency of the
directors and officers of the New Corporation and as to the signatures of such
directors and officers who have executed documents delivered at the Closing on
behalf of the New Corporation;
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(h) a certificate, dated within 10 days of the
Closing Date, of the Secretary of the State of ______________ establishing that
the Company is in existence and is in good standing to transact business in its
state of incorporation;
(i) non-foreign affidavits executed by the
Company and each Shareholder;
(j) all authorizations, consents, approvals,
permits and licenses referred to in Sections 2.3 and 2.5; and
(k) the resignations of the directors and
officers of the Company as requested by Premier;
(l) a Shareholder Release in form attached
hereto as Exhibit 8.1(l) executed by each Shareholder;
(m) such other instruments and documents as
reasonably requested by Premier to carry out and effect the purpose and intent
of this Agreement; and
(n) a Receipt of Premier Stock in form attached
hereto as Exhibit 8.1(n).
8.2 DELIVERIES OF PREMIER. At or prior to the Closing, Premier
shall deliver to the Company the following, all of which shall be in a form
satisfactory to counsel to the Company and the Shareholders, as applicable:
(a) the Merger Consideration;
(b) an executed Service Agreement;
(c) a copy of the resolutions of the Board of
Directors of Premier (or a committee thereof) authorizing the execution,
delivery and performance of this Agreement and all related documents and
agreements each certified by the Secretary as being true and correct copies of
the original thereof;
(d) certificates of the President of Premier,
dated as of the Closing Date, (i) as to the truth and correctness of the
representations and warranties of Premier contained herein; (ii) as to the
performance of and compliance by Premier with all covenants contained herein;
and (iii) certifying that all conditions precedent of Premier to the Closing
have been satisfied;
(e) a certificate of the Secretary of Premier
certifying as to the incumbency of the directors and officers of Premier and as
to the signatures of such directors and officers who have executed documents
delivered at the Closing on behalf of Premier;
(f) certificates, dated within 10 days of the
Closing Date, of the Secretary of the State of Delaware establishing that
Premier is in existence and is in good standing; and
(g) such other instruments and documents as
reasonably requested by the Company or Shareholders to carry out and effect the
purpose and intent of this Agreement.
SECTION 9. NATURE AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION.
9.1 NATURE AND SURVIVAL. Unless a party had knowledge of any
misrepresentation or breach of warranty as of the Closing Date of the other
party, all statements contained in this Agreement or in any Exhibit attached
hereto, any agreement executed pursuant hereto, and any certificate executed and
delivered by any party
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pursuant to the terms of this Agreement, shall constitute representations and
warranties of the Company and the Shareholders, jointly and severally, or of
Premier, as the case may be. All such representations and warranties, and all
representations and warranties expressly labeled as such in this Agreement shall
survive the date of this Agreement and for a period of one (1) year following
the Closing Date. Each party covenants with the other parties not to make any
claim with respect to such representations and warranties, against any party
after the date on which such survival period shall terminate. After the Closing
Date, with respect to all breaches of warranties and representations herein,
each party's sole remedy with respect to a breach of a warranty and
representation shall be indemnification pursuant to this Section 9.
9.2 INDEMNIFICATION BY PREMIER. PREMIER (FOR PURPOSES OF THIS
SECTION 9.2 AND, TO THE EXTENT APPLICABLE, SECTION 9.4, "INDEMNITOR"), SHALL
INDEMNIFY AND HOLD THE SHAREHOLDERS, AND THEIR RESPECTIVE AGENTS AND EMPLOYEES
(EACH OF THE FOREGOING, INCLUDING THE COMPANY AND THE SHAREHOLDERS, FOR PURPOSES
OF THIS SECTION 9.2 AND, TO THE EXTENT APPLICABLE, SECTION 9.4, AS "INDEMNIFIED
PERSON"), HARMLESS FROM AND AGAINST ANY AND ALL LIABILITIES, LOSSES, DAMAGES,
ACTIONS, SUITS, COSTS, DEFICIENCIES AND EXPENSES (INCLUDING, BUT NOT LIMITED TO,
REASONABLE FEES AND DISBURSEMENTS OF COUNSEL THROUGH APPEAL) ARISING FROM OR BY
REASON OF OR RESULTING FROM ANY BREACH BY INDEMNITOR OF ANY REPRESENTATION,
WARRANTY, AGREEMENT OR COVENANT CONTAINED IN THIS AGREEMENT (INCLUDING THE
EXHIBITS HERETO) AND EACH DOCUMENT, CERTIFICATE OR OTHER INSTRUMENT FURNISHED OR
TO BE FURNISHED BY INDEMNITOR HEREUNDER. IN CONNECTION WITH INDEMNITOR'S
OBLIGATION TO INDEMNIFY FOR EXPENSES, INDEMNITOR SHALL REIMBURSE EACH
INDEMNIFIED PERSON FOR ALL SUCH EXPENSES AS THEY ARE INCURRED BY SUCH
INDEMNIFIED PERSON, PROVIDED THAT SUCH INDEMNIFIED PERSON HEREBY AGREES IN
WRITING TO REFUND ALL SUCH REIMBURSED EXPENSES IF AND TO THE EXTENT THAT IT IS
FINALLY JUDICIALLY DETERMINED THAT SUCH INDEMNIFIED PERSON IS NOT ENTITLED TO
INDEMNIFICATION HEREUNDER.
9.3 INDEMNIFICATION BY THE COMPANY AND THE SHAREHOLDERS. THE
COMPANY AND THE SHAREHOLDERS (FOR PURPOSES OF THIS SECTION 9.3 AND, TO THE
EXTENT APPLICABLE, SECTION 9.4, "INDEMNITOR"), JOINTLY AND SEVERALLY, SHALL
INDEMNIFY AND HOLD PREMIER AND ITS RESPECTIVE OFFICERS, DIRECTORS, SHAREHOLDERS,
AGENTS AND EMPLOYEES (EACH OF THE FOREGOING, INCLUDING PREMIER, FOR PURPOSES OF
THIS SECTION 9.3 AND, TO THE EXTENT APPLICABLE, SECTION 9.4, BEING REFERRED TO
AS "INDEMNIFIED PERSON") HARMLESS FROM AND AGAINST ANY AND ALL LIABILITIES,
LOSSES, CLAIMS, DAMAGES, ACTIONS, SUITS, COSTS, DEFICIENCIES AND EXPENSES
(INCLUDING, BUT NOT LIMITED TO, REASONABLE FEES AND DISBURSEMENTS OF COUNSEL
THROUGH APPEAL) ARISING FROM OR BY REASON OF OR RESULTING FROM ANY BREACH BY
INDEMNITOR OF ANY REPRESENTATION, WARRANTY, AGREEMENT OR COVENANT CONTAINED IN
THIS AGREEMENT (INCLUDING THE EXHIBITS HERETO) AND EACH DOCUMENT, CERTIFICATE,
OR OTHER INSTRUMENT FURNISHED OR TO BE FURNISHED BY INDEMNITOR HEREUNDER, AND,
WITH RESPECT TO ALL TIMES PRIOR TO THE CLOSING DATE, ARISING FROM OR BY REASON
OF OR RESULTING FROM THE INDEMNITOR'S MANAGEMENT AND CONDUCT OF THE OWNERSHIP OR
OPERATION OF THE COMPANY AND FROM ANY ALLEGED ACT OR NEGLIGENCE OF INDEMNITOR OR
ITS EMPLOYEES, AGENTS AND INDEPENDENT CONTRACTORS IN OR ABOUT THE COMPANY'S
BUSINESS, AND WITH RESPECT TO (i) ANY VIOLATION BY THE COMPANY OR THE
SHAREHOLDERS OR THEIR CONSULTANTS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS AND
AFFILIATES OF STATE OR FEDERAL LAWS GOVERNING HEALTHCARE FRAUD AND ABUSE, OR ANY
OVERPAYMENT OR OBLIGATION ARISING OUT OF OR RESULTING FROM CLAIMS SUBMITTED TO
ANY THIRD PARTY PAYOR, WHETHER ON OR AFTER THE CLOSING DATE, (ii) TAXES OF THE
COMPANY OR ANY OTHER PERSON (INCLUDING ANY SHAREHOLDER) ARISING FROM OR AS A
RESULT OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, (iii) ANY LIABILITY
OF THE COMPANY OR THE SHAREHOLDERS FOR COSTS AND EXPENSES (INCLUDING, WITHOUT
LIMITATION, ATTORNEYS' FEES) INCURRED IN
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CONNECTION WITH THE NEGOTIATION, PREPARATION OR CLOSING OF TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT OR THE OTHER DOCUMENTS TO BE EXECUTED IN
CONNECTION HEREWITH, (iv) ANY ACCRUED UNFUNDED RETIREMENT OR PENSION PLAN
LIABILITIES, (v) ANY CLAIM AGAINST OR LIABILITY OF THE COMPANY THAT IS OF A
NATURE THAT, IF KNOWN AT THE CLOSING WOULD HAVE BEEN REQUIRED TO HAVE BEEN
DISCLOSED PURSUANT TO THIS AGREEMENT, AND (vi) ANY LIABILITIES THAT ARE PAST DUE
AS OF THE CLOSING DATE, THAT ARE NOT REFLECTED ON THE BALANCE SHEET, THAT ARE
NOT INCURRED IN THE ORDINARY COURSE OF BUSINESS AND THAT ARE OTHERWISE EXCLUDED
PURSUANT TO THE TERMS OF THIS AGREEMENT. IN CONNECTION WITH INDEMNITOR'S
OBLIGATION TO INDEMNIFY FOR EXPENSES, INDEMNITOR SHALL REIMBURSE EACH
INDEMNIFIED PERSON FOR ALL SUCH EXPENSES AS THEY ARE INCURRED BY SUCH
INDEMNIFIED PERSON, PROVIDED THAT SUCH INDEMNIFIED PERSON HEREBY AGREES IN
WRITING TO REFUND ALL SUCH REIMBURSED EXPENSES IF AND TO THE EXTENT THAT IT IS
FINALLY JUDICIALLY DETERMINED THAT SUCH INDEMNIFIED PERSON IS NOT ENTITLED TO
INDEMNIFICATION HEREUNDER.
9.4 INDEMNIFICATION PROCEDURE. Within sixty (60) days after
Indemnified Person receives written notice of the commencement of any action or
other proceeding in respect of which indemnification or reimbursement may be
sought hereunder, or within such lesser time as may be provided by law for the
defense of such action or proceeding, such Indemnified Person shall notify
Indemnitor thereof. If any such action or other proceeding shall be brought
against any Indemnified Person, Indemnitor shall, upon written notice given
within a reasonable time following receipt by Indemnitor of such notice from
Indemnified Person, be entitled to assume the defense of such action or
proceeding with counsel chosen by Indemnitor and reasonably satisfactory to
Indemnified Person; provided, however, that any Indemnified Person may at its
own expense retain separate counsel to participate in such defense.
Notwithstanding the foregoing, Indemnified Person shall have the right to employ
separate counsel at Indemnitor's expense and to control its own defense of such
action or proceeding if, in the reasonable opinion of counsel to such
Indemnified Person, (a) there are or may be legal defenses available to such
Indemnified Person or to other Indemnified Persons that are different from or
additional to those available to Indemnitor and which could not be adequately
advanced by counsel chosen by Indemnitor, or (b) a conflict or potential
conflict exists between Indemnitor and such Indemnified Person that would make
such separate representation advisable; provided, however, that in no event
shall Indemnitor be required to pay fees and expenses hereunder for more than
one firm of attorneys of Indemnified Person in any jurisdiction in any one
action or proceeding or group of related actions or proceedings. Indemnitor
shall not, without the prior written consent of any Indemnified Person, settle
or compromise or consent to the entry of any judgment in any pending or
threatened claim, action or proceeding to which such Indemnified Person is a
parry unless such settlement, compromise or consent includes an unconditional
release of such Indemnified Person from all liability arising or potentially
arising from or by reason of such claim, action or proceeding.
9.5 CERTAIN TAX MATTERS.
(a) Shareholders shall prepare and file or cause
to be prepared and filed any tax returns, statements and reports ("Tax Returns")
of the Company covering taxable periods ending on or before the Closing Date
which have not been filed on or before the Closing Date. Shareholders shall,
jointly and severally, reimburse, indemnify and hold harmless Premier for all
taxes, and all related interest, penalties and additions to tax with respect to
taxable periods of the Company ending on or before the Closing Date.
(b) Premier shall prepare and file or cause to
be prepared and filed any Tax Returns of Surviving Corporation covering taxable
periods which begin before the Closing Date and end after the Closing Date
("Straddle Periods") taking into account any reasonable reportable positions
advocated and requested by Shareholders for such Straddle Periods. Shareholders
shall, jointly and severally, within fifteen (15) days after payment thereof and
notice of such payment, reimburse, indemnify and hold harmless Premier and the
Surviving Corporation for all Taxes for any Straddle Period, to the extent
related to the portion of the Straddle Period ending on the Closing Date. For
such purposes, the portion of any tax attributable to the portions of a Straddle
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<PAGE> 20
Period ending on the Closing Date and beginning after the Closing Date shall be
determined by apportioning the tax for the entire Straddle Period among such
periods based on the number of days in each such period, provided that, in the
case of taxes based upon or related to income or receipts, such portion shall be
the amount of tax which would have been due if the relevant Straddle Period
ended on the Closing Date.
(c) The Company, Shareholders and Premier shall
reasonably cooperate with each other in connection with the reporting and filing
of Tax Returns pursuant to this Section 9.5 and any audit, litigation or other
proceeding with respect to taxes. Such cooperation shall include the provision
of copies, at the requesting party's expense, of records and information
relevant to any such Tax Return or proceeding and making employees available on
a mutually convenient basis to provide additional information and explanation of
any material provided hereunder.
9.6 RIGHT OF SET-OFF. In the event of any breach of warranty,
representation, covenant or agreement by the Company or the Shareholders giving
rise to indemnification under Section 9.3 or Section 9.5 hereof, Premier shall
be entitled to offset the amount of damages incurred by it as a result of such
breach of warranty, representation, covenant or agreement against any amounts
payable by Premier to the Shareholders or their affiliates.
SECTION 10. TERMINATION. This Agreement may be terminated:
(a) at any time by mutual agreement of all
parties;
(b) at any time by Premier if at any time prior
to the Closing Date any representation or warranty of the Company or any
Shareholder contained in this Agreement or in any certificate or other document
executed and delivered by the Company or any Shareholder pursuant to this
Agreement is or becomes untrue or breached in any material respect or if the
Company or any Shareholder fails to comply in any material respect with any
covenant or agreement contained herein, and any such misrepresentation,
noncompliance or breach is not cured, waived or eliminated within twenty (20)
days after receipt of written notice thereof;
(c) at any time by the Company or the
Shareholders if at any time prior to the Closing Date any representation or
warranty of Premier contained in this Agreement or in any certificate or other
document executed and delivered by Premier pursuant to this Agreement is or
becomes untrue in any material respect or Premier fails to comply in any
material respect with any covenant or agreement contained herein and such
misrepresentation, noncompliance or breach is not cured, waived or eliminated
within twenty (20) days of written notice thereof;
(d) by Premier, the Company or the Shareholders
if the merger contemplated hereby or the IPO shall not have been consummated by
October 15, 1997; or
(e) by Premier at any time prior to the Closing
Date if Premier determines in its sole discretion as the result of its legal,
financial and operational due diligence with respect to the Company, that such
termination is desirable and in the best interests of Premier.
SECTION 11. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. The Shareholders
recognize and acknowledge that they had in the past, currently have, and in the
future may possibly have, access to certain confidential information of Premier
and Surviving Corporation that is valuable, special and unique assets of
Premier's and Surviving Corporation's businesses. The Shareholders hereby agree
that they will not disclose such confidential information to any person, firm,
corporation, association or other entity for any purpose or reason whatsoever,
unless (i) such information becomes available to or known by the public
generally through no fault of the Shareholders, (ii) disclosure is required by
law or the order of any governmental authority under color of law,
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<PAGE> 21
provided, that prior to disclosing any information pursuant to this clause (ii),
the Shareholders shall, if possible, give prior written notice thereof to the
other parties hereto, and provide such other parties hereto with the opportunity
to contest such disclosure, (iii) the Shareholders reasonably believe that such
disclosure is required in connection with the defense of a lawsuit against the
disclosing party, or (iv) the Shareholders are the sole and exclusive owner of
such confidential information as a result of the transactions contemplated
hereunder or otherwise. In the event of a breach or threatened breach by the
Shareholders of the provisions of this Section 11, Premier or Surviving
Corporation shall be entitled to an injunction restraining the Shareholders from
disclosing, in whole or in part, such confidential information. Nothing herein
shall be construed as prohibiting Premier or Surviving Corporation from pursuing
any other available remedy for such breach or threatened breach, including the
recovery of damages. The obligations of the parties under this Section 11 shall
survive the termination of this Agreement.
SECTION 12. INVESTMENT AND SECURITIES REPRESENTATIONS
12.1 ECONOMIC RISK; SOPHISTICATION. The Shareholders represent that
they are able to bear the economic risk of an investment in Premier common stock
acquired pursuant to this Agreement and can afford to sustain a total loss of
such investment and have such knowledge and experience in financial and business
matters that they are capable of evaluating the merits and risks of the proposed
investment and therefore have the capacity to protect their own interests in
connection with the acquisition of the Premier common stock. The Shareholders or
their respective representatives have had an adequate opportunity to ask
questions and receive answers from the officers of Premier concerning any and
all matters relating to the background and experience of the officers and
directors of Premier, the plans for the operations of the business of Premier,
and any plans for additional acquisitions and the like. The Shareholders or
their respective representatives have asked any and all questions in the nature
described in the preceding sentence and all questions have been answered to
their satisfaction.
12.2 COMPLIANCE WITH LAW. Shareholders represent and warrant that
none of the shares of Premier stock issued to Shareholders will be offered,
sold, assigned, pledged, hypothecated, transferred or otherwise disposed of,
except after full compliance with all of the applicable provisions of the 1933
Act and the rules and regulations of the SEC and applicable state securities
laws and regulations. All certificates evidencing shares of Premier stock issued
hereunder shall bear the following restrictive legend, as well as any legend
required by the securities or blue sky laws of the state where Premier resides:
THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE
SECURITIES LAWS OF ANY JURISDICTION AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AFTER RECEIPT
OF AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT AN EXEMPTION
FROM REGISTRATION IS AVAILABLE UNDER APPLICABLE SECURITIES LAWS.
12.3 ACCREDITED INVESTOR STATUS. Each of the Shareholders
represents and warrants that he or she is an "accredited investor" as defined in
Rule 501(a) under the 1933 Act.
12.4 PIGGYBACK REGISTRATION RIGHTS. Premier has no obligation to
register the shares of Premier stock that Shareholders will receive under this
Agreement. Provided, however, in the event Premier, at any time within 24 months
after the Closing, contemplates and undertakes a public offering of its shares
of Common Stock and the filing of a registration statement with the SEC in
connection therewith, Premier shall notify the Shareholders in writing of the
proposed offering and of any material terms and conditions of the offering known
to Premier. Premier shall use all reasonable efforts to have included in such
registration statement all or any portion of the shares distributed to
Shareholders hereunder, subject, however, to such terms, conditions and
limitations
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<PAGE> 22
(including but not limited to the number of shares that Shareholders may offer
to sell in such registration statement) as any underwriter retained by Premier
in connection with such offering may require, and provided that the public
offering and sale of such shares is not restricted by any legend or other
condition imposed by any state securities commissioner. Shareholders shall take
all such action and execute all such documents including, but not limited to,
the execution and delivery of an underwriting agreement in form and substance in
all material respects the same as the underwriting agreement to be signed by
Premier, as may be requested by Premier. The cost of such public offering shall
be borne by Premier, except that Shareholders shall pay its proportionate share
of underwriters' commissions and discounts and the costs and fees of any
attorneys, accountants and other persons retained by Shareholders in connection
with the offering. The provisions of this Section 12.4 shall not apply to
registration statements filed in connection with employee stock purchase and
option programs by Premier or in connection with actual or proposed acquisitions
by Premier. Shareholders shall notify Premier of its election to exercise its
rights herein specified in writing within thirty (30) days after the aforesaid
written notice to the Shareholders by Premier.
SECTION 13. MISCELLANEOUS.
13.1 NOTICES. Any communications required or desired to be given
hereunder shall be deemed to have been properly given if sent by hand delivery,
or by facsimile AND overnight courier, to the parties hereto at the following
addresses, or at such other address as either party may advise the other in
writing from time to time:
If to Premier:
Premier Orthodontic Group, Inc.
23848 Hawthorne Boulevard, Suite 200
Torrance, California 90505
Attn: Mr. Sam Westover, President
Facsimile: (310) 791-5660
Telephone: (310) 791-5657
with a copy of each notice directed to Premier to:
Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, N.E.
First Union Plaza, Suite 1400
Atlanta, Georgia 30309
Attn: Paul A. Quiros, Esquire
Facsimile: (404) 817-6050
Telephone: (404) 817-6103
If to the Company or the Shareholders:
- -----------------------------------
- -----------------------------------
- -----------------------------------
- -----------------------------------
Facsimile:
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<PAGE> 23
with a copy to:
- -----------------------------------
- -----------------------------------
- -----------------------------------
- -----------------------------------
- -----------------------------------
- -----------------------------------
- -----------------------------------
All such communications shall be deemed to have been delivered on the date of
hand delivery or on the next business day following the deposit of such
communications, properly addressed and postage prepaid with the overnight
courier.
13.2 FURTHER ASSURANCES; ACCOUNTS RECEIVABLE. Each party hereby
agrees to perform any further acts and to execute and deliver any documents
which may be reasonably necessary to carry out the provisions of Agreement.
Shareholders shall assist Premier and Surviving Corporation in collecting the
accounts receivable of the Company acquired by Premier in connection with this
transaction and in the event that any Shareholder shall receive the proceeds of
any such accounts receivable, shall immediately forward such amounts to
Surviving Corporation.
13.3 EACH PARTY TO BEAR COSTS. Each of the parties to this
Agreement shall pay all of the costs and expenses incurred by such party in
connection with the transactions contemplated by this Agreement, whether or not
such transactions are consummated. Without limiting the generality of the
foregoing and whether or not such liabilities may be deemed to have been
incurred in the ordinary course of business, Premier and Surviving Corporation
shall not be liable to or required to pay, either directly or indirectly, any
(a) fees and expenses of legal counsel, accountants, auditors or other persons
or entities retained by the Company, the New Corporation or the Shareholders for
services rendered in connection with negotiating and closing the transactions
contemplated by this Agreement or the documents to be executed in connection
herewith, whether or not such costs or expenses are incurred before or after the
Closing Date and the Shareholders shall be liable for all such costs and
expenses of the Company, and (b) local, state and federal income taxes or other
similar charges on income or gain incurred by the Company, the New Corporation
or the Shareholders as a result of the transactions contemplated hereby.
13.4 PUBLIC DISCLOSURES. Except as otherwise required by law, no
party to this Agreement shall make any public or other disclosure of this
Agreement or the transactions contemplated hereby without the prior consent of
the other parties. The parties to this Agreement shall cooperate with respect to
the form and content of any such disclosures.
13.5 GOVERNING LAW. THIS AGREEMENT SHALL BE INTERPRETED, CONSTRUED
AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE AND APPLIED
WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAWS PRINCIPLES.
13.6 CAPTIONS. The captions or headings in this Agreement are made
for convenience and general reference only and shall not be construed to
describe, define or limit the scope or intent of the provisions of this
Agreement.
13.7 INTEGRATION OF EXHIBITS. All Exhibits attached to this
Agreement are integral parts of this Agreement as if fully set forth herein, and
all statements appearing therein shall be deemed disclosed for all purposes and
not only in connection with the specific representation in which they are
explicitly referenced.
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<PAGE> 24
13.8 ENTIRE AGREEMENT/AMENDMENT. THIS INSTRUMENT, INCLUDING ALL
EXHIBITS ATTACHED HERETO, CONTAINS THE ENTIRE AGREEMENT OF THE PARTIES AND
SUPERSEDES ANY AND ALL PRIOR OR CONTEMPORANEOUS AGREEMENTS BETWEEN THE PARTIES,
WRITTEN OR ORAL, WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREBY.
13.9 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which when so executed shall be deemed to be an original,
and such counterparts shall together constitute and be one and the same
instrument
13.10 BINDING EFFECT/ASSIGNMENT. This Agreement shall be assignable
by Premier to (i) any person, firm or corporation that controls or is under
common control with Premier, (ii) US Orthodontic Care, Inc. ("USOC") or any
person, firm or corporation that controls or is under common control with USOC,
or (iii) any entity that results from a merger or other combination between
Premier and USOC ("Newco") and any person, firm or corporation that
controls or is under common control with Newco. Except as set forth above, no
party shall have the right to assign their respective rights and obligations
hereunder without the written consent of the other party, which consent shall
not be unreasonably withheld. In considering whether or not to grant or withhold
consent, it shall be deemed reasonable for the Orthodontic Entity to take into
account the management style, philosophy and performance of such proposed
assignee, in addition to any other commercially reasonable facts and
circumstances at the time. Subject to this provision, this Agreement shall be
binding upon the parties hereto, and their successors and assigns.
13.11 AMENDMENTS; WAIVER. This Agreement may be amended, modified or
supplemented only by an instrument in writing executed by all the parties
hereto. Any waiver of the terms and conditions hereof must be in writing, and
signed by the parties hereto. The waiver of any of the terms and conditions of
this Agreement shall not be construed as a waiver of any other terms and
conditions hereof.
13.12 ARBITRATION. Any controversy, dispute or disagreement arising
out of or relating to this Agreement, the breach thereof, or the subject matter
thereof, shall be settled exclusively by binding arbitration, which shall be
conducted in Los Angeles, California in accordance with the Commercial
Arbitration Rules administered by the American Arbitration Association before a
single arbitrator selected by the parties jointly. Judgment on the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof.
13.13 SERVICE OF PROCESS. Service of any and all process that may be
served on any party hereto in any suit, action or proceeding arising out of this
Agreement may be made in the manner and to the address set forth in Section 13.1
and service thus made shall be taken and held to be valid personal service upon
such party by any party hereto on whose behalf such service is made.
13.14 SEVERABILITY. If any provision of this Agreement shall be
found to be illegal, invalid or unenforceable under present or future laws, such
provision shall be fully severable and this Agreement shall be construed and
enforced as if such provision never comprised a part hereof; and the remaining
provisions hereof shall remain in full force and effect. In lieu of such
provision, there shall be added automatically as part of this Agreement, a
provision as similar in its terms to such provision as may be possible and be
legal, valid and enforceable.
13.15 KNOWLEDGE. For purposes of this Agreement, "knowledge" means
actual knowledge of any part, or its Shareholders, partners, officers and
directors after reasonable investigation.
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<PAGE> 25
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
PREMIER ORTHODONTIC GROUP, INC.
By:
-------------------------
Its:
------------------------
COMPANY:
- ---------------------------- SHAREHOLDERS:
By:
------------------------- -------------------------
Its: , D.M.D.
------------------------ -------------------
25
<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
2.1 Capitalization of the Company; Partnership/Joint Venture Agreements to which the
Company is a party
2.3 Permits and Licenses
2.5 Consents
2.6 Financial Statements
2.7 Leases
2.9 Personal Property; Encumbrances
2.11 Patents and Trademarks; Names
2.12 Directors and Officers; Payroll Information
2.14 Contracts (other than Leases)
2.16 Accounts Receivable/Accounts Payable
2.19 Debt
2.20 Insurance Policies
2.21 Employee Benefit Plans
2.28 Suppliers
2.29 Banking Relations
2.31 Payors
3.6 Legal Proceedings
4.1 Capitalization of New Corporation
4.4 New Corporation Assets
8.7 Form of Service Agreement
8.8 Employment Agreement
10.1(m) Shareholder Release
10.1(o) Receipt of Premier Stock
</TABLE>
26
<PAGE> 27
ANNEX I
MERGER CONSIDERATION
The consideration to be received by the Shareholders pursuant to the
Agreement (the "Merger Consideration") is payable as follows:
Premier hereby agrees to pay to the Shareholders Premier common stock
and cash totaling an amount equal to at least one hundred (100%) of the
Company's 1996 Adjusted Gross Revenues (as hereinafter defined) less the amount,
if any, of any liabilities of the Company assumed by the Surviving Corporation
in connection with the transactions contemplated by this Agreement, with the
actual amount to be determined upon completion of an initial public offering of
Premier's common stock (the "IPO") (as finally determined, the "Purchase
Price"), which final Purchase Price shall be the respective Shareholders'
proportional interest in the sum of the value of all of the orthodontic entities
included in the IPO, which sum shall constitute 62% of the total market
capitalization of Premier without giving effect to the IPO. The valuation for
determining the final Purchase Price of each orthodontic entity included in the
IPO shall be based on the Adjusted Gross Revenues and operating results of each
such orthodontic entity for the trailing twelve-month period used in preparation
of Premier's registration statement on Form S-1 with respect to the IPO. The
Purchase Price shall be paid as follows:
(a) Up to a maximum of 20% of the Purchase Price shall be
paid in cash or immediately available funds at Closing; and
(b) The remainder of the Purchase Price to be paid to the
Shareholders in stock of Premier to be valued at the time of the IPO,
which IPO shall occur simultaneously with the Closing.
As used herein, the term "1996 Adjusted Gross Revenue" shall be
determined in accordance with generally accepted accounting principles and shall
mean all fees and charges recorded or booked in fiscal year 1996 by or on behalf
of the Company as a result of professional orthodontic services personally
furnished to patients by the Orthodontist(s) and those under the Orthodontist's
supervision and other fees or income generated in their capacity as
professionals after any adjustments for uncollectible accounts, professional
courtesies and other activities that do not generate a collectible fee.
<PAGE> 28
EXHIBIT 10.1(m)
SHAREHOLDER RELEASE
THIS SHAREHOLDER RELEASE (this "Release") is made by _________________,
D.M.D., and _______________________, D.M.D.(collectively, the "Shareholders").
WHEREAS, __________________________________, (the "Company"), the
Shareholders, and US Orthodontic Care, Inc., a Georgia corporation ("Premier")
have entered into an Agreement and Plan of Reorganization (the "Agreement")
whereby the Company will be merged into Premier; and
WHEREAS, the Shareholders are directors and/or officers and employees
of the Company;
WHEREAS, pursuant to the Agreement, this Release is a condition to
Premier entering into the Agreement and consummating the transactions
contemplated thereby;
NOW, THEREFORE, in consideration of the foregoing premises and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Shareholders hereby agree as follows:
1. Release. The Shareholders hereby unconditionally release and
forever discharge the Company, their respective subsidiaries and other
affiliated companies and their respective agents, employees, representatives,
officers, directors, stockholders, trustees and attorneys, past and present, and
the heirs, successors and assigns of all of the foregoing (collectively, the
"Released Parties"), from any and all debts, liabilities, claims, demands,
actions or causes of action, suits, judgments or controversies of any kind
whatsoever (collectively, the "Claims") against the Released Parties, that now
exist or that may arise in the future out of any matter, transaction or event
occurring prior to the date hereof, including without limitation: (i) claims by
the Shareholders with respect to repayment of loans or indebtedness, (ii) any
rights, titles and interests in, to and under any agreements, arrangements or
understandings to which any of the Shareholders is a party and (iii) claims by
the Shareholders with respect to dividends, violation of preemptive rights, or
payment of salaries or other compensation or in any way arising out of or in
connection with his employment with the Company, the cessation of such
employment, his status as an officer, director or stockholder of the Company or
otherwise. The Shareholders further agrees not to file or bring any claim, suit,
civil action, complaint, arbitration or administrative action in any city, state
or federal court or agency or arbitration tribunal with respect to any Claim.
Provided, however, this General Release shall not in any way whatsoever apply to
those obligations of the Company relating to the Agreement and the related and
ancillary agreements thereto, dated as of ____________________.
2. Disclaimer of Liability. The Shareholders acknowledge that
this Release shall not in any way be construed as an admission by any of the
Released Parties of any wrongful or illegal act against the Shareholders or any
other person, and that the Released Parties expressly disclaim any liability of
any nature whatsoever arising from or related to the subject of this Release.
3. Competency. The Shareholders acknowledge that they fully
comprehend and understand all of the terms of this Release and their legal
effects. The Shareholders hereby further expressly warrant that they are
competent to execute this Release, that it is executed knowingly and voluntarily
and without reliance upon any statement or representation of any Released Party
or its representatives, and that they had the opportunity to consult with an
attorney of their choice regarding this Release.
4. Parties in Interest. This Release is for the benefit of the
Released Parties and shall be binding upon the Shareholders and their legal
representatives and heirs.
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<PAGE> 29
5. Governing Law. This Release and the rights and obligations of
the Shareholders hereunder shall be governed by and construed and enforced in
accordance with the substantive laws (but not the rules governing conflict of
laws) of the State of Georgia.
6. Amendment. This Release may not be clarified, modified,
changed or amended except in writing and signed by each Shareholders or their
respective duly authorized representatives, the Company, and Premier.
7. Severability. If any provision of this Release is held to be
illegal, invalid or unenforceable under present or future laws, such provision
shall be fully severable and this Release shall be construed and enforced as if
such illegal, invalid or unenforceable provision never comprised a part hereof;
and the remaining provisions hereof shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision, and
there shall be added automatically as part of this Release a provision as
similar in its terms to such illegal, invalid or unenforceable provision as may
be possible and be legal, valid and enforceable.
IN WITNESS WHEREOF, the Shareholders have executed this Release as of
the ____ day of ____________________, 1997.
WITNESS:
- ----------------------------------- --------------------------------
D.M.D.
----------------
- -----------------------------------
- ----------------------------------- --------------------------------
D.M.D.
----------------
- -----------------------------------
33
<PAGE> 1
EXHIBIT 10.1
PREMIER ORTHODONTIC GROUP, INC.
SERVICE AGREEMENT
THIS SERVICE AGREEMENT (this "Agreement"), dated as of
__________________, 1997, by and between PREMIER ORTHODONTIC GROUP, INC., a
Delaware corporation, and its successors and assigns ("Premier"), and
_______________________________, a Florida __________________________ (the
"Orthodontic Entity").
RECITALS:
WHEREAS, the Orthodontic Entity owns and operates an orthodontic
practice with offices located in the facilities identified in Exhibit 1.2 (the
"Center(s)") and furnishes orthodontic and other dental care to the general
public through the services of the orthodontist(s) and dentist(s) affiliated
with the Orthodontic Entity to provide patient care at the Center (the
"Orthodontist(s)"); and
WHEREAS, Premier is a company which has been formed to own the assets
of, provide personnel and practice management to, and manage the business
affairs of orthodontic practices;
WHEREAS, Premier's services are designed to improve the efficiency and
profitability of orthodontic practices while enhancing the ability of the
orthodontists in such practices to render quality orthodontic care to their
patients;
WHEREAS, the Orthodontic Entity and Premier mutually desire to enter
into a business relationship under the terms of this Agreement to help the
Orthodontic Entity achieve the above goals.
NOW THEREFORE, in consideration of the foregoing, and of the mutual
covenants and agreements herein contained, the parties hereto agree as follows:
I. RESPONSIBILITIES AND OBLIGATIONS OF PREMIER
1.1. General. Premier shall provide the Orthodontic Entity with
comprehensive practice management, financial and marketing services, and such
facilities, equipment, and support personnel as reasonably required by the
Orthodontic Entity to operate its practice, as determined by Premier in
consultation with the Orthodontist. The Orthodontic Entity hereby appoints
Premier as the sole and exclusive business manager of the Center and agrees that
Premier shall have all power and authority reasonably necessary to manage the
business affairs of the Center and carry out Premier's duties under this
Agreement, subject to the requirements
<PAGE> 2
of the applicable provisions of Florida law relating to the practice of
dentistry. Notwithstanding anything contained herein to the contrary, the
Orthodontic Entity (or the Orthodontist as appropriate) shall retain control
over all aspects of and decisions directly affecting the course of treatment of
any patients of the Orthodontic Entity.
1.2. Facilities and Equipment. The parties expressly agree that all
office space and facilities provided by Premier to the Orthodontic Entity
hereunder shall be leased or provided to the Orthodontic Entity by Premier at
the rental amount incurred by Premier under a lease or other agreement or
arrangement under which the Orthodontic Entity shall maintain complete care,
custody, and control of the foregoing. Subject to the foregoing, Premier agrees
to provide or arrange for on behalf of the Orthodontic Entity the offices,
facilities, furnishings, equipment, and related services described in Exhibit
1.2 hereto, as such Exhibit may be amended from time to time, and, on an ongoing
basis, shall provide for the maintenance and upkeep of the foregoing as a Center
Expense (as hereinafter defined); provided, however that the Orthodontic Entity
shall maintain complete control over and shall make all decisions directly
affecting the complete care, custody and control over all dental equipment.
Premier additionally agrees, on an ongoing basis, to evaluate and consult with
the Orthodontic Entity on the equipment needs of and the efficiency and adequacy
of the facilities utilized by the Center. Unless the Orthodontic Entity chooses
to directly purchase furnishings, equipment and related assets in the future,
Premier shall purchase such assets and lease such assets to the Orthodontic
Entity under a capital leasing arrangement with such terms as mutually agreed to
by the Orthodontic Entity and Premier. If the Orthodontic Entity chooses to
purchase such assets, then it shall depreciate such assets in accordance with
generally accepted accounting principles ("GAAP") and treat such depreciation as
a Center Expense.
1.3. Personnel and Payroll. Premier shall employ all of the Center's
staff, except the Orthodontists and dental hygienists, as determined by the
Orthodontic Entity in consultation with Premier, to be required for the
operation of the Center. Additionally, Premier shall be responsible for the
performance of all payroll and payroll accounting functions. The Orthodontic
Entity shall be responsible for determining the hours of practice for the
Center.
1.4. Business Systems, Procedures and Forms. In consultation with the
Orthodontic Entity, Premier shall establish business systems and procedures for
the Center developed by Premier that are designed to improve the Center's
operating efficiency. Premier shall provide training to the Center's staff in
the implementation and operation of such business systems and procedures.
Premier shall additionally provide the Orthodontic Entity with and train the
Center's staff in the use of clinical forms, including, without limitation,
forms for patient evaluations and treatment plans. The Orthodontic Entity
expressly acknowledges and agrees that it shall have no property rights in the
foregoing systems, procedures and clinical forms, and further agrees that such
systems, procedures, and forms shall be deemed to constitute Confidential
Information within the meaning of Section 2.7 hereof and subject to the
restrictions on the use, appropriation, and reproduction of such Confidential
Information provided for in Section 2.7.
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1.5. Purchasing, Accounts Payable and Inventory Control. In
consultation with the Orthodontic Entity, Premier shall purchase and maintain as
a Center Expense all inventory and supplies required by the Center. The price
charged to the Center for such inventory and supplies shall be the same as the
price paid by Premier, including any rebates. In any event, the Orthodontic
Entity has the right to purchase its supplies from the supplier of its choice.
Premier shall be responsible for and shall establish and maintain systems for
the handling and processing of all purchasing and payment activities and for the
performance of all payroll and payroll accounting functions of the Center.
1.6. Information Systems and Accounting. Premier shall establish,
maintain and train the Center's staff in the use of information systems to
produce financial and operational information concerning the Center's
operations. Premier shall analyze such information on an ongoing basis in order
to advise the Orthodontic Entity on ways of improving operating efficiencies.
Premier shall provide or arrange for all accounting and bookkeeping services
related to the Center's operations, provided that such services are incurred in
the ordinary course of business.
1.7. Legal Compliance and Services. Premier shall be responsible for
ensuring compliance with all rules, regulations and ordinances applicable to the
Center's operations, and shall arrange for all legal services reasonably
required by the Center, but excluding the costs of malpractice litigation which
shall be the sole responsibility of the Orthodontist. Premier shall use
reasonable efforts to obtain under its blanket policies for the Orthodontist as
a Center Expense malpractice insurance that meets the coverage requirements set
forth in Section 4.1 hereof.
1.8. Marketing. The parties expressly acknowledge and agree that the
Orthodontic Entity shall exercise control over all policies and decisions
relating to pricing, credit, refunds, warranties and advertising. Subject to the
foregoing, Premier shall design and execute a marketing plan to promote the
Orthodontist's professional services. In connection with such marketing plan,
Premier shall advise the affiliated Orthodontist on establishing and maintaining
a plan for patients' payment for orthodontic services on an installment plan
basis. All marketing activities hereunder shall be conducted in compliance with
all applicable laws and regulations governing advertising by the dental
profession.
1.9. Planning. Premier will assess and advise the Orthodontic Entity on
the establishment of orthodontic offices in new locations and, subject to mutual
agreement, will provide assistance to the Orthodontic Entity in the opening of
such new offices, including assistance in the location of such offices and in
the sale of existing practices, as appropriate.
1.10. Financial Services. On a continuous basis, the accounts receivable
of the Orthodontic Entity shall be deposited with Premier for the Orthodontic
Entity's account, and Premier shall use the funds collected from such accounts
receivable to pay the Service Fee (as hereinafter set forth) and the expenses of
the Orthodontic Entity, including the Center
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Expenses and shall return to the Orthodontic Entity any funds remaining after
payment in full of such items. Premier shall be responsible for (i) billing and
collecting payments for all orthodontic services rendered by the Orthodontist to
his patients and for all other professional and Center services, with all such
billing and collecting to be done in the name of the Orthodontic Entity; (ii)
receiving payments from patients, insurance companies and all other third party
payors; (iii) taking possession of and endorsing in the name of the Orthodontic
Entity any notes, checks, money orders, insurance payments and other instruments
received in payment of accounts receivable; (iv) administering the Orthodontic
Entity's payroll as applicable; (v) preparing and submitting to the Orthodontist
monthly operating data and quarterly financial reports with respect to the
operation of the Center; and (vii) paying all Center Expenses, as set forth in
Section 3. No funds from the Medicare or Medicaid programs shall be billed or
collected by the Orthodontic Entity or by Premier on the Orthodontic Entity's
behalf, provided, however, that all such funds collected shall be immediately
deposited into the Orthodontic Entity Account (as hereinafter defined) upon
receipt thereof. The Orthodontic Entity and the Orthodontist hereby appoint
Premier for the term of this Agreement to be their true and lawful
attorney-in-fact for the purposes set forth above in this Section.
1.11. Disbursement of Funds. (a) All monies collected for the
Orthodontic Entity by Premier pursuant to Section 1.10 above shall be deposited
into an account (the "Orthodontic Entity Account") with a bank whose deposits
are insured with the Federal Deposit Insurance Corporation. The Orthodontic
Entity Account shall contain the name of the Orthodontic Entity, but Premier
shall make all disbursements therefrom. Premier shall account for all monies so
disbursed from the Orthodontic Entity Account. From the funds collected and
deposited each month by Premier in the Orthodontic Entity Account, Premier shall
make the following disbursements, among others, promptly when payable:
(i) Compensation payable to all employees of the Orthodontic
Entity, and all taxes and assessments payable to local, state and Federal
governments in connection with the employment of such personnel; and
(ii) All sums otherwise due and payable by the Orthodontic
Entity as Center Expenses, as defined in Article III hereof, as well as
fees payable to Premier pursuant to Article III hereof.
(b) In the event the funds in the Orthodontic Entity Account will, at
any time, be insufficient to cover current expenses, Premier shall notify the
Orthodontic Entity and Premier shall advance to the Orthodontic Entity the
necessary funds to pay current expenses for the benefit of the Orthodontic
Entity, which advances will be deemed to be loans to the Orthodontic Entity to
be repaid upon such terms as agreed to by the Orthodontic Entity and Premier,
which indebtedness shall be deemed a Center Expense for purposes of Article III
hereof; provided, however, that in any event the outstanding principal amount of
such indebtedness shall bear interest at an annual rate adjusted on the first
calendar day of each month to reflect that certain rate from time to time
published by the Wall Street Journal as the
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prime rate, as of the last business day of the immediately preceding month for
which such prime rate was published (the "Prime Rate"), plus one percent (1%).
1.12. Records. Premier shall supervise, manage, organize and develop
systems with respect to all files and records relating to the operation of the
Center, including but not limited to accounting, billing, patient records, and
collection records. Patient records shall at all times be and remain the
property of the Orthodontist and shall be located at the Orthodontic Entity's
facilities so that they are readily accessible for patient care. The management
of all files and records shall comply with applicable state and federal
statutes. Premier shall use its reasonable efforts to preserve the
confidentiality of patient medical records and use information contained in such
records only for the limited purpose necessary to perform the services set forth
herein; provided, however, in no event shall a breach of said confidentiality be
deemed a default under this Agreement.
II. OBLIGATIONS OF THE ORTHODONTIC ENTITY
2.1. Employment of Orthodontists and Rendering of Patient Care. The
Orthodontic Entity shall be responsible for the employment and professional
supervision of all Orthodontist(s) affiliated with the Orthodontic Entity and
all orthodontic care rendered to patients shall be rendered by such
Orthodontist(s). Additionally, the Orthodontist shall be responsible for the
direct professional supervision of all hygienists and technicians in their
rendering of patient care.
2.2. Professional Services. The Orthodontic Entity shall use and occupy
the offices and facilities designated on Exhibit 1.2 exclusively for the
practice of orthodontic and general dentistry services, and shall comply with
all applicable local rules, ordinances and all standards of dental and
orthodontic care. It is expressly acknowledged by the parties that the
orthodontic practice conducted at the Center shall be conducted solely by the
Orthodontists associated with the Orthodontic Entity except those additional
orthodontists employed by the general dentists' offices from which the
Orthodontic Entity rents only space, and no other orthodontist shall be
permitted to use or occupy the Center, except as provided in Exhibit 2.3. The
Orthodontic Entity shall provide professional services to patients hereunder in
compliance at all times with ethical standards, and laws and regulations
applying to the dental profession. The Orthodontic Entity shall ensure that each
Orthodontist providing orthodontic or dental services to patients is licensed by
the state in which the Center is located. In the event that any disciplinary,
medical malpractice or other actions are initiated against any such
Orthodontist, the Orthodontic Entity shall immediately inform Premier of such
action and the underlying facts and circumstances. The Orthodontic Entity agrees
to cooperate with and participate in quality assurance/utilization review
programs established by Premier or mandated by accreditation and/or licensure
standards applicable to the practice of orthodontics and dentistry. Deficiencies
discovered in the performance of any personnel or in the quality of professional
services shall be reported immediately to Premier, and appropriate steps shall
be taken by the Orthodontic Entity at once
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to remedy such deficiencies. Any termination of an Orthodontist other than for
cause (as such term is defined in the Employment Agreement between the
Orthodontic Entity and the Orthodontist) must be approved by a majority of the
Board of Advisors of Premier.
2.3. Records. The Orthodontic Entity will keep or cause to be kept
accurate, complete and timely medical and other records of all patients. Such
records shall be sufficient to enable Premier, on behalf of the Orthodontic
Entity, to obtain payment for the services provided by the Orthodontist.
2.4. Professional Expenses. Payments expended each fiscal year by the
Orthodontic Entity on behalf of the Orthodontist and other orthodontists or
dentists delivering patient care at the Center(s) for continuing education,
seminars, professional license fees and dues, professional memberships, expenses
related to a company automobile for the Orthodontist, and all other expenses of
the Orthodontist and other orthodontists and dentists delivering patient care at
the Center(s) that do not directly benefit the Orthodontic Entity (as determined
by the auditors for Premier), up to the amount of three percent (3%) of the
Orthodontic Entity's Adjusted Gross Revenue, shall be considered a Center
Expense. To the extent that such expenses exceed three percent (3%) of the
Orthodontic Entity's Adjusted Gross Revenue for such year, the Center Expenses
shall be reduced by such excess amount solely for the purpose of calculating the
Service Fee (as defined in the Service Agreement); provided, however, that the
Orthodontic Entity shall pay such excess expenses. Notwithstanding the
foregoing, the Orthodontic Entity shall be solely responsible for the cost of
professional licensure fees and board certification fees, membership in
professional associations, and continuing professional education incurred by the
Orthodontist. The Orthodontic Entity shall ensure that the Orthodontist
participates in such continuing education as is necessary for such Orthodontist
to remain current.
2.5. Professional Insurance Eligibility. The Orthodontic Entity shall
cooperate in the obtaining and retaining of professional liability insurance by
assuring that each of its Orthodontists is insurable, and participating in an
on-going risk management program.
2.6. Employment Agreement. The parties recognize that the services to
be provided by Premier are feasible only if the Orthodontic Entity operates an
active orthodontic practice to which it and each orthodontist associated with
the Orthodontic Entity devote their full time and attention. Simultaneously with
the execution of this Agreement, each Orthodontist who is or becomes an equity
owner of the Orthodontic Entity or delivers patient care at the Center(s) on
average more than ten (10) days each month, whether on the date hereof or at any
time during the term of this Agreement, shall enter into an employment agreement
with the Orthodontic Entity in substantially the form of that certain Employment
Agreement dated of even date herewith by and between the Orthodontic Entity and
the principal Orthodontist(s) of the Orthodontic Entity.
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2.7. Confidentiality. The Orthodontic Entity agrees and acknowledges
that all materials provided by Premier or a Premier Affiliate (as hereinafter
defined) to the Orthodontic Entity, including all trade secrets, constitute
"Confidential Information" and are disclosed in confidence and with the
understanding that it constitutes valuable business information developed by
Premier at great expenditures of time, effort, and money. Trade secrets are
property rights protected by law and, for purposes of this letter, shall have
the meaning provided under applicable law, including, in Florida, Fla. Stat. ch.
688.002. The Orthodontic Entity further agrees that it shall not, directly or
indirectly, without the express prior written consent of Premier, use or
disclose such Confidential information for any purpose other than in connection
with the services to be rendered hereunder. The Orthodontic Entity further
agrees: (i) to keep strictly confidential and hold in trust all Confidential
Information and not disclose such Confidential Information to any third party
without the express prior written consent of Premier; and (ii) to impose this
obligation of confidentiality on its affiliates, co-owners, associates,
partners, employees, shareholders, members and independent contractors. The
Orthodontic Entity acknowledges that the disclosure of Confidential Information
to it by Premier is done in reliance upon its representations and covenants in
this Agreement. Upon expiration or termination of this Agreement by either party
for any reason whatsoever, the Orthodontic Entity shall immediately return and
shall cause its affiliates, co-owners, associates, partners, employees,
shareholders, members and independent contractors to immediately return to
Premier all Confidential Information (only to the extent such Confidential
Information does not include patient information), and the Orthodontic Entity
will not, and will cause its affiliates, co-owners, associates, partners,
employees, shareholders, members and independent contractors not to, thereafter
use, appropriate, or reproduce such Confidential Information. The Orthodontic
Entity further expressly acknowledges and agrees that any such use,
appropriation, or reproduction of any such Confidential Information by any of
the foregoing after the expiration or termination of this Agreement will result
in irreparable injury to Premier, that the remedy at law for the foregoing would
be inadequate, and that in the event of any such use, appropriation, or
reproduction of any such Confidential Information after the termination or
expiration of this Agreement, Premier, in addition to any other remedies which
may be available to it, shall be entitled to injunctive or other equitable
relief. As used in this Agreement, the term "Premier Affiliate" shall mean (i)
each corporation or other business entity directly or indirectly controlling,
controlled by, or under common control with Premier and (ii) each orthodontic or
dental practice to which Premier provides management or consulting services, the
employees and principals of such practices, and each corporation or other
business entity directly or indirectly controlling, controlled by, or under
common control with each such practice or the principals thereof.
2.8. Leases. The Orthodontic Entity agrees to sublease from Premier the
Center or Centers leased by Premier at which the Orthodontic Entity is
practicing pursuant to the form of Center Sublease Agreement attached hereto as
Exhibit 2.8. All such Center Sublease Agreements shall include a provision
whereby the parties agree that the Orthodontic Entity maintains complete care,
custody and control over such office space. The lease expenses
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incurred by Orthodontic Entity in connection with the Center Sublease Agreement
will be deemed "Center Expenses" for purposes of Article III of this Agreement.
2.9. Covenant Not to Compete. During the term of this Agreement, the
Orthodontic Entity, and any of its shareholders, agrees not to establish,
develop or open any offices for the provision of orthodontic services within a
ten (10) mile radius of any of the Centers covered by this Agreement (the "Area
of Dominant Influence") without the express written consent of Premier. For a
period of two (2) years following the termination of this Agreement, the
Orthodontic Entity and any of its shareholders shall be prohibited within the
Area of Dominant Influence (i) from advertising in print (except for yellow page
advertising and announcements for the opening of a practice) or electronic media
of any kind, (ii) from soliciting in any manner patients, orthodontists or staff
associated with the Centers, and (iii) from soliciting any referrals from any
dentist who referred one or more patients to the Center within the three (3)
years prior to the date of such termination. In the event the Orthodontic Entity
terminates this Agreement pursuant to Section 5.2(b), then this Section 2.9
shall be void and of no further effect; provided, however, the remainder of this
Agreement shall remain in full force and effect.
III. FINANCIAL ARRANGEMENTS
3.1. Service Fees. Premier shall receive an annual Service Fee, subject
to the provisions of Section 3.3 below, of 13.5% of the Adjusted Gross Revenue
(based on accrual method of accounting). Except as otherwise provided, the
amounts to be paid to Premier under this Section 3.1 shall be payable monthly.
The amounts shall be paid based upon the previous month's operating results of
the Center. Upon preparation of quarterly financial statements, final
adjustments to the Service Fee for the quarter, if any are required, shall be
made and any additional amounts owing to Premier or the Orthodontic Entity shall
then be made. Any audit adjustments shall be reflected in the calculations for
the fourth quarter.
3.2. Center Expenses. Premier shall be responsible for the payment of
all Center Expenses, as defined below, during the term of this Agreement and the
Orthodontic Entity shall immediately reimburse Premier for such payments from
funds held in the Orthodontic Entity Account.
3.3. Definitions. For the purposes of this Agreement, the following
definitions shall apply and shall comply with generally accepted accounting
principles:
(a) "Adjusted Gross Revenue" shall mean Gross Revenue of the
Center less any Adjustments, based on the accrual method of accounting.
(b) "Adjustments" shall mean any adjustments to Gross Revenue
for uncollectible accounts, professional courtesies and other activities,
contractual allowances and discounts that do not generate a collectible
fee.
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(c) "Center Expenses" shall mean all operating and
non-operating expenses incurred in the operation of the Center,
including, without limitation:
(i) Salaries, benefits, payroll taxes, workers
compensation, health insurance, 401(k) and other benefit plans,
and other direct costs of all employees of Premier at the Center,
including dental assistants (but excluding all Orthodontists);
provided that only expenses for health insurance, 401(k) and other
benefit plans approved by the Orthodontic Entity shall be
included;
(ii) Direct costs of all employees or consultants of
Premier who, upon mutual agreement of Premier and the Orthodontic
Entity, provide services at or, if consented to by the Orthodontic
Entity, in connection with the Center required for improved clinic
performance, such as work management, materials management,
purchasing, charge and coding analysis, and business office
consultation;
(iii) Obligations of Premier under leases or subleases
entered into in connection with the operation of the Center;
(iv) Personal property and intangible taxes assessed
against Premier's assets used in connection with the operation of
the Center, commencing on the date of this Agreement;
(v) Malpractice insurance expenses and Orthodontist
recruitment expenses as agreed to by mutual agreement of Premier
and the Orthodontic Entity;
(vi) Property, casualty and liability insurance for the
Center and its operations;
(vii) In the event an opportunity arises for additional
Orthodontists in the Area of Dominant Influence to become employed
by or merge with the Orthodontic Entity, actual out-of-pocket
expenses of Premier personnel working on a specified merger,
whether or not such merger is completed if such merger is approved
or requested by the Orthodontic Entity;
(viii) Amortization of intangible asset value as a result
of each such acquisition referred to in subsection (vii) above;
(ix) Depreciation of all assets used by the Orthodontic
Entity in the operation of the Center;
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(x) Repayment of any interest on funds loaned to the
Orthodontic Entity by Premier in connection with the operation of
the Center, at an interest rate not in excess of the Prime Rate
plus one percent (1%);
(xi) Advertising and other marketing expenses
attributable to the promotion of the Center and/or its
Orthodontist(s); and
(xii) Other expenses incurred by Premier with the consent
of the Orthodontic Entity in carrying out its obligations under
this Agreement for the benefit of the Center or the Orthodontic
Entity; provided, however, that such expenses shall not include
Premier's home office overhead expenses.
"Center Expenses" shall not include:
(i) Any federal or state income taxes; or
(ii) Any personal expenses of the Orthodontist as
permitted in the first sentence of Section 3(b) of that certain
employment agreement(s), by and between the Orthodontist(s) and
the Orthodontic Entity, in excess of three percent (3%) of the
Orthodontic Entity's Adjusted Gross Revenue.
(d) "Contract" shall mean the agreement entered into by
patients with the Orthodontic Entity for the provision of orthodontic
services at a predetermined fee for an estimated period of treatment.
(e) "Gross Revenue" shall mean all fees and charges recorded or
booked each month by or on behalf of the Orthodontic Entity as a result
of professional orthodontic or other dental services personally furnished
to patients by the Orthodontist and those under the Orthodontist's
supervision and other fees or income generated in their capacity as a
professional prior to any Adjustments.
3.4. Additional Facilities. In the event the parties agree to add an
additional facility in which the Orthodontic Entity will provide services, the
service fees payable to Premier shall be determined by aggregating the results
of the operations of each additional facility with the results of the operations
of the existing Center or Centers and such fees payable to Premier shall be
calculated pursuant to the provisions of Section 3.1. All other provisions of
this Article III shall apply to any additional facilities. As part of its
strategic growth strategy, Premier plans to provide capital support or arrange
favorable funding for orthodontic practice expansion and development. Any
expenditures on practice growth, acquisition or development shall be subject to
approval by Premier's Board of Directors.
3.5. Reasonable Efforts. Premier shall use reasonable efforts to
perform the services contemplated by this Agreement.
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IV. INSURANCE AND INDEMNITY
4.1. Insurance to be Maintained by the Orthodontic Entity. Throughout
the term of this Agreement, the Orthodontic Entity shall maintain comprehensive
professional liability insurance with limits of not less than $500,000 per claim
and with aggregate policy limits of not less than $1,000,000 per Orthodontist
providing services at the Center and a separate limit for the Orthodontic Entity
or such other amounts as required by applicable Florida laws, regulations, rules
or directives. The Orthodontic Entity shall be responsible for all such
liabilities in excess of the limits of such policies. Premier agrees to
negotiate for and cause premiums to be paid with respect to such insurance.
Premiums and deductibles with respect to such policies shall be a Center
Expense.
4.2. Insurance to be Maintained by Premier. Throughout the term of this
Agreement, Premier will use reasonable efforts to provide and maintain, as a
Center Expense, comprehensive general liability and property insurance covering
the Center premises and operations.
4.3. Tail Insurance Coverage. The Orthodontic Entity will cause each
individual Orthodontist providing services at the Center to enter into an
agreement with the Orthodontic Entity that upon termination of such Orthodontic
Entity's relationship with the Orthodontist, for any reason, tail insurance
coverage for a period of three (3) years will be purchased by each Orthodontist.
Such provisions may be contained in employment agreements, restrictive covenant
agreements or other agreements entered into by the Orthodontic Entity and the
individual Orthodontists, and the Orthodontic Entity hereby covenants with
Premier to enforce such provisions relating to the tail insurance coverage or to
provide such coverage at the expense of the Orthodontic Entity.
4.4. Additional Insureds. The Orthodontic Entity shall have Premier
named as an additional insured on the Orthodontic Entity's professional
liability insurance programs.
4.5. Indemnification. The Orthodontic Entity shall indemnify, hold
harmless and defend Premier, its officers, directors, shareholders, members, and
employees, from and against any and all liabilities, losses, damages, claims,
causes of action, and expenses (including reasonable attorneys' fees), whether
or not covered by insurance, caused or asserted to have been caused, directly or
indirectly, by or as a result of the performance of medical, dental or
orthodontic services or the performance of any intentional acts, negligent acts
or omissions by the Orthodontic Entity and/or its affiliates, shareholders,
members, agents, employees and/or subcontractors (other than Premier) prior to
and after the date of this Agreement and throughout the term hereof. Premier
shall indemnify, hold harmless and defend the Orthodontic Entity, and its
directors, shareholders, members and employees, from and against any and all
liabilities, losses, damages, claims, causes of action, and expenses (including
reasonable attorneys' fees), caused or asserted to have been caused, directly or
indirectly, by or as a result of the performance of any intentional acts,
negligent acts or
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omissions by Premier, a Premier Affiliate and/or their agents, employees and/or
subcontractors (other than the Orthodontic Entity) during the term of this
Agreement.
V. TERM AND TERMINATION
5.1. Term of Agreement. This Agreement shall commence on the date the
Securities and Exchange Commission declares effective Premier's registration
Statement on Form S-1 for the sale of Premier's common stock in an initial
public offering (the "IPO") and shall expire on the twentieth (20th) anniversary
thereof unless earlier terminated pursuant to the terms hereof. In the event
that Premier does not complete the IPO on or before October 15, 1997, this
Agreement shall be null and void and of no further effect between the parties
hereto.
5.2. Termination by the Orthodontic Entity. The Orthodontic Entity may
terminate this Agreement as follows:
(a) In the event of the filing of a petition in voluntary bankruptcy
or an assignment for the benefit of creditors by Premier, or upon other action
taken or suffered, voluntarily or involuntarily, under any federal or state law
for the benefit of debtors by Premier, except for the filing of a petition in
involuntary bankruptcy against Premier which is dismissed within thirty (30)
days thereafter, the Orthodontic Entity may give written notice of the immediate
termination of this Agreement.
(b) In the event Premier shall materially default in the performance
of any duty or obligation imposed upon it by this Agreement and such default
shall continue for a period of ninety (90) days after written notice thereof has
been given to Premier by the Orthodontic Entity (which notice shall contain
specific details of the reason for such default), the Orthodontic Entity may
terminate this Agreement; provided, however, if the nature of such default is
such that cure is not capable within said 90-day period, then Premier shall have
such additional time as may be required to effect and complete such cure
provided that Premier shall commence such cure within the aforesaid 90-day
period and shall prosecute such cure to completion with reasonable diligence.
(c) In the event that the IPO has not been completed on or before
October 15, 1997, the Orthodontic Entity may terminate this Agreement.
5.3. Termination by Premier. Premier may terminate this Agreement as
follows:
(a) In the event of the filing of a petition in voluntary bankruptcy
or an assignment for the benefit of creditors by the Orthodontic Entity, or upon
other action taken or suffered, voluntarily or involuntarily, under any federal
or state law for the benefit of debtors by the Orthodontic Entity, except for
the filing of a petition in involuntary bankruptcy against the Orthodontic
Entity which is dismissed within thirty (30) days thereafter, Premier may give
written notice of the immediate termination of this Agreement.
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(b) In the event the Orthodontic Entity shall materially default in
the performance of any duty or obligation imposed upon it by this Agreement, and
such default shall continue for a period of ninety (90) days after written
notice thereof has been given to the Orthodontic Entity by Premier, Premier may
terminate this Agreement.
(c) In the event that the IPO has not been completed on or before
October 15, 1997, Premier may terminate this Agreement.
5.4. Actions after Termination. Upon termination of this Agreement by
either party for any reason other than a default by the Orthodontic Entity or
upon expiration of this Agreement, the Orthodontic Entity may, and upon
termination of this Agreement by Premier due to the reasons set forth in Section
5.3(b) hereof, the Orthodontic Entity shall:
(a) Purchase all improvements, additions or leasehold improvements
which have been made by Premier and which relate solely to the performance of
its obligations under this Agreement at adjusted book value;
(b) Assume all debt and all contracts, payables and leases which are
obligations of Premier and which relate solely to the performance of its
obligations under this Agreement or the properties subleased by Premier; and
(c) Purchase from Premier at book value all of the equipment of the
Center, including all replacements and additions thereto made by Premier
pursuant to the performance of its obligations under this Agreement, and all
other assets, including inventory and supplies, tangibles and intangibles
(including but not limited to accounts receivable), set forth on the balance
sheet prepared for the month most recently ended prior to the date of such
termination in accordance with GAAP to reflect operations of the Center,
depreciation, amortization and other adjustments of assets shown on such balance
sheet.
5.5. Closing of Repurchase by the Orthodontic Entity and Effective Date
of Termination. Unless another form of payment is agreed to by Premier at such
time, the Orthodontic Entity shall pay cash to Premier for the assets
repurchased pursuant to Section 5.4; provided, however, that such cash payments
for such portion of contracts receivable for services determined in accordance
with GAAP to constitute accounts receivable shall be made as such accounts
receivables are actually collected by the Orthodontic Entity; provided, further,
that the Orthodontic Entity shall in any event pay in cash to Premier the amount
of accounts receivable not collected by the Orthodontic Entity within ninety
(90) days of termination that are not deemed uncollectible accounts. The amount
of the purchase price shall be reduced by the amount of debt and liabilities of
Premier assumed by the Orthodontic Entity and shall also be reduced by any
payment Premier has failed to make under this Agreement. The Orthodontic Entity
and any Orthodontist associated with the Orthodontic Entity shall execute such
documents as may be required to assume the liabilities set forth in Section
5.4(c) and shall use its best efforts to remove Premier from any liability with
respect to such
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repurchased assets and with respect to any property leased or subleased by
Premier. The closing date for the repurchase shall be determined by the
Orthodontic Entity, but shall in no event occur later than 180 days from the
date of the notice of termination. The termination of this Agreement shall
become effective upon the closing of the sale of the assets and the Orthodontic
Entity and Premier shall be released from the restrictive covenants provided for
in Section 2.9 on the closing date. From and after any termination, each party
shall provide the other party with reasonable access to books and records then
owned by it to permit such requesting party to satisfy reporting and contractual
obligations which may be required of it.
5.6. Patient Records. Upon termination of this Agreement, the
Orthodontic Entity shall retain all patient medical records maintained by the
Orthodontic Entity or Premier in the name of the Orthodontic Entity. During the
term of this Agreement, and thereafter, the Orthodontic Entity or its designee
shall have reasonable access during normal business hours to the Orthodontic
Entity's and Premier's records, including, but not limited to, records of
collections, expenses and disbursements as kept by Premier in performing
Premier's obligations under this Agreement, and the Orthodontic Entity may copy
any or all such records.
VI. INDEPENDENT CONTRACTOR
6.1. Orthodontic Entity's Control Over Professional Services.
Notwithstanding the authority granted to Premier herein, Premier and the
Orthodontic Entity agree that the affiliated Orthodontist, personally or through
any of his professional employees or agents, shall have control or supervision
over the provision of all professional services, with the sole authority to
direct the professional, and ethical aspects of his orthodontic practice.
Premier will have no authority, directly or indirectly, to perform, and will not
perform, any orthodontic function. Premier may, however, advise the Orthodontic
Entity as to the relationship between its performance of orthodontic functions
and the overall administrative and business functions of its practice.
6.2. Independent Relationship. The Orthodontic Entity and Premier
intend to act and perform as independent contractors, and the provisions hereof
are not intended to create any partnership, joint venture, agency or employment
relationship between the parties. The Orthodontic Entity will not have any claim
under this Agreement, or otherwise, against Premier for vacation pay, sick
leave, unemployment insurance, worker's compensation, disability benefits or
employee benefits of any kind.
6.3. Other Professionals. No provision of this Agreement is intended to
limit Premier's right, authority, or ability under applicable law to contract
with other dentists or physicians, or to employ, contract with, or enter into
any partnership or joint venture with any healthcare professional; provided that
the exercise of such right, authority or ability does not contravene the terms
of this Agreement.
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6.4 Patient Care. Nothing in this Agreement is intended to interfere,
or shall be construed as interfering, in any way with the Orthodontist(s)'s
ability to independently exercise professional and ethical judgment in the
performance of his patient care responsibilities.
VII. GENERAL PROVISIONS
7.1. Assignment. This Agreement shall be assignable by Premier to (i)
any person, firm or corporation that controls or is under common control with
Premier, (ii) US Orthodontic Care, Inc. ("USOC") or any person, firm or
corporation that controls or is under common control with USOC, or (iii) any
entity that results from a merger or other combination between Premier and USOC
("Newco") and any person, firm or corporation that controls or is under common
control with Newco. Except as set forth above, neither Premier nor the
Orthodontic Entity shall have the right to assign their respective rights and
obligations hereunder without the written consent of the other party, which
consent shall not be unreasonably withheld. Subject to this provision, this
Agreement shall be binding upon the parties hereto, and their successors and
assigns.
7.2. Whole Agreement; Modification. There are no other agreements or
understandings, written or oral, between the parties regarding this Agreement,
the Exhibits and the Schedules, other than as set forth herein. This Agreement
shall not be modified or amended except by a written document executed by both
parties to this Agreement, and such written modification(s) shall be attached
hereto.
7.3. Notices. All notices required or permitted by this Agreement shall
be in writing and shall be addressed as follows:
To Premier: Premier Orthodontic Group, Inc.
23848 Hawthorne Boulevard, Suite 200
Torrance, California 90505
Attn: Mr. Sam Westover, Chief Executive Officer
Telecopier: (310) 791-5660
Telephone: (310) 791-5657
With a copy to: Nelson Mullins Riley & Scarborough, L.L.P.
First Union Plaza, Suite 1400
999 Peachtree Street, N.E.
Atlanta, Georgia 30309
Attn: Paul A. Quiros, Esquire
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To the _________________________________
Orthodontic Entity: _________________________________
_________________________________
_________________________________
or to such other address as either party shall notify the other.
7.4. Waiver of Provisions. Any waiver of any terms and conditions
hereof must be in writing, and signed by the parties hereto. The waiver of any
of the terms and conditions of this Agreement shall not be construed as a waiver
of any other terms and conditions hereof.
7.5. Governing Law. The validity, interpretation and performance of
this Agreement shall be governed by and construed in accordance with the laws of
the State of Florida. The parties acknowledge that Premier is not authorized or
qualified to engage in any activity which may be construed or deemed to
constitute the practice of dentistry or orthodontics. To the extent any act or
service required of Premier in this Agreement should be construed or deemed, by
any governmental authority, agency or court to constitute the practice of
dentistry or orthodontics, the performance of said act or service by Premier
shall be deemed waived and forever unenforceable and the provision of Section
7.12 shall be applicable.
7.6. Events Excusing Performance. Neither party shall be liable to the
other party for failure to perform any of the services required herein in the
event of strikes, lock-outs, calamities, acts of God, unavailability of supplies
or other events over which that party has no control for so long as such events
continue, and for a reasonable period of time thereafter.
7.7. Compliance with Applicable Laws. Both parties shall comply with
all applicable federal, state and local laws, regulations and restrictions in
the conduct of their obligations under this Agreement.
7.8. Severability. The provisions of this Agreement shall be deemed
severable and if any portion shall be held invalid, illegal or unenforceable for
any reason, the remainder of this Agreement shall be effective and binding upon
the parties.
7.9. Additional Documents. Each of the parties hereto agrees to execute
any document or documents that may be requested from time to time by the other
party to implement or complete such party's obligations pursuant to this
Agreement.
7.10. Attorneys' Fees. If legal action is commenced by either party to
enforce or defend its rights under this Agreement, the prevailing party in such
action shall be entitled to recover its costs and reasonable attorneys' fees in
addition to any other relief granted.
7.11. Confidentiality. Neither party hereto shall disseminate or release
to any third party any information regarding any provision of this Agreement, or
any financial information
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regarding the other (past, present or future) that was obtained by the other in
the course of the negotiation of this Agreement or in the course of the
performance of this Agreement, without the other party's written approval;
provided, however, the foregoing shall not apply to information which is
required to be disclosed by law, including federal or state securities laws, or
pursuant to court order.
7.12. Contract Modifications for Prospective Legal Events. In the event
any state or federal laws or regulations, now existing or enacted or promulgated
after the effective date of this Agreement, are interpreted by judicial
decision, a regulatory agency or legal counsel for both parties in such a manner
as to indicate that the structure of this Agreement may be in violation of such
laws or regulations, the Orthodontic Entity and Premier shall amend this
Agreement as necessary. To the maximum extent possible, any such amendment shall
preserve the underlying economic and financial arrangements between the
Orthodontic Entity and Premier.
7.13. Remedies Cumulative. No remedy set forth in this Agreement or
otherwise conferred upon or reserved to any party shall be considered exclusive
of any other remedy available to any party, but the same shall be distinct,
separate and cumulative and may be exercised from time to time as often as
occasion may arise or as may be deemed expedient.
7.14. Language Construction. The language in all parts of this Agreement
shall be construed, in all cases, according to the parties' intent and the
parties hereto acknowledge that each party and its counsel have reviewed and
revised this Agreement and that the normal rule of construction to the effect
that any ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement.
7.15. No Obligation to Third Parties. None of the obligations and duties
of Premier or the Orthodontic Entity under this Agreement shall in any way or in
any manner be deemed to create any obligation of Premier or of the Orthodontic
Entity to, or any rights in, any person or entity not a party to this Agreement.
7.16. Counterparts. This Agreement may be executed in counterparts, each
of which shall constitute an original and all of which together shall constitute
one and the same Agreement.
7.17. Singular and Plural; Gender. Where the context so requires or
permits, the use of the singular form includes the plural, and the use of the
plural form includes the singular, and the use of any gender includes any and
all genders.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
ORTHODONTIC ENTITY:
-------------------------------------------------
By:
----------------------------------------------
Name:
--------------------------------------------
Title:
-------------------------------------------
PREMIER:
PREMIER ORTHODONTIC GROUP, INC.
By:
----------------------------------------------
Name:
--------------------------------------------
Title:
-------------------------------------------
18
<PAGE> 1
EXHIBIT 10.2
PREMIER ORTHODONTIC GROUP, INC.
CONSULTING AND BUSINESS SERVICES AGREEMENT
THIS CONSULTING AND BUSINESS SERVICES AGREEMENT (this
"Agreement"), dated as of _____________, 1997, by and between PREMIER
ORTHODONTIC GROUP, INC., a Delaware corporation, and its successor or assigns
("Premier") and _________________________________, a California
________________________ (the "Orthodontic Entity").
W I T N E S S E T H:
WHEREAS, the Orthodontic Entity owns and operates an
orthodontic practice with offices located in the facilities identified in
Exhibit 1.2 (the "Center(s)") and furnishes orthodontic and other dental care to
the general public through the services of the orthodontist(s) and dentist(s)
affiliated with the Orthodontic Entity to provide patient care at the Center(s)
(the "Orthodontist(s)"); and
WHEREAS, Premier is a company which has been formed to provide
business and consulting services to orthodontists; and
WHEREAS, the Orthodontic Entity and Premier mutually desire to
enter into this Consulting and Business Services Agreement.
NOW THEREFORE, in consideration of Ten Dollars ($10.00), the
mutual covenants and agreements herein contained, and other good and valuable
consideration, the receipt, adequacy and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
I. RESPONSIBILITIES OF PREMIER
1.1 General. Premier shall furnish the Orthodontic Entity
the business and consulting services described in this Agreement, subject to the
requirements of the California Dental Practice Act relating to, without
limitations, the control by dentists over the practice of dentistry.
1.2 Facilities and Equipment. Premier will consult with
and advise the Orthodontic Entity on its equipment and office needs and the
efficient configuration of its office space and will arrange for all equipment
and furnishings determined by the Orthodontic Entity to be necessary for the
operation of the Center, as specified on Exhibit 1.2 (together with any future
asset purchases in accordance herewith, the "Assets"). The Orthodontic Entity
shall have complete custody and control over the Assets provided to the
Orthodontic Entity by Premier, including, without limitation, the right to make
decisions, after consultation with Premier, with respect to the repair,
replacement, modification and upkeep of such Assets.
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Unless the Orthodontic Entity chooses to directly purchase furnishings,
equipment and related assets in the future, Premier shall purchase such assets
and lease such assets to the Orthodontic Entity under a capital leasing
arrangement with such terms as mutually agreed to by the Orthodontic Entity and
Premier. If the Orthodontic Entity chooses to purchase such assets, then it
shall depreciate such assets in accordance with generally accepted accounting
principles ("GAAP") and treat such depreciation as a Center Expense.
1.3 Personnel and Payroll. Premier will consult with the
Orthodontic Entity on its staffing needs. Premier will employ the staff
determined by the Orthodontic Entity to be necessary for the Center's
operations, as specified on Exhibit 1.3, except for the Orthodontists and
orthodontic and hygienist staff, who will be employed by the Orthodontic Entity.
At the election of the Orthodontic Entity, Premier will additionally assist in
staff scheduling, administer the Center's payroll and provide payroll accounting
services. The parties expressly agree that the Orthodontic Entity will have
discretion and control over all personnel and staffing matters in respect to the
Center's staff.
1.4 Business Systems, Procedures and Forms. Premier will
advise the Orthodontic Entity on and assist in the implementation and operation
of business systems and procedures. Premier will provide training to the
Center's staff in the use of such systems and procedures. Premier will
additionally provide the Orthodontic Entity clinical forms developed in
consultation with the Orthodontic Entity and will provide training to the
Center's staff in the use of such forms. The Orthodontic Entity expressly
acknowledges and agrees that it shall have no property rights in the foregoing
systems, procedures or clinical forms, and further agrees that such systems,
procedures and form shall be deemed to constitute Confidential Information
within the meaning of Section 2.8 hereof and shall be subject to the
restrictions on the use, appropriation and reproduction of such Confidential
Information provided for in Section 2.8. The parties agree that the Orthodontic
Entity's use of any such systems, procedures and forms shall be at the
Orthodontic Entity's sole discretion and, notwithstanding its use of any such
systems, procedures, or forms, the Orthodontic Entity shall retain control over
the management of all aspects of the Center's operations, including, without
limitation, patient scheduling.
1.5 Purchasing and Inventory Control. Premier in
consultation with the Orthodontic Entity, will provide the Orthodontic Entity
purchasing services for inventory and supplies and will be responsible for
maintaining the Center's inventory. The price charged to the Center for such
inventory and supplies shall be the same as the price paid by Premier, including
any rebates. In any event, the Orthodontic Entity has the right to purchase its
supplies from the supplier of its choice.
1.6 Accounting Services and Financial Reporting. Premier
will advise the Orthodontic Entity with respect to and provide or arrange for
all accounting and bookkeeping services reasonably required for the Center's
normal and routine operations. Premier will additionally advise the Orthodontic
Entity on and assist in implementing information systems designed in
consultation with the Orthodontic Entity to generate financial and operational
data
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concerning the Center. Premier will prepare and submit to the Orthodontic
Entity monthly operating data and quarterly financial reports with respect to
the Center's operations. Premier will analyze such data on an ongoing basis to
advise the Center on improving productivity.
1.7 Legal Compliance and Services. Premier will assist
the Orthodontic Entity in complying with applicable local, state, and federal
laws, rules, regulations and ordinances applicable to the Center's operations.
1.8 Marketing. Premier will advise the Orthodontic Entity
in designing and assist in executing a marketing plan to promote the Center's
professional services. In connection with the development of the marketing plan,
Premier will advise the Orthodontic Entity on establishing an installment plan
for patient payments, and, in the event the Orthodontic Entity elects to offer
such a plan, will assist in implementing and administering the plan. The
Orthodontic Entity shall exercise sole discretion and control over all policies
and decisions relating to marketing, pricing, credits, refunds, warranties and
advertising. All marketing activities hereunder will be conducted in compliance
with applicable laws and regulations of the State of California governing the
dental profession.
1.9 Planning. Premier will assess the business potential
of establishing orthodontic offices in new locations, and, in the event the
Orthodontic Entity elects to relocate or open an office in a new location,
subject to mutual agreement, Premier will provide assistance to the Orthodontic
Entity as appropriate.
1.10 Billing and Collections. Premier shall provide
billing and collection services for all professional services rendered at the
Center, all such billing and collections to be done in the name of and subject
to the control of the Orthodontic Entity.
1.11 Payment Services. On a continuous basis, the accounts
receivable of the Orthodontic Entity shall be deposited with Premier for the
Orthodontic Entity's account, and Premier shall use the funds collected from
such accounts receivable to pay the Consulting Fee (as hereinafter defined) and
to pay, on the Orthodontic Entity's behalf as a Center Expense (as hereinafter
defined) and otherwise, all expenses of the Orthodontic Entity duly authorized
for payment by the Orthodontic Entity and shall return to the Orthodontic Entity
any funds remaining after payment in full of such items.
1.12 Disbursement of Funds. (a) All monies collected by
Premier from the Orthodontic Entity's accounts receivable pursuant to Section
1.10 above shall be deposited into an account (the "Orthodontic Entity Account")
with a bank whose deposits are insured with the Federal Deposit Insurance
Corporation. The Orthodontic Entity Account shall contain the name of the
Orthodontic Entity, but Premier shall make all disbursements therefrom. Premier
shall account for all monies so disbursed from the Orthodontic Entity Account.
From the funds collected and deposited each month by Premier in the Orthodontic
Entity Account, Premier shall make the following disbursements, among others,
promptly when payable.
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(i) Compensation payable to all employees of the
Orthodontic Entity, and all taxes and assessments payable to
local, state and Federal governments in connection with the
employment of such personnel; and
(ii) All other sums otherwise due and payable by
the Orthodontic Entity as Center Expenses or otherwise,
including, without limitation, the Consulting Fee.
(b) In the event the funds in the Orthodontic Entity
Account will, at any time, be insufficient to cover current expenses, Premier
shall notify the Orthodontic Entity and Premier shall advance to the Orthodontic
Entity the necessary funds to pay current expenses for the benefit of the
Orthodontic Entity, which advances will be deemed to be loans to the Orthodontic
Entity to be repaid upon such terms as agreed to by the Orthodontic Entity and
Premier, which indebtedness shall be deemed a Center Expense for purposes of
Article III hereof; provided, however, that in any event the outstanding
principal amount of such indebtedness shall bear interest at an annual rate
adjusted on the first calendar day of each month to reflect that certain rate
from time to time published by the Wall Street Journal as the prime rate, as of
the last business day of the immediately preceding month for which such prime
rate was published (the "Prime Rate"), plus one percent (1%).
1.13 Records. Premier shall organize and develop systems
in consultation with the Orthodontic Entity with respect to all files and
records relating to the business operations of the Center, including, but not
limited to, accounting, billing and collection records. The parties expressly
acknowledge and agree that patient records shall at all times be and remain the
property and under the control of the Orthodontist and shall be located at the
Orthodontic Entity's facilities so that they are readily accessible for patient
care. The management of all files and records shall comply with applicable state
and federal statutes. Premier shall use its reasonable efforts to preserve the
confidentiality of patient medical records and use information contained in such
records only for the limited purpose necessary to perform the services set forth
herein; provided, however, in no event shall a breach of said confidentiality be
deemed a default under this Agreement.
II. OBLIGATIONS OF THE ORTHODONTIC ENTITY
2.1 General. The Orthodontic Entity will be responsible
for the management of the Center, in accordance with the requirements of the
California Dental Practice Act.
2.2 Employment of Orthodontists and Rendering of Patient
Care. The Orthodontic Entity will be responsible for the employment of all
Orthodontist(s) and hygienists affiliated with the Orthodontic Entity and
supervision of all care and services rendered to patients.
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2.3 Professional Services. The Orthodontic Entity shall
use and occupy the offices and facilities designated on Exhibit 1.2 exclusively
for the practice of orthodontic and general dentistry services and shall comply
with all applicable local rules, ordinances and all standards of dental and
orthodontic care. It is expressly acknowledged by the parties that the
orthodontic practice conducted at the Center shall be conducted solely by the
Orthodontists associated with the Orthodontic Entity except those additional
orthodontists employed by the general dentists' offices from which the
Orthodontic Entity rents only space, and no other orthodontist shall be
permitted to use or occupy the Center or Centers, except as provided in Exhibit
2.3. The Orthodontic Entity shall provide professional services to patients
hereunder in compliance at all times with ethical standards and laws and
regulations applying to the dental profession. The Orthodontic Entity shall
ensure that each Orthodontist providing orthodontic or dental services to
patients is licensed by the state in which the Center is located. In the event
that any disciplinary, medical malpractice or other actions are initiated
against any such Orthodontist, the Orthodontic Entity shall immediately inform
Premier of such action and the underlying facts and circumstances. The
Orthodontic Entity agrees to cooperate with and participate in the quality
assurance/utilization review programs established by Premier or mandated by
accreditation and/or licensure standards applicable to the practice of
orthodontics and dentistry. Deficiencies discovered in the performance of any
personnel or in the quality of professional services shall be reported
immediately to Premier, and appropriate steps shall be taken by the Orthodontic
Entity at once to remedy such deficiencies. Any termination of an Orthodontist
other than for cause (as such term is defined in the Employment Agreement
between the Orthodontic Entity and the Orthodontist) must be approved by a
majority of the Board of Advisors of Premier.
2.4 Records. The Orthodontic Entity will keep or cause to
be kept accurate, complete and timely medical and other records of all patients.
Such records shall be sufficient to enable Premier, on behalf of the Orthodontic
Entity, to obtain payment for the services and facilities and to facilitate the
delivery of quality patient care by the Orthodontist.
2.5 Professional Expenses. Payments expended each fiscal
year by the Orthodontic Entity on behalf of the Orthodontist and other
orthodontists or dentists delivering patient care at the Center(s) for
continuing education, seminars, professional license fees and dues, professional
memberships, expenses related to a company automobile for the Orthodontist, and
all other expenses of the Orthodontist and other orthodontists and dentists
delivering patient care at the Center(s) that do not directly benefit the
Orthodontic Entity (as reasonably determined by Premier), up to the amount of
three percent (3%) of the Orthodontic Entity's Adjusted Gross Revenue, shall be
considered a Center Expense. To the extent that such expenses exceed three
percent (3%) of the Orthodontic Entity's Adjusted Gross Revenue for such year,
the Center Expenses shall be reduced by such excess amount solely for the
purpose of calculating the Consulting Fee; provided, however, that the
Orthodontic Entity shall pay such excess expenses. Notwithstanding the
foregoing, the Orthodontic Entity shall be solely responsible for the cost of
professional licensure fees and board certification fees, membership in
professional associations and continuing professional education incurred by the
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Orthodontist. The Orthodontic Entity shall ensure that the Orthodontist
participates in such continuing education as is necessary for such Orthodontist
to remain current.
2.6 Professional Insurance Eligibility. The Orthodontic
Entity shall cooperate in the obtaining and retaining of professional liability
insurance by assuring that each of its Orthodontists is insurable and
participating in an on-going risk management program.
2.7 Employment Agreement. The parties recognize that the
services to be provided by Premier are feasible only if the Orthodontic Entity
operates an active orthodontic practice to which it and each orthodontist
associated with the Orthodontic Entity devote their full time and attention.
Simultaneously with the execution of this Agreement, each Orthodontist who is or
becomes an equity owner of the Orthodontic Entity or delivers patient care at
the Center(s) on average more than ten (10) days each month, whether on the date
hereof or at any time during the term of this Agreement, shall enter into an
employment agreement with the Orthodontic Entity in substantially the form of
that certain Employment Agreement dated of even date herewith by and between the
Orthodontic Entity and the principal Orthodontist(s) of the Orthodontic Entity.
2.8 Confidentiality. The Orthodontic Entity agrees and
acknowledges that all materials provided by Premier or a Premier Affiliate (as
hereinafter defined) to the Orthodontic Entity, including all trade secrets,
constitute "Confidential Information" and are disclosed in confidence and with
the understanding that it constitutes valuable business information developed by
Premier at great expenditures of time, effort, and money. Trade secrets are
property rights protected by law and, for purposes of this letter, shall have
the meaning provided under applicable California law. The Orthodontic Entity
further agrees that it shall not, directly or indirectly, without the express
prior written consent of Premier, use or disclose such Confidential information
for any purpose other than in connection with the services to be rendered
hereunder. The Orthodontic Entity further agrees: (i) to keep strictly
confidential and hold in trust all Confidential Information and not disclose
such Confidential Information to any third party without the express prior
written consent of Premier; and (ii) to impose this obligation of
confidentiality on its affiliates, co-owners, associates, partners, employees,
shareholders, members and independent contractors. The Orthodontic Entity
acknowledges that the disclosure of Confidential Information to it by Premier is
done in reliance upon its representations and covenants in this Agreement. Upon
expiration or termination of this Agreement by either party for any reason
whatsoever, the Orthodontic Entity shall immediately return and shall cause its
affiliates, co-owners, associates, partners, employees, shareholders, members
and independent contractors to immediately return to Premier all Confidential
Information (only to the extent such Confidential Information does not include
patient information), and the Orthodontic Entity will not, and will cause its
affiliates, co-owners, associates, partners, employees, shareholders, members
and independent contractors not to, thereafter use, appropriate, or reproduce
such Confidential Information. The Orthodontic Entity further expressly
acknowledges and agrees that any such use, appropriation, or reproduction of any
such Confidential Information by any of the foregoing after the expiration or
termination of this Agreement will result in irreparable injury to
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Premier, that the remedy at law for the foregoing would be inadequate, and that
in the event of any such use, appropriation, or reproduction of any such
Confidential Information after the termination or expiration of this Agreement,
Premier, in addition to any other remedies which may be available to it, shall
be entitled to injunctive or other equitable relief. As used in this Agreement,
the term "Premier Affiliate" shall mean (i) each corporation or other business
entity directly or indirectly controlling, controlled by, or under common
control with Premier and (ii) each orthodontic or dental practice to which
Premier provides management or consulting services, the employees and principals
of such practices, and each corporation or other business entity directly or
indirectly controlling, controlled by, or under common control with each such
practice or the principals thereof.
2.9 Covenant Not to Compete. During the term of this
Agreement, the Orthodontic Entity, and any of its members or shareholders,
agrees not to establish, develop or open any offices for the provision of
orthodontic services within a ten (10) mile radius of any of the Centers covered
by this Agreement (the "Area of Dominant Influence") without the express written
consent of Premier. For a period of two (2) years following the termination of
this Agreement, the Orthodontic Entity and any of its members or shareholders
shall be prohibited within the Area of Dominant Influence (i) from advertising
in print (except for yellow page advertising and announcements for the opening
of a practice) or electronic media of any kind, (ii) from soliciting in any
manner patients, orthodontists or staff associated with the Centers, and (iii)
from soliciting any referrals from any dentist who referred one or more patients
to the Center within the three (3) years prior to the date of such termination.
In the event the Orthodontic Entity terminates this Agreement pursuant to
Section 5.2(b), then this Section 2.9 shall be void and of no further effect;
provided, however, the remainder of this Agreement shall remain in full force
and effect.
III. FINANCIAL ARRANGEMENTS
3.1 Consulting Fees. Premier shall receive a Consulting
Fee, subject to the provisions of Section 3.3 below, of between 14% and 17% of
the Adjusted Gross Revenue as determined pursuant to Exhibit 3.1 attached hereto
and incorporated herein by reference.
Except as otherwise provided, the amounts to be paid to
Premier under this Section 3.1 shall be payable monthly. The amounts shall be
estimated based upon the previous month's operating results of the Center.
Adjustments to the estimated payments shall be made to reconcile actual amounts
due under this Section 3.1, by the end of the following month. Upon preparation
of quarterly financial statements, final adjustments to the Consulting Fee for
the quarter shall be made and any additional amounts owing to Premier or the
Orthodontic Entity shall then be made. Any audit adjustments shall be reflected
in the calculations for the fourth quarter.
3.2 Center Expenses. Premier shall be responsible for the
payment of all Center Expenses, as defined below, during the term of this
Agreement and the Orthodontic Entity shall immediately reimburse Premier for
such payments from funds held in the Orthodontic Entity Account.
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3.3 Definitions. For the purposes of this Agreement,
the following definitions shall apply and shall comply with
generally accepted accounting principles:
(a) "Adjusted Gross Revenue" shall mean Gross
Revenue of the Center less any Adjustments, based on the
accrual method of accounting.
(b) "Adjustments" shall mean any adjustments to
Gross Revenue for uncollectible accounts, professional
courtesies and other activities, contractual allowances and
discounts that do not generate a collectible fee.
(c) "Center Expenses" shall mean all operating
and non-operating expenses incurred in the operation of the
Center, including, without limitation:
(i) Salaries, benefits, payroll taxes,
workers compensation, health insurance, 401(k) and
other benefit plans, and other direct costs of all
employees of Premier at the Center, including dental
assistants (but excluding all Orthodontists);
provided that only expenses for health insurance,
401(k) and other benefit plans approved by the
Orthodontic Entity shall be included;
(ii) Direct costs of all employees or
consultants of Premier who, upon mutual agreement of
Premier and the Orthodontic Entity, provide services
at or, if consented to by the Orthodontic Entity, in
connection with the Center required for improved
clinic performance, such as work management,
materials management, purchasing, charge and coding
analysis, and business office consultation;
(iii) Obligations of Premier under leases
or subleases entered into in connection with the
operation of the Center;
(iv) Personal property and intangible
taxes assessed against Premier's assets used in
connection with the operation of the Center,
commencing on the date of this Agreement;
(v) Malpractice insurance expenses and
Orthodontist recruitment expenses as agreed to by
Premier and the Orthodontic Entity;
(vi) Property, casualty and liability
insurance for the Center and its operations;
(vii) In the event an opportunity arises
for additional Orthodontists in the Area of Dominant
Influence to become employed by or merge with the
Orthodontic Entity, actual out-of-pocket expenses of
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Premier personnel working on a specified merger,
whether or not such merger is completed if such
merger is approved or requested by the Orthodontic
Entity;
(viii) Amortization of intangible asset
value as a result of each such acquisition referred
to in subsection (vii) above;
(ix) Depreciation of all assets used by
the Orthodontic Entity in the operation of the
Center;
(x) Repayment of interest on any funds
loaned to the Orthodontic Entity by Premier in
connection with the operation of the Center, at an
interest rate not in excess of the Prime Rate plus
one percent (1%);
(xi) Advertising and other marketing
expenses attributable to the promotion of the Center
and/or its Orthodontist(s); and
(xii) Other expenses incurred by Premier
with the consent of the Orthodontic Entity in
carrying out its obligations under this Agreement for
the benefit of the Center or the Orthodontic Entity;
provided, however, that such expenses shall not
include Premier's home office overhead expenses.
"Center Expenses" shall not include:
(i) Any federal or state income taxes;
or
(ii) Any personal expenses of the
Orthodontist as permitted in the first sentence of
Section 3(b) of that certain employment agreement(s)
by and between the Orthodontist(s) and the
Orthodontic Entity, in excess of three percent (3%)
of the Orthodontic Entity's Adjusted Gross Revenue.
(d) "Contract" shall mean the agreement entered
into by patients with the Orthodontic Entity for the provision
of orthodontic services at a predetermined fee for an
estimated period of treatment.
(e) "Gross Revenue" shall mean all fees and
charges recorded or booked each month by or on behalf of the
Orthodontic Entity as a result of professional orthodontic or
other dental services personally furnished to patients by the
Orthodontist and those under the Orthodontist's supervision
and other fees or income generated in their capacity as a
professional prior to any Adjustments.
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<PAGE> 10
3.4 Additional Facilities. In the event the parties agree
to add an additional facility in which the Orthodontic Entity will provide
services, the consulting fees payable to Premier shall be determined by
aggregating the results of the operations of each additional facility with the
results of the operations of the existing Center or Centers and such fees
payable to Premier shall be calculated pursuant to the provisions of Section
3.1. All other provisions of this Article III shall apply to any additional
facilities. As part of its strategic growth strategy, Premier plans to provide
capital support or arrange favorable funding for orthodontic practice expansion
and development. Any expenditures on practice growth, acquisition or development
shall be subject to approval by Premier's Board of Directors.
IV. INSURANCE AND INDEMNITY
4.1 Insurance to be Maintained by the Orthodontic Entity.
Throughout the term of this Agreement, the Orthodontic Entity shall maintain
comprehensive professional liability insurance with limits of not less than
$500,000 per claim and with aggregate policy limits of not less than $1,000,000
per Orthodontist providing services at the Center and a separate limit for the
Orthodontic Entity or such other amounts required by the applicable state laws,
regulations, rules or directives. The Orthodontic Entity shall be responsible
for all such liabilities in excess of the limits of such policies. Premier
agrees to negotiate for and cause premiums to be paid with respect to such
insurance. Premiums and deductibles with respect to such policies shall be a
Center Expense.
4.2 Insurance to be Maintained by Premier. Throughout the
term of this Agreement, Premier will use reasonable efforts to provide and
maintain, as a Center Expense, comprehensive general liability and property
insurance covering the Center premises and operations.
4.3 Tail Insurance Coverage. The Orthodontic Entity will
cause each individual Orthodontist providing services at the Center to enter
into an agreement with the Orthodontic Entity that upon termination of such
Orthodontic Entity's relationship with the Orthodontist, for any reason, tail
insurance coverage for a period of three (3) years will be purchased by each
Orthodontist. Such provisions may be contained in employment agreements,
restrictive covenant agreements or other agreements entered into by the
Orthodontic Entity and the individual Orthodontists, and the Orthodontic Entity
hereby covenants with Premier to enforce such provisions relating to the tail
insurance coverage or to provide such coverage at the expense of the Orthodontic
Entity.
4.4 Additional Insureds. The Orthodontic Entity shall
have Premier named as an additional insured on the Orthodontic Entity's
professional liability insurance programs.
4.5 Indemnification. The Orthodontic Entity shall
indemnify, hold harmless and defend Premier, its officers, directors,
shareholders, members and employees, from and against any and all liabilities,
losses, damages, claims, causes of action, and expenses
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<PAGE> 11
(including reasonable attorneys' fees), whether or not covered by insurance,
caused or asserted to have been caused, directly or indirectly, by or as a
result of the performance of medical, dental or orthodontic services or the
performance of any intentional acts, negligent acts or omissions by the
Orthodontic Entity and/or its affiliates, shareholders, members, agents,
employees and/or subcontractors (other than Premier) prior to and after the date
of this Agreement and throughout the term hereof. Premier shall indemnify, hold
harmless and defend the Orthodontic Entity, and its directors, shareholders,
members and employees, from and against any and all liabilities, losses,
damages, claims, causes of action, and expenses (including reasonable attorneys'
fees), caused or asserted to have been caused, directly or indirectly, by or as
a result of the performance of any intentional acts, negligent acts or omissions
by Premier, a Premier Affiliate and/or their members, shareholders, agents,
employees and/or subcontractors (other than the Orthodontic Entity) during the
term of this Agreement.
V. TERM AND TERMINATION
5.1 Term of Agreement. This Agreement shall commence on
the date the Securities and Exchange Commission declares effective Premier's
registration Statement on Form S-1 for the sale of Premier's common stock or
membership interests in an initial public offering (the "IPO") and shall expire
on the twentieth (20th) anniversary thereof unless earlier terminated pursuant
to the terms hereof. In the event that Premier does not complete the IPO on or
before October 15, 1997, this Agreement shall be null and void and of no further
effect between the parties hereto.
5.2 Termination by the Orthodontic Entity. The
Orthodontic Entity may terminate this Agreement as follows:
(a) In the event of the filing of a petition in voluntary
bankruptcy or an assignment for the benefit of creditors by Premier, or upon
other action taken or suffered, voluntarily or involuntarily, under any federal
or state law for the benefit of debtors by Premier, except for the filing of a
petition in involuntary bankruptcy against Premier which is dismissed within
thirty (30) days thereafter, the Orthodontic Entity may give written notice of
the immediate termination of this Agreement.
(b) In the event Premier shall materially default in the
performance of any duty or obligation imposed upon it by this Agreement and such
default shall continue for a period of ninety (90) days after written notice
thereof has been given to Premier by the Orthodontic Entity (which notice shall
contain specific details of the reason for such default), the Orthodontic Entity
may terminate this Agreement; provided, however, if the nature of such default
is such that cure is not capable within said 90-day period, then Premier shall
have such additional time as may be required to effect and complete such cure
provided that Premier shall commence such cure within the aforesaid 90-day
period and shall prosecute such cure to completion with reasonable diligence.
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<PAGE> 12
(c) In the event that the IPO has not been completed on
or before October 15, 1997, the Orthodontic Entity may terminate this Agreement.
5.3 Termination by Premier. Premier may terminate this
Agreement as follows:
(a) In the event of the filing of a petition in voluntary
bankruptcy or an assignment for the benefit of creditors by the Orthodontic
Entity, or upon other action taken or suffered, voluntarily or involuntarily,
under any federal or state law for the benefit of debtors by the Orthodontic
Entity, except for the filing of an involuntary petition in bankruptcy against
the Orthodontic Entity which is dismissed within thirty (30) days thereafter,
Premier may give written notice of the immediate termination of this Agreement.
(b) In the event the Orthodontic Entity shall materially
default in the performance of any duty or obligation imposed upon it by this
Agreement, and such default shall continue for a period of ninety (90) days
after written notice thereof has been given to the Orthodontic Entity by
Premier, Premier may terminate this Agreement.
(c) In the event that the IPO has not been completed on
or before October 15, 1997, Premier may terminate this Agreement.
5.4 Actions after Termination. Upon termination of this
Agreement by either party for any reason other than a default by the Orthodontic
Entity or upon expiration of this Agreement, the Orthodontic Entity may, and
upon termination of this Agreement by Premier due to the reasons set forth in
Section 5.3(b) hereof, the Orthodontic Entity shall:
(a) Purchase all improvements, additions or leasehold
improvements which have been made by Premier and which relate solely to the
performance of its obligations under this Agreement at adjusted book value;
(b) Assume all debt and all contracts, payables and
leases which are obligations of Premier and which relate solely to the
performance of its obligations under this Agreement or the properties subleased
by Premier; and
(c) Purchase from Premier at book value all of the
equipment of the Center, including all replacements and additions thereto made
by Premier pursuant to the performance of its obligations under this Agreement,
and all other assets, including inventory and supplies, tangibles and
intangibles (including but not limited to accounts receivable), set forth on the
balance sheet prepared for the month most recently ended prior to the date of
such termination in accordance with GAAP to reflect operations of the Center,
depreciation, amortization and other adjustments of assets shown on such balance
sheet.
5.5 Closing of Repurchase by the Orthodontic Entity and
Effective Date of Termination. Unless another form of payment is agreed to by
Premier at such time, the
12
<PAGE> 13
Orthodontic Entity shall pay cash to Premier for the assets repurchased pursuant
to Section 5.4; provided, however, that such cash payments for such portion of
contracts receivable for services determined in accordance with GAAP to
constitute accounts receivable shall be made as such accounts receivables are
actually collected by the Orthodontic Entity; provided, further, that the
Orthodontic Entity shall in any event pay in cash to Premier the amount of
accounts receivable not collected by the Orthodontic Entity within ninety (90)
days of termination that are not deemed uncollectible accounts. The amount of
the purchase price shall be reduced by the amount of debt and liabilities of
Premier assumed by the Orthodontic Entity and shall also be reduced by any
payment Premier has failed to make under this Agreement. The Orthodontic Entity
and any Orthodontist associated with the Orthodontic Entity shall execute such
documents as may be required to assume the liabilities set forth in Section
5.4(c) and shall use its best efforts to remove Premier from any liability with
respect to such repurchased assets and with respect to any property leased or
subleased by Premier. The closing date for the repurchase shall be determined by
the Orthodontic Entity, but shall in no event occur later than 180 days from the
date of the notice of termination. The termination of this Agreement shall
become effective upon the closing of the sale of the assets and the Orthodontic
Entity and Premier shall be released from the restrictive covenants provided for
in Section 2.9 on the closing date. From and after any termination, each party
shall provide the other party with reasonable access to books and records then
owned by it to permit such requesting party to satisfy reporting and contractual
obligations which may be required of it.
5.6 Patient Records. Upon termination of this Agreement,
the Orthodontic Entity shall retain all patient medical records maintained by
the Orthodontic Entity or Premier in the name of the Orthodontic Entity. During
the term of this Agreement, and thereafter, the Orthodontic Entity or its
designee shall have reasonable access during normal business hours to the
Orthodontic Entity's and Premier's records, including, but not limited to,
records of collections, expenses and disbursements as kept by Premier in
performing Premier's obligations under this Agreement, and the Orthodontic
Entity may copy any or all such records.
VI. INDEPENDENT CONTRACTOR
6.1 Orthodontic Entity's Control Over the Orthodontic
Practice. Notwithstanding the authority granted to Premier herein, Premier and
the Orthodontic Entity agree that the affiliated Orthodontist, personally or
through any of his professional employees or agents, shall have complete control
and supervision over the business aspects of the Orthodontic Entity's practice,
as well as the provision of all professional services, including, without
limitation, the selection of a course of treatment for a patient, the procedures
or materials to be used as a part of such course of treatment, and the manner in
which such course of treatment is carried out by the Orthodontist(s). The
Orthodontist(s) shall have sole authority to direct the business, professional,
and ethical aspects of the orthodontic practice. Premier will have no authority,
directly or indirectly, to perform, and will not perform, any orthodontic
function, or to influence or otherwise interfere with the exercise of the
Orthodontist(s) professional judgment. Premier may, however, advise the
Orthodontic Entity
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<PAGE> 14
as to the relationship between its performance of orthodontic functions and the
overall administrative and business functions of its practice.
6.2 Independent Relationship. The Orthodontic Entity and
Premier intend to act and perform as independent contractors, and the provisions
hereof are not intended to create any partnership, joint venture, agency or
employment relationship between the parties. The Orthodontic Entity will not
have any claim under this Agreement, or otherwise, against Premier for vacation
pay, sick leave, unemployment insurance, worker's compensation, disability
benefits or employee benefits of any kind.
6.3 Other Professionals. No provision of this Agreement
is intended to limit Premier's right, authority, or ability under applicable law
to contract with other dentists or physicians, or to employ, contract with, or
enter into any partnership or joint venture with any healthcare professional,
provided that the exercise of such right, authority or ability does not
contravene the terms of this Agreement.
6.4 Patient Care. Nothing in this Agreement is intended
to interfere, or shall be construed as interfering, in any way with the
Orthodontist(s)'s ability to independently exercise professional and ethical
judgment in the performance of his patient care responsibilities.
VII. GENERAL PROVISIONS
7.1 Assignment. This Agreement shall be assignable by
Premier to (i) any person, firm or corporation that controls or is under common
control with Premier, (ii) US Orthodontic Care, Inc. ("USOC") or any person,
firm or corporation that controls or is under common control with USOC, or (iii)
any entity that results from a merger or other combination between Premier and
USOC ("Newco") and any person, firm or corporation that controls or is under
common control with Newco. Except as set forth above, neither Premier nor the
Orthodontic Entity shall have the right to assign their respective rights and
obligations hereunder without the written consent of the other party, which
consent shall not be unreasonably withheld. Subject to this provision, this
Agreement shall be binding upon the parties hereto, and their successors and
assigns.
7.2 Whole Agreement; Modification. There are no other
agreements or understandings, written or oral, between the parties regarding
this Agreement, the Exhibits and the Schedules, other than as set forth herein.
This Agreement shall not be modified or amended except by a written document
executed by both parties to this Agreement, and such written modification(s)
shall be attached hereto.
7.3 Notices. All notices required or permitted by
this Agreement shall be in writing and shall be addressed as follows:
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<PAGE> 15
To Premier: Premier Orthodontic Group, Inc.
23848 Hawthorne Boulevard, Suite 200
Torrance, California 90505
Attn: Mr. Sam Westover, Chief Executive
Officer
Telecopier: (310) 791-5660
Telephone: (310) 791-5657
With a copy to: Nelson Mullins Riley &
Scarborough, L.L.P.
First Union Plaza, Suite 1400
999 Peachtree Street, N.E.
Atlanta, Georgia 30309
Attn: Paul A. Quiros, Esquire
To the
------------------------------------
Orthodontic Entity:
------------------------------------
------------------------------------
------------------------------------
or to such other address as either party shall notify the other.
7.4 Waiver of Provisions. Any waiver of any terms and
conditions hereof must be in writing, and signed by the parties hereto. The
waiver of any of the terms and conditions of this Agreement shall not be
construed as a waiver of any other terms and conditions hereof.
7.5 Governing Law. The validity, interpretation and
performance of this Agreement shall be governed by and construed in accordance
with the laws of the State of California. The parties acknowledge that Premier
is not authorized or qualified to engage in any activity which may be construed
or deemed to constitute the practice of dentistry or orthodontics. To the extent
any act or service required of Premier in this Agreement should be construed or
deemed, by any governmental authority, agency or court to constitute the
practice of dentistry or orthodontics, the performance of said act or service by
Premier shall be deemed waived and forever unenforceable and the provision of
Section 7.12 shall be applicable.
7.6 Events Excusing Performance. Neither party shall be
liable to the other party for failure to perform any of the services required
herein in the event of strikes, lock-outs, calamities, acts of God,
unavailability of supplies or other events over which that party has no control
for so long as such events continue, and for a reasonable period of time
thereafter.
7.7 Compliance with Applicable Laws. Both parties shall
comply with all applicable federal, state and local laws, regulations and
restrictions in the conduct of their obligations under this Agreement.
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<PAGE> 16
7.8 Severability. In the event that any provision of this
Agreement or the application thereof to any of the parties hereto or any
circumstance in any jurisdiction governing this Agreement shall, to any extent,
be invalid or unenforceable under any applicable statute, regulation or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict herewith and shall be deemed modified to conform to such statute,
regulation or rule of law, and the remainder of this Agreement and the
application of any such invalid or unenforceable provision to parties,
jurisdictions or circumstances other than to whom or to which it is held invalid
or unenforceable shall not be affected thereby nor shall the same affect the
validity or enforceability of any other provision of this Agreement.
7.9 Additional Documents. Each of the parties hereto
agrees to execute any document or documents that may be requested from time to
time by the other party to implement or complete such party's obligations
pursuant to this Agreement.
7.10 Attorneys' Fees. If legal action is commenced by
either party to enforce or defend its rights under this Agreement, the
prevailing party in such action shall be entitled to recover its costs and
reasonable attorneys' fees in addition to any other relief granted.
7.11 Confidentiality. Neither party hereto shall
disseminate or release to any third party any information regarding any
provision of this Agreement, or any financial information regarding the other
(past, present or future) that was obtained by the other in the course of the
negotiation of this Agreement or in the course of the performance of this
Agreement, without the other party's written approval; provided, however, the
foregoing shall not apply to information which is required to be disclosed by
law, including federal or state securities laws, or pursuant to court order.
7.12 Contract Modifications for Prospective Legal Events.
In the event any state or federal laws or regulations, now existing or enacted
or promulgated after the effective date of this Agreement, are interpreted by
judicial decision, a regulatory agency or legal counsel for both parties in such
a manner as to indicate that the structure of this Agreement may be in violation
of such laws or regulations, the Orthodontic Entity and Premier shall amend this
Agreement as necessary. To the maximum extent possible, any such amendment shall
preserve the underlying economic and financial arrangements between the
Orthodontic Entity and Premier.
7.13 Remedies Cumulative. No remedy set forth in this
Agreement or otherwise conferred upon or reserved to any party shall be
considered exclusive of any other remedy available to any party, but the same
shall be distinct, separate and cumulative and may be exercised from time to
time as often as occasion may arise or as may be deemed expedient.
7.14 Language Construction. The language in all parts of
this Agreement shall be construed, in all cases, according to the parties'
intent and the parties hereto acknowledge that each party and its counsel have
reviewed and revised this Agreement and that
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<PAGE> 17
the normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation
of this Agreement.
7.15 No Obligation to Third Parties. None of the
obligations and duties of Premier or the Orthodontic Entity under this Agreement
shall in any way or in any manner be deemed to create any obligation of Premier
or of the Orthodontic Entity to, or any rights in, any person or entity not a
party to this Agreement.
7.16 Counterparts. This Agreement may be executed in
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same Agreement.
7.17 Singular and Plural; Gender. Where the context so
requires or permits, the use of the singular form includes the plural, and the
use of the plural form includes the singular, and the use of any gender includes
any and all genders.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
ORTHODONTIC ENTITY:
------------------------------------------
By:
Name
Title:
PREMIER:
PREMIER ORTHODONTIC GROUP, INC.
By:
Name:
Title:
17
<PAGE> 18
EXHIBIT 3.1
CONSULTING FEE
Premier shall receive a monthly Consulting Fee of between 14%
and 17% of Adjusted Gross Revenue based on the profitability of the Orthodontic
Entity as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Office Profit Total Total % Profit % Profit
Overhead % Margin % % to DR % to to DR to Premier
Premier
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
64% 36% 22.00% 14.00% 61.11% 38.89%
- -----------------------------------------------------------------------------------------------------------------------------------
62% 38% 23.75% 14.25% 62.50% 37.50%
- -----------------------------------------------------------------------------------------------------------------------------------
60% 40% 25.50% 14.50% 63.75% 36.25%
- -----------------------------------------------------------------------------------------------------------------------------------
58% 42% 27.25% 14.75% 64.88% 35.12%
- -----------------------------------------------------------------------------------------------------------------------------------
56% 44% 29.00% 15.00% 65.91% 34.09%
- -----------------------------------------------------------------------------------------------------------------------------------
54% 46% 30.75% 15.25% 66.85% 33.15%
- -----------------------------------------------------------------------------------------------------------------------------------
52% 48% 32.50% 15.50% 67.71% 32.29%
- -----------------------------------------------------------------------------------------------------------------------------------
50% 50% 34.25% 15.75% 68.50% 31.50%
- -----------------------------------------------------------------------------------------------------------------------------------
48% 52% 36.00% 16.00% 69.23% 30.77%
- -----------------------------------------------------------------------------------------------------------------------------------
46% 54% 37.75% 16.25% 69.91% 30.09%
- -----------------------------------------------------------------------------------------------------------------------------------
44% 56% 39.50% 16.50% 70.54% 29.46%
- -----------------------------------------------------------------------------------------------------------------------------------
42% 58% 41.25% 16.75% 71.12% 28.88%
- -----------------------------------------------------------------------------------------------------------------------------------
40% 60% 43.00% 17.00% 71.67% 28.33%
- -----------------------------------------------------------------------------------------------------------------------------------
===================================================================================================================================
</TABLE>
Such Consulting Fee shall be adjusted annually at the beginning of each calendar
year; provided, however, that during the term of this Agreement, such Consulting
Fee percentage shall not be less than the initial Consulting Fee percentage
charged during the first year of the term of this Agreement.
Example
If the Orthodontic Entity grossed $100,000 (net of adjustments) in the first
month and the Profit Margin in 1996 was 50%, then the Consulting Fee for the
first month will be set at $100,000 * 15.75%, or $15,750. If during the next
month, the practice increased its Adjusted Gross Revenue to $110,000, the
Consulting Fee for the month would be $110,000 * 15.75%, or $17,325. All profit
percentages will be rounded up to the nearest category.
18
<PAGE> 1
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") dated as of
_________________, 1997 by and between _______________________, a Florida
_________________________ (the "Orthodontic Entity"), and
______________________________, a licensed orthodontist (the "Orthodontist").
W I T N E S S E T H:
WHEREAS, the Orthodontic Entity desires to employ the Orthodontist and
to be assured of his services as such on the terms and conditions hereinafter
set forth; and
WHEREAS, the Orthodontist is willing to accept such
employment on such terms and conditions;
NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00), the
mutual covenants and agreements hereinafter set forth, and other good and
valuable consideration, the adequacy, receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound hereby, the Orthodontic
Entity and the Orthodontist hereby agree as follows:
1. EMPLOYMENT.
(a) The Orthodontic Entity hereby employs the Orthodontist to
provide orthodontic services to the general public at the facility or facilities
operated by the Orthodontic Entity (the "Center(s)"), as listed on Exhibit A
attached hereto and incorporated herein by reference, in accordance with the
methods, procedures and processes from time to time set forth by the Orthodontic
Entity, to the extent permitted by applicable law.
(b) The Orthodontist shall faithfully and diligently discharge
his duties hereunder and shall devote his full business time, attention, skill,
and effort exclusively to the business and affairs of the Orthodontic Entity,
subject to allowed vacations and to reasonable periods of illness. During the
term of this Agreement, the Orthodontist shall not, directly or indirectly, as a
partner, member, stockholder, consultant, agent, joint venturer, investor,
lender, individual proprietor, officer, director, employee (except for stock or
investments held by the Orthodontist as of July 31, 1996), or in any capacity
whatsoever, alone or in association with others, own, manage, operate, control
or participate in the ownership, management, operation or
<PAGE> 2
control of, or work for or permit the use of Orthodontist's name by, or be
connected with in any manner with, or contract to be provided services from any
business, organization or person in competition with the Orthodontic Entity or
any of its affiliated organizations, without the prior written consent of the
Orthodontic Entity. Notwithstanding the foregoing, the Orthodontist shall be
permitted to devote up to eight (8) business days per month to the
Orthodontist's other non-dental and non-orthodontic business interests and
activities; provided, however, that in conducting such activities, the
Orthodontist shall not compete with Premier Orthodontic Group, Inc., a Delaware
corporation, or its successors or assigns ("Premier") or act in any manner
inconsistent with the best business interests of Premier.
2. TERM OF EMPLOYMENT. Unless sooner terminated as provided in
Section 4 hereof, the Orthodontist's employment shall be for an initial term of
five (5) years commencing on the date the Securities and Exchange Commission
declares effective Premier's registration statement on Form S-1 for the sale of
Premier's common stock in an initial public offering (the "IPO") and ending on
the fifth (5th) anniversary thereof (the "Initial Term"). Upon expiration of the
Initial Term, this Agreement shall renew automatically thereafter for additional
one year terms, unless and until terminated as provided in Section 4 hereof.
3. COMPENSATION.
(a) As compensation for services hereunder, the Orthodontic
Entity shall pay to the Orthodontist a percentage as determined by the
Orthodontic Entity of the amount of Adjusted Gross Revenue (determined based on
the accrual method of accounting) of the Center remaining after payment in full
each month of (i) the monthly Service Fee as defined in that certain Service
Agreement, by and between the Orthodontic Entity and Premier, dated as of even
date herewith (the "Service Agreement"), and (ii) all expenses of the Center,
including, without limitation, all Center Expenses (as defined in the Service
Agreement) and all malpractice insurance premiums. As used herein, the term
"Adjusted Gross Revenue" shall mean Gross Revenue of the Center less any
adjustments for uncollectible accounts, professional courtesies and other
activities that do not generate a collectible fee. The term "Gross Revenue" as
used herein shall mean all fees and charges recorded or booked each month by or
on behalf of the Orthodontic Entity as a result of professional orthodontic
services personally furnished to patients by the Orthodontist and those under
the Orthodontist's supervision and other fees or income generated in his
capacity as a professional prior to any adjustments.
2
<PAGE> 3
(b) Payments expended each fiscal year by the Orthodontic
Entity on behalf of the Orthodontist and other orthodontists or dentists
delivering patient care at the Center(s) for continuing education, seminars,
professional license fees and dues, professional memberships, expenses related
to a company automobile for the Orthodontist, and all other expenses of the
Orthodontist and other orthodontists and dentists delivering patient care at the
Center(s) that do not directly benefit the Orthodontic Entity (as reasonably
determined by Premier), up to the amount of three percent (3%) of the
Orthodontic Entity's Adjusted Gross Revenue, shall be considered a Center
Expense. To the extent that such expenses exceed three percent (3%) of the
Orthodontic Entity's Adjusted Gross Revenue for such year, the Center Expenses
shall be reduced by such excess amount for the purpose of calculating the
Service Fee (as defined in the Service Agreement). Notwithstanding the
foregoing, Orthodontist is encouraged to incur expenses that will promote the
Orthodontic Entity, which expenses shall be considered Center Expenses for
purposes of calculating the Service Fee.
4. TERMINATION.
(a) Notwithstanding the provisions of Section 2 hereof,
either the Orthodontic Entity or the Orthodontist may terminate the
Orthodontist's employment without cause at any time after the expiration of the
Initial Term by giving one (1) year's prior written notice to the other party to
such effect, such notice to be effective upon receipt by the non-terminating
party. Orthodontic Entity may terminate Orthodontist's employment for "cause"
(as defined in Section 4(b) below) and the Orthodontist may terminate his
employment pursuant to Section 4(c) below. Notice of termination pursuant to
Sections 4(b) or 4(c) shall be effective upon receipt and shall indicate the
basis for termination. Upon termination of this Agreement for any reason, the
Orthodontist shall purchase tail insurance coverage for a period of three (3)
years at the Orthodontist's expense.
(b) For purposes of this Agreement, termination may be for
"cause" in the event of the occurrence of any of the following:
(i) The death of the Orthodontist.
(ii) The physical or mental incapacity of the
Orthodontist. The Orthodontist shall be deemed to be
physically or mentally incapacitated for purposes of this
paragraph if by reason of any physical or mental incapacity he
has been unable or it is deemed that he
3
<PAGE> 4
will be unable for a period of at least ninety (90) days to
perform his duties and responsibilities hereunder in a
reasonably satisfactory manner. In the event of any
disagreement between the Orthodontist and the Orthodontic
Entity about whether he is physically or mentally
incapacitated such as to permit the Orthodontic Entity to
terminate his employment pursuant to this paragraph, the
question of such incapacity shall be submitted to an impartial
and reputable physician selected by mutual agreement of the
Orthodontist and the Orthodontic Entity or, failing such
agreement, selected by two physicians (one of which shall be
selected by the Orthodontic Entity and the other by the
Orthodontist). The determination of the question of such
incapacity by such physician shall be final and binding on the
Orthodontist and the Orthodontic Entity for purposes of this
Agreement. The Orthodontic Entity shall pay the reasonable
fees and expenses of such physician.
(iii) Any of (A) the commission by the
Orthodontist of willful misconduct which causes material harm
to the Orthodontic Entity, (B) the conviction of the
Orthodontist for the commission or perpetration by the
Orthodontist of any felony or any act of fraud, or (C)
habitual absenteeism, chronic alcoholism, or drug addiction;
provided, however, that if any such habitual absenteeism,
chronic alcoholism, or drug addiction may reasonably be cured,
the Orthodontist shall have a reasonable time, not exceeding
thirty (30) days, to cure such matter after receiving notice
thereof from the Orthodontic Entity.
(c) For purposes of this Agreement, the Orthodontist may
terminate this Agreement in the event the Orthodontic Entity has committed a
material breach of this Agreement; provided, however, that if such matter may
reasonably be cured, the Orthodontic Entity shall have a reasonable time, not
exceeding ninety (90) days, to cure such matter after receiving notice thereof
from the Orthodontist.
5. PARTIAL RESTRAINT ON POST-TERMINATION COMPETITION.
(a) Orthodontic Entity expects to invest considerable time,
effort, and capital in enhancing the value and desirability of the skills of the
Orthodontist. Both this investment and the Orthodontist's individual
compensation reflect Orthodontic Entity's expectation of receiving a
considerable return from the exclusive use of the Orthodontist's services and
know-how in the future, free from any danger that Orthodontic Entity's
4
<PAGE> 5
competitors may attempt to induce the Orthodontist to leave Orthodontic Entity
and wrongfully gain the benefit of Orthodontic Entity's investment. The partial
restraint set forth in subsection (b) of this Section 5 hereof does not, and
cannot, provide complete protection for Orthodontic Entity's investment,
development efforts, and proprietary information, but Orthodontic Entity
believes that in combination with the other provisions of this Agreement, it is
the most fair and reasonable measure permitted under applicable law to protect
Orthodontic Entity's interests, giving due regard to both the Orthodontist's
interests and the interests of Orthodontic Entity.
(b) Orthodontic Entity requires its orthodontists and
dentists to accept and observe the following partial restraint on
post-termination competition, which Orthodontist agrees to honor:
FOR A PERIOD OF TWO YEARS FOLLOWING THE TERMINATION OF YOUR
EMPLOYMENT, YOU MAY NOT (I) ENGAGE IN ANY NEWSPAPER, PRINT,
RADIO, TELEVISION OR ELECTRONIC ADVERTISING FOR YOUR
ORTHODONTIC OR DENTAL SERVICES IN THE BROADCAST COVERAGE AREA
OF TELEVISION STATIONS IN THE MARKET AREA WHERE THE CENTER
COVERED BY THIS AGREEMENT IS LOCATED, WITHOUT ORTHODONTIC
ENTITY'S PRIOR WRITTEN CONSENT, (II) ACTIVELY SOLICIT OR
DIRECTLY MARKET YOUR ORTHODONTIC OR DENTAL SERVICES (OR THOSE
OF ANY OTHER ORTHODONTIC ENTITY WITH WHICH YOU ARE AFFILIATED
OR EMPLOYED) TO ANYONE WHO WAS YOUR PATIENT (OR A PATIENT OF
THE ORTHODONTIC ENTITY) DURING THE TERM OF THIS AGREEMENT,
(III) PROVIDE ORTHODONTIC OR DENTAL SERVICES TO ANY PATIENTS
WITHIN A TEN (10) MILE RADIUS OF ANY CENTER(S)'S, (IV)
ACTIVELY SOLICIT THE CENTER'S STAFF OR PATIENTS, OR (V)
SOLICIT REFERRALS FROM ANY DENTIST WHO REFERRED ONE OR MORE
PATIENTS TO ORTHODONTIST OR THE ORTHODONTIC ENTITY WITHIN THE
TWO YEARS PRIOR TO SUCH TERMINATION.
The running of the two year period prescribed above shall be tolled and
suspended by the length of time Orthodontist works in circumstances that a court
of competent jurisdiction subsequently finds to violate the terms of this
partial restraint.
6. CONFIDENTIAL INFORMATION. The Orthodontist shall agree to
maintain in strict confidence, and not use or disclose except under the
instruction of the Orthodontic Entity, any confidential business information
comprising confidential information and/or a trade secret of the Orthodontic
Entity or an Affiliate (as hereinafter defined. Trade secrets are property
rights protected by law and, for purposes of this letter, shall have the meaning
provided under applicable law, including, in Florida, Fla. Stat. ch. 688.002.
Some of the information that the Orthodontic Entity treats as trade secrets
includes financial information (revenues,
5
<PAGE> 6
margins, assets, net income, etc.), annual and long-range business plans,
marketing plans and methods, account invoices, training, educational, and
administrative manuals, patient information, employee lists, suppliers,
wholesalers, and future business plans of the Orthodontic Entity. Confidential
information shall also include all information regarding Premier or any
Affiliate, Premier's or any Affiliate's activities, Premier's or any Affiliate's
business or Premier's or any Affiliate's customers or patients that is not
generally known to persons not employed by Premier or an Affiliate, but that
does not rise to the level of a Trade Secret and that is not generally disclosed
by practice or authority of Premier or an Affiliate to persons not employed by
Premier or an Affiliate. Throughout the term of this Agreement and at all times
after the date that this Agreement terminates for any reason, Orthodontist shall
not directly or indirectly transmit or disclose any confidential information or
trade secret to any person, concern or entity, and shall not make use of any
such trade secret, directly or indirectly, for himself or for others, except (i)
to the extent such disclosure is consistent with Orthodontist's duties hereunder
or (ii) for a disclosure that is required by an law or regulation or court
order, in which latter case Orthodontist shall provide Premier prior written
notice of such disclosure and an opportunity to contest such disclosure. Upon
termination of the Term of this Agreement, Orthodontist will return all trade
secrets and all confidential information of the Orthodontic Entity or Premier,
including without limitation, any documents, notes, analyses, compilations or
other materials incorporating or based on any trade secrets or confidential
information of the Orthodontic Entity or Premier. As used in this Agreement, the
term "Affiliate" shall mean (i) each corporation or other business entity
directly or indirectly controlling, controlled by, or under common control with
the Orthodontic Entity or Premier, and (ii) each orthodontic or dental practice
to which Premier provides management or consulting services, the employees and
principals of such practices, and each corporation or other business entity
directly or indirectly controlling, controlled by, or under common control with
each such practice or the principals thereof.
7. WAIVER. Any waiver of any term or condition or any amendment
of this Agreement shall be effective only if in writing and signed by the
parties. The waiver by either party of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent breach
by either party.
8. PUBLICITY. Following termination of the Orthodontist's
employment, neither party will disparage or injure the reputation of the other
party. This obligation will include, in the Orthodontist's case, refraining from
negative statements about
6
<PAGE> 7
the Orthodontic Entity's methods of doing business, the effectiveness of its
business policies, and the quality of any of its services or personnel. In
addition, neither party will make any statements regarding the other or
regarding the Orthodontist's former employment with the Orthodontic Entity to
any member of the print or broadcast media except after mutual consultation.
9. PATIENT CARE. Nothing in this Agreement is intended to
interfere, or shall be construed as interfering, in any way with the
Orthodontist's ability to independently exercise professional and ethical
judgment in the performance of his patient care responsibilities.
10. MISCELLANEOUS.
(a) This Agreement contains the entire agreement between the
Orthodontic Entity and the Orthodontist with respect to the subject matter
hereof and thereof and supersedes all prior arrangements or understandings with
respect hereto or thereto.
(b) The descriptive headings of this Agreement are for
convenience only and shall not control or affect the meaning or construction of
any provision.
(c) Notwithstanding any other term or provision of this
Agreement, all amounts payable to the Orthodontist by the Orthodontic Entity
hereunder shall be subject to the withholding of such sums relating to taxes as
the Orthodontic Entity may reasonably determine it is required to withhold
pursuant to any applicable law or regulation.
(d) All notices pursuant to this Agreement shall be in
writing and sufficient if delivered personally or sent by overnight courier or
registered or certified mail, postage prepaid, addressed as follows:
If to the Orthodontic Entity to:
-----------------------------
-----------------------------
-----------------------------
-----------------------------
If to the Orthodontist to:
-----------------------------
-----------------------------
-----------------------------
7
<PAGE> 8
Either party may by written notice change the address to which notices to such
party are to be delivered or mailed.
(e) The parties acknowledge and agree that any legal
remedies for breach of this Agreement would be inadequate and irreparable harm
shall be presumed. The faithful observance of all covenants in this Agreement is
an essential condition to Orthodontist's employment, and Orthodontic Entity is
depending upon absolute compliance herewith. Damages would be very difficult, if
not impossible, to ascertain if the Orthodontist breaches this Agreement.
Orthodontist acknowledges and agrees that any court of competent jurisdiction
should immediately enjoin any breach of this Agreement upon the request of
Orthodontic Entity, and Orthodontist specifically releases Orthodontic Entity
from the requirement of posting any bond in connection with temporary or
interlocutory injunctive relief, to the extent permitted by law.
(f) This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida (without respect to its rules
of conflicts of law).
(g) This Agreement may be executed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same Agreement.
(h) In the event that any provision of this Agreement or the
application thereof to the Orthodontist or any circumstance in any jurisdiction
governing this Agreement shall, to any extent, be invalid or unenforceable under
any applicable statute, regulation or rule of law, then such provision shall be
deemed inoperative to the extent that it may conflict therewith and shall be
deemed modified to conform to such statute, regulation or rule of law, and the
remainder of this Agreement and the application of any such invalid or
unenforceable provision to parties, jurisdictions or circumstances other than to
whom or to which it is held invalid or unenforceable shall not be affected
thereby nor shall the same affect the validity or enforceability of any other
provision of this Agreement.
(i) No remedy set forth in this Agreement or otherwise
conferred upon or reserved to any party shall be considered exclusive of any
other remedy available to any party, but the same shall be distinct, separate
and cumulative and may be exercised from time to time as often as occasion may
arise or as may be deemed expedient.
IN WITNESS WHEREOF, the Orthodontic Entity and the Orthodontist have
executed this Agreement under seal as of the day and year first above written.
8
<PAGE> 9
ORTHODONTIC ENTITY:
--------------------------------------
By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
ORTHODONTIST:
[SEAL]
-----------------------------
-----------------------------
9
<PAGE> 1
EXHIBIT 10.9
[PREMIER ORTHODONTIC GROUP, INC. LETTERHEAD]
April 18, 1997
Mr. Robert S. Chilton
15916 Daniel Lane
Encino, California 91436
Dear Bob:
I am pleased to formalize and present the following employment offer for the
position of Chief Financial Officer of Premier Orthodontic Group, Inc.
("Company") reporting to me:
COMPENSATION:
- -- Base Salary of $11,250 per month.
- -- Bonus equal to 30% of annualized base salary upon the achievement of
Company targets established by the Board of Directors and Management of the
Company.
STOCK OPTIONS:
- -- A stock option grant for 50,000 shares of common stock of Company, or its
successor, will be granted on the effective date of the initial public
offering of the common stock of Company, or its successor. Vesting will be
25% on such date of grant and 25% on each anniversary of such date.
COMPANY BENEFITS:
- -- Participation in all benefits made generally available to Company employees
from time to time, subject to eligibility requirements.
- -- The Company will reimburse your COBRA insurance costs for 3 months.
START DATE:
- -- May 12, 1997
INDEMNIFICATION:
- -- The Company will indemnify you in accordance with its Bylaws, in effect
from time to time. A copy of Article VI of the Bylaws, Indemnification of
Directors and Officers, is attached hereto.
<PAGE> 2
Mr. Robert S. Chilton
April 18, 1997
Page 2 of 2
It is the policy of the Company that all employment is for an unspecified
period, and may be discontinued at will by you or the Company, at any time and
for any reason, with or without cause. If these terms are acceptable, please
sign in the space provided below and return one copy of this letter to me.
I am excited about the opportunity to work with you. Please feel free to call
me with any questions.
Sincerely,
/s/ Sam Westover
- -----------------------------------
Sam Westover
cc: Colleen Hulce
Agreed:
/s/ Robert S. Chilton Date: April 23, 1997
- ----------------------------------- -------------------------
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our firm) included in or made part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
June 17, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ORTHALLIANCE, INC. FOR THE TWO MONTHS ENDED DECEMBER 31,
1996 AND THE THREE MONTHS ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 2-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 MAR-31-1997
<PERIOD-START> OCT-21-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 0 0
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 0
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 0 0
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
