<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________ to _________.
Commission file number
PENTEGRA DENTAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-045043
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2999 N. 44TH STREET, SUITE 650, PHOENIX, ARIZONA 85018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 952-1200
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock of the Registrant, par value $.001
per share, outstanding at November 12, 1998, was 7,581,681.
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FORM 10-Q REPORT INDEX
<TABLE>
<CAPTION>
10-Q PART AND ITEM NO.
PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . PAGE
<S> <C>
Item 1 - Consolidated Financial Statements. . . . . . . . . . . . . . 3
Consolidated Balance Sheets as of March 31, 1998 and
September 30, 1998 (unaudited). . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three and Six
Months Ended September 30, 1997 and September 30, 1998
(unaudited). . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Changes in Shareholders'
Equity as of September 30, 1998 (unaudited) . . . . . . . . 5
Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 1997 and September 30, 1998
(unaudited). . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . 11
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 15
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENTEGRA DENTAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000s)
<TABLE>
<CAPTION>
March 31, September 30,
Assets 1998 1998
- --------------------------------------------------- ---------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,708 $ 697
Receivables from affiliated practices 4,851
Prepaid and other current assets 101 352
---------- -------------
Total current assets 6,809 5,900
Property and equipment, net 3,577 4,387
Intangible assets, net 183 7,502
Notes receivables from affiliated practices 1,058
Other assets, net 64 172
---------- -------------
Total assets $ 10,633 $ 19,019
---------- -------------
---------- -------------
Liabilities and Shareholders' Equity
- ---------------------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 1,313 $ 1,325
Accrued employment agreement 1,250 1,130
---------- -------------
Total current liabilities 2,563 2,455
Long-term debt 1,074 502
---------- -------------
Total liabilities 3,637 2,957
---------- -------------
Shareholders' equity
Common stock 6 8
Additional paid-in capital 10,304 18,400
Retained earnings (deficit) (3,314) (2,346)
---------- -------------
Total shareholders' equity 6,996 16,062
---------- -------------
Total liabilities and shareholders' equity $ 10,633 $ 19,019
---------- -------------
---------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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PENTEGRA DENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
For the three For the three For the six For the six
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net revenue $ -- $ 8,761 $ -- $ 16,173
Operating expenses:
Clinical salaries, wages and benefits -- 3,534 -- 6,370
Dental supplies and lab fees -- 1,586 -- 2,806
Rent -- 703 -- 1,253
Advertising and marketing -- 155 -- 266
General and administrative 320 960 400 1,836
Compensation expense in connection with
issuance of common stock 191 -- 339 --
Other operating expenses -- 1,231 -- 1,982
Depreciation and amortization -- 225 -- 396
------------- ------------- ------------- -------------
Total operating expenses 511 8,394 739 14,909
Earnings (loss) from operations (511) 367 (739) 1,264
Interest income, net -- 39 -- 79
------------- ------------- ------------- -------------
Income (loss) before income taxes (511) 406 (739) 1,343
Income taxes -- 112 -- 375
------------- ------------- ------------- -------------
Net income (loss) $ (511) $ 294 $ (739) $ 968
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Basic and diluted earnings per share $ 0.04 $ 0.13
Weighted average number of shares outstanding:
Basic 7,526,000 7,206,000
------------- -------------
------------- -------------
Diluted 7,526,000 7,206,000
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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PENTEGRA DENTAL GROUP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Stockholders'
Shares Amount Capital Earnings/(Deficit) Equity
--------- ------ ---------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1998 6,441,898 $ 6 $ 10,304 $ (3,314) $ 6,996
Issuance of common stock 375,000 2,929 2,929
Issuance of common stock to affliated practices 764,783 2 5,167 5,169
Net income 968 968
--------- ------ ---------- ----------------- -------------
Balance at September 30, 1998 7,581,681 $ 8 $ 18,400 $ (2,346) $ 16,062
--------- ------ ---------- ----------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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PENTEGRA DENTAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000s)
<TABLE>
<CAPTION>
For the six For the six
months ended months ended
September 30, September 30,
1997 1998
------------- -------------
<S> <C> <C>
Net cash used in operating activities $ (341) $ (2,896)
------------- -------------
Cash used in investing activities:
Capital expenditures (67) (566)
Acquisition of intangible assets (2,925)
Issuance of notes receivable to affiliated practices (1,058)
------------- -------------
Net cash used in investing activities (67) (4,549)
------------- -------------
Cash flows provided by financing activities:
Issuance of common stock 703 2,964
Issuance of preferred stock 763
Repayment of indebtedness (392)
Payment of offering costs (700) (1,088)
Payment of organization costs (5)
Payment of financing costs (50)
------------- -------------
Net cash provided by financing activities 761 1,434
------------- -------------
Net increase (decrease) in cash and cash equivalents 353 (6,011)
Balance at beginning of period 1 6,708
------------- -------------
Balance at end of period $ 354 $ 697
------------- -------------
------------- -------------
Non-cash activities:
Stock subscription receivable $ 326
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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PENTEGRA DENTAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Pentegra Dental Group, Inc. (the "Company") together with its wholly
owned subsidiary, Pentegra Investments, Inc. ("PII"), provides practice
management services to dental practices throughout the United States. In
July 1997, Pentegra Dental Group, Inc., changed its name to Pentegra
Investments, Inc. and formed a new wholly owned subsidiary named Pentegra
Dental Group, Inc. ("Pentegra Dental" or "the Company"). On March 30, 1998,
simultaneously with the Company's initial public offering, PII repurchased
(the "Share Repurchase") from the stockholders of PII, on a pro rata basis,
at a purchase price of $0.015 per share, that number of shares as was
necessary so that the aggregate number of shares of Pentegra Dental common
stock, par value $.001 per share (the "Common Stock"), issued in connection
with the Affiliations (as defined below) and the Share Exchange (as defined
below) would not exceed 3,941,898 shares. Pursuant to that agreement, PII
repurchased 909,237 shares for approximately $14,000. The PII shareholders
exchanged on a share-for-share basis, shares of PII common stock, par value
$0.015 per share, for 1,756,667 shares of Common Stock (the "Share
Exchange"). On March 30, 1998, Pentegra Dental acquired (the "Affiliations")
simultaneously with the closing of its initial public offering (the
"Offering" or "IPO"), substantially all of the tangible and intangible
assets, and assumed the liabilities, of 50 dental practices (collectively,
the "Founding Affiliated Practices") in exchange for 3.1 million shares of
Common Stock, $6.5 million in cash and net assets assumed of approximately
$300,000. The net proceeds of the 2.5 million shares of Common Stock issued
in the IPO (after deducting the underwriting discounts and commissions) were
$19.8 million. Total related offering costs were $3.4 million.
The acquisitions of the Founding Affiliated Practices have been
accounted for in accordance with the Securities and Exchange Commission's
Staff Accounting Bulletin ("SAB") No. 48, "Transfers of Nonmonetary Assets by
Promoters or Shareholders". In accordance with SAB No. 48, the acquisition
of the assets and assumption of certain liabilities for all of the Founding
Affiliated Practices pursuant to the Affiliations has been accounted for by
the Company at the transferors' historical cost basis, with the shares of
Common Stock issued in those transactions being valued at the historical cost
of the nonmonetary assets acquired net of liabilities assumed. The cash
consideration of approximately $6.5 million, paid at closing on March 30,
1998, less net assets acquired of approximately $300,000, is reflected as a
dividend by the Company to the owners of the Founding Affiliated Practices in
the quarter ended March 31, 1998. SAB No. 48 is not applicable to any
acquisitions made by the Company subsequent to the IPO. Acquisitions of
certain of the assets and liabilities of practices that affiliate with the
Company after the IPO will generally be accounted for as purchases, and may
result in substantial annual noncash amortization charges for intangible
assets in the Company's statements of operations.
In April, 1998, the over allotment option to sell 375,000 shares of
Common Stock was exercised at a price of $8.50 per share, yielding additional
net proceeds to the Company of approximately $2.9 million.
On April 17, 1998, the Company filed a registration statement on Form
S-4 for 1,500,000 shares of Common Stock, which the Company may issue from
time to time in connection with the direct and indirect acquisitions of other
businesses, properties or securities in business combination transactions.
The terms upon which it issues the shares in business combination
transactions are determined through negotiations with the security holders or
principal owners of the businesses whose securities or assets are to be
acquired. The shares that are issued are valued at prices reasonably related
to prevailing market prices for the Common Stock. Persons receiving Common
Stock in connection with such acquisitions may be contractually required to
hold all or some portion of the Common Stock for varying periods of time. As
of September 30, 1998, 764,783 shares registered under this filing had been
issued.
In May 1998, the Company changed its fiscal year from December 31 to
March 31, effective for the year beginning April 1, 1998.
On September 29, 1998, the Company filed a registration statement on
Form S-4 for 1,500,000 shares of Common Stock, and $50,000,000 in Convertible
Subordinated Debt Securities, which the Company may issue from time to time
in connection with the direct and indirect acquisitions of other businesses,
properties or securities in business combination transactions. The terms
upon which it issues the shares and convertible subordinated debt securities
are determined through negotiations with the security holders or principal
owners of the businesses whose securities or assets are to be acquired. The
shares of Common Stock that are issued are valued at prices reasonably
related to prevailing market prices for the Common Stock. The convertible
debt securities will be convertible in whole or in part into shares of Common
Stock at any time on or after their convertibility commencement date, and at
or before the convertibility termination date, unless previously redeemed.
The convertible debt securities will be (i) unsecured and (ii) subordinate to
all present and future Senior Indebtedness of Pentegra and (iii) effectively
subordinated to all indebtedness and other liabilities of subsidiaries of
Pentegra. The convertible debt securities issued will be valued at prices
reasonably related to their principal amount.
7
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The unaudited consolidated financial statements included herein have
been prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Pursuant
to such regulations, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The Company
believes the presentation and disclosures herein are adequate to make the
information not misleading, but do not purport to be a complete presentation
inasmuch as all note disclosures required by generally accepted accounting
principles are not included. In the opinion of management, the consolidated
financial statements reflect all elimination entries and normal adjustments
that are necessary for a fair presentation of the results for the interim
period ended September 30, 1998.
Operating results for interim periods are not necessarily indicative of
the results for full years. It is suggested that these consolidated
financial statements be read in conjunction with the Financial Statements of
Pentegra Dental Group, Inc., and related notes thereto, and management's
discussion and analysis related thereto, all of which are included in the
Company's Registration Statement on Form S-1 (No. 333-37633), as amended (the
"Registration Statement"), filed with the SEC in connection with the
Offering.
2. SIGNIFICANT ACCOUNTING POLICIES
INTANGIBLE ASSETS
Intangible assets consist primarily of management service fee
intangibles that are amortized over a 25-year period. The Company's
management periodically evaluates the realizability of the intangible assets
on a practice by practice basis considering such factors as profitability and
net cash flow. Should this evaluation result in an assessment that the value
of the intangible asset is impaired, a loss will be recorded in the period
that the impairment is identified. If it is determined that the estimated
amortization period requires revision, that revision will be made on a
prospective basis.
INCOME TAXES
The Company utilizes the liability method of accounting for income
taxes. Under this method, deferred taxes are determined based on differences
between the financial reporting and tax bases of assets and liabilities and
are measured using the enacted marginal tax rates currently in effect when
the differences reverse.
The Company's effective tax rate for the period was 28%. The difference
between the effective tax rate and the statutory rate reflects the
utilization of operating loss carryforwards.
EARNINGS PER SHARE
Earnings per share are computed based upon the weighted average number
of shares of common stock and common stock equivalents outstanding during
each period. Diluted earnings per share are not separately presented because
such amounts would be the same as amounts computed for basic earnings per
share.
Outstanding options to purchase 714,666 shares of Common Stock at
exercise prices above the market value of Common Stock were excluded from the
calculation of earnings per share for the three and six months ended
September 30, 1998 because their effect would have been antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
by management in determining the reported amounts of liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
3. NOTES PAYABLE
On June 1, 1998, the Company closed a revolving bank credit facility
with Bank One, Texas, N.A., which provides the Company with a revolving line
of credit of up to $15.0 million, to be used for general corporate purposes
including financing of acquisitions, capital expenditures and working
capital. The credit facility is collateralized by liens on certain of the
Company's assets, including its rights under the management service
agreements and accounts receivable. The credit facility contains
restrictions on the incurrence of additional indebtedness and payment of
dividends on the Common Stock. Additionally, compliance with certain
financial covenants is required and the lender has approval rights with
respect to acquisitions exceeding certain limits. At September 30, 1998, no
amounts
8
<PAGE>
were outstanding under the revolving line of credit. Subsequent to September
30, 1998, draws totaling $8.0 million were made under the revolving credit
facility to fund additional affiliations and working capital requirements.
4. RETAINED EARNINGS (DEFICIT)
The Company's retained earnings (deficit) at September 30, 1998 is
primarily attributable to compensation costs and other costs of managing the
company prior to its IPO. On March 30, 1998, an employment bonus of
$1,250,000 to the Chairman of the Board of Directors (the "Chairman") was
recorded, and therefore is included in the Company's retained earnings
(deficit). Payments of the bonus have been and will continue to be made in
increments of $10,000 on the closing of each future dental practice
affiliation until the bonus has been paid in full. Pursuant to the terms of
the Company's employment agreement with the Chairman, the employment bonus
must be paid in full within three years of the IPO. At September 30, 1998, a
bonus payable of $1,130,000 remained outstanding.
5. NEW DENTIST AFFILIATIONS
During the period from March 30, 1998 through September 30, 1998, the
Company completed new dentist affiliations with 13 practices representing 17
dentists and 13 office locations. Total consideration paid by the Company in
the new affiliations consisted of 764,783 shares of Common Stock and
$3,042,000 cash.
The cost of each of the above new dental practice affiliations has been
allocated on the basis of the estimated fair market value of the assets
acquired and liabilities assumed, resulting in intangibles aggregating to
$7,502,000. These allocations may be adjusted to the extent that management
becomes aware of additional information within one reporting year of the
affiliation date which results in a material change in the amount of any
contingency or changes in the estimated fair market value of assets acquired
and liabilities assumed.
6. SUBSEQUENT EVENTS
On November 13, the Company and Liberty Dental Alliance, Inc.
("Liberty") entered into an Agreement and Plan of Merger (the "Merger
Agreement"), pursuant to which Liberty will become a wholly owned subsidiary
of the Company, and James M. Powers, Jr., D.D.S. was named President of the
Company, replacing Gary S. Glatter. The Merger Agreement provides the
Company will pay (a) $0.01 per share for each outstanding share of Liberty
common stock, par value $0.01 per share (the "Liberty Common Stock") at
closing and (b) up to $3.99 per share and options to purchase up to 0.25
shares of Common Stock with an exercise price of $6.125 per share for each
share of Liberty Common Stock (collectively, the "Additional Common Merger
Consideration") in accordance with the following:
(i) One-third of the Additional Common Merger Consideration is payable
upon completion of affiliations with dental practices under a
letter of intent with Liberty ("Liberty Affiliations") that had
collected revenues for the year ended December 31, 1997 ("1997
Practice Revenues") aggregating to at least $10,000,000;
(ii) One-third of the Additional Common Merger Consideration is payable
upon completion of additional Liberty Affiliations that had
aggregate 1997 Practice Revenues of at least $15,000,000; and
(iii) One-third of the Additional Common Merger Consideration is payable
upon completion of additional Liberty Affiliations that had
aggregate 1997 Practice Revenues of at least $15,000,000.
The holders of shares of Liberty Common Stock will forfeit any right to
receive the Additional Common Merger Consideration related to Liberty
Affiliations not consummated by June 30, 1999. As of November 13, 1998,
there are 315,750 shares of Liberty Common Stock outstanding, which would
result in the Company paying an aggregate of up to $1,263,000 cash and
issuing options to acquire up to 78,938 shares of Common Stock.
The Merger Agreement also provides that the Company pay (a) $0.01 per
share for each outstanding share of Liberty Class B common stock, par value
$0.01 per share (the "Class B Stock") at closing and (b) up to one share of
Common Stock for each outstanding share of Class B Stock (the "Additional
Class B Merger Consideration") in accordance with the following:
(i) One-fifth of the Additional Class B Merger Consideration is payable
upon completion of Liberty Affiliations that had aggregate 1997
Practice Revenues of at least $10,000,000;
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(ii) Three-tenths of the Additional Class B Merger Consideration is
payable upon completion of additional Liberty Affiliations that had
aggregate 1997 Practice Revenues of at least $10,000,000;
(iii) Two-fifths of the Additional Class B Merger Consideration is
payable upon completion of additional Liberty Affiliations that had
aggregate 1997 Practice Revenues of at least $20,000,000; and
(iv) One-tenth of the Additional Class B Merger Consideration is payable
upon completion of additional Liberty Affiliations that had
aggregate 1997 Practice Revenues of at least $10,000,000.
The holders of shares of Class B Stock will forfeit any right to receive
Additional Class B Merger Consideration related to Liberty Affiliations not
consummated by June 30, 1999. As of November 13, 1998, there are 545,000
shares of Liberty Class B Stock outstanding, which would result in the
Company paying an aggregate of up to $5,450 cash and up to 545,000 shares of
Common Stock. Consummation of the Merger Agreement, which is anticipated to
occur prior to December 31, 1998, is subject to, among other things, the
Company obtaining the consent of its lenders.
In connection with Merger Agreement, the Company has agreed to pay
investment banking fees of up to $600,000 to SunTrust Equitable Securities
Corporation, $166,667 of which is payable upon completion of Liberty
Affiliations that had aggregate 1997 Practice Revenues of at least
$10,000,000, $166,667 of which is payable upon completion of additional
Liberty Affiliations that had aggregate 1997 Practice Revenues of at least
$15,000,000 and $266,666 of which is payable upon completion of additional
Liberty Affiliations that had aggregate 1997 Practice Revenues of at least
$15,000,000. The Company also agreed to issue an aggregate of 145,000
options to acquire Common Stock to certain consultants of the Company with an
exercise price of $6.125 per share, in the same proportions and upon
completion of Liberty Affiliations as the Additional Common Merger
Consideration is payable.
On November 13, 1998, the Company completed Liberty Affiliations with
five dental practices as well as one affiliation with an additional dental
practice not affiliated with Liberty. These six dental practices generated
aggregate annual patient revenue of approximately $4.1 million during their
most recently completed fiscal year, and include nine dentists treating
patients in six dental offices. The aggregate consideration paid by the
Company for these practices consisted of approximately $1.6 million, 369,639
shares of Common Stock and approximately $1.2 million aggregate principal
amount of 6% Series A convertible subordinated notes, due November 2003.
Dr. Powers has entered into an employment agreement with the Company,
effective November 13, 1998, pursuant to which he will initially serve as
President. Once the Company has consummated Liberty Affiliations aggregating
to at least $10,000,000 in 1997 Practice Revenues, Dr. Powers will also serve
as the Company's Chairman of the Board and Chief Executive Officer. Omer K.
Reed, D.D.S. will continue to serve as a director and Chief Clinical Officer
of the Company once Dr. Powers is elected to those additional positions. Dr.
Power's two year employment agreement also provides for a base annual salary
of $200,000, bonus payments of up to 25% of the base salary upon achievement
of certain earnings per share targets and the issuance of options to acquire
150,000 shares of Common Stock with an exercise price of $6.125 per share and
an additional 150,000 shares with an exercise price of $3.1875 per share (the
closing sale price on November 13, 1998).
Mr. Glatter has entered into a severance agreement with the Company
effective November 13, 1998 pursuant to which he has resigned as President,
Chief Executive Officer and a director of the Company. Mr. Glatter will
receive payment of $350,000 from the Company pursuant to the agreement and
forfeit all options to acquire shares of Common Stock previously issued to
him.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. THESE STATEMENTS ARE BASED ON CURRENT PLANS AND EXPECTATIONS OF THE
COMPANY AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL FUTURE
ACTIVITIES AND RESULTS OF OPERATIONS TO BE MATERIALLY DIFFERENT FROM THAT SET
FORTH IN THE FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER INCLUDE, AMONG OTHERS, RISKS ASSOCIATED WITH
AFFILIATIONS, FLUCTUATIONS IN OPERATING RESULTS BECAUSE OF AFFILIATIONS AND
VARIATIONS IN STOCK PRICE, CHANGES IN GOVERNMENT REGULATIONS, COMPETITION,
RISKS OF OPERATIONS AND GROWTH OF EXISTING AND NEW AFFILIATED DENTAL
PRACTICES, AND RISKS DETAILED IN THE COMPANY'S SEC FILINGS.
OVERVIEW
The Company provides practice management services to fee-for-service
dental practices in the United States. On March 30, 1998, the Company
acquired simultaneously with the closing of its IPO, substantially all of the
tangible and intangible assets, and assumed the liabilities, of the 50
Founding Affiliated Practices. The Company also began to provide practice
management services to professional corporations or associations owned by the
dentist-owners of the Founding Affiliated Practices (one of which split into
two separate dental practices immediately after the IPO) pursuant to
long-term management service agreements entered into at the time of the
Affiliations. As of September 30, 1998, the Company had affiliated with 13
additional practices and provided funding to affiliated dentists who
purchased the patient records of four retiring dentists. As of September 30,
1998, the Company expects its future growth will come from (i) implementing a
comprehensive operating strategy designed to drive internal growth of the
affiliated practices and (ii) entering into management service agreements
with new affiliated practices. As of September 30, 1998 the Company manages
64 dental practices, which include 97 dentists and 76 dental offices in 20
states.
The expenses incurred by the Company in fulfilling its obligations under
the management service agreements will be generally of the same nature as the
operating costs and expenses that would have otherwise been incurred by the
affiliated practices, including salaries, wages and benefits of practice
personnel (excluding dentists and certain other licensed dental care
professionals), dental supplies and office supplies used in administering
their practices and the office (general and administrative) expenses of their
practices. In addition to the operating costs and expenses discussed above,
the Company incurs personnel and administrative expenses in connection with
maintaining a corporate office, which provides management, practice
enhancements, administrative and business development services.
RESULTS OF OPERATIONS (UNAUDITED)
Following completion of the IPO and the Affiliations on March 30, 1998,
the Company began operations effective April 1, 1998. Management service fee
recognition and related expenses began April 1, 1998 and the Company began
managing 51 dental practices in 18 states. At September 30, 1998, the
Company managed 64 practices in 77 offices in 20 states.
COMPONENTS OF REVENUES AND EXPENSES
Under the terms of the typical management services agreement with an
Affiliated Practice, the Company becomes the exclusive manager and
administrator of all non-dental services relating to the operation of the
Affiliated Practice. The obligations of the Company include assuming
responsibility for the operating expenses incurred in connection with
managing the dental centers. These expenses include salaries, wages and
related costs of non-dental personnel, dental supplies and laboratory fees,
rental and lease expenses, promotion and marketing costs, management
information systems and other operating expenses incurred at the Affiliated
Practices. In addition, the Company incurs general and administrative
expenses related to the financial and administrative management of dental
operations, insurance, training and development and other typical corporate
expenditures. As compensation for its services under the typical services
agreement and subject to applicable law, the Company is paid a management fee
comprised of two components: (1) the costs incurred by it on behalf of the
Affiliated Practice, and (2) a management fee either fixed in amount or an
amount usually approximating 35% of the Affiliated Practice's operating
profit, before dentist compensation ("Service Fee"). Therefore, net revenues
represent amounts earned by the Company under the terms of its management
services agreements with the Affiliated Practices, which generally equate to
the sum of the Service Fees and the operating expenses that the affiliated
practices paid to the Company under the service agreements.
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NET REVENUE
Net revenue generated for the three and six months ended September 30,
1998 was $8.8 and $16.2 million, respectively. During the three months ended
September 30, 1998, the Company affiliated with three practices in addition
to the 61 at the beginning of the quarter. For the three and six months
ended September 30, 1998, dental center revenues aggregated to approximately
$11.7 and $22.6 million, respectively.
OPERATING EXPENSES
The Company incurred operating expenses of $8.4 million (95.8% of net
revenue) and $14.9 million (92.2% of net revenue) for the three and six
months ended September 30, 1998, respectively. Operating expenses consisted
primarily of salaries, wages and benefits, dental supplies and laboratory
fees, rent, advertising and marketing, and general and administrative
expenses.
General and administrative expenses include primarily the corporate
expenses of the Company. These corporate expenses include salaries, wages
and benefits, rent, consulting fees, travel (primarily related to practice
development), office costs and other general corporate expenses. For the
three months ended September 30, 1998, general and administrative expenses
totaled $960,000, which represented 11.0% of net revenue. For the six months
ended September 30, 1998, general and administrative expenses totaled
$1,836,000, which represented 11.4% of net revenue.
INCOME TAX EXPENSE
The Company incurred income tax expense of $112,000 and $375,000 for the
three and six months ended September 30, 1998, respectively, which
represented a 28% tax rate. The difference between the effective tax rate and
the statutory rate reflects the anticipated utilization of the operating
losses that were carried forward into fiscal 1999 from 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had a working capital balance of
approximately $3.4 million. Current assets included approximately $.7
million in cash and $4.8 million in accounts receivable, due entirely from
Affiliated Practices. Current liabilities consisted of approximately $2.5
million in accounts payable and accrued liabilities, mostly related to
expenses of the Affiliated Practices. The Company believes that cash on
hand, together with the availability under the revolving line of credit will
be sufficient to continue execution of its affiliation strategy.
On June 1, 1998 the Company closed a revolving bank credit facility with
Bank One, Texas, N.A., which provides the Company with a revolving line of
credit of up to $15.0 million, to be used for general corporate purposes
including financing of acquisitions, capital expenditures and working
capital. The credit facility is collateralized by liens on certain of the
Company's assets, including its rights under the management service
agreements and accounts receivable. The credit facility contains
restrictions on the incurrence of additional indebtedness and payment of
dividends on the Common Stock. Additionally, compliance with certain
financial covenants is required and the lender has approval rights with
respect with acquisitions exceeding certain limits. At September 30, 1998,
no amounts were outstanding under the revolving line of credit. Subsequent
to September 30, 1998, draws totaling $8.0 million were made under the
revolving line of credit to fund additional affiliations and working capital
requirements.
Cash used for investing activities for the six months ended September
30, 1998 included $566,000 for purchases of capital equipment, mostly for
assets acquired in new practice affiliations, and $2,925,000 for the purchase
of intangibles associated with those new practice affiliations.
Cash generated from financing activities in the six-month period ended
September 30, 1998 included the issuance of 375,000 shares of stock with the
exercise of the over-allotment option that provided net proceeds to the
Company of approximately $2.9 million. Uses of cash during the six month
period ended June 30, 1998 by financing activities included the payment of
costs related to the IPO totaling approximately $1.1 million, and the
repayment of debt assumed in the IPO of $392,000. These payments related to
liabilities recognized at March 31, 1998.
YEAR 2000 ISSUE
A number of computer programs and other equipment with embedded chips or
processors ("Systems") use two digits rather than four digits to define the
applicable year. Any Systems that are date sensitive may recognize a date of
"00" as the year 1900 rather than the year 2000. This could result in
miscalculations or System failures causing disruptions of operations, as well
as potentially exposing
12
<PAGE>
the Company to third party liability. This issue is commonly referred to as
the year 2000 problem ("Y2K").
The Company initiated a Y2K compliance program to ensure that all of the
critical Systems and processes that are under its direct control remain
functional. The Company has completed the installation of year 2000
compliant software for its operations prior to the IPO. Accordingly the
Company does not expect the year 2000 issue to have a material effect on its
financial position, results of operations or cash flows.
Although the Company's Y2K compliance program will attempt to determine
the Y2K readiness of key third parties, there may be certain Systems or
processes relied on by the Company that are outside of its control, and there
can be no assurance that these Systems or processes will remain functional.
Non-compliance by key third parties could have a material effect on the
operations of the Company. To date, the costs incurred by the Company that
relate solely to the Y2K compliance program have been minimal. In the
opinion of management, the costs to complete the Company's Y2K compliance
program will not have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
RECENT EVENTS
On November 13, 1998 the Company and Liberty Dental Alliance, Inc.
("Liberty") entered into an Agreement and Plan of Merger (the "Merger
Agreement"), pursuant to which Liberty will become a wholly owned subsidiary
of the Company, and James M. Powers, Jr., D.D.S. was named President of the
Company, replacing Gary S. Glatter. The Merger Agreement provides the
Company will pay (a) $0.01 per share for each outstanding share of Liberty
common stock, par value $0.01 per share (the "Liberty Common Stock") at
closing and (b) up to $3.99 per share and options to purchase up to 0.25
shares of Common Stock with an exercise price of $6.125 per share for each
share of Liberty Common Stock (collectively, the "Additional Common Merger
Consideration") in accordance with the following:
(i) One-third of the Additional Common Merger Consideration is payable
upon completion of affiliations with dental practices under a letter
of intent with Liberty ("Liberty Affiliations") that had collected
revenues for the year ended December 31, 1997 ("1997 Practice
Revenues") aggregating to at least $10,000,000;
(ii) One-third of the Additional Common Merger Consideration is payable
upon completion of additional Liberty Affiliations that had
aggregate 1997 Practice Revenues of at least $15,000,000; and
(iii) One-third of the Additional Common Merger Consideration is payable
upon completion of additional Liberty Affiliations that had
aggregate 1997 Practice Revenues of at least $15,000,000.
The holders of shares of Liberty Common Stock will forfeit any right to
receive the Additional Common Merger Consideration related to Liberty
Affiliations not consummated by June 30, 1999. As of November 13, 1998,
there are 315,750 shares of Liberty Common Stock outstanding, which would
result in the Company paying an aggregate of up to $1,263,000 cash and
issuing options to acquire 78,938 shares of Common Stock.
The Merger Agreement also provides that the Company pay (a) $0.01 per
share for each outstanding share of Liberty Class B common stock, par value
$0.01 per share (the "Class B Stock") at closing and (b) up to one share of
Common Stock for each outstanding share of Class B Stock (the "Additional
Class B Merger Consideration") in accordance with the following:
(i) One-fifth of the Additional Class B Merger Consideration is payable
upon completion of Liberty Affiliations that had aggregate 1997
Practice Revenues of at least $10,000,000;
(ii) Three-tenths of the Additional Class B Merger Consideration is
payable upon completion of additional Liberty Affiliations that had
aggregate 1997 Practice Revenues of at least $10,000,000;
(iii) Two-fifths of the Additional Class B Merger Consideration is
payable upon completion of additional Liberty Affiliations that had
aggregate 1997 Practice Revenues of at least $20,000,000; and
(iv) One-tenth of the Additional Class B Merger Consideration is payable
upon completion of additional Liberty Affiliations that had
aggregate 1997 Practice Revenues of at least $10,000,000.
The holders of shares of Class B Stock will forfeit any right to receive
Additional Class B Merger Consideration related to Liberty Affiliations not
consummated by June 30, 1999. As of November 13, 1998, there are 545,000
shares of Liberty Class B Stock outstanding, which would result in the
Company paying an aggregate of up to $5,450 cash and up to 545,000 shares of
Common Stock. Consummation of the Merger
13
<PAGE>
Agreement, which is anticipated to occur prior to December 31, 1998, is
subject to, among other things, the Company obtaining the consent of its
lenders.
In connection with Merger Agreement, the Company has agreed to pay
investment banking fees of up to $600,000 to SunTrust Equitable Securities
Corporation, $166,667 of which is payable upon completion of Liberty
Affiliations that had aggregate 1997 Practice Revenues of at least
$10,000,000, $166,667 of which is payable upon completion of additional
Liberty Affiliations that had aggregate 1997 Practice Revenues of at least
$15,000,000 and $266,666 of which is payable upon completion of additional
Liberty Affiliations that had aggregate 1997 Practice Revenues of at least
$15,000,000. The Company also agreed to issue an aggregate of 145,000
options to acquire Common Stock to certain consultants of the Company with an
exercise price of $6.125 per share, in the same proportions and upon
completion of Liberty Affiliations as the Additional Common Merger
Consideration is payable.
On November 13, 1998, the Company completed Liberty Affiliations with
five dental practices as well as one affiliation with an additional dental
practice not affiliated with Liberty. These six dental practices generated
aggregate annual patient revenue of approximately $4.1 million during their
most recently completed fiscal year, and include nine dentists treating
patients in six dental offices. The aggregate consideration paid by the
Company for these practices consisted of approximately $1.6 million, 369,639
shares of Common Stock and approximately $1.2 million aggregate principal
amount of 6% Series A convertible subordinated notes, due November 2003.
Dr. Powers has entered into an employment agreement with the Company,
effective November 13, 1998, pursuant to which he will initially serve as
President. Once the Company has consummated Liberty Affiliations aggregating
to at least $10,000,000 in 1997 Practice Revenues, Dr. Powers will also serve
as the Company's Chairman of the Board and Chief Executive Officer. Omer K.
Reed, D.D.S. will continue to serve as a director and Chief Clinical Officer
of the Company once Dr. Powers is elected to those additional positions. Dr.
Power's two year employment agreement also provides for a base annual salary
of $200,000, bonus payments of up to 25% of the base salary upon achievement
of certain earnings per share targets and the issuance of options to acquire
150,000 shares of Common Stock with an exercise price of $6.125 per share and
an additional 150,000 shares with an exercise price of $3.1875 per share (the
closing sale price on November 13, 1998).
Mr. Glatter has entered into a severance agreement with the Company
effective November 13, 1998 pursuant to which he has resigned as President,
Chief Executive Officer and a director of the Company. Mr. Glatter will
receive payment of $350,000 from the Company pursuant to the agreement and
forfeit all options to acquire shares of Common Stock previously issued to
him.
14
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS - None
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS - none
ITEM 3. DEFAULTS OF SENIOR SECURITIES - none
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - none
ITEM 5. OTHER INFORMATION - none
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1* Restated Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.1 of the Company's Registration Statement on
Form S-1 (Registration No. 333-37633))
3.2* Bylaws (incorporated herein by reference to Exhibit 3.2 of the
Company's Registration Statement on Form S-1 (Registration
No. 333-37633)).
10.1* Credit Agreement between Pentegra Dental Group, Inc. and Bank One,
Texas, N.A. dated June 1, 1998(incorporated herein by reference to
Exhibit 10.1 of the Company's Quarterly report filed on Form 10-Q
(File No. 001-13725)).
10.2 Amendment to Credit Agreement between Pentegra Dental Group, Inc.
and Bank One Texas, N.A. dated September 9, 1998
10.3 Second Amendment to Employment Agreement between Pentegra Dental
Group, Inc. and James L. Dunn, Jr. dated April 22, 1998
10.4 Separation and Mutual Release Agreement between Pentegra Dental
Group, Inc., and Gary S. Glatter dated November 13, 1998
10.5 Agreement and Plan of Merger among Pentegra Dental Group, Inc.,
Liberty Dental Alliance, Inc., Liberty Acquisition Corporation,
James M. Powers, Jr., Sylvia H. McAlister and William Kelly, dated
as of November 13, 1998
10.6 Employment Agreement between Pentegra Dental Group, Inc. and James
M. Powers, Jr. dated November 13, 1998
27.1 Financial Data Schedule.
- ------------------
*Incorporated by reference as indicated
(b) Reports on Form 8-K
None
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Pentegra Dental Group, Inc., has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PENTEGRA DENTAL GROUP, INC.
Dated: November 16, 1998
/s/ Sam H. Carr
-----------------
By: Sam H. Carr
Sr. Vice President - Chief Financial Officer
16
<PAGE>
BANK ONE, TEXAS, N.A.
1717 MAIN STREET, THIRD FLOOR
DALLAS, TEXAS 75265
September 9, 1998
Gary S. Glatter, CEO
PENTEGRA DENTAL GROUP, INC.
2999 N. 44th St., Ste. 650
Phoenix, AZ 85018
Re: Modification of Provisions under the Credit Agreement dated June 1,
1998 (the "Credit Agreement") between Pentegra Dental Group, Inc.
("BORROWER") and Bank One, Texas, N.A. ("BANK ONE")
Ladies and Gentlemen:
Reference is made to the Credit Agreement for the meaning of terms that
are defined therein and that are used without further definition herein.
Borrower and Bank One wish to modify the definition of the Base Rate Payment
Date used in the Note. Accordingly, Borrower and Bank One hereby:
1. Amend the definition of "BASE RATE PAYMENT DATE" in Section 1.1 of
the Credit Agreement to provide as follows:
"'BASE RATE PAYMENT DATE' has the meaning given such term in the
Note"
2. Delete the reference to Section 6.9 in Section 3.1(a), GENERAL
PROCEDURES, and substitute therefor, "Section 6.10".
3. Delete the reference to Section 2.7 in the last paragraph of
Section 3.1 GENERAL PROCEDURES, and substitute therefor, "Section 2.8."
4. Amend the proviso at the end of Section 7.18 of the Credit
Agreement, FIXED CHARGE COVERAGE RATIO, by deleting such proviso and
substituting therefor, the following:
"provided that for purposes of calculating such ratio for the Fiscal
Quarter ending June 30, 1998, EBITDA and Fixed Charges shall be calculated
for that Fiscal Quarter only."
5. Delete Exhibit D to the Credit Agreement and substitute Exhibit D
attached hereto.
This letter agreement is a Loan Document, as defined in the Credit
Agreement, and is subject to all provisions of the Credit Agreement
applicable to Loan Documents. The Credit Agreement as amended hereby is
ratified and confirmed in all respects. This letter may be
<PAGE>
Pantegra Dental Group, Inc.
September 9, 1998
Page 2
executed in multiple counterparts, all of which shall constitute one letter
agreement and may be validly executed and delivered by facsimile or other
electronic transmission.
Please execute a copy of this letter agreement in the space provided
below to evidence your agreement to and acknowledgment of the foregoing.
BANK ONE, TEXAS, N.A.
By: /s/ James B. Lukowicz
----------------------------------
James B. Lukowicz
Vice President
<PAGE>
AGREED TO AND ACKNOWLEDGED
as of the date first written above:
PENTEGRA DENTAL GROUP, INC.
By: /s/ Gary S. Glatter, CEO
-----------------------------------
Gary S. Glatter, CEO
<PAGE>
EXHIBIT D
CERTIFICATE ACCOMPANYING
FINANCIAL STATEMENTS
Reference is made to that certain Credit Agreement dated as of June 1,
1998 (as from time to time amended, the "Agreement"), by and among PENTEGRA
DENTAL GROUP, Inc. ("Borrower"), Bank One, Texas, N.A., as Agent, and certain
financial institutions ("Lenders"), which Agreement is in full force and
effect on the date hereof. Terms which are defined in the Agreement are used
herein with the meanings given them in the Agreement.
This Certificate is furnished pursuant to Section 6.2(b) of the
Agreement. Together herewith Borrower is furnishing to Agent and each Lender
Borrower's *[audited/unaudited] financial statements (the "Financial
Statements") as at ____________ (the "Reporting Date"). Borrower hereby
represents, warrants, and acknowledges to Agent and each Lender that:
(a) the officer of Borrower signing this instrument is the duly
elected, qualified and acting ____________ of Borrower and as such is
Borrower's chief financial officer;
(b) the Financial Statements are accurate and complete and satisfy
the requirements of the Agreement;
(c) attached hereto is a schedule of calculations showing Borrower's
compliance as of the Reporting Date with the requirements of Sections [7.11
to 7.20] of the Agreement *[and Borrower's non-compliance as of such date
with the requirements of Section(s) ____________ of the Agreement];
(d) on the Reporting Date, Borrower was, and on the date hereof
Borrower is, in full compliance with the disclosure requirements of Section
6.2 of the Agreement, and no Default otherwise existed on the Reporting
Date or otherwise exists on the date of this instrument *[except for
Default(s) under Section(s) ____________ of the Agreement, which *[is/are]
more fully described on a schedule attached hereto];
(d) on the Reporting Date, the Borrowing Availability was
$______________; and
(e) *[Unless otherwise disclosed on a schedule attached hereto,] The
representations and warranties of Borrower set forth in the Agreement and
the other Loan Documents are true and correct, in all material respects, on
and as of the date hereof (except to the extent that the facts on which
such representations and warranties are based have been changed by the
extension of credit under the Agreement), with the same effect as though
such representations and warranties had been made on and as of the date
hereof.
<PAGE>
The officer of Borrower signing this instrument hereby certifies that he
has reviewed the Loan Documents and the Financial Statements and has
otherwise undertaken such inquiry as is in his opinion necessary to enable
him to express an informed opinion with respect to the above representations,
warranties and acknowledgments of Borrower and, to the best of his knowledge,
such representations, warranties, and acknowledgments are true, correct and
complete.
IN WITNESS WHEREOF, this instrument is executed as of ____________, 19__.
PENTEGRA DENTAL GROUP, INC.
By:
------------------------------
Name:
Title:
<PAGE>
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to the Employment Agreement (the "Amendment") is
executed on the underwritten date to be effective on that date, and is made
by and between Pentegra Dental Group, Inc., a Delaware Corporation (the
"Company"), and James L. Dunn, Jr. (the "Employee").
WITNESSETH
Whereas, the Company and the Employee had entered into an employment
agreement dated July 12, 1997, as previously amended by the First Amendment,
(the "Employment Agreement") to be effective at the initial public offering,
and
Whereas, the Company and the Employee wish to amend the Employment
Agreement as more fully set forth herein;
Therefore, in consideration for the mutual promises and representations
contained in the Employment Agreement and herein and for other good and
valuable consideration, the sufficiency of which is hereby acknowledged, the
undersigned Employee and Company do agree as follows:
The Employment Agreement shall be amended to add the following paragraph to
the end of Section 2 "Duties":
"Notwithstanding the foregoing, the Company and the Employee agree
that the Employee may act as an attorney and provide certain limited
pro bono legal services to the Employee's close friends and family,
but only if the Employee's legal services are approved by the
Company's Chief Executive Officer (the "C.E.O.") before the engagement
begins and, the Employee's legal service does not interfere with, or
materially divert, the Employee's full time and best efforts from the
Company. The Employee will be permitted to attend certain continuing
education courses in Texas which are necessary to maintain the
Employee's legal license, and/or certified public accountant license,
provided that the Employee endeavors to obtain an exemption from those
requirements and/or endeavors to enroll in those courses which enhance
the Employee's ability to perform his duties to the Company. The
Employee may serve as a director of any publicly traded company, or
any privately held company which is in the process of attempting to
offer its stock to the public, provided that the Employee's service on
that board of directors does not interfere with or materially divert
the Employee's full time and best efforts from the Company and the
Employee obtains prior consent from the C.E.O.. The Employee may
serve as a member of a limited liability company (the "LLC") which
acts as a corporate sponsor of certain entities which are seeking
their initial public offering, but only if the Employee does not serve
as a "manager" or "officer" of the LLC."
<PAGE>
The Employment Agreement shall be amended to add the following paragraph
to Section 6 "Termination":
"(d) Termination by the Company, pursuant to Section 6(b) shall not
be effective unless and until the Company provides written notice of
the conduct it finds objectionable and the Employee fails to cure the
Company's objections within the time specified by the Company in its
written notice."
It is further agreed that the remainder of the Employment Agreement,
together with any prior amendments, shall remain unchanged and in effect.
Executed this 22nd day of April, 1998.
COMPANY EMPLOYEE
Pentegra Dental Group, Inc.
By: /s/ Gary S. Glatter /s/ James L. Dunn, Jr.
-------------------------------- ---------------------------
Gary S. Glatter, James L. Dunn, Jr.
President and Chief
Executive Officer
2
<PAGE>
SEPARATION AND MUTUAL RELEASE AGREEMENT
BETWEEN
GARY S. GLATTER
AND
PENTEGRA DENTAL GROUP, INC.
PENTEGRA DENTAL GROUP, INC. ("Employer") and GARY S. GLATTER ("Employee")
(Employer and Employee are hereinafter sometimes referred to as the
"Parties") make this Separation and Mutual Release Agreement (this
"Agreement").
Whereas, Employee is currently employed by Employer pursuant to the
terms of a certain Employment Agreement dated July 1, 1997, as amended by an
Amendment also dated July 1, 1997 (referred to herein as the "Employment
Agreement");
Whereas, Employee and Employer are parties to a certain Incentive
Stock Option Agreement dated March 24, 1998 (referred to herein as the
"Option Agreement");
Whereas, Employer and Employee are parties to an Indemnity Agreement
dated March 30, 1998 (referred to herein as the "Indemnity Agreement");
Whereas, the Parties desire an amicable termination of Employee's
service and their mutual obligations under the Employment Agreement;
Whereas, it is the intent of the Parties that the Option Agreement
be terminated;
Now, therefore, for and in consideration of the promises made
between them and for other good and valuable consideration, the Parties agree
as follows:
1. RESIGNATION. Employee hereby resigns (i) his employment and each
office he holds with Employer (including without limitation his offices as
President and Chief Executive Officer of Employer) and any position held by
Employee in subsidiaries and affiliates of Employer and (ii) as a director of
Employer and each of its subsidiaries effective at the later to occur of the
close of business on November 13, 1998 or the time at which the payment
called for by paragraph 3(a) hereof is placed into escrow (the "Effective
Date").
2. RELEASE FROM EMPLOYMENT AGREEMENT. In consideration of the mutual
promises contained herein, Employer and Employee agree to release each other
from any and all liability under the Employment Agreement or otherwise
arising from the employment relationship, and enter this Agreement.
3. PAYMENT.
(a) In consideration of Employee executing this Agreement, giving
Employer the covenant not to solicit employees of Employer or any of its
affiliates or subsidiaries, and not to compete in specified ways, and an
agreement to maintain the secrecy of all confidential and trade
<PAGE>
secret information (as hereinafter described and defined in paragraphs 6
through 8 below), and in settlement of any obligation to pay severance pay
which Employer may owe to Employee, Employee will receive a lump sum cash
payment of $350,000 (the "Severance Payment"). Employer will withhold, as
employee taxes, from the Severance Payment an aggregate of $33,075 that must
be withheld to pay federal ($10,000), state ($18,000) and Medicare ($5,075)
taxes. The Severance Payment (net of tax withholdings) will be placed in
escrow by Employer pursuant to the terms of the Escrow Agreement in the form
attached hereto as EXHIBIT A.
(b) To the extent any taxes may be due on the amount paid pursuant
to this Agreement, Employer shall pay related "employer taxes" and Employee
shall pay related "employee taxes," such as federal income tax, social
security tax and Medicare tax. Each Party hereto agrees to indemnify and
hold the other Party harmless for any tax claims or penalties resulting from
the failure by a Party to pay his designated taxes.
(c) By execution of this Agreement, Employee acknowledges and
agrees that for purposes of unemployment compensation benefits, the amount
specified in subparagraph (a) of this paragraph constitutes wages in lieu of
notice for the period from the Effective Date until the date 21 months
following the Effective Date. Accordingly, Employee may not be eligible to
receive unemployment compensation benefits during this period of time.
4. UNPAID SALARY AND BENEFITS.
(a) Not conditioned upon execution of this Agreement, Employee will
receive payment of all accrued but unpaid salary through the Effective Date.
Employee will not receive payment for any accrued benefits.
(b) Employee will have the option of continuing his group insurance
for Employee and his dependents for a period of up to 18 months. Employer
will pay for Employee's health insurance for himself and his dependents
through December 31, 1999, or until Employee obtains other full-time
employment, whichever is sooner.
(c) With respect to expense reimbursements, the Parties agree as
follows:
(i) Employee will present to Employer his corporate American
Express bill and Employer will pay the outstanding balance on Employee's
corporate American Express account to the extent that items delineated in
the invoice (a) were incurred by employees of Employer other than Employee
or (b) were business expenses incurred by Employee. Employee agrees that
he will not use his corporate American Express card after the close of
business on the Effective Date;
(ii) Employee will present to Employer Employee's cell phone
invoice and Employer will pay the outstanding balance reflected on such
invoice for service through the Effective Date, but only to the extent that
the outstanding balance of such invoice does not exceed $750; and
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<PAGE>
(iii) Employee will present to Employer and Employer will pay the
outstanding balance on invoices rendered to Employee by MCI for conference
calls related to Employer's business.
5. OPTION AGREEMENT AND BONUS.
(a) The Parties agree that the Option Agreement, which covers, in
the aggregate, 333,333 shares of the common stock of Employer (the "Common
Stock"), is terminated as of the Effective Date. Employee represents and
acknowledges that, other than the Option Agreement, he and Employer do not
have any agreements with each other relating to options to purchase Common
Stock and to the extent any such other agreements do exist they are canceled.
(b) The Parties agree that no bonus payment is or will ever become
due to Employee under the terms of the Employment Agreement.
6. NONSOLICITATION OF EMPLOYEES. It is recognized and understood by
the Parties hereto that the employees of Employer are an integral part of
Employer's business, and that it is extremely important for Employer to use
its maximum efforts to prevent the loss of such employees. It is therefore
understood and agreed by the Parties that, because of the nature of the
business of Employer, it is necessary to afford fair protection to Employer
from the loss of any such employees. Consequently, as material inducement to
Employer to pay Employee the sum specified in paragraph 3, Employee covenants
and agrees that for a period commencing on the Effective Date of this
Agreement and ending one year after the Effective Date of this Agreement,
Employee shall not, directly or indirectly, hire or engage or attempt to hire
or engage any individual who shall have been an employee of Employer or any
of its affiliates or subsidiaries at any time during the one-year period
prior to such Effective Date of this Agreement or during the one-year period
immediately following the Effective Date, whether for or on behalf of
Employee or for any entity in which Employee shall have a direct or indirect
interest (or any subsidiary or affiliate of any such entity), whether as a
proprietor, partner, co-venturer, financier, investor, stockholder, director,
officer, employer, employee, servant, agent, representative or otherwise.
Further, Employee covenants and agrees that for a period commencing on the
Effective Date of this Agreement and ending one year after such Effective
Date, Employee shall not, directly or indirectly, or through any other
person, firm, or corporation, or in any capacity as described in this
paragraph above, induce, or attempt to induce or influence any employee of
Employer to terminate employment with Employer, when Employer or any of
Employer's affiliates or subsidiaries desires to retain that employee's
services.
7. NONCOMPETITION. As a further material inducement to Employer to pay
Employee the sum specified in paragraph 3, for a period of one year after the
Effective Date Employee shall not solicit, interfere, or divert any
then-existing business relationship of Employer, including any existing
relationships with any dentists or dental practice management companies who
came to Employee's attention as the result of Employee's relationship with
Employer. Employee acknowledges that this noncompetition covenant is less
onerous than the noncompetition provisions of the Employment Agreement;
Employee further acknowledges that his release from the noncompetition
provisions of the Employment Agreement constitutes good and valuable
-3-
<PAGE>
consideration for the agreements and covenants contained herein. Further,
Employee acknowledges and agrees that he was a person of exceptional and
unique knowledge, skill and ability in performing the tasks assigned while
employed with Employer.
8. CONFIDENTIAL INFORMATION. Employee acknowledges and agrees that he
had access to certain confidential information, trade secrets and proprietary
data of Employer by virtue of Employee's employment with Employer, and
Employee's participation in Employer's activities and business. Employee
acknowledges that he has a legal obligation, independent of this Agreement,
to preserve the confidentiality of Employer's trade secrets and confidential
information and return such information to Employer prior to the Effective
Date. As a further material inducement to Employer to pay Employee the sum
specified in paragraph 3, Employee agrees to maintain the secrecy of all
confidential information (as hereinafter defined) and agrees not to disclose
such confidential information to any person(s), employer(s), partnership(s),
corporation(s) or other entity of any nature whatsoever, and agrees to
maintain such confidential information in the strictest confidence and trust.
"Confidential Information" means, in whatever form (tangible or intangible,
including electronic data recorded or retrieved by any means), any and all
trade secrets, confidential knowledge, proprietary data, and information
owned by Employer, furnished by Employer to Employee, or developed by
Employer or any affiliate, agent, contractor or employee of Employer and
which relates to the business or activities of Employer, including strategic
marketing plans, product development plans, cost or pricing information,
vendor or supplier information, confidential customer information,
information regarding proposed joint ventures, mergers, acquisitions, and
other such anticipated or contemplated business ventures of Employer, and
confidential financial information, technical specifications, diagrams, flow
charts, methods, processes, procedures, discoveries, concepts, calculations,
techniques, formulae, systems, production plans, designs, research and
development plans, customer records and lists, manufacturing, financial and
marketing know-how, copyrightable works and applications for registrations
thereof, pending applications for letters patent of the United States and
foreign countries, and any such that are issued, granted or published, in
common law, state and federal rights relating to and under any trademarks,
trade names or service marks (and also including any of the foregoing
provided to Employee by or on behalf of Employer prior to the Effective Date
of this Agreement). The term "Confidential Information" expressly excludes
information which (1) was available to the public prior to the time of
disclosure to, or discovery of production by Employee; (2) becomes available
to the public through no act or omission of Employee; or (3) becomes
available to Employee through or from a third party who is not under any
obligation of confidentiality to Employer.
9. INJUNCTIVE RELIEF. Employee further agrees and acknowledges that
should he breach his obligation under paragraphs 6, 7, or 8, Employer will be
entitled to enforce the provisions of this paragraph by seeking injunctive
relief, in addition to recovering any monetary damages Employer may sustain
as a result of such breach.
10. UNDERSTANDING OF EMPLOYEE. EMPLOYEE HAS CAREFULLY READ AND CONSIDERED
THE PROVISIONS OF THIS AGREEMENT AND, HAVING DONE SO, AGREES THAT THE
RESTRICTIONS SET FORTH HEREIN ARE REASONABLE AND ARE REASONABLY REQUIRED FOR THE
PROTECTION OF THE BUSINESS
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<PAGE>
INTERESTS AND GOODWILL OF EMPLOYER AND ITS BUSINESS, OFFICERS, DIRECTORS AND
EMPLOYEES. EMPLOYEE FURTHER AGREES THAT THE RESTRICTIONS SET FORTH IN THIS
AGREEMENT ARE NOT MEANT TO IMPAIR EMPLOYEE'S ABILITY TO SECURE EMPLOYMENT
WITHIN THE FIELD OR FIELDS OF EMPLOYEE'S CHOICE, INCLUDING THOSE AREAS IN
WHICH EMPLOYEE HAS BEEN EMPLOYED BY EMPLOYER BUT INSTEAD TO PROTECT THE
CONFIDENTIALITY OF ITS CONFIDENTIAL INFORMATION, TRADE SECRETS, AND
LEGITIMATE BUSINESS INTERESTS.
11. FURTHER RELEASES OF RELEASED PARTIES AND EMPLOYEE.
(a) For and in consideration of the promises made in this
Agreement, Employee agrees to RELEASE, ACQUIT AND FOREVER DISCHARGE Employer,
its directors, officers, employees, agents, attorneys, affiliates,
subsidiaries, stockholders, predecessors, transferees, trustees, assignees,
insurers, and all other persons or entities affiliated with or in privity
with any of them (collectively the "Released Parties") from any and all
claims, demands, causes of action, debts, liens, judgments, damages or
liabilities of any nature whatsoever, that arose prior to the Effective Date
of this Agreement. The intent and purpose of this Agreement is to release
and discharge all claims, demands and causes of action, whether known or
unknown, unless otherwise expressly excluded by this Agreement and excluding
any breach of this Agreement. The release of liabilities is intended to
include, but not be limited to, the following: any and all claims arising
from Employee's Employment Agreement and employment with any of the Released
Parties or arising from the termination of that employment and Employment
Agreement; any claims of violation of Title VII of the Civil Rights Act of
1964, the Employee Retirement Income Security Act of 1974, the Fair Credit
Reporting Act, or the Americans with Disabilities Act, any state
antidiscrimination statute or any and all claims for breach of contract or
wrongful discharge; any and all claims for defamation, damage to personal or
business reputation, or impairment of economic opportunity; any and all
claims for intentional or negligent infliction of emotional distress; any and
all claims for loss of consortium, damage to family or business
relationships, and any alleged breach of the covenant of good faith and fair
dealing; any and all claims for an alleged breach of fiduciary duties or
breach of corporate officer or director responsibilities; any and all claims
for personal injury; any and all claims for tortious interference with
contractual relationships or any other tortious conduct; any and all claims
for reimbursement, bonus, commission or other incentives; any and all claims
for employment discrimination including, but not limited to, any age
discrimination claims brought under the Age Discrimination in Employment Act;
any and all claims for injunctive or other equitable relief; any and all
claims arising under federal, state or local statute, common law, regulation
or ordinance; and any and all other clauses for compensatory, statutory, or
punitive damages.
(b) For and in consideration of the promises made in this Agreement,
Employer agrees to release, acquit and forever discharge Employee from any and
all claims, demands, causes of action, derivative suits, debts, liens,
judgments, damages or liabilities of any nature whatsoever that arose prior to
the Effective Date of this Agreement. The intent and purpose of this Agreement
is to release and discharge all claims, demands and causes of action, whether
known or unknown,
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<PAGE>
unless otherwise expressly excluded by this Agreement and excluding any
breach of this Agreement. The release of liabilities is intended to include,
but not be limited to, the following: any and all claims arising from
Employee's employment with any of the Released Parties; any and all claims
for an alleged breach of fiduciary duties or breach of corporate officer or
director responsibilities, including, without limitation, all matters
concerning Employer's public offerings of common stock and convertible debt;
any and all claims for tortious interference with contractual relationships
or any other tortious conduct; claims for back wages, future wages, bonuses,
reinstatement, accrued vacation benefits and sick time, any and all claims
for injunctive or other equitable relief; any and all claims arising under
federal, state, or local statute, common law, regulation or ordinance; and
any and all other claims for compensatory, statutory, or punitive damages.
12. NONDISPARAGEMENT AND REFERENCES. Employee and the Released Parties
further promise and agree that they will not damage, or attempt to damage,
the business reputation or goodwill of each other. The Released Parties
further agree that should any third party contact them for reference
information concerning Employee, the Released Parties will express a
favorable opinion of Employee's performance while employed by Employer.
Employer will not use Employee's name in any press release, annual report,
proxy statement or other documents that will receive widespread public
circulation without Employee's prior consent or, in the absence of such
consent, without the advise of outside counsel to Employer that the use of
Employee's name is legally required.
13. INDEMNITIES AND ASSURANCES.
(a) It is understood and agreed that the releases of liability
described in this Agreement are material provisions of this Agreement.
Accordingly, Employee and Employer, covenant and promise not to sue or
otherwise pursue legal action against the other with respect to any released
claim, demand or cause of action, and further covenant and promise to
indemnify and defend the other from any and all such claims, demands and
causes of action, including the payment of reasonable costs and attorneys'
fees. Employee agrees that should any legal action be pursued on his behalf
by any person or other entity against Employer regarding the claims released
in paragraph 11, Employee will not accept recovery from such action, will
assign any recovery to Employer, and agrees to indemnify Employer against
such claims and any assessment of damages. Employer and its subsidiaries
agree that should any legal action be pursued on their behalf by any person
or other entity against Employee regarding the claims released in paragraph
11, they will not accept recovery from such action, will assign any recovery
to Employer, and agree to indemnify Employee against such claims and
assessment of damages.
(b) The Indemnity Agreement shall survive the Effective Date and
remain in full force and effect. In the event of a conflict between the
terms of this Agreement and the terms of the Indemnity Agreement, the terms
of the Indemnity Agreement shall control.
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<PAGE>
14. NOTICE AND CURE. If Employee or Employer determine that the other
has breached this Agreement, the non-breaching party will notify the party in
breach of that fact in writing and the party in breach and will be afforded
ten (10) days to cure the breach.
15. RETURN OF PROPERTY. Employee acknowledges that, in addition to
signing this Agreement, he agrees to return on the Effective Date to Employer
any and all of Employer's property entrusted to him, such as (but not limited
to) marketing plans and related information, product development plans and
related information, trade secret information, pricing information, customer
information, vendor information, financial information, telephone lists,
computer software and hardware, keys, credit cards, vehicle, telephone,
computer, and office equipment and that he will not retain copies of any
Confidential Information.
16. NO ADMISSION OF LIABILITY. The Parties understand and agree that
neither the making of this Agreement nor the fulfillment of any condition or
obligation of this Agreement constitutes an admission of any liability or
wrongdoing on the part of the other or any Released Party from liability by
this Agreement. All liability by either Party to the other has been and is
expressly denied.
17. FUTURE COOPERATION. Employee agrees that in all future litigation
involving Employer for which Employer requests Employee's cooperation that he
will fully cooperate with Employer subject to Employee's reasonable
availability. In return for this cooperation, Employer agrees to pay
Employee all reasonable costs incurred by Employee due to his cooperation and
compensate him at the rate of $180 per hour (including travel) for such
services. Employer agrees to pay Employee all such costs and compensation
within thirty (30) days of receiving an appropriate invoice.
18. LAW APPLICABLE AND SEVERABILITY. It is intended that the provisions
of this Agreement shall be enforced to the fullest extent permissible under
the laws and public policies of each jurisdiction in which enforcement of
this Agreement is sought. The provisions of this Agreement shall be
construed in accordance with the laws of the State of Arizona. In the event
any term or condition or provision of this Agreement shall be determined to
be invalid, illegal or unenforceable by a court of competent jurisdiction,
the remaining terms, conditions and provisions of this Agreement shall remain
in full force and effect to the extent permitted by law.
19. STATEMENT OF FULL UNDERSTANDING. The Parties acknowledge by signing
this Agreement that they have read this Agreement, that they fully understand
it, that they have been advised by legal counsel, that they have not
transferred, assigned or conveyed any of the claims, rights or entitlements
covered by this Agreement, that they have had sufficient time to consider the
terms of this Agreement, that they have received and relied on no
representations, promises or inducements not otherwise expressed in this
Agreement, and that they have signed this Agreement KNOWINGLY AND VOLUNTARILY
AND WITH THE FULL UNDERSTANDING THAT THIS AGREEMENT AFFECTS THEIR LEGAL
RIGHTS.
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<PAGE>
20. ATTORNEY CONSULTATION. EMPLOYEE ACKNOWLEDGES THAT HE HAS BEEN
ADVISED TO CONSULT WITH AN ATTORNEY OF HIS CHOICE, DANIEL A. BOCK, ABOUT THE
TERMS AND CONDITIONS OF THIS AGREEMENT AND THAT HE HAS HAD THE BENEFIT OF
INDEPENDENT LEGAL ADVICE WITH RESPECT TO THIS AGREEMENT AND THE MATTERS
PROVIDED FOR HEREIN. EMPLOYEE HAS NOT RELIED UPON EMPLOYER OR ITS EMPLOYEES
OR ADVISORS FOR SUCH PURPOSES.
21. TIME TO REVIEW. Employee understands that this Agreement includes a
release of claims arising under the Age Discrimination in Employment Act.
Employee understands and warrants that he has been offered a period of
twenty-one days to review and consider this Agreement. By his signature
below, Employee warrants that he has been fully and fairly advised by his
legal counsel as to the terms of this Agreement. Employee further warrants
that he has used as much or all of his twenty-one day period as he wished
before signing, and warrants that he has done so.
22. REVOCATION AND NOTICE. Employee further warrants that he
understands that he has until 5 p.m. (Arizona Time) on the seventh day
following the execution of this Agreement to revoke this Agreement by notice
in writing to Kimberlee K. Rozman, Senior Vice President and General Counsel,
of Employer. Such notice shall be delivered to Ms. Rozman by facsimile at
214/953-5736 with a copy to Sam H. Carr, Senior Vice President and Chief
Financial Officer by facsimile at 602/952-0544 and the original delivered by
regular mail, return receipt requested to Ms. Rozman's attention at 901 Main
Street, Suite 6000, Dallas, Texas 75202. This Agreement shall be binding,
effective, and enforceable upon the Parties upon the expiration of this
seven-day revocation period if Ms. Rozman has not received Employee's
revocation.
23. WAIVER AND AMENDMENT. No waiver of any of the terms of this
Agreement shall be valid unless in writing and signed by all Parties to this
Agreement. No waiver or default of any term of this Agreement shall be deemed
a waiver of any subsequent breach or default of the same or similar nature.
This Agreement may not be amended except by writing signed by all Parties.
24. PARAGRAPH HEADINGS. Paragraph headings are for ease of reading and
do not alter the meaning of any terms of this Agreement.
This document was signed to become effective on the 13th day of November,
1998.
/s/ Gary S. Glatter
----------------------------------
Gary S. Glatter
PENTEGRA DENTAL GROUP, INC.
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<PAGE>
BY:
/s/ Sam H. Carr
---------------------------------------------
Sam H. Carr, Senior Vice President and Chief
Financial Officer
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<PAGE>
EXHIBIT A
ESCROW AGREEMENT
<PAGE>
EXHIBIT A
ESCROW AGREEMENT
This Escrow Agreement (this "Agreement"), entered into effective as of
the 13th day of November, 1998, by and among Pentegra Dental Group, Inc.
("Employer"), Gary S. Glatter ("Employee"), and Jackson Walker L.L.P., a
Texas limited liability partnership (the "Escrow Agent"),
W I T N E S S E T H:
WHEREAS, Employer and Employee have entered into that certain Separation
and Mutual Release Agreement dated November 13, 1998 (the "Separation
Agreement"), pursuant to which, the parties have negotiated an amicable
termination of Employee's service and their mutual obligations under the
Employment Agreement between the Employer and Employee dated July 1, 1997, as
amended by an Amendment also dated July 1, 1997 ( the "Employment
Agreement"); and
WHEREAS, in consideration of the Employee executing the Separation
Agreement, and in settlement of any obligation to pay severance pay or any
other amounts of pay which Employer may owe to Employee, Employee is entitled
to receive a lump sum cash payment of $350,000, net of federal, state and
Medicare taxes that Employer is obligated to withhold aggregating $33,075
(the "Severance Payment"); and
WHEREAS, under the terms of the Separation Agreement, the Severance
Payment is to be held in escrow by Escrow Agent until such time that the
conditions set forth in this Agreement have been satisfied;
NOW THEREFORE, in consideration of the mutual representations, warranties
and covenants herein contained, and on the terms and subject to the
conditions herein set forth, the parties hereto agree as follows:
<PAGE>
1. APPOINTMENT OF ESCROW AGENT. Employer and Employee hereby designate
Jackson Walker L.L.P., as Escrow Agent, and Escrow Agent accepts such
appointment for the purposes hereinafter set forth.
2. DEPOSIT IN ESCROW. On the date of this Agreement, Employer shall
deliver to Escrow Agent the Severance Payment ($316,925). The Severance
Payment and interest earned thereon shall be distributed by Escrow Agent only
in accordance with Section 3 below. Escrow Agent will place the Severance
Payment in an interest bearing account of its choice.
3. DISTRIBUTION FROM ESCROW. The Severance Payment and interest earned
thereon shall be held in escrow under the terms of this Agreement and
released by the Escrow Agent upon the following terms:
(a) Upon the delivery of a written notice from Employee to both
Employer and Escrow Agent (in the form of EXHIBIT A) indicating that Employee
will not exercise his right under the Age Discrimination in Employment Act to
revoke the Separation Agreement, with such delivery occurring at any time on
or after November 23, 1998 but in no case later than November 29, 1998, the
Escrow Agent shall deliver the Severance Payment to Employee by wire transfer
to the address set forth in the notice.
(b) In the event that prior to November 30, 1998 neither Escrow
Agent nor Employer has received notice from Employee indicating that Employee
will exercise his right under the Age Discrimination in Employment Act to
revoke the Separation Agreement, Escrow Agent shall deliver the Severance
Payment and interest earned thereon to Employee by wire transfer in
accordance with the instructions set forth in the form of notice attached
hereto as EXHIBIT A.
(c) Except as provided above the Escrow Agent shall not release or
make any disbursements of the Severance Payment. Upon disbursement of the
Severance Payment in
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<PAGE>
accordance with this Section 3, this Agreement shall be terminated and the
Escrow Agent shall be released and discharged from any further obligations
hereunder.
4. LIABILITY OF THE ESCROW AGENT. The duties of the Escrow Agent
hereunder shall be limited to the observance of the express provisions of
this Agreement. The Escrow Agent shall not be subject to, or be obliged to
recognize, any other agreement between the parties hereto or directions or
instructions not specifically set forth or provided for herein. The Escrow
Agent may rely upon and act upon any instrument received by it pursuant to
the provisions of this Agreement which it in good faith believes to be
genuine and in conformity with the requirements of this Agreement. Except as
expressly provided in this Agreement, the Escrow Agent shall have no duty to
determine or inquire into the happening or occurrence of any event or the
performance or failure of performance of any of Employer or Employee with
respect to arrangements or contracts between them or with others. Anything
in this Agreement to the contrary notwithstanding, the Escrow Agent shall not
be liable to any person for anything which it may do or refrain from doing in
connection with this Agreement, unless the Escrow Agent is guilty of gross
negligence or willful misconduct.
5. INDEMNIFICATION OF THE ESCROW AGENT. Employer and Employee shall
indemnify and hold the Escrow Agent, its employees, officers, agents,
successors and assigns harmless from and against any and all loss, cost,
damages or expenses (including reasonable attorneys' fees) it or they may
sustain by reason of the Escrow Agent's service as escrow agent hereunder,
except such a loss, cost, damage or expense (including reasonable attorneys'
fees) incurred by reason of such acts or omissions by the Escrow Agent
constituting gross negligence or willful misconduct.
6. REMEDIES OF THE ESCROW AGENT.
(a) In the event of any dispute hereunder, or if conflicting demands
or notices are made upon the Escrow Agent, or in the event the Escrow Agent in
good faith is in doubt as to what action it should take hereunder, the Escrow
Agent shall have the right to (i) stop all further
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<PAGE>
proceedings in, and performance of, this Agreement and instructions received
hereunder; and/or (ii) file a suit in interpleader and obtain an order from a
court of competent jurisdiction requiring all persons involved to interplead
and litigate in such court their several claims and rights with respect to
the Severance Payment.
(b) While any legal proceeding arising out of this Agreement is
pending, the Escrow Agent shall have the right to stop all further
proceedings in, and performance of, this Agreement and instructions received
hereunder until all differences shall have been resolved by agreement or a
final order.
(c) The Escrow Agent may from time to time consult with legal
counsel of its own choosing in the event of any disagreement, controversy,
question or doubt as to the construction of any of the provisions hereof or
its duties hereunder, and it shall incur no liability and shall be fully
protected in acting in good faith in accordance with the opinion and
instructions of such counsel.
7. NOTICES. Unless otherwise expressly indicated, any notice or
communication hereunder or in any agreement entered into in connection with the
transactions contemplated hereby must be in writing and given by depositing the
same in the United States mail, addressed to the party to be notified, postage
prepaid and registered or certified with return receipt requested, or by
delivering the same in person or by facsimile transmission. Such notice shall
be deemed received on the date on which it is hand-delivered or received by
facsimile transmission or on the second
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<PAGE>
business day following the date on which it is so mailed. For purposes of
notice, the addresses of the parties shall be:
If to Employer: Kimberlee K. Rozman
Senior Vice President and General Counsel
Pentegra Dental Group, Inc.
901 Main Street, Suite 6000
Dallas, Texas 75202
fax #: (214) 953-5736
with a copy to: Sam H. Carr
Senior Vice President and Chief Financial
Officer
Pentegra Dental Group, Inc.
2999 N. 44th Street, Suite 650
Phoenix, Arizona 85018
fax #: (602) 952-0544
with a copy to: Daniel A. Bock
Cruse, Firetag & Bock, P.C.
5611 North 16th Street
Phoenix, Arizona 85016
fax #: (602) 241-1260
If to Employee: Gary S. Glatter
11160 E. Cochise Ave.
Scottsdale, Arizona 85259
fax #: (602) 860-6679
If to the Escrow Agent: James S. Ryan, III
Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75201
fax #: (214) 953-5736
Any party may change its address for notice by written notice given to the
other parties in accordance with this Section.
8. AMENDMENT. This Agreement may be amended, modified or supplemented
only by an instrument in writing executed by all the parties hereto.
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<PAGE>
9. ASSIGNMENT. Neither this Agreement nor any right created hereby or
in any agreement entered into in connection with the transactions
contemplated hereby shall be assignable by any party hereto except by
Employer to an affiliate of Employer.
10. ENTIRE AGREEMENT. This Agreement and the agreements contemplated
hereby constitute the entire agreement of the parties regarding the subject
matter hereof, and supersede all prior agreements and understandings, both
written and oral, among the parties, or any of them, with respect to the
subject matter hereof.
11. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective
during the term hereof, such provision shall be fully severable and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision never comprised a part hereof; and the remaining
provisions hereof shall remain in full force and effect and shall not be
affected by the illegal, invalid or unenforceable provision or by its
severance herefrom. Furthermore, in lieu of such illegal, invalid or
unenforceable provision, there shall be added automatically as part of this
Agreement a provision as similar in its terms to such illegal, invalid or
unenforceable provision as may be possible and be legal, valid and
enforceable.
12. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS
OF LAWS) OF THE STATE OF TEXAS. THE PARTIES AGREE THAT THIS AGREEMENT SHALL
BE PERFORMABLE IN DALLAS COUNTY, TEXAS.
13. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
[Intentionally Left Blank]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto caused this
Agreement to be executed by their respective officers hereunto duly
authorized, as of the day and year first above written.
JACKSON WALKER L.L.P.
By:
--------------------------------
Its:
-------------------------------
EMPLOYER
By:
--------------------------------
Its:
-------------------------------
EMPLOYEE
-----------------------------------
Gary S. Glatter
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<PAGE>
AGREEMENT AND PLAN OF MERGER
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S><C> <C>
ARTICLE 1
The Merger
1.1. THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2. THE CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE 2
Articles of Incorporation and Bylaws of the Surviving Corporation
2.1. ARTICLES OF INCORPORATION . . . . . . . . . . . . . . . . . . . . . .2
2.2. BYLAWS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
ARTICLE 3
Directors and Officers of the Surviving Corporation
3.1. DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
3.2. OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
ARTICLE 4
Conversion of Shares in the Merger
4.1. CONVERSION OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . .3
4.2. DELIVERY OF MERGER CONSIDERATION; CERTAIN DEFINITIONS . . . . . . . .4
4.3. EXCHANGE OF CERTIFICATES REPRESENTING SHARES. . . . . . . . . . . . .7
ARTICLE 5
Representations and Warranties of the Corporation and the Class B Holders
5.1. EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY; COMPLIANCE
WITH LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
5.2. AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS. . . . . . . . . . .8
5.3. CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .8
5.4. TARGET PRACTICES. . . . . . . . . . . . . . . . . . . . . . . . . . .9
5.5. OTHER INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . .9
5.6. NONCONTRAVENTION. . . . . . . . . . . . . . . . . . . . . . . . . . .9
5.7. PRIVATE PLACEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.8. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . 10
5.9. NO UNDISCLOSED LIABILITIES. . . . . . . . . . . . . . . . . . . . . 11
5.10. LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.11. ABSENCE OF CERTAIN CHANGES. . . . . . . . . . . . . . . . . . . . . 11
5.12. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.13. PROPRIETARY RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . 13
5.14. EMPLOYEE BENEFIT PLANS. . . . . . . . . . . . . . . . . . . . . . . 13
5.15. LABOR MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.16. RELATED PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.17 NO BROKERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.18. VOTE REQUIRED . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
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5.19. CONTRACTS; NO DEFAULT . . . . . . . . . . . . . . . . . . . . . . . 16
5.20. REAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.21. INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.22. COMPLIANCE WITH APPLICABLE LAWS . . . . . . . . . . . . . . . . . . 17
5.23. ENVIRONMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.24. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.25. TITLE TO ASSETS; LIENS. . . . . . . . . . . . . . . . . . . . . . . 19
5.26. NO MATERIAL ADVERSE EFFECT. . . . . . . . . . . . . . . . . . . . . 19
ARTICLE 6
Representations and Warranties of Acquiror
6.1. EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY; COMPLIANCE
WITH LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.2. AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS. . . . . . . . . . 20
6.3. CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.4. SUBSIDIARIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.5. NONCONTRAVENTION. . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.6. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . 21
6.7. LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.8. ABSENCE OF CERTAIN CHANGES. . . . . . . . . . . . . . . . . . . . . 22
6.9. TAXES AND TAX RETURNS . . . . . . . . . . . . . . . . . . . . . . . 22
6.10. LABOR MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.11. NO BROKERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.12. CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.13. COMPLIANCE WITH APPLICABLE LAWS . . . . . . . . . . . . . . . . . . 22
6.14. CERTAIN AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 23
6.15. NO MATERIAL ADVERSE EFFECT. . . . . . . . . . . . . . . . . . . . . 23
6.16. INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.17. ENVIRONMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.18. TITLE TO ASSETS; LIENS. . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE 7
Covenants
7.1. ACQUISITION PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . 24
7.2. INTERIM OPERATIONS OF THE CORPORATION . . . . . . . . . . . . . . . 24
7.3. FILINGS; OTHER ACTION . . . . . . . . . . . . . . . . . . . . . . . 25
7.4. ACCESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
7.5. MERGER INDEMNIFICATION AND INSURANCE. . . . . . . . . . . . . . . . 26
7.6. FEES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.7. PUBLICITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.8. LISTING APPLICATION . . . . . . . . . . . . . . . . . . . . . . . . 27
7.9. FURTHER ACTION. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.10. NOTIFICATION OF CERTAIN MATTERS . . . . . . . . . . . . . . . . . . 27
7.11. LEGAL CONDITIONS TO MERGER. . . . . . . . . . . . . . . . . . . . . 28
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7.12. ACQUIROR BOARD. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.13. LIBERTY ACQUISITIONS. . . . . . . . . . . . . . . . . . . . . . . . 28
7.14. BANK ONE CONSENT. . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE 8
Conditions
8.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. . . . . 28
8.2. CONDITIONS TO OBLIGATION OF THE CORPORATION TO EFFECT
THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
8.3. CONDITIONS TO OBLIGATION OF ACQUIROR AND MERGER SUB TO
EFFECT THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . 29
8.4. FRUSTRATION OF CLOSING CONDITIONS . . . . . . . . . . . . . . . . . 30
ARTICLE 9
Termination
9.1. TERMINATION BY MUTUAL CONSENT . . . . . . . . . . . . . . . . . . . 31
9.2. TERMINATION BY EITHER ACQUIROR OR THE CORPORATION . . . . . . . . . 31
9.3. TERMINATION BY THE CORPORATION. . . . . . . . . . . . . . . . . . . 31
9.4. TERMINATION BY ACQUIROR . . . . . . . . . . . . . . . . . . . . . . 31
9.5. EFFECT OF TERMINATION AND ABANDONMENT . . . . . . . . . . . . . . . 31
9.6. EXTENSION; WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE 10
Indemnity
10.1. INDEMNIFICATION BY CLASS B HOLDERS. . . . . . . . . . . . . . . . . 33
10.2. PROCEDURE FOR INDEMNIFICATION -- THIRD PARTY CLAIMS . . . . . . . . 33
10.3. PROCEDURE FOR INDEMNIFICATION -- OTHER CLAIMS . . . . . . . . . . . 34
10.4. LIMITATION ON AMOUNT. . . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE 11
General Provisions
11.1. NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS . . . . . 35
11.2. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
11.3. BINDING EFFECT; BENEFIT . . . . . . . . . . . . . . . . . . . . . . 36
11.4. ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 36
11.5. AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
11.6. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
11.7. COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
11.8. HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
11.9. INTERPRETATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 37
11.10. WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
11.11. INCORPORATION OF EXHIBITS AND DISCLOSURE LETTERS. . . . . . . . . . 37
11.12. SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
11.13. OBLIGATION OF ACQUIROR. . . . . . . . . . . . . . . . . . . . . . . 37
11.14 MEDIATION AND ARBITRATION . . . . . . . . . . . . . . . . . . . . . 37
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EXHIBITS
4.1(i) Form of Advisor Agreement; Form of Option (Merger Consideration)
4.2(i)(A) Acquisition Agreement
4.2(i)(C) MSA
4.2(i)(D) Dentist Owner Employment Agreement
5.1 Articles of Incorporation and Bylaws of the Corporation
5.3 Options
5.4 Target Practices
5.6 Required Consents
5.9 No Undisclosed Liabilities
5.13 Proprietary Rights
5.14 Employee Benefit Plans
5.16 Related Parties
5.17 No Brokers
5.19 Contracts
5.24 Insurance Policies
5.25 Title to Assets; Liens
6.5 Noncontravention
6.14 Certain Agreements
6.18 Title to Assets; Liens
8.1(iii) Powers Form of Employment Agreement
8.1(iv) McAlister Form of Employment Agreement
8.2(ii) Form of Opinion of Counsel to Acquiror
8.3(ii) Form of Opinion of Counsel to the Corporation
8.3(iii) Form of Option
8.3(iv) SunTrust Equitable Securities Corporation Agreement
8.3(vi) Termination and Release Agreement
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of
November 13, 1998, is among PENTEGRA DENTAL GROUP, INC., a Delaware
corporation ("Acquiror"), LIBERTY DENTAL ALLIANCE, INC., a Tennessee
corporation (the "Corporation"), and LIBERTY ACQUISITION CORPORATION, a
Tennessee corporation and a wholly-owned subsidiary of Acquiror ("Merger
Sub"), James M. Powers, Jr. ("Powers"), Sylvia H. McAlister ("McAlister"),
and William Kelly ("Kelly") (Powers, McAlister and Kelly being collectively
referred to in this Agreement as the "Class B Holders").
RECITALS
A. The Board of Directors of the Corporation and Acquiror each have
determined that a business combination between Acquiror and the Corporation
is in the best interests of their respective companies and stockholders, and
presents an opportunity for their respective companies to achieve long-term
strategic objectives, and accordingly have agreed to effect the merger
provided for herein upon the terms and subject to the conditions set forth
herein.
B. The Corporation, Acquiror, Merger Sub and the Class B Holders
desire to make certain representations, warranties and agreements in
connection with the Merger.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
THE MERGER
1.1. THE MERGER. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in SECTION 1.3), Merger Sub
shall be merged with and into the Corporation in accordance with this
Agreement and the separate corporate existence of the Corporation shall
thereupon cease (the "Merger"). The Corporation shall be the surviving
corporation in the Merger (sometimes hereinafter referred to as the
"Surviving Corporation") and shall continue to be governed by the laws of the
State of Tennessee, and the separate corporate existence of the Corporation
with all its rights, privileges, powers, immunities, purposes and franchises
shall continue unaffected by the Merger, except as set forth in ARTICLES 2
AND 3. The Merger shall have the effects specified in Section 48-21-108 of
the Tennessee Business Corporation Act (the "TBCA").
1.2. THE CLOSING. The closing of the Merger (the "Closing") shall take
place (i) at the offices of Jackson Walker L.L.P., 901 Main Street, Dallas,
Texas, at 9:00 a.m., local time, on the first business day immediately following
the day on which the last to be fulfilled or waived of the
<PAGE>
conditions set forth in ARTICLE 8 shall be fulfilled or waived in accordance
herewith or (ii) at such other time and place and/or on such other date as
the Corporation and Acquiror may agree. The date on which the Closing occurs
is hereafter referred to as the "Closing Date."
1.3. EFFECTIVE TIME. If all the conditions to the Merger set forth in
ARTICLE 8 shall have been fulfilled or waived in accordance herewith and this
Agreement shall not have been terminated in accordance with ARTICLE 9, the
parties hereto shall, on the Closing Date, cause Articles of Merger meeting
the requirements of Section 48-21-107 of the TBCA to be properly executed and
filed with the Secretary of State of the State of Tennessee in accordance
with such section. The Merger shall become effective at the time of the
filing of Articles of Merger in accordance with the TBCA or at such later
time as the parties hereto have theretofore agreed upon and designated in
such filing as the effective time of the Merger (the "Effective Time").
ARTICLE 2
ARTICLES OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION
2.1. ARTICLES OF INCORPORATION. Effective at the Effective Time, the
Articles of Incorporation of the Corporation shall be the Articles of
Incorporation of the Surviving Corporation.
2.2. BYLAWS. The Bylaws of the Corporation in effect immediately
prior to the Effective Time shall be the Bylaws of the Surviving Corporation,
until duly amended in accordance with their terms and the TBCA.
ARTICLE 3
DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
3.1. DIRECTORS. The persons who are directors of Merger Sub
immediately prior to the Effective Time shall, from and after the Effective
Time, be and become 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.
3.2. OFFICERS. The officers of Merger Sub shall continue as officers
of the Surviving Corporation until their resignation or removal.
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ARTICLE 4
CONVERSION OF SHARES IN THE MERGER
4.1. CONVERSION OF SHARES. The manner of converting shares of the
Corporation and Merger Sub in the Merger shall be as follows:
(i) At the Effective Time, each share of the common stock par
value $0.01 per share (the "Common Shares"), of the Corporation issued and
outstanding immediately prior to the Effective Time (other than Common
Shares, if any, owned by Acquiror, Merger Sub or any other subsidiary of
Acquiror (the "Acquiror Group")) shall, by virtue of the Merger and without
any action on the part of the holder thereof, be converted into the right to
receive cash in the amount of $0.01. Additionally, on the dates specified in
SECTION 4.2, holders of Common Shares shall be entitled to receive up to
$3.99 and options to purchase up to 0.25 shares of common stock, $0.001 par
value of Acquiror (the "Acquiror Common Stock") for each Common Share.
Notwithstanding the foregoing, no options to purchase fractional shares will
be issued. Rather, the number of shares of Acquiror Common Stock for which
an option otherwise would be exercisable will be rounded up to the nearest
whole number. The cash and options into which the Common Shares are
converted shall be collectively referred to herein as the Common Merger
Consideration. The Acquiror's obligation to issue options on conversion of
Common Shares is conditioned on the execution by the holder of Common Shares
of an Advisor Agreement in the form of EXHIBIT 4.1(i). The options
constituting a portion of the Common Merger Consideration shall be in the
form of EXHIBIT 4.1(i).
(ii) At the Effective Time, each share of the Class B common
stock, par value $0.01 per share (the "Class B Shares"), of the Corporation
issued and outstanding immediately prior to the Effective Time shall, by
virtue of the Merger and without any action of the part of the holder
thereof, be converted into the right to receive cash in the amount of $0.01.
Additionally, on the dates specified in SECTION 4.2, holders of Class B
Shares shall be entitled to receive up to one (1) share of Acquiror Common
Stock for each Class B Share. Notwithstanding the foregoing, no fractional
shares of Acquiror Common Stock will be issued. Rather, the number of shares
of Acquiror Common Stock into which a Class B Share is converted will be
rounded up to the nearest whole number. The cash and shares of Acquiror
Common Stock into which the Class B Shares are converted shall be referred to
herein as the "Class B Merger Consideration" and the Common Merger
Consideration and Class B Merger Consideration are collectively referred to
herein as the "Merger Consideration". The Common Shares and the Class B
Shares shall be collectively referred to herein as the "Shares". The Merger
Consideration shall be deliverable only as set forth in SECTION 4.2.
(iii) As a result of the Merger and without any action on the part
of the holder thereof, all Shares shall cease to be outstanding and shall be
canceled and retired and shall cease to exist, and each holder of a certificate
(a "Certificate") representing any Shares shall thereafter cease to have any
rights with respect to such Shares, except the right to receive, without
interest, the
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<PAGE>
Merger Consideration in accordance with SECTION 4.1(i) or SECTION 4.1(ii), as
the case may be, following the surrender of such Certificate and at the times
specified in SECTION 4.2.
(iv) Each Share issued and held in the Corporation's treasury at
the Effective Time, by virtue of the Merger and without any action on the
part of the holder thereof, shall cease to be outstanding and shall be
canceled and retired without payment of any consideration therefor and shall
cease to exist.
(v) At the Effective Time, each share of common stock, par
value $0.01 per share, of Merger Sub issued and outstanding immediately prior
to the Effective Time as a result of the Merger shall continue to be an
issued and outstanding share of common stock of the Surviving Corporation.
Each certificate representing immediately prior to the Effective Date issued
shares of common stock of Merger Sub shall continue to evidence ownership of
the same number of shares of common stock of the Surviving Corporation.
(vi) Notwithstanding anything in this Agreement to the contrary,
Shares outstanding immediately prior to the Effective Time held by a holder
(if any) who is entitled to demand, and who properly demands, appraisal for
such shares in accordance with all provisions of the Tennessee law concerning
the right of such holders to dissent from the Merger and demand appraisal of
his shares ("Dissenting Shares") shall not be converted into a right to
receive Merger Consideration in accordance with SECTIONS 4.1(i) and 4.2
unless such holder fails to perfect or otherwise loses such holder's right to
appraisal, if any. If, after the Effective Time, such holder fails to
perfect or loses any such right to appraisal, such shares shall be treated as
if they had been converted as of the Effective Time into the right to receive
Merger Consideration in accordance with SECTION 4.1(i) and 4.2 hereof. The
Corporation shall give prompt notice to Acquiror of any demands received by
the Corporation for appraisal of Shares, and Acquiror shall have the right to
participate in and direct all negotiations and proceedings with respect to
such demands. The Corporation shall not, except with the prior written
consent of Acquiror, make any payment with respect to, or settle or offer to
settle, any such demands.
4.2. DELIVERY OF MERGER CONSIDERATION; CERTAIN DEFINITIONS. The
Merger Consideration shall be deliverable by Acquiror as set forth below:
(i) As used herein a "Liberty Practice Acquisition" is an
acquisition by a member of the Acquiror Group of substantially all of the assets
of or the entire equity interest in a dental practice with which the Corporation
has executed a letter of intent prior to the date hereof that is listed on
EXHIBIT 5.4 or that Powers or the Corporation has identified in writing to
Acquiror on or before December 31, 1998 as a dental practice with which Powers
or the Corporation has had communications prior to December 31, 1998 regarding a
dental practice management affiliation and which Powers or the Corporation
expects to execute a letter of intent with Acquiror regarding a
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<PAGE>
dental practice management affiliation on or prior to June 30, 1999 (a
"Liberty Practice"), which acquisition meets the following criteria, unless
otherwise agreed by Acquiror:
(A) The Acquisition is consummated on or before June 30,
1999 pursuant to the terms of an acquisition agreement in the form of EXHIBIT
4.2(i)(A) (with such changes therein as may be approved in writing by
Acquiror);
(B) The aggregate consideration paid by a member of the
Acquiror Group in connection with the acquisition is no greater than 95% of
the Practice Gross Revenues (hereinafter defined) of the dental practice
acquired. For purposes of this subparagraph (B), the value attributed to any
promissory note or convertible promissory note delivered at closing will be
the principal amount of the promissory note or convertible promissory note
delivered at closing. For purposes of this subparagraph (B), the value of
any Acquiror Common Stock delivered at closing will be the price agreed to
between the dental practice acquired, the Acquiror and the Corporation;
(C) Concurrently with closing, the dental practice or a
successor practice formed by the equity owners of the dental practice
acquired will enter into a 30-year management services agreement
substantially in the form of EXHIBIT 4.2(i)(C) (an "MSA") with a member of
the Acquiror Group (with such changes therein as may be approved in writing
by Acquiror) providing for a service fee based on 15% of collected revenues
of the dental practice, with the minimum service fee being no less than 15%
of the dental practice's Practice Gross Revenues (hereinafter defined).
However, in states where the management services fee legally cannot be based
on a percentage of collected revenues, the management fee will be based on a
methodology chosen by Acquiror's general counsel or, in the absence of a
general counsel, Acquiror's principal outside counsel, based on the advice of
local counsel;
(D) Concurrently with closing, the equity owners of the
dental practice will execute employment agreements in the form attached
hereto as EXHIBIT 4.2(i)(D) ("Dentist Employment Agreements") with the dental
practice pursuant to which the dentists agree to devote their full time and
attention to the dental practice for a period of five years beginning on the
closing date, subject to limited exceptions acceptable to Acquiror;
(E) Concurrently with closing, the dentist employees of
the dental practice who are not equity owners of the dental practice will
execute employment agreements with the dental practice in form satisfactory
to Acquiror.
(F) The persons receiving shares of Acquiror Common Stock
in connection with the acquisition will agree in writing not to sell or
transfer such shares of Acquiror Common Stock for a period of one year
following closing;
(G) Acquiror's legal, financial and operational due
diligence with respect to the dental practice acquired shall have been
completed by Acquiror and the results of such due diligence investigation
shall have been satisfactory to Acquiror.
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<PAGE>
(ii) As used herein "Practice Gross Revenues" refer to the
collected revenues of a dental practice for the year ended December 31, 1997.
(iii) Upon receipt of Certificates for Common Shares and letters
of transmittal in accordance with SECTION 4.3, $0.01 per Common Share of the
Common Merger Consideration shall be deliverable by Acquiror.
(iv) One-third (1/3) of the remaining Common Merger
Consideration shall be deliverable by Acquiror when members of the Acquiror
Group have consummated Liberty Practice Acquisitions representing a total of
$10,000,000 in Practice Gross Revenues.
(v) One-third (1/3) of the remaining Common Merger
Consideration shall be deliverable by Acquiror when members of the Acquiror
Group have consummated Liberty Practice Acquisitions representing a
cumulative total of $25,000,000 in Practice Gross Revenues.
(vi) One-third (1/3) of the remaining Common Merger
Consideration shall be deliverable by Acquiror when members of the Acquiror
Group have consummated Liberty Practice Acquisitions representing a
cumulative total of $40,000,000 in Practice Gross Revenues.
(vii) Upon receipt of the Certificates for Series B Shares and
letters of transmittal in accordance with SECTION 4.3, $0.01 in cash shall be
deliverable for each Class B Share.
(viii) Twenty percent (20%) of the remaining Class B Merger
Consideration shall be deliverable by Acquiror when members of the Acquiror
Group have consummated Liberty Practice Acquisitions representing a total of
$10,000,000 in Practice Gross Revenues.
(ix) An additional thirty percent (30%) of the remaining Class B
Merger Consideration shall be deliverable by Acquiror when members of the
Acquiror Group have consummated Liberty Practice Acquisitions representing a
cumulative total of $20,000,000 in Practice Gross Revenues. However, in the
event that at or before June 30, 1999, members of the Acquiror Group have
consummated Liberty Practice Acquisitions representing more than a cumulative
total of $10,000,000 but less than a cumulative total of $20,000,000 in
Practice Gross Revenues, there shall be deliverable by Acquiror as the total
remaining Class B Merger Consideration an additional percentage of Class B
Merger Consideration determined by multiplying thirty percent (30%) by the
quotient of (a) the difference between $10,000,000 and the cumulative total
of Practice Gross Revenues in excess of $10,000,000 attributable to Liberty
Practice Acquisitions consummated by members of the Acquiror Group at or
before June 30, 1999 divided by (b) $10,000,000.
(x) An additional forty percent (40%) of the remaining Class B
Merger Consideration shall be deliverable by Acquiror when members of the
Acquiror Group have consummated Liberty Practice Acquisitions representing a
cumulative total of $40,000,000 in Practice Gross Revenues. However, in the
event that at or before June 30, 1999, members of the
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Acquiror Group have consummated Liberty Practice Acquisitions representing
more than a cumulative total of $20,000,000 but less than a cumulative total
of $40,000,000 in Practice Gross Revenues, there shall be deliverable by
Acquiror as the total remaining Class B Merger Consideration an additional
percentage of Class B Merger Consideration determined by multiplying forty
percent (40%) by the quotient of (a) the difference between $20,000,000 and
the cumulative total of Practice Gross Revenues in excess of $20,000,000
attributable to Liberty Practice Acquisitions consummated by members of the
Acquiror Group at or before June 30, 1999 divided by (b) $20,000,000.
(xi) The final ten percent (10%) of the remaining Class B Merger
Consideration shall be deliverable by Acquiror when members of the Acquiror
Group have consummated Liberty Practice Acquisitions representing a
cumulative total of $50,000,000 in Practice Gross Revenues. However, in the
event that at or before June 30, 1999, members of the Acquiror Group have
consummated Liberty Practice Acquisitions representing more than a cumulative
total of $40,000,000 but less than a cumulative total of $50,000,000 in
Practice Gross Revenues, there shall be deliverable by Acquiror as the total
remaining Class B Merger Consideration an additional percentage of Class B
Merger Consideration determined by multiplying ten percent (10%) by the
quotient of (a) the difference between $10,000,000 and the cumulative total
of Practice Gross Revenues in excess of $40,000,000 attributable to Liberty
Practice Acquisitions consummated by members of the Acquiror Group at or
before June 30, 1999 divided by (b) $10,000,000.
4.3. EXCHANGE OF CERTIFICATES REPRESENTING SHARES.
(i) At the Effective Time, Acquiror shall mail to each person
who was, at the Effective Time, a holder of record (other than any of the
Acquiror Group) of a Certificate or Certificates (i) a letter of transmittal
which shall specify that delivery shall be effected, and a risk of loss and
title to the Certificates shall pass, upon (and only upon) delivery of the
Certificates to Acquiror, and which shall be in such form and have such other
provisions as Acquiror may reasonably specify, and (ii) instructions for use
in effecting the surrender of the Certificates in exchange for the Merger
Consideration. Upon surrender to the Acquiror of a Certificate for
cancellation together with such letter of transmittal, duly executed and
completed in accordance with the instructions thereto, the holder of such
Certificate shall, subject to the provisions of SECTION 4.2 hereof, be
entitled to receive in exchange therefor the Merger Consideration, which such
holder has the right to receive in respect of the Certificate surrendered
pursuant to the provisions of this ARTICLE 4, after giving effect to any
required tax withholdings, and the Certificate so surrendered shall forthwith
be canceled. No interest will be paid or accrued on the amount payable upon
surrender of Certificates.
(ii) At or after the date hereof, there shall be no transfers on
the stock transfer books of the Corporation of Shares which were outstanding
immediately prior to the date hereof. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, they shall be
canceled and exchanged for certificates for Merger Consideration in
accordance with the procedures set forth in this ARTICLE 4.
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<PAGE>
(iii) None of the Corporation, the Surviving Corporation, Merger
Sub, the Acquiror or any other person shall be liable to any former holder of
Shares for any amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(iv) In the event any Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
the Surviving Corporation, the posting by such person of a bond in such
reasonable amount as the Surviving Corporation may direct as indemnity
against any claim that may be made against it with respect to such
Certificate, Acquiror will issue in exchange for such lost, stolen or
destroyed Certificate the Merger Consideration, deliverable in respect
thereof pursuant to this Agreement.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE CORPORATION AND THE CLASS B HOLDERS
The Corporation and the Class B Holders jointly and severally represent
and warrant to Acquiror as of the date of this Agreement as follows:
5.1. EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY; COMPLIANCE WITH
LAW. The Corporation is a corporation duly incorporated, validly existing and
in good standing under the laws of Tennessee. The Corporation is qualified
to do business and is in good standing only under the laws of the State of
Tennessee, which is the only jurisdiction in which the character of the
properties owned or leased by it or in which the transaction of its business
makes such qualification necessary, except where the failure to be so
qualified would not have a material adverse effect on the business of the
Corporation (a "Corporation Adverse Effect"). As used in this Agreement, the
term "material adverse effect" means, with respect to any entity, a material
adverse effect on the financial condition, properties, business prospects, or
results of operations of such entity and its subsidiaries taken as a whole,
and on the ability of such entity to perform its obligations hereunder or to
consummate the transactions contemplated hereby. The Corporation has all
requisite corporate power and authority to own, operate and lease its
properties and carry on its business as now conducted. The Corporation has
delivered to Acquiror complete and correct copies of the Articles of
Incorporation and Bylaws of the Corporation, as amended to the date hereof,
copies of which are attached hereto as EXHIBIT 5.1.
5.2. AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS. The Corporation
has the requisite corporate power and authority to execute and deliver this
Agreement and all agreements and documents contemplated hereby by Acquiror, and
the consummation by the Corporation of the transactions contemplated hereby,
have been duly authorized by all requisite corporate action. This Agreement
constitutes, and all agreements and documents contemplated hereby (when executed
and delivered pursuant hereto for value received) will constitute, the valid and
legally binding obligations of the Corporation enforceable in accordance with
their terms, except as the same may be limited
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by bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting generally the enforcement of creditors' rights and by general
principles of equity.
5.3. CAPITALIZATION. The authorized capital stock of the Corporation
consists of 100,000,000 Common Shares. At the date of this Agreement, there
are 315,750 Common Shares and 545,000 Class B Shares issued and outstanding.
EXHIBIT 5.3 includes a complete list of the Corporation's shareholders at the
date of this Agreement. The Corporation has no Shares reserved for issuance,
except that, as of the date of this Agreement, 145,000 Common Shares are
reserved for issuance pursuant to outstanding options listed on EXHIBIT 5.3
(the "Options"). Except as listed on EXHIBIT 5.3, the Corporation has no
outstanding bonds, debentures, notes or other obligations the holders of
which have the right to vote (or, are convertible into or exercisable for
securities having the right to vote) with the stockholders of the Corporation
on any matter ("Voting Debt"). All of the issued and outstanding Common
Shares and Class B Shares are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights. Other than as set forth above
or as listed on EXHIBIT 5.3, there are not at the date of this Agreement any
existing options, warrants, calls, subscriptions, convertible securities, or
other rights or other agreements or commitments which obligate the
Corporation to issue, transfer or sell any shares of capital stock of the
Corporation. EXHIBIT 5.3 includes a true and complete list of all options
currently outstanding to purchase the Corporation's securities, including the
names of the holders thereof and the number of securities subject to each
option. After the Effective Time, assuming that all outstanding Options are
exchanged as contemplated by SECTION 8.3(iii), the Surviving Corporation will
have no obligation to issue, transfer or sell any Shares or common stock of
the Surviving Corporation pursuant to any Employee Benefit Plan (as defined
in SECTION 5.14).
5.4. TARGET PRACTICES. EXHIBIT 5.4 lists:
(i) Each entity with which the Corporation has entered into a
letter of intent with respect to a dental practice affiliation (each such
entity is referred to herein as a "Target Practice" and collectively such
entities are referred to herein as the "Target Practices"); and
(ii) to the extent available to the Corporation, with respect to
each Target Practice, the type of entity that comprises the Target Practice
and its jurisdiction of organization or formation.
5.5. OTHER INTERESTS. The Corporation does not own, directly or
indirectly, any interest or investment (whether equity or debt) in any
corporation, partnership, joint venture, business, trust or entity.
5.6. NONCONTRAVENTION. Neither the execution and delivery by the
Corporation of this Agreement, nor the consummation by the Corporation of the
transactions contemplated hereby and thereby in accordance with the terms hereof
and thereof, will: (i) conflict with or result in a breach of any provisions of
the Articles of Incorporation or Bylaws of the Corporation; (ii) result in a
breach or violation of, a default under, or the triggering of any payment or
other material obligations pursuant to, or accelerate vesting under the terms of
any outstanding options or warrants to purchase
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the Corporation's securities, or (iii) violate, or conflict with, or result
in a material breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination or in a right of termination or
cancellation of, or accelerate the performance required by, or result in the
creation of any lien, security interest, charge or encumbrance upon any of
the material properties of the Corporation under, or result in being declared
void, voidable, or without further binding effect, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of
trust or any material license, franchise, permit, lease, contract, agreement,
management services agreement or other instrument or commitment or obligation
("Contracts") to which the Corporation is a party other than Contracts which
require the consent of the other party or parties thereto to assign or
transfer to Merger Sub or Acquiror by reason of the execution of this
Agreement or the consummation of the transactions contemplated herein, which
required consents are set forth on EXHIBIT 5.6, or by which the Corporation
or any of its properties is bound or affected except with respect to matters
which are not material to the business of the Corporation.
5.7. PRIVATE PLACEMENT. The Corporation has delivered to Acquiror the
Corporation's Private Placement Memorandum dated January 12, 1998 and all
amendments and supplements thereto filed (the "Memorandum"). The Memorandum
(i) was prepared in all material respects in accordance with the requirements
of the Securities Act of 1933, as amended (the "Securities Act") and all
applicable state securities laws, and the rules and regulations thereunder
and (ii) does not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in the light of the circumstances under which they
were made, not misleading. The private placement of Shares contemplated by
the Memorandum was conducted and consummated in compliance with the
Securities Act, all applicable state securities laws and the rules and
regulations thereunder.
5.8. FINANCIAL STATEMENTS. The Corporation has delivered to Acquiror
(a) an audited balance sheet of Acquiror as at December 31, 1997 (including
the notes thereto, the "Balance Sheet"), and the related audited statements
of income, changes in shareholders' equity and cash flows for the fiscal year
then ended, including in each case the notes thereto, together with the
report thereon of Arthur Andersen, LLP, independent certified public
accountants, and (b) an unaudited balance sheet of the Corporation as at
September 30, 1998 (the "Interim Balance Sheet") and the related unaudited
statement[s] of income, changes in shareholders' equity, and cash flows for
the nine (9) months then ended, including in each case the notes thereto.
Such financial statements fairly present the financial condition and the
results of operations, changes in shareholders' equity, and cash flows of the
Corporation as at the respective dates of and for the periods referred to in
such financial statements, all in accordance with GAAP, subject, in the case
of interim financial statements, to normal recurring year-end adjustments
(the effect of which will not, individually or in the aggregate, be
materially adverse) and the absence of notes (that, if presented, would not
differ materially from those included in the Balance Sheet). The financial
statements referred to in this SECTION 5.8 reflect the consistent application
of such accounting principles throughout the periods involved, except as
disclosed in the notes to such financial statements. The financial statements
have been and will be prepared from and are in accordance with the books and
records of the Corporation.
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The Corporation has also delivered to Acquiror copies of all letters from the
Corporation's auditors to the Corporation's board of directors or the audit
committee thereof since the Corporation's inception.
5.9. NO UNDISCLOSED LIABILITIES. Except as set forth in EXHIBIT 5.9,
the Corporation has no liabilities or obligations of any nature (whether
known or unknown and whether absolute, accrued, contingent, or otherwise)
except for liabilities or obligations reflected or reserved against in the
Balance Sheet or the Interim Balance Sheet or as otherwise may be incurred in
the ordinary course of business.
5.10. LITIGATION. There are no actions, suits or proceedings pending
against the Corporation or, to the knowledge of the officers of the
Corporation or the Class B Holders, threatened against the Corporation, at
law or in equity, or before or by any federal, state or local commission,
board, bureau, agency or instrumentality.
5.11. ABSENCE OF CERTAIN CHANGES. Since its incorporation, the
Corporation has conducted no business other than incident to the proposed
Liberty Practice Acquisitions and there has not been (i) any damage,
destruction or loss (not covered by insurance) with respect to any assets of
the Corporation; (ii) any change in the Corporation or any development or
combination of developments of which its officers or the Class B Holders have
knowledge which has resulted or is reasonably likely to result in a
Corporation Adverse Effect; (iii) any declaration, setting aside or payment
of any dividend or other distribution with respect to the Shares; or (iv) any
material change in the Corporation's accounting principles, practices or
methods.
5.12. TAXES.
(i) FILING OF TAX RETURNS. The Corporation has duly and timely
filed with the appropriate governmental agencies all income, excise,
corporate, franchise, property, sales, use, payroll, withholding and other
tax returns (including information returns) and reports required to be filed
by the United States or any state or any political subdivision thereof or any
foreign jurisdiction. All such tax returns or reports are complete and
accurate and properly reflect the taxes of the Corporation for the periods
covered thereby.
(ii) PAYMENT OF TAXES. The Corporation has paid or accrued all
taxes, penalties and interest which have become due with respect to any
returns that it has filed and any assessments of which it is aware. The
Corporation is not delinquent in the payment of any tax, assessment or
governmental charge.
(iii) NO PENDING DEFICIENCIES, DELINQUENCIES, ASSESSMENTS OR
AUDITS. No tax deficiency or delinquency has been asserted against the
Corporation. There is no unpaid assessment, proposal for additional taxes,
deficiency or delinquency in the payment of any of the taxes of the
Corporation that could be asserted by any taxing authority. There is no
taxing authority audit of the
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Corporation pending or threatened. The Corporation has not violated any
federal state, local or foreign tax law, except as would not have a
Corporation Adverse Effect.
(iv) NO EXTENSION OF LIMITATION PERIOD. The Corporation has not
granted an extension to any taxing authority of the limitation period during
which any tax liability may be assessed or collected.
(v) ALL WITHHOLDING REQUIREMENTS SATISFIED. All monies
required to be withheld by the Corporation and paid to governmental agencies
for all income, social security, unemployment insurance, sales, excise, use
and other taxes have been collected or withheld and either paid to the
respective governmental agencies or set aside in accounts for such purpose.
(vi) STATE UNEMPLOYMENT TAXES. In respect of its most recently
completed reporting period, the Corporation has paid state unemployment taxes
to the state of Tennessee at the rate of 2.7 percent of the wages paid by the
Corporation during such period that are subject to such tax. The Corporation
does not know or have reason to know of any increase or proposed increase, or
facts that would lead to an increase, in the rate of such state unemployment
tax for any period in the future.
(vii) REASONABLE EXPENDITURES. All amounts paid by the
Corporation (i) to officers, employees, consultants and agents as salaries,
compensation, and expenses reimbursed by the Corporation, and (ii) as rental
payments, have been in amounts which are reasonable and deductible for income
tax purposes.
(viii) AFFILIATED GROUP. The Corporation is not, and in prior
years has not been, a member of an affiliated group, as such term is defined
in Section 1504 of the Code, filing a consolidated return.
(ix) SAFE HARBOR LEASE. None of the assets of the Corporation
constitute property that Acquiror or any member of the Acquiror Group, will
be required to treat as being owned by another person pursuant to the "Safe
Harbor Lease" provisions of Section 168(f)(8) of the Code prior to repeal by
the Tax Equity and Fiscal Responsibility Act of 1982.
(x) TAX EXEMPT ENTITY. None of the assets of the Corporation
are or will be subject to a lease to a "tax exempt entity" as such term is
defined in Section 168(h)(2) of the Code.
(xi) COLLAPSIBLE CORPORATION. The Corporation has not at any
time consented to have the provisions of Section 341(f)(2) of the Code apply
to it.
(xii) CHANGE IN ACCOUNTING METHOD. The Corporation has not
voluntarily or involuntarily changed a method of accounting resulting in the
Corporation's inclusion of amounts in income pursuant to adjustments under
Section 481 of the Code.
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(xiii) S CORPORATION. The Corporation is not currently and at no
time has been an S corporation as such term is defined in Section 1361(a) of
the Code.
(xiv) GOLDEN PARACHUTE. The Corporation is not a party to any
employment agreement, or any incentive compensation, deferred compensation,
profit sharing, stock option, stock bonus, stock purchase, savings,
retirement, pension or other similar plan or arrangement which would require
a payment, and the Corporation will not make a payment that would not be
deductible by Acquiror or the Corporation because such payment or other
compensation would constitute an excess parachute payment within the meaning
of Section 280G of the Code.
5.13. PROPRIETARY RIGHTS. EXHIBIT 5.13 lists all material patents,
trademarks, trade names, service marks, service names, copyrights, know how,
other proprietary intellectual property rights, applications therefor and
licenses or other rights in respect thereof ("Intellectual Property") used or
held for use in connection with the business of the Corporation. The
Corporation owns or has valid, binding, enforceable and adequate rights to
use all Intellectual Property without any conflict with the rights of others.
The Corporation has not received any notice from any other person pertaining
to or challenging its right to use any Intellectual Property or any trade
secrets, proprietary information, inventions, processes and procedures owned
or used by or licensed to it, except with respect to rights the loss of
which, individually have not had and are not reasonably likely to result in a
Corporation Adverse Effect. To the knowledge of the officers of the
Corporation or the Class B Holders, none of the officers or employees of the
Corporation is in violation of any term of any employment contract, or any
other contract or agreement relating to the relationship of any such employee
with the Corporation or any other party the result of which has had or is
reasonably likely to result in a cost, loss or damage to the Corporation in
excess of $1,000.
5.14. EMPLOYEE BENEFIT PLANS.
(i) EXHIBIT 5.14 contains a complete and accurate list of the
following: (I) all employee benefit plans (the "Employee Benefit Plans")
(within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) sponsored or administered by the
Corporation or any ERISA Affiliate to which the Corporation or any ERISA
Affiliate contributes or is required to contribute on behalf of the
Corporation's current or former employees; (II) all compensation plans,
funds, arrangements and practices (the "Compensation Plans") sponsored by the
Corporation for the benefit of its current or former employees, including
plans providing for bonuses, incentive compensation, stock options, fringe
benefits, and deferred compensation; and (III) all employment agreements (the
"Employment Agreements") to which the Corporation is a party with respect to
the Corporation's employees, including agreements pertaining to employee
leasing, services, noncompetition, and other similar matters with current or
former employees. The term "ERISA Affiliate" shall include any person,
entity or arrangement which is considered one employer with the Corporation
within the meaning of Section 414 of the Code or Section 4001 of ERISA. No
Employee Benefit Plan is a single-employer plan within the meaning of Section
4001(a)(15) of ERISA or a multiemployer plan (within the meaning of Section
4001(a)(3) of ERISA.
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(ii) Each Employee Benefit Plan has been administered and
maintained in compliance with all applicable laws, rules and regulations, and
all reports required by any governmental agency have been timely filed. No
Employee Benefit Plan or Compensation Plan is currently the subject of an
audit, investigation, enforcement action or other similar proceeding
conducted by any state or federal agency. There is no proceeding, claim
(other than routine claims for benefits), lawsuit, or investigation pending
or to the knowledge of the officers of the Corporation or the Class B Holders
threatened, concerning or involving any Compensation Plan or Employee Benefit
Plan. There is no litigation involving, and there are no proceedings before,
the U.S. Department of Labor or any other commission or administrative or
regulatory authority pending against the Corporation or any ERISA Affiliate,
or against any fiduciary of any Compensation Plan or Employee Benefit Plan,
relating to claims for benefits, breaches of duties or relating in any way to
the maintenance or operation of such plans; and to the knowledge of the
officers of the Corporation or the Class B Holders no such claim exists or
has been threatened.
(iii) The Corporation has received a current favorable
determination letter or ruling from the Internal Revenue Service for each
Employee Benefit Plan sponsored by the Corporation, and each amendment
thereto, intended to be qualified within the meaning of Section 401(a) of the
Code and/or tax-exempt within the meaning of Section 501(a) of the Code. No
proceedings exist or, to the knowledge of the officers of the Corporation or
the Class B Holders, have been threatened that could result in the revocation
of any such favorable determination letter or ruling.
(iv) All contributions due to each Employee Benefit Plan have
been made in a timely manner and all liabilities of the Corporation with
respect to the Employee Benefit Plans and Compensation Plans are reflected in
the Corporation's balance sheet.
(v) The Corporation has no obligation or commitment to provide
medical, dental or life insurance benefits to or on behalf of any of the
Corporation's employees who may retire or any of the Corporation's former
employees who have retired from employment with the Corporation, except as
provided in Section 4980B of the Code with respect to continuation coverage
under COBRA.
(vi) There are no restrictions on the rights of the Corporation
to amend or terminate any Employee Benefit Plan or Compensation Plan without
incurring any liability thereunder.
5.15. LABOR MATTERS.
(i) The Corporation has never been a party to any agreement with
any union, labor organization or collective bargaining unit. No employees of
the Corporation are represented by any union, labor organization or collective
bargaining unit. To the knowledge of the officers of the Corporation or the
Class B Holders, the Corporation's employees have no intention to and have not
threatened to organize or join a union, labor organization or collective
bargaining unit, and there
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are no existing or threatened labor strikes, disputes, grievances,
controversies or other labor troubles affecting the Corporation, nor does any
basis therefor exist.
(ii) The Corporation has been and is in compliance with all
applicable laws, rules, regulations and ordinances respecting employment and
employment practices, terms and conditions of employment and wages and hours,
and is not liable for any arrears of wages or penalties for failure to comply
with any of the foregoing. The Corporation has not engaged in any unfair
labor practice or discriminated on the basis of race, color, religion, sex,
national origin, age or handicap in its employment conditions or practices.
There are no unfair labor practice charges or complaints or racial, color,
religious, sex, national origin, age or handicap discrimination charges or
complaints pending or, to the knowledge of the officers of the Corporation or
the Class B Holders, threatened against the Corporation before any federal,
state or local court, board, department, commission or agency nor to their
knowledge, does any basis therefor exist.
5.16. RELATED PARTIES. Except as set forth on EXHIBIT 5.16, to the
knowledge of the officers of the Corporation or the Class B Holders, none of
the executive officers or directors of the Corporation or any entity
controlled by any of the foregoing or any member of the immediate family of
any of the foregoing or any Class B Holder:
(i) owns, directly or indirectly, any interest in (except for
stock holdings not in excess of two percent (2%) held solely for investment
purposes in securities which are listed on a national securities exchange or
which are regularly traded in the over-the-counter market), or is an owner,
sole proprietor, stockholder, partner, director, officer, employee, provider,
consultant or agent of any person which is a competitor, lessor, lessee or
customer of or a party to a management services or similar agreement with, or
supplier of goods or services to, the Corporation;
(ii) owns, directly or indirectly, in whole or in part, any real
property, leasehold interests, tangible property or intangible property which
the Corporation currently uses in its business;
(iii) has any cause of action or other suit, action or claim
whatsoever against, or owes any amount to the Corporation.
(iv) has sold to, or purchased from, the Corporation any assets
or property since the incorporation of the Corporation;
(v) is competing or at any time since the incorporation of the
Corporation has competed, directly or indirectly, with the Corporation; or
(vi) is indebted to the Corporation.
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As used in this SECTION 5.16, a person's immediate family shall mean
such person's spouse, parents, children, siblings, mothers and
fathers-in-law, sons and daughters-in-law, and brothers and sisters-in-law.
5.17 NO BROKERS. Except as set forth on EXHIBIT 5.17, the Corporation
has not entered into any contract, arrangement or understanding with any
person or firm which may result in the obligation of Acquiror to pay any
finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
5.18. VOTE REQUIRED. The affirmative vote of the holders of a majority
of the outstanding Shares is the only vote of the holders of any class or
series of capital stock of the Corporation necessary to approve the Merger.
Such vote has been obtained.
5.19. CONTRACTS; NO DEFAULT.
(i) EXHIBIT 5.19 sets forth as of the date of this Agreement a
list of each Contract of the Corporation:
(A) involving an aggregate payment or commitment per Contract
on the part of any party of more than $1,000 during the 12-month period ended
December 31, 1998;
(B) with an individual or entity rendering services as an
employee of or contractor to the Corporation;
(C) concerning a partnership or joint venture with another
person; or
(D) involving the provision by the Corporation of dental
practice management or similar services;
(E) involving an acquisition of assets or securities, which
acquisition has not yet been consummated or has been consummated by the
Corporation since its incorporation; or
(F) evidencing indebtedness of the Corporation.
(ii) EXHIBIT 5.19 lists each Contract to which the Corporation
is a party limiting the right of the Corporation prior to the Effective Time,
or the Surviving Corporation or any of its subsidiaries or affiliates (other
than individuals) at or after the Effective Time, to engage in, or to compete
with any person in, any business, including each contract or agreement
containing exclusivity provisions restricting the geographical area in which,
or the method by which, any business may be conducted by the Corporation
prior to the Effective Time, or Surviving Corporation or any of its
subsidiaries or affiliates (other than individuals) after the Effective Time.
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(iii) Each Contract, and each other contract or agreement of the
Corporation which would have been required to be disclosed on EXHIBIT 5.19
had such contract or agreement been entered into prior to the date of this
Agreement, is in full force and effect and is a legal, valid and binding
Contract and there is no material default (or any event which, with the
giving of notice or lapse of time or both, would be a material default) by
the Corporation or, to the knowledge of the executive officers of the
Corporation or the Class B Holders, any other party, in the timely
performance of any obligation to be performed or paid under any of Contracts
or any such other contract or agreement.
5.20. REAL PROPERTY.
(i) The Corporation does not own or have the option or right to
acquire any real property.
(ii) With respect to the sublease dated January 13, 1998
relating to the Corporation's principal executive offices in Nashville,
Tennessee (the "Nashville Lease"):
(A) such lease is in full force and effect and is a
legal, valid and binding obligation of the Corporation, enforceable by the
Corporation in accordance with its terms;
(B) no notice of default under such lease has been
received by the Corporation which is still in effect, the Corporation is not
in breach or default of such lease, and no event has occurred which, with
notice or lapse of time, would constitute such a breach or default or permit
termination, modification or acceleration under such lease;
(C) as of the date of this Agreement, to the knowledge of
the officers of the Corporation or the Class B Holders, there are no pending
or threatened condemnation or eminent domain proceedings with respect to the
real property subject to such lease; and
(D) as of the date of this Agreement, the Corporation has
not received notice of any special assessments relating to the real property
subject to such lease.
(iii) The Nashville Lease is the only lease to which the
Corporation is a party related to real property.
5.21. INFORMATION. No representation or warranty made by the
Corporation contained in this Agreement and no statement contained in any
certificate, list, exhibit or other instrument specified in this Agreement
contains any untrue statement of a material fact or omits or will omit to
state a material fact necessary to make the statements contained herein or
therein, in light of the circumstances under which they were made, not
misleading.
5.22. COMPLIANCE WITH APPLICABLE LAWS. The Corporation holds all permits,
licenses, variances, exemptions, orders and approvals of all courts,
administrative agencies or commissions
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or other governmental authorities or instrumentalities, domestic or foreign
(each, a "Governmental Entity") necessary or required for the conduct of the
business of the Corporation (the "Corporation Permits"), except for such
permits, licenses, variances, exemptions, orders and approvals the failure to
hold which would not have a Corporation Adverse Effect. The Corporation is in
compliance with the terms of the Corporation Permits, except for such
failures to comply, which, singly or in the aggregate, would not have a
Corporation Adverse Effect. The business of the Corporation is not being
conducted in violation of any law, ordinance or regulation of any
Governmental Entity, except for possible violations which individually or in
the aggregate do not and could not have a Corporation Adverse Effect. No
investigation or review by any Governmental Entity with respect to the
Corporation is pending, or, to the knowledge of the officers of the
Corporation or the Class B Holders, threatened, nor has any Governmental
Entity indicated an intention to conduct the same.
5.23. ENVIRONMENT. As used herein, the term "Environmental Laws" means
all federal, state, local or foreign laws relating to pollution or protection
of human health or the environment (including, without limitation, ambient
air, surface water, groundwater, land surface or subsurface strata),
including without limitation laws relating to emissions, discharges, releases
or threatened releases of chemicals, pollutants, contaminants, or industrial,
toxic or hazardous substances or wastes into the environment, or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of chemicals, pollutants,
contaminants, or industrial, toxic or hazardous substances or wastes, as well
as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved thereunder.
There are, with respect to the Corporation, no past or present violations of
Environmental Laws, releases of any material into the environment, actions,
activities, circumstances, conditions, events, incidents, or contractual
obligations which may give rise to any common law liability or any liability
under the Comprehensive Environmental Response Compensation and Liability Act
of 1980 ("CERCLA") or similar state or local laws, which liabilities, either
individually or in the aggregate, would have a Corporation Adverse Effect.
5.24. INSURANCE.
(i) The Corporation has (A) property, fire and casualty
insurance policies, with extended coverage (subject to reasonable
deductibles), sufficient to allow it to replace any of its properties that
might be damaged or destroyed, and (B) liability, workers compensation
insurance and bond and surety arrangements reasonably adequate, in light of
the business in which it is engaged, to protect it and its financial
condition against the risks involved in the business conducted by it.
EXHIBIT 5.24 sets forth a list of all such policies.
(ii) EXHIBIT 5.24 sets forth any pending claims under each of
the policies listed therein, and there are no other pending claims under any
of such policies, and no event has occurred and no condition exists that
could reasonably be expected to give rise to or serve as a basis for any such
claim.
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(iii) The Corporation is not in default under any insurance
policy or bond listed on EXHIBIT 5.24 and no event which would (with the
passage of time, notice or both) constitute a breach or default thereunder by
the Corporation or, to the knowledge of the officers of the Corporation or
the Class B Holders, the insurer thereunder, has occurred, or, to the
knowledge of the officers of the Corporation or the Class B Holders, will
occur as a result of the transactions contemplated herein. Consummation of
the transactions contemplated herein will not (and will not give any person
or entity a right to) terminate or modify any material rights of, or
accelerate or augment any material obligation of the Corporation under any
insurance policy or bond insofar as such policy or bond relates to or covers
incidents that give rise to claims for incidents taking place prior to the
Closing Date. The Corporation has not done anything by way of action or
inaction which might invalidate or diminish coverage under any of such
policies in whole or in part. There are no outstanding requirements or
recommendations of any insurance company that has issued a policy to the
Corporation which require or recommend any changes to the conduct of the
business of the Corporation or any repair or other work with respect to any
of its properties.
5.25. TITLE TO ASSETS; LIENS. Except as disclosed on EXHIBIT 5.25, the
Corporation has good and marketable title to all of its assets, and such
assets are free and clear of any material mortgages, liens, charges,
encumbrances, or title defects of any nature whatsoever. The Corporation has
valid and enforceable leases for the premises and the equipment, furniture
and fixtures purported to be leased by it. All such leases are listed on
EXHIBIT 5.25.
5.26. NO MATERIAL ADVERSE EFFECT. Except as disclosed in this
Agreement or the exhibits hereto, the Corporation and Class B Holders are not
aware of any fact which, alone or together with another fact, is likely to
result in a Corporation Adverse Effect.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF ACQUIROR
Acquiror represents and warrants to the Corporation and Class B Holders
as of the date of this Agreement as follows:
6.1. EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY; COMPLIANCE WITH
LAW. Acquiror is a corporation duly incorporated, validly existing in good
standing under the laws of Delaware. Acquiror is duly licensed or qualified to
do business as a foreign corporation and in good standing under the laws of each
jurisdiction in which the character of the properties owned or leased by it
therein or in which the transaction of its business makes such qualification
necessary, except where the failure to be so qualified would not have a material
adverse effect on the business of Acquiror taken as a whole, which for purposes
of this Agreement shall mean the business of Acquiror and the Acquiror
Subsidiaries (hereinafter defined) taken as a whole (an "Acquiror Adverse
Effect"). Acquiror has all requisite corporate power and authority to own,
operate and lease its properties and carry on its business as now conducted.
The copies of Acquiror's Certificate of Incorporation and
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Bylaws previously delivered to the Corporation are true and correct. Merger
Sub is a corporation duly incorporated, validly existing and in good standing
under the laws of Delaware. Merger Sub has not conducted any business or
incurred any liabilities other than in connection with the negotiation and
execution of this Agreement. Merger Sub is duly licensed or qualified to do
business as a foreign corporation and is in good standing under the laws of
each jurisdiction in which the character of the properties owned or leased by
it therein or in which the transaction of its business makes such
qualification necessary. Merger Sub has the corporate power and authority to
execute and deliver this Agreement and consummate the transactions
contemplated hereby.
6.2. AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS. The sole
stockholder of Merger Sub has approved this Agreement. The execution and
delivery of this Agreement and all agreements and documents contemplated
hereby by Acquiror and Merger Sub, and the consummation by them of the
transactions contemplated hereby and thereby, have been duly authorized by
all requisite corporate action. This Agreement constitutes, and all
agreements and documents contemplated hereby (when executed and delivered
pursuant hereto for value received) will constitute, the valid and legally
binding obligations of Acquiror and Merger Sub, enforceable in accordance
with their terms, except as the same may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting generally
the enforcement of creditors' rights and by general principles of equity.
6.3. CAPITALIZATION. The authorized capital stock of Acquiror
consists of 40,000,000 shares of Acquiror Common Stock and 10,000,000 shares
of Preferred Stock, par value $0.001 per share ("Acquiror Preferred Stock").
As of September 30, 1998, there were 7,613,033 shares of Acquiror Common
Stock issued and outstanding and no shares of Acquiror Preferred Stock issued
and outstanding. Acquiror has no shares of Acquiror Common Stock or Acquiror
Preferred Stock reserved for issuance, except that, as of September 30, 1998,
2,000,000 shares of Acquiror Common Stock were reserved for issuance pursuant
to Acquiror's 1997 Stock Compensation Plan. Acquiror has no outstanding
Voting Debt. All such issued and outstanding shares of Acquiror Common Stock
are duly authorized, validly issued, fully paid, nonassessable and free of
preemptive rights. No certificate of designation has been filed by Acquiror
with the office of the Delaware Secretary of State with respect to the
Acquiror Preferred Stock
6.4. SUBSIDIARIES. Acquiror owns, directly or indirectly, each of the
outstanding shares of capital stock of each of Acquiror's subsidiaries
(individually, an "Acquiror Subsidiary" and collectively, the "Acquiror
Subsidiaries"). Each Acquiror Subsidiary is duly licensed or qualified to do
business as a foreign corporation and is in good standing under the laws of
each jurisdiction in which the character of the properties owned or leased by
it therein or in which the transaction of its business makes such
qualification necessary, except where the failure to be so qualified would
not have an Acquiror Adverse Effect.
6.5. NONCONTRAVENTION. Except as set forth on EXHIBIT 6.5, neither the
execution and delivery by Acquiror of this Agreement, nor the consummation by
Acquiror of the transactions contemplated hereby in accordance with the terms
hereof, will: (i) conflict with or result in a breach
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of any provisions of the Certificate of Incorporation or Bylaws of Acquiror;
(ii) violate, or conflict with, or result in a material breach of any
provision of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or result in the
termination or in a right of termination or cancellation of, or accelerate
the performance required by, or result in the creation of any material lien,
security interest, charge or encumbrance upon any of the material properties
of Acquiror under, or result in being declared void, voidable, or without
further binding effect, any of the terms, conditions or provisions of any
Contract to which Acquiror is a party, or by which Acquiror or any of its
properties is bound or affected except with respect to matters which are not
material to the business of Acquiror taken as a whole; or (iii) require any
material consent, approval or authorization of, or declaration, filing or
registration with, any governmental or regulatory authority, of which the
failure to obtain would have an Acquiror Adverse Effect.
6.6. FINANCIAL STATEMENTS. Acquiror has delivered to the Corporation
Acquiror's Registration Statement on Form S-4 (No. 333-49473) together with
all amendments thereto and Acquiror's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, each in the form (including exhibits and any
amendments thereto) filed with the Securities and Exchange Commission ("SEC")
(collectively, the "Acquiror Reports"). As of their respective dates, the
Acquiror Reports (i) were prepared in accordance with the requirements of the
Securities Act, the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and the rules and regulations thereunder and (ii) did not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. Each of the consolidated balance sheets of Acquiror included in
or incorporated by reference into the Acquiror Reports (including any related
notes and schedules) fairly presents the consolidated financial position of
Acquiror and the Acquiror Subsidiaries as of its date and each of the
consolidated statements of income, retained earnings and cash flows of
Acquiror included in or incorporated by reference into the Acquiror Reports
(including any related notes and schedules) fairly presents the consolidated
results of operations, retained earnings and cash flows, as the case may be,
of Acquiror and the Acquiror Subsidiaries for the periods set forth therein
(subject, in the case of unaudited statements, to normal year-end adjustments
which would not be material in amount or effect), in each case in accordance
with generally accepted accounting principles consistently applied during the
periods involved, except as may be noted therein and subject to normal
year-end adjustments in the case of interim financial statements. Except as
and to the extent set forth on the unaudited consolidated balance sheet of
Acquiror and the Acquiror Subsidiaries at June 30, 1998, including all notes
thereto, neither Acquiror nor any Acquiror Subsidiaries has any material
liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) that would be required to be reflected on, or
reserved against in, a consolidated balance sheet of Acquiror or in the notes
thereto, prepared in accordance with generally accepted accounting principles
consistently applied, except liabilities arising in the ordinary course of
business since such date.
6.7. LITIGATION. There are no actions, suits or proceedings pending
against Acquiror or Acquiror's Subsidiaries or, to the knowledge of the
executive officers of Acquiror, threatened against Acquiror or Acquiror's
Subsidiaries, at law or in equity, or before or by any federal, state or local
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commission, board, bureau, agency or instrumentality that are reasonably
likely to have an Acquiror Adverse Effect.
6.8. ABSENCE OF CERTAIN CHANGES. Except as disclosed in the Acquiror
Reports filed with the SEC prior to the date hereof or has otherwise been
publicly announced, since June 30 1998, Acquiror has conducted its business
only in the ordinary course of such business and there has not been (i) any
material adverse change in such business of which its executive officers have
knowledge; (ii) any declaration, setting aside or payment of any dividend or
other distribution with respect to its capital stock; or (iii) any material
change in its accounting principles, practices or methods.
6.9. TAXES AND TAX RETURNS. Acquiror (i) has timely filed all
federal, state, local and foreign tax returns required to be filed by it for
the years ended prior to the date of this Agreement or requests for
extensions have been timely filed and any such request shall have been
granted and not expired and all such filed returns are complete in all
material respects, (ii) has paid or accrued all taxes shown to be due and
payable on such returns and (iii) has properly accrued all such taxes for
periods subsequent to the periods covered by such returns.
6.10. LABOR MATTERS. Acquiror is not a party to or bound by any
collective bargaining agreement. There is no unfair labor practice or labor
arbitration proceeding pending or, to the knowledge of the executive officers
of Acquiror, threatened relating to its business. To the knowledge of the
executive officers of Acquiror, there are not any organizational efforts
presently being made or threatened involving employees of Acquiror.
6.11. NO BROKERS. Acquiror has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of Acquiror to pay any finder's fees, brokerage or agent's
commissions or other like payments in connection with the negotiations
leading to this Agreement or the consummation of the transactions
contemplated hereby, Acquiror is not aware of any claim for payment of any
finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
6.12. CAPITAL STOCK. The outstanding shares of common stock of Merger
Sub are validly issued, fully paid and nonassessable and are owned directly
by Acquiror. The issuance and delivery by Acquiror of the Merger
Consideration in connection with the Merger have been duly and validly
authorized by all necessary corporate action on the part of Acquiror. The
shares of Acquiror Common Stock to be issued in connection with the exercise
of the options comprising a portion of the Merger Consideration, when issued
in accordance with the terms of this Agreement, will be validly issued, fully
paid and nonassessable and listed on the American Stock Exchange (the "AMEX").
6.13. COMPLIANCE WITH APPLICABLE LAWS. Acquiror and the Acquiror
Subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities required
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or necessary for the conduct of their respective businesses, except for such
permits, licenses, variances, exemptions, orders and approvals the failure of
which to hold would not have an Acquiror Adverse Effect (the "Acquiror
Permits"). Acquiror and the Acquiror Subsidiaries are in compliance with the
terms of the Acquiror Permits, except for such failures to comply, which
singly or in the aggregate, would not have an Acquiror Adverse Effect.
Except as disclosed in the Acquiror Reports filed prior to the date of this
Merger Agreement, the businesses of Acquiror and the Acquiror Subsidiaries
are not being conducted in violation of any law, ordinance or regulation of
any Governmental Entity, except for possible violations which individually or
in the aggregate do not and would not have an Acquiror Adverse Effect. No
investigation or review by any Governmental Entity with respect to Acquiror
or any of the Acquiror Subsidiaries is pending, or, to the knowledge of
Acquiror, threatened, nor has any Governmental Entity indicated an intention
to conduct the same, other than those the outcome of which would not have an
Acquiror Adverse Effect.
6.14. CERTAIN AGREEMENTS. Except as disclosed in the Acquiror Reports
filed prior to the date of this Agreement or as set forth on EXHIBIT 6.14
neither Acquiror nor any of the Acquiror Subsidiaries is a party to any oral
or written (i) agreement, contract, indenture or other instrument relating to
Indebtedness in an amount exceeding $1,000,000 or (ii) other contract,
agreement or commitment (except those entered into in the ordinary course of
business) having an Acquiror Adverse Effect. Neither Acquiror nor any of the
Acquiror Subsidiaries is in default (with or without notice or lapse of time,
or both) under any indenture, note, credit agreement, loan document, lease,
license or other agreement including, but not limited to, any benefit plan,
whether or not such default has been waived, which default, alone or in the
aggregate with other such defaults, would have an Acquiror Adverse Effect.
6.15. NO MATERIAL ADVERSE EFFECT. Except as disclosed in the Acquiror
Reports, Acquiror is not aware of any fact which, alone or together with
another fact, is likely to result in an Acquiror Adverse Effect.
6.16. INFORMATION. No representation or warranty made by Acquiror
contained in this Agreement and no statement contained in any certificate,
list, exhibit or other instrument specified in this Agreement, including
without limitation the exhibits hereto, contains any untrue statement of a
material fact or omits or will omit to state a material fact necessary to
make the statements contained herein or therein, in light of the
circumstances under which they were made, not misleading.
6.17. ENVIRONMENT. There are not, with respect to Acquiror or any of
the Acquiror Subsidiaries, no past or present violations of Environmental
Laws, releases of any material into the environment, actions, activities,
circumstances, conditions, events, incidents, or contractual obligations
which may give rise to any common law liability or any liability under CERCLA
or similar state or local laws, which liabilities, either individually or in
the aggregate, would have an Acquiror Adverse Effect.
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6.18. TITLE TO ASSETS; LIENS. Except as disclosed on EXHIBIT 6.18, to
the extent material to the business or operations of Acquiror and the
Acquiror Subsidiaries, Acquiror has good and marketable title to all of its
inventory, accounts receivable, property, equipment and other assets, and
such assets are free and clear of any material mortgages, liens, charges,
encumbrances, or title defects of any nature whatsoever, except for such
mortgages, liens, charges, encumbrances or title defects which would not
materially and adversely affect the value of such property as carried on
Acquiror's financial statements contained in the Acquiror Reports or would
not have an Acquiror Adverse Effect. Acquiror and the Acquiror Subsidiaries
have valid and enforceable leases for the premises and the equipment,
furniture and fixtures purported to be leased by them, except for leases, the
failure of which to have or be enforceable, would not have an Acquiror
Adverse Effect.
ARTICLE 7
COVENANTS
7.1. ACQUISITION PROPOSALS. The Corporation shall not, directly or
indirectly, take (nor shall the Corporation authorize or permit its officers,
directors, employees, representatives, investment bankers, attorneys,
accountants or other agents or affiliates, to take) any action to (i)
encourage, solicit or initiate the submission of any Acquisition Proposal
(hereinafter defined), (ii) enter into any agreement with respect to any
Acquisition Proposal or (iii) participate in any way in discussions or
negotiations with, or furnish any information to, any person in connection
with, or take any other action to facilitate any inquiries or the making of
any proposal that constitutes, or may reasonably be expected to lead to, any
Acquisition Proposal. The Corporation will promptly communicate to Acquiror
any solicitation by the Corporation and the terms of any proposal or inquiry,
including the identity of the person and its affiliates making the same, that
it may receive in respect of any such transaction, or of any such information
requested from it or of any such negotiations or discussions being sought to
be initiated with it. "Acquisition Proposal" shall mean any proposed (A)
merger, consolidation or similar transaction involving the Corporation, (B)
sale, lease or other disposition, directly or indirectly, by merger,
consolidation, share exchange or otherwise of assets of the Corporation
(including, but not limited to, letters of intent to which the Corporation is
a party) representing 30% or more of the assets of the Corporation, (C)
issue, sale, or other disposition of (including by way of merger,
consolidation, share exchange or any similar transaction) securities (or
options, rights or warrants to purchase, or securities convertible into, such
securities) representing 20% or more of the voting power of the Corporation
or (D) transaction in which any person shall acquire beneficial ownership (as
such term is defined in Rule 13d-3 under the Exchange Act), or the right to
acquire beneficial ownership or any "group" (as such term is defined under
the Exchange Act) shall have been formed which beneficially owns or has the
right to acquire beneficial ownership of 20% or more of the outstanding
Shares.
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7.2. INTERIM OPERATIONS OF THE CORPORATION. The Corporation covenants
and agrees that, from and after the date hereof until the Effective Time
(except as Acquiror shall otherwise agree or except as otherwise contemplated
by this Agreement):
(i) The business of the Corporation shall be conducted only in
the ordinary course and, to the extent consistent therewith, the Corporation
shall use its commercially reasonable efforts to preserve its business
organization intact.
(ii) The Corporation shall not (a) amend its Articles of
Incorporation or Bylaws; (b) split, combine or reclassify any outstanding
capital stock; (c) declare, set aside or pay any dividend payable in cash,
stock or property with respect to any of its capital stock or (d) repurchase,
redeem or otherwise acquire, directly or indirectly, any shares of its
capital stock or any securities convertible into or exercisable for any
shares of its capital stock.
(iii) The Corporation shall not (a) issue, sell, pledge, dispose
of or encumber, or authorize or propose the issuance, sale, pledge,
disposition or encumbrance of, any shares of, or securities convertible or
exchangeable for, or options, warrants, calls, commitments or rights of any
kind to acquire, any shares of its capital stock of any class or Voting Debt;
(b) transfer, lease, license, guarantee, sell, mortgage, pledge, dispose of
any other property or assets or encumber any property or assets or incur or
modify any indebtedness or other liability; (c) authorize capital
expenditures; (d) make any acquisitions of, or investment in, substantially
all the assets of or stock of any other person or entity; or (e) make any
payment to third parties for goods or services which are not commercially
reasonable or on an arm's length basis.
(iv) The Corporation shall not grant any bonus or pay increase
or any severance or termination pay to, or enter into any employment
agreement with, any director, officers or other employee of the Corporation,
except as (y) may be required to satisfy existing contractual obligations of
the Corporation as of the date hereof, or (z) required by applicable law.
(v) The Corporation shall not establish, adopt, enter into,
make or amend any collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, employee
stock ownership, deferred compensation, employment, termination, severance or
other plan, trust, fund, policy or arrangement for the benefit of any class
of directors, officers or employees or make, or accelerate the vesting of,
any grants, awards, benefits or options under any such plans.
(vi) The Corporation shall not, except in the ordinary and usual
course of business and on commercially reasonable terms, modify, amend or
terminate any of its Contracts or waive, release or assign any rights or
claims.
(vii) The Corporation shall not change its method of accounting as
in effect at September 30, 1998, except as required by changes in generally
accepted accounting principles as
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concurred in by the Corporation's independent auditors. The Corporation will
not change its fiscal year.
(viii) The Corporation will not authorize or enter into an
agreement to do any of the actions referred to in paragraphs (i) through
(vii) above unless such agreement is conditioned upon the consent of Acquiror.
7.3. FILINGS; OTHER ACTION. Subject to the terms and conditions
herein provided, the Corporation and Acquiror shall: (a) use all reasonable
efforts to cooperate with one another in (i) determining which filings are
required to be made prior to the Effective Time with, and which consents,
approvals, permits or authorizations are required to be obtained prior to the
Effective Time from, governmental or regulatory authorities of the United
States, the several States and foreign jurisdictions in connection with the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby and thereby and (ii) timely making all such
filings and timely seeking all such consents, approvals, permits or
authorizations; and (b) use all reasonable efforts to take, or cause to be
taken, all other action and do, or cause to be done, all other things,
necessary, proper or appropriate to consummate and make effective the
transactions contemplated by this Agreement. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purpose of this Agreement, the proper officers and/or directors of Acquiror,
Merger Sub and the Corporation shall take all such necessary action.
7.4. ACCESS. Each of Acquiror and the Corporation shall afford to the
other party and to the officers, employees, accountants, counsel, financial
advisors and other representatives of such other party, reasonable access
during normal business hours during the period prior to the Effective Time to
all their respective properties, books, contracts, commitments, personnel and
records and, during such period, each of Acquiror and the Corporation shall,
and shall cause each of its respective subsidiaries to, furnish promptly to
the other party (a) a copy of each report, schedule, registration statement
and other document filed by it during such period pursuant to the
requirements of Federal of state securities laws and (b) all other
information concerning its business, properties and personnel as such other
party may reasonably request.
7.5. MERGER INDEMNIFICATION AND INSURANCE.
(i) Acquiror and Merger Sub agree that all rights to
indemnification for acts or omissions occurring at or prior to the Effective
Time now existing in favor of the current or former directors or officers of
the Corporation as provided in their respective articles or certificates of
incorporation or bylaws shall survive the Merger and shall continue in full
force and effect in accordance with their terms.
(ii) In the event Acquiror, the Surviving Corporation or any of
their successors or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or surviving corporation or entity of
such consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any person, then and in each such case, proper
provisions shall be
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made so that the successors and assigns of Acquiror or the Surviving
Corporation, as the case may be, shall assume the obligations set forth in
this SECTION 7.5.
(iii) This SECTION 7.5 shall survive the consummation of the
Merger at the Effective Time, is intended to benefit the Corporation,
Acquiror, the Surviving Corporation and the persons indemnified pursuant to
SECTION 7.5(i), and shall be binding on all successors and assigns of
Acquiror and the Surviving Corporation.
7.6. FEES AND EXPENSES. Except as provided below in this SECTION 7.6,
all fees and expenses incurred in connection with the Merger, this Agreement
and the transactions contemplated by this Agreement shall be paid by the
party incurring such fees or expenses, whether or not the Merger is
consummated.
7.7. PUBLICITY. Acquiror shall consult with the Corporation in
issuing any press releases or otherwise making public statements with respect
to the transactions contemplated hereby and in making any filings with any
federal or state governmental or regulatory agency or with any national
securities exchange with respect thereto. The Corporation shall not issue
any press releases or otherwise make public announcements with respect to the
transaction contemplated hereby without the prior written consent of Acquiror.
7.8. LISTING APPLICATION. Prior to the time of issuance, Acquiror
shall prepare and submit to the AMEX a listing application covering Acquiror
Common Stock to be issued upon exercise of options comprising a portion of
the Merger Consideration and upon conversion of the Class B Shares in
accordance with the terms of this Agreement and shall use its best efforts to
obtain approval for the listing of such Acquiror Common Stock upon official
notice of issuance.
7.9. FURTHER ACTION. Each party hereto shall, subject to the
fulfillment at or before the Effective Time of each of the conditions of
performance set forth herein or the waiver thereof, perform such further acts
and execute such documents as may be reasonably required to effectuate the
Merger.
7.10. NOTIFICATION OF CERTAIN MATTERS.
(i) The Corporation shall give prompt notice to Acquiror of:
(a) any notice of, or other communication which becomes known to an executive
officer of the Corporation relating to, a default or event that, with notice
or lapse of time or both, would become a default, received by the
Corporation, subsequent to the date of this Agreement and prior to the
Effective Time, under any Contract material to the business of the
Corporation and to which the Corporation is a party or is subject; and (b)
any change that results in a Corporation Adverse Effect. The Corporation
shall give prompt notice to Acquiror when any notice or other communication
from any third party becomes known to an executive officer of the Corporation
alleging that the consent of such third party is or may be required in
connection with the transactions contemplated by this Agreement.
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(ii) The Corporation shall give prompt notice to Acquiror, and
Acquiror or Merger Sub shall give prompt notice to the Corporation, of (a)
any representation or warranty made by it contained in this Agreement that is
qualified as to materiality becoming untrue or inaccurate in any respect or
any such representation or warranty that is not so qualified becoming untrue
or inaccurate in any material respect or (b) the failure by it to comply with
or satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement; PROVIDED HOWEVER, that
no such notification shall affect the representations, warranties, covenants
or agreements of the parties or the conditions to the obligations of the
parties under this Agreement.
7.11. LEGAL CONDITIONS TO MERGER. Each party shall use its best
efforts to take, or cause to be taken, all actions necessary to comply
promptly with all legal requirements which may be imposed on such party with
respect to the Merger and, subject to the terms and conditions set forth in
this Agreement, to consummate the transactions contemplated by this
Agreement; provided that nothing in this Agreement shall limit the ability of
Acquiror or the Corporation to exercise any of its rights or perform any of
its obligations under ARTICLE 9 of this Agreement. Each party will promptly
cooperate with and furnish information to each other party in connection with
any such restriction suffered by, or requirement imposed upon, it or any of
its subsidiaries in connection with the foregoing.
7.12. ACQUIROR BOARD. Acquiror shall use its best efforts to cause
Powers to be elected to the Board of Directors (as Chairman of the Board) of
Acquiror following the consummation by members of the Acquiror Group of
Liberty Practice Acquisitions representing $10,000,000 in Practice Gross
Revenues.
7.13. LIBERTY ACQUISITIONS. From the date of this Agreement through
June 30, 1999, Acquiror shall use its reasonable efforts to consummate
Liberty Practice Acquisitions.
7.14. BANK ONE CONSENT. Acquiror shall use its best efforts to obtain
the consent of Bank One, Texas, N.A. ("Bank One") to the consummation of the
Merger or to obtain a new credit facility (replacing its existing credit
facility with Bank One) at or prior to January 31, 1999. However, failure to
succeed in obtaining the consent of Bank One to consummation of the Merger or
a replacement credit facility shall not, in and of itself, constitute a
breach of the terms of this Agreement.
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ARTICLE 8
CONDITIONS
8.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment in all material respects at or prior to the Effective Time of
the following conditions:
(i) None of the parties hereto shall be subject to any order or
injunction against the consummation of the transaction contemplated by this
Agreement. In the event any such order or injunction shall have been issued,
each party agrees to use its reasonable efforts to have any such injunction
lifted.
(ii) No more than 5% of the outstanding Shares immediately prior
to the Merger shall constitute Dissenting Shares in accordance with SECTION
4.1(vi).
(iii) Powers shall have executed and delivered to the Corporation
an employment agreement in the form of EXHIBIT 8.1(iii) and such employment
agreement shall be in full force and effect.
(iv) McAlister shall have executed and delivered to the
Corporation an employment agreement in the form of EXHIBIT 8.1(iv).
(v) Bank One shall have consented to the consummation of the
Merger or in the absence of such consent, Acquiror shall have obtained a new
credit facility replacing its existing credit facility with Bank One.
8.2. CONDITIONS TO OBLIGATION OF THE CORPORATION TO EFFECT THE MERGER.
The obligation of the Corporation to effect the Merger shall be subject to
the fulfillment in all material respects at or prior to the Effective Time of
the following conditions:
(i) Acquiror and Merger Sub shall have performed each agreement
contained in this Agreement required to be performed on or prior to the
Effective Time and the representations and warranties of Acquiror contained
in this Agreement shall be true in all material respects on and as of the
Effective Time (other than any failure to so perform or any misrepresentation
or omission which would not materially influence the investment decision of a
reasonable purchaser of securities); and the Corporation shall have received
a certificate of the President of Acquiror certifying to such effect.
(ii) The Corporation shall have received an opinion of Jackson
Walker L.L.P., counsel to Acquiror, substantially in the form of EXHIBIT
8.2(ii).
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8.3. CONDITIONS TO OBLIGATION OF ACQUIROR AND MERGER SUB TO EFFECT THE
MERGER. The obligation of Acquiror and Merger Sub to effect the Merger shall
be subject to the fulfillment in all material respects at or prior to the
Effective Time of the following conditions:
(i) The Corporation shall have performed its agreements
contained in this Agreement required to be performed on or prior to the
Effective Time and the representations and warranties of the Corporation
contained in this Agreement shall be true in all respects on and as of the
Effective Time (other than any failure to so perform or any misrepresentation
or omission which would not materially influence the investment decision of a
reasonable purchaser of securities); and Acquiror shall have received a
certificate of the President of the Corporation certifying to such effect.
(ii) The Acquiror shall have received an opinion of Baker,
Donelson, Bearman & Caldwell, counsel to the Corporation, substantially in
the form of EXHIBIT 8.3(ii).
(iii) The holders of the options to purchase the corporation's
securities listed on EXHIBIT 5.3 (the "Corporation Options") shall have
agreed in writing to exchange their Corporation Options for options to
purchase a like number (145,000) shares of Acquiror Common Stock, which
options shall be in the form of EXHIBIT 8.3(iii).
(iv) SunTrust Equitable Securities Corporation shall have
executed an agreement with the Corporation substantially in the form of
EXHIBIT 8.3(iv).
(v) Acquiror shall have received evidence reasonably
satisfactory to Acquiror that at the Closing Date accrued but unpaid
liabilities of the Corporation, including fees (the "Closing Date
Liabilities") do not exceed $250,000. Acquiror and Merger Sub acknowledge
and agree that the Closing Date Liabilities shall not include (a) legal and
accounting fees and expenses specifically authorized in writing by Acquiror
incurred to effect Liberty Practice Acquisitions or (b) expenses incurred by
the Corporation to promote Liberty Practice Acquisitions that are approved in
writing by Acquiror. At Closing, the Corporation will present to Acquiror
(a) final statements of Arthur Andersen L.L.P. and Baker, Donelson, Bearman &
Caldwell L.L.P. and (b) a statement of all other liabilities for which the
Corporation is responsible for payment in connection with the transactions
contemplated by this Agreement.
(vi) Acquiror and the Corporation shall have received from each
person listed on EXHIBIT 5.19 as a party to an Employment Agreement or
Consulting Agreement with the Corporation an executed termination and release
agreement in the form of EXHIBIT 8.3(vi).
(vii) Acquiror and the Corporation shall have received a written
resignation of each director and officer of the Corporation effective the
Effective Time.
(viii) Acquiror shall have received letter agreements from each of
Powers, McAlister and Kelly in the form requested by Acquiror providing for the
restriction of the sale of
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one-half (1/2) of the shares of Pentegra Common Stock received by them
hereunder for a period of one year from the date of issuance and one-half of
the shares of Pentegra Common Stock received by them hereunder for a period
of two years from the date of issuance.
8.4. FRUSTRATION OF CLOSING CONDITIONS. None of the Corporation,
Acquiror and Merger Sub may rely on the failure of any condition set forth in
SECTION 8.1, 8.2 OR 8.3, as the case may be, to be satisfied if such failure
was caused by such party's failure to act in good faith or to use its best
efforts to consummate the Merger and the other transactions contemplated by
this Agreement, as required by SECTION 7.3.
ARTICLE 9
TERMINATION
9.1. TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated
and may be abandoned at any time prior to the Effective Time by the mutual
consent of Acquiror, Merger Sub and the Corporation.
9.2. TERMINATION BY EITHER ACQUIROR OR THE CORPORATION. This
Agreement may be terminated and the Merger may be abandoned by action of the
Board of Directors of either Acquiror or the Corporation if the Merger shall
not have been consummated by January 31, 1999, provided that the terminating
party shall not have breached in any material respect its obligations under
this Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in such clause.
9.3. TERMINATION BY THE CORPORATION. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time by
action of the Board of Directors of the Corporation, if (i) the Board of
Directors of Acquiror shall have withdrawn or modified in a manner adverse to
the Corporation its approval or recommendation of this Agreement or the
Merger, or (ii) there has been a breach by Acquiror or Merger Sub of any
representation, warranty, covenant or agreement contained in this Agreement
which would have an Acquiror Adverse Effect which is not curable or, if
curable, is not cured within 30 days after written notice of such breach is
given by the Corporation to the Acquiror.
9.4. TERMINATION BY ACQUIROR. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time by action of the
Board of Directors of Acquiror, if (a) the Board of Directors of the Corporation
shall have withdrawn or modified in a manner adverse to Acquiror its approval or
recommendation of this Agreement, or the Merger, or shall have recommended to
stockholders of the Corporation an Acquisition Proposal, or (b) there has been a
breach by the Corporation of any representation, warranty, covenant or agreement
contained in this Agreement, or the Stock Option Agreement which would have a
Corporation Adverse Effect
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which is not curable or, if curable, is not cured within 30 days after
written notice of such breach is given by Acquiror to the party committing
such breach.
9.5. EFFECT OF TERMINATION AND ABANDONMENT.
(i) In the event of termination of this Agreement and the
abandonment of the Merger pursuant to this ARTICLE 9, no party hereto (or any
of its directors or officers) shall have any liability or further obligation
to any other party to this Agreement except as provided in SECTION 9.5(ii),
SECTION 7.7 (subject to SECTION 9.5(ii)) and SECTION 11.6 below, and except
that nothing herein will relieve any party from liability for any breach of
this Agreement.
(ii) In the event that any person shall have made an Acquisition
Proposal for the Corporation and thereafter this Agreement is terminated by
either party (other than pursuant to the breach of this Agreement by
Acquiror) then the Corporation, if requested by Acquiror, shall, subject to
the provisions set forth below, promptly, but in no event later than two days
after the date of such request, pay Acquiror $300,000, which amount shall be
payable by wire transfer of same day funds; provided that no fee shall be
payable to Acquiror pursuant to this SECTION 9.5(ii) unless and until (i) any
person (other than Acquiror) (an "Acquiring Party") has entered into a letter
of intent, agreement in principle or definitive agreement to acquire, by
purchase, merger, consolidation, sale, assignment, lease, transfer or
otherwise, in a transaction or a series of transactions, a majority of the
voting power of the outstanding securities of the Corporation or 50% or more
of the assets of the Corporation (including, but not limited to, letters of
intent to which the Corporation is a party), (ii) there has been executed a
letter of intent, agreement in principle or definitive agreement with respect
to a consolidation, merger or similar transaction between the Corporation and
an Acquiring Party in which the stockholders of the Corporation immediately
prior to such proposed consolidation, merger or similar transaction do not
own securities representing at least 50% of the outstanding voting power of
the surviving entity (or, if applicable, any entity in control of such
Acquiring Party) of such proposed consolidation, merger or similar
transaction immediately following the consummation thereof, or (iii) an
Acquiring Party, or any "group" (as such term is defined under Section 13(d)
of the Exchange Act) acquires beneficial ownership or the right to acquire
beneficial ownership of 50% of the common stock of the Corporation, whether
by tender offer, exchange offer or otherwise. The Corporation acknowledges
that the agreements contained in this SECTION 9.5(ii) are an integral part of
the transactions contemplated in this Agreement, and that, without these
agreements, Acquiror and Merger Sub would not enter into this Agreement;
accordingly, if the Corporation fails to promptly pay the amount due pursuant
to this SECTION 9.5(ii), and, in order to obtain such payment, Acquiror or
Merger Sub commences a suit which results in a judgment against the
Corporation for the fee set forth in this paragraph (b), the non-prevailing
party shall pay to the prevailing party its costs and expenses (including
attorneys' fees) in connection with such suit, together with interest on the
amount of the fee at the prime rate of Bank One, N.A. in effect on the date
such payment was required to be made.
9.6. EXTENSION; WAIVER. At any time prior to the Effective Time of the
Merger, any party hereto may, to the extent legally allowed, (i) extend the time
for the performance of any of the
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obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties made to such party
contained herein or in any document delivered pursuant hereto and (ii) waive
compliance with any of the agreements or conditions for the benefit of such
party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE 10
INDEMNITY
10.1. INDEMNIFICATION BY CLASS B HOLDERS. The Class B Holders, jointly
and severally, will indemnify and hold harmless Acquiror, and its officers,
directors, stockholders and subsidiaries (collectively, the "Indemnified
Persons"), and will reimburse the Indemnified Persons, for any loss,
liability, claim, damage, expense (including costs of investigation and
defense and reasonable attorneys' fees and expenses) or diminution of value,
whether or not involving a third-party claim (collectively, "Damages"),
arising from or in connection with: (i) any breach of any representation or
warranty, covenant or agreement made by the Corporation or the Class B
Holders in this Agreement, or any other certificate or document delivered by
the Corporation or any Class B Holder pursuant to this Agreement; (ii) any
reimbursement made by the Corporation of advances by dental practices to the
Corporation pursuant to the letters of intent listed on EXHIBIT 5.4; or (iii)
any amounts by which the Closing Date Liabilities of the Corporation exceed
$250,000.
10.2. PROCEDURE FOR INDEMNIFICATION -- THIRD PARTY CLAIMS.
(i) Promptly after receipt by an Indemnified Party under
SECTION 10.1 of notice of the commencement of any action, arbitration, audit,
hearing, investigation, litigation, or suit (whether civil, criminal,
administrative, judicial or investigative, whether formal or informal, public
or private) commenced, brought, conducted or heard by or before or otherwise
involving any governmental body or arbitrator (a "Proceeding") against it,
such Indemnified Party will, if a claim is to be made against an indemnifying
party under this ARTICLE 10, give notice to the indemnifying party of the
commencement of such Proceeding, but the failure to notify the indemnifying
party will not relieve the indemnifying party of any liability that it may
have to any Indemnified Party, except to the extent that the indemnifying
party demonstrates that the defense of such action is prejudiced by the
indemnifying party's failure to give such notice.
(ii) If any Proceeding referred to in SECTION 10.2 is brought
against an Indemnified Party and it gives notice to the indemnifying party of
the commencement of such Proceeding, the indemnifying party will be entitled
to participate in such Proceeding and, to the extent that it wishes (unless
(i) the indemnifying party is also a party to such Proceeding and the
Indemnified Party determines in good faith that joint representation would be
inappropriate, or (ii) the indemnifying party fails to provide reasonable
assurance to the Indemnified Party of its financial capacity to defend such
Proceeding and provide indemnification with respect to such Proceeding), to
assume
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the defense of such Proceeding with counsel satisfactory to the Indemnified
Party and, after notice from the indemnifying party to the Indemnified Party
of its election to assume the defense of such Proceeding, the indemnifying
party will not, as long as it diligently conducts such defense, be liable to
the Indemnified Party under this ARTICLE 10 for any fees of other counsel or
any other expenses with respect to the defense of such Proceeding, in each
case subsequently incurred by the Indemnified Party in connection with the
defense of such Proceeding, other than reasonable costs of investigation. If
the indemnifying party assumes the defense of a Proceeding, (i) it will be
conclusively established for purposes of this Agreement that the claims made
in that Proceeding are within the scope of and subject to indemnification;
(ii) no compromise or settlement of such claims may be effected by the
indemnifying party without the Indemnified Party's consent unless (A) there
is no finding or admission of any violation of law or any violation of the
rights of any person and no effect on any other claims that may be made
against the Indemnified Party, and (B) the sole relief provided is monetary
damages that are paid in full by the indemnifying party; and (iii) the
indemnifying party will have no liability with respect to any compromise or
settlement of such claims effected without its prior written consent. If
notice is given to an indemnifying party of the commencement of any
Proceeding and the indemnifying party does not, within ten days after the
Indemnified Party's notice is given, give notice to the Indemnified Party of
its election to assume the defense of such Proceeding, the indemnifying party
will be bound by any determination made in such Proceeding or any compromise
or settlement effected by the Indemnified Party.
(iii) Notwithstanding the foregoing, if an Indemnified Party
determines in good faith that there is a reasonable probability that a
Proceeding may adversely affect it or its affiliates or advisors other than
as a result of monetary damages for which it would be entitled to
indemnification under this Agreement, the Indemnified Party may, by notice to
the indemnifying party, assume the exclusive right to defend, compromise, or
settle such Proceeding, but the indemnifying party will not be bound by any
determination of a Proceeding so defended or any compromise or settlement
effected without its prior written consent (which may not be unreasonably
withheld).
(iv) With respect to any Proceeding subject to indemnification
under this ARTICLE 10: (i) both the Indemnified Party and the indemnifying
party, as the case may be, shall keep the other party fully informed of the
Proceeding at all stages thereof where such party is not represented by its
own counsel, and (ii) the parties agree (each at its own expense) to render
to each other such assistance as they may reasonably require of each other
and to cooperate in good faith with each other in order to ensure the proper
and adequate defense of any Proceeding brought by any third party.
(v) With respect to any Proceeding subject to indemnification
under this ARTICLE 10, the parties agree to cooperate in such a manner as to
preserve in full (to the extent possible) the confidentiality of all
confidential business records and the attorney-client and work-product
privileges. In connection therewith, each party agrees that: (i) it will use
its best efforts, in any Proceeding in which it has assumed or participated in
the defense, to avoid production of confidential business records (consistent
with applicable law and rules of procedure), and (ii) all
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communications between any party hereto and counsel responsible for or
participating in the defense of any Proceeding shall, to the extent possible,
be made so as to preserve any applicable attorney-client work-product
privilege.
10.3. PROCEDURE FOR INDEMNIFICATION -- OTHER CLAIMS. A claim for
indemnification for any matter not involving a third party claim may be
asserted by notice to the party from whom indemnification is sought.
10.4. LIMITATION ON AMOUNT. The liability of McAlister under this
ARTICLE 10 shall be limited to an amount equal to the value of the Class B
Merger Consideration received by her pursuant to the terms of this Agreement.
The liability of Kelly under this ARTICLE 10 shall be limited to an amount
equal to the value of the Class B Merger Consideration received by him
pursuant to the terms of this Agreement. For purposes of this SECTION 10.4
only, the shares of Acquiror Common Stock issued as Class B Merger
Consideration shall be valued at $2.00 per share.
ARTICLE 11
GENERAL PROVISIONS
11.1. NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall be deemed to survive
the Merger until June 30, 2000, provided, however, that the agreements
contained in ARTICLE 4 and in SECTIONS 7.6, 7.8, 7.12, 11.6 and 11.4 and the
agreements delivered pursuant to this Agreement shall survive the Merger
indefinitely.
11.2. NOTICES. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by facsimile transmission and by courier
service (with proof of service), hand delivery or certified or registered
mail (return receipt requested and first-class postage prepaid), addressed as
follows:
If to the Corporation:
Liberty Dental Alliance, Inc.
3100 West End Avenue
Suite 1230
Nashville, Tennessee 37203-1385
Attention: James M. Powers, Jr.
FAX: (615) 783-0790
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Copy to: Baker, Donelson, Bearman & Caldwell
1700 Nashville City Center
511 Union Street
Nashville, Tennessee 37219
Attention: James L. McElroy
FAX: 615-726-0464
If to Acquiror or Merger Sub:
Pentegra Dental Group, Inc.
2999 N. 44th Street, Suite 650
Phoenix, Arizona 85018
Attention: Chief Executive Officer
FAX: (602) 952-0544
Copy to: Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
Attention: James S. Ryan, III
FAX: (214) 953-5822
or to such other address as any party shall specify by written notice so
given, and such notice shall be deemed to have been delivered as of the date
so telecommunicated, personally delivered or mailed.
11.3. BINDING EFFECT; BENEFIT. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns. Notwithstanding anything contained in this Agreement
to the contrary, except for the provisions of ARTICLE 4 and SECTIONS 7.8,
7.9, 7.11, 7.12 and 11.6 nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto or their
respective heirs, successors, executors, administrators and assigns any
rights, remedies, obligations or liabilities under or by reason of this
Agreement.
11.4. ENTIRE AGREEMENT. This Agreement, the exhibits and other
documents and agreements among the parties hereto, constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, among the parties with
respect thereto. No addition to or modification of any provision of this
Agreement shall be binding upon any party hereto unless made in writing and
signed by all parties hereto.
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11.5. AMENDMENT. This Agreement may be amended by the parties hereto,
by action taken by their respective Board of Directors or a committee
thereof, at any time before or after approval of matters presented in
connection with the Merger by the stockholders of the Corporation, but after
any such stockholder approval no amendment shall be made which by law
requires the further approval of stockholders without obtaining such further
approval. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
11.6. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware without regard to its
rules of conflict of laws.
11.7. COUNTERPARTS. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the
parties hereto.
11.8. HEADINGS. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
11.9. INTERPRETATION. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
VICE VERSA, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and VICE
VERSA.
11.10. WAIVERS. Except as provided in this Agreement, no action
taken pursuant to this Agreement, including without limitation any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any
representations, warranties, covenants or agreements contained in this
Agreement. The waiver by any party hereto of a breach of any provision
hereunder shall not operate or be construed as a waiver of any prior or
subsequent breach of the same or any other provision hereunder.
11.11. INCORPORATION OF EXHIBITS AND DISCLOSURE LETTERS. All
exhibits attached hereto and referred to herein are hereby incorporated
herein and made a part hereof for all purposes as if fully set forth herein.
11.12. SEVERABILITY. If for any reason whatsoever, any one or
more of the provisions of this Agreement shall be held or deemed to be
inoperative, unenforceable or invalid as applied to any particular case or in
all cases, such circumstances shall not have the effect of rendering such
provision invalid in any other case or of rendering any of the other
provisions of this Agreement inoperative, unenforceable or invalid.
11.13. OBLIGATION OF ACQUIROR. Acquiror shall cause Merger Sub to
perform each of its duties and obligations under this Agreement.
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11.14 MEDIATION AND ARBITRATION. Upon the request of any party
(hereinafter referred to as a "Party"), whether made before or after the
institution on any legal proceeding, any dispute among the Parties hereto in
any way arising out of, related to or in connection with this Agreement
(hereinafter a "Dispute"), shall be resolved in accordance with the terms of
this Section (hereinafter the "Arbitration Program").
If a Dispute between the Parties cannot be resolved through
negotiation, the Parties agree first to try in good faith to settle the
Dispute by mediation administered by the American Arbitration Association
("AAA") under its Commercial Mediation Rules before resorting to arbitration.
The mediator's fees, as well as other fees and expenses related to mediation
(excluding attorneys' fees), shall be paid by the Party requesting mediation.
Mediation proceedings hereunder shall be conducted where agreed to in
writing by the Parties or, in the absence of such agreement in Phoenix,
Arizona or the corporate headquarters of Acquiror if other than Phoenix,
Arizona as set forth in the most recent securities filing of Acquiror.
In the event the Parties are unable to resolve a Dispute through
mediation, it shall then be submitted to and resolved by binding arbitration
administered by the AAA in accordance with the terms of this Arbitration
Program and the Commercial Arbitration Rules of the AAA. In the event of any
inconsistency between this Arbitration Program and those rules or statutes,
then the terms of this Arbitration Program shall control.
A Party may release or settle with one or more liable persons as the
Party deems fit without releasing or impairing rights to proceed against any
persons not so released. All statutes of limitation that would otherwise be
applicable shall apply to any arbitration proceeding. All Disputes shall be
decided in accordance with applicable law.
Any Dispute wherein the claim or amount in controversy does not exceed
$100,000, shall be decided by a single arbitrator (who shall have authority
to render a maximum award of $100,000 including all damages of any kind,
costs, and fees, including attorney's fees). Any Dispute in which the amount
in controversy exceeds $100,000 shall be decided by a majority vote of three
arbitrators. The arbitrators may grant any remedy or relief within the scope
of this Arbitration Program and this Agreement. The arbitrators may also
grant such ancillary relief as is necessary to make effective the award. In
all arbitration proceedings, the arbitrators shall make specific and written
findings of fact and conclusions of law. In arbitration proceedings in which
the amount in controversy exceeds $100,000, in the aggregate, the Parties
shall have in addition to the statutory right to seek vacation or
modification of any award pursuant to applicable law, the right to seek
vacation or modification of any award that is based in whole, or in part, on
a incorrect or erroneous ruling of law by appeal to an appropriate court
having jurisdiction; provided, however, that any such application for
vacation and modification of any award based on an incorrect ruling of law
must be filed in a court having jurisdiction over the Dispute within 15 days
from the date the award is rendered. The arbitrators' findings of fact shall
be binding on all Parties and shall not be subject to further review except
as otherwise allowed by a court of law.
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To the maximum extent practicable, an arbitration proceeding hereunder
shall be concluded within 180 days of the filing of the Dispute with AAA.
Arbitration proceedings hereunder shall be conducted where agreed to in
writing by the Parties or, in the absence of such agreement in Phoenix,
Arizona or the corporate headquarters of Acquiror if other than Phoenix,
Arizona as set forth in the most recent securities filing of Acquiror. The
provisions of this Arbitration Program shall survive any termination,
amendment, or expiration of the Documents, unless the Parties otherwise
expressly agree in writing making specific reference to this Arbitration
Program. To the extent permitted by applicable law, the arbitrator(s) shall
have the power to award recovery of all costs and fees (including attorney's
fees, administrative fees, and arbitrator's fees) to the prevailing Party.
This Arbitration Program may be amended, changed, or modified only by a
writing which specifically refers to this Arbitration Program and which is
signed by all the Parties. If any term, covenant, condition or provision of
the Arbitration Program is found to be unlawful or invalid or unenforceable,
such illegality or invalidity or unenforceability shall not affect the
legality, validity or enforceability of the remaining parts of this
Arbitration Program, and all such remaining parts hereof shall be valid and
enforceable and have full force and effect as if the illegal, invalid or
unenforceable part had not been included. Each Party agrees to keep all
Disputes and arbitration proceedings, including any awards or decisions,
strictly confidential, except for disclosures of information required in the
ordinary course of business of the Parties or by applicable law or regulation.
[Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties have executed this Agreement and caused
the same to be duly delivered on their behalf on the day and year first
hereinabove written.
THE CORPORATION:
LIBERTY DENTAL ALLIANCE, INC.
By: /s/ James M. Powers, Jr.
------------------------------
Title: President
---------------------------
ACQUIROR:
PENTEGRA DENTAL GROUP, INC.
By: /s/ Kimberlee K. Rozman
------------------------------
Title: Senior Vice President
---------------------------
MERGER SUB:
LIBERTY ACQUISITION CORPORATION
By: /s/ Kimberlee K. Rozman
------------------------------
Title: Senior Vice President
---------------------------
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/s/ James M. Powers, Jr.
-----------------------------------
James M. Powers, Jr.
/s/ Sylvia H. McAlister
-----------------------------------
Sylvia H. McAlister
/s/ William Kelly
-----------------------------------
William Kelly
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EMPLOYMENT AGREEMENT
Employment Agreement (the "Agreement"), dated November 13, 1998, by and
between Pentegra Dental Group, Inc., a Delaware corporation (the "Company"),
and James M. Powers, Jr.("Employee").
In consideration of the mutual premises and conditions contained herein,
the parties hereto agree as follows:
Section 1. EMPLOYMENT. The Company hereby agrees to employ
Employee, and Employee hereby accepts employment by the Company, upon the
terms and subject to the conditions hereinafter set forth.
Section 2. DUTIES. Initially, employee shall serve as the President
of the Company. Employee's duties and powers shall be limited to taking
actions necessary to effect dental practice acquisitions contemplated by that
certain Agreement and Plan of Merger dated November 13, 1998 between the
Company, Liberty Acquisition Corporation, Liberty Dental Alliance, Inc. and
certain other parties thereto (the "Merger Agreement") until such time that
members of the Acquiror Group have consummated Liberty Practice Acquisitions
representing $10,000,000 in Practice Gross Revenues. Upon consummation by
members of the Acquiror Group of Liberty Practice Acquisitions representing
$10,000,000 in Practice Gross Revenues, the duties and powers of the Employee
will be expanded to include the duties and authority of the President, Chief
Executive Officer and Chairman of the Board of the Company as delineated in
the Company's Bylaws and as may otherwise be specified by the Company's Board
of Directors.
Capitalized terms used but not otherwise defined in this Agreement shall have
the meaning assigned to such terms in the Merger Agreement.
Employee agrees to devote his full time and best efforts to the performance
of his duties to the Company. All of the Employee's powers and authorities
shall be subject to the reasonable direction and control of the Company's
Board of Directors ("Board"). Employee acknowledges that the executive
offices of the Company will be located in Phoenix, Arizona and that he shall
perform his duties under this Agreement from such executive offices.
Employee and the Company further agree as follows:
(a) Upon the consummation by members of the Acquiror Group of Liberty
Practice Acquisitions representing a cumulative total of $10,000,000 in
Practice Gross Revenues until the acquisition by members of the Acquiror
Group of Liberty Practice Acquisitions representing a cumulative total of
$25,000,000 in Practice Gross Revenues, Employee shall establish and
maintain a residence in the Phoenix, Arizona area and the Company shall
provide Employee a living allowance of $1,500 per month.
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(b) Employee agrees that upon consummation by members of the Acquiror
Group of Liberty Practice Acquisitions representing a cumulative total of
$25,000,000 in Practice Gross Revenues, Employee shall establish and
maintain his principal residence in the Phoenix, Arizona area. Company
shall reimburse Employee for relocation costs as set forth on Exhibit B and
the Company will have no further obligation to pay to Employee the living
allowance provided for in subparagraph (a).
Section 3. TERM. Except as otherwise provided in Section 6 hereof,
the term of this Agreement shall be for two (2) years ("Term"), commencing on
the date hereof (the "Commencement Date").
Section 4. COMPENSATION AND BENEFITS. In consideration for the
services of the Employee hereunder, the Company will compensate Employee as
follows:
(a) BASE SALARY. Commencing on the date at which members of the
Acquiror Group have consummated Liberty Practice Acquisitions representing
$10,000,000 in Practice Gross Revenues, Employee shall be entitled to
receive a base salary of $200,000.00 per annum or as increased from time to
time by the Board of Directors of the Company or the Compensation Committee
of the Board of Directors ("Compensation Committee").
(b) BONUS. Commencing with the fiscal year beginning April 1, 1999
and ending March 31, 2000, Employee shall be eligible to receive a bonus
each year during the term of this Agreement in accordance with the bonus
plan set forth on Exhibit A. Such bonus shall be payable by the Company to
Employee on or before 90 days from the end of each fiscal year.
(c) BENEFITS. The Company shall grant Employee options to purchase
150,000 shares of the Company's Common Stock at the closing sales price of
the Common Stock as quoted by the American Stock Exchange on the date that
the merger contemplated by the Merger Agreement is consummated; and 150,000
shares of the Company's Common Stock at the price of $6.125 per share of
Company Common Stock, with such options vesting 20% on March 24, 1999 and
20% per year thereafter.
In addition, during the term of this Agreement, Employee shall be
entitled to participate in and receive benefits under any and all employee
benefit plans and programs which are from time to time generally made
available to the executive employees of the Company, subject to approval
and grant by the appropriate committee of the Board of Directors of the
Company with respect to programs calling for such approvals or grants.
Additionally, Employee shall be entitled to medical, dental, disability,
life insurance and other benefits as are generally made available to the
executive employees of the Company. Employee shall be entitled to three
(3) weeks vacation and such other days for personal use as reasonably
determined by the Company.
2
<PAGE>
Section 5. EXPENSES; AUTOMOBILE. It is acknowledged by the parties
that Employee, in connection with the services to be performed by him
pursuant to the terms of this Agreement, will be required to make payments
for travel, entertainment of business associates, mobile telephone and
similar expenses. The Company will reimburse Employee for all reasonable
expenses of types authorized by the Company and incurred by Employee in the
performance of his duties hereunder, including, without limitation,
reasonable expenses incurred by him for the purpose of effecting Liberty
Practice Acquisitions. Employee will comply with such budget limitations and
approval and reporting requirements with respect to expenses as the Company
may establish from time to time.
The Company shall provide Employee with a suitable automobile for
business use, or at the Company's option, Company shall provide Employee with
an automobile allowance and Company shall pay all costs and expenses
reasonably incurred by Employee in connection with the business use thereof;
provided that the cost to Company for such automobile costs and expenses
shall not exceed $750 per month.
Section 6. TERMINATION. Employee's employment hereunder will
commence on the Commencement Date and continue until the end of the Term,
except that the employment of Employee hereunder will terminate earlier upon
the occurrence of the following events:
(a) DEATH OR DISABILITY. Employee's employment will terminate
immediately upon the death of Employee during the term of his employment
hereunder or, at the option of the Company, in the event of Employee's
disability, upon 30 days notice to Employee. Employee will be deemed
disabled if, as a result of Employee's incapacity due to physical or mental
illness, Employee shall have been absent from his duties with the Company
on a full-time basis for 120 consecutive business days and Employee shall
not reasonably be expected to be able to resume his duties within 60 days
of the end of such 120 day period. In the event of the termination of this
Agreement pursuant to this subsection, Employee will not be entitled to any
severance pay or other compensation except for any portion of his base
salary accrued but unpaid from the last monthly payment date to the date of
termination and expense reimbursements under Section 5 hereof for expenses
incurred in the performance of his duties hereunder prior to termination.
(b) FOR CAUSE. The Company may terminate the Employee's employment
for "Cause" immediately upon written notice by the Company to Employee.
For purposes of this Agreement, a termination will be for Cause if: (i)
Employee willfully and continuously fails to perform his duties with the
Company (other than any such failure resulting from incapacity due to
physical or mental illness), (ii) Employee willfully engages in gross
misconduct materially and demonstrably injurious to the Company, (iii)
Employee has been convicted of a felony, or (iv) Employee fails to use his
best efforts to take actions necessary to effect Liberty Practice
Acquisitions representing $10,000,000 in Gross Practice Revenues. In the
event of the termination of this Agreement pursuant to this subsection,
Employee will not be entitled to any severance pay or other compensation
except for any portion of his base
3
<PAGE>
salary accrued but unpaid from the last monthly payment date to the date
of termination and expense reimbursements under Section 5 hereof for
expenses incurred in the performance of his duties hereunder prior to
termination.
(c) BY COMPANY WITHOUT CAUSE. The Company may terminate this
Agreement during the Term at any time for any reason without cause. In the
event of the termination of this Agreement pursuant to this subsection, the
Company will pay Employee, as Employee's sole remedy in connection with
such termination, severance pay in the amount determined by multiplying
Employee's monthly base salary at the rate in effect immediately preceding
the termination of Employee's employment by twelve (12) months. The
Company will also pay Employee the portion of his base salary accrued but
unpaid from the last monthly payment date to the date of termination and
expense reimbursements under Section 5 hereof for expenses incurred in the
performance of his duties hereunder prior to termination. The Company will
pay the severance payments provided for in this subsection (other than in
the foregoing sentence) in a lump sum amount concurrent with Employee's
termination of employment. The Company will not be entitled to offset or
mitigate the amount due under this subsection by any other amounts payable
to Employee, including amounts payable or paid to Employee by third parties
for Employee's services after the date of termination. This subsection (c)
shall not apply in the event of a termination by the Company pursuant to
subsection (d) below.
(d) BY COMPANY AS THE RESULT OF FAILURE TO CLOSE LIBERTY
ACQUISITIONS. The Company may terminate this Agreement at any time after
January 31, 1999 by action of the Board of Directors of the Company, if on
or prior to January 31, 1999 members of the Acquiror Group have not
consummated Liberty Practice Acquisitions representing $10,000,000 in
Practice Gross Revenues. In the event of the termination of this Agreement
pursuant to this subsection, Employee will not be entitled to any severance
pay or other compensation except for expense reimbursements under Section 5
hereof for expenses incurred in the performance of his duties hereunder
prior to termination.
Section 7. EFFECT OF TERMINATION ON OPTIONS. The Employee has been
granted options to purchase shares of the Company's Common Stock pursuant to
the terms of an Incentive Stock Option Agreement in the form of Exhibit C
attached hereto and may continue to be granted such options from time to
time. The effect of the termination of the Employee's employment on such
options shall be determined by the terms of the option plan under which the
options are issued and the option agreement related to such options.
Section 8. CONFIDENTIAL INFORMATION. Employee recognizes and
acknowledges that certain assets of the Company and its affiliates, including
without limitation information regarding customers, pricing policies, methods
of operation, proprietary computer programs, sales, products, profits, costs,
markets, key personnel, formulae, product applications, technical processes,
and trade secrets (hereinafter called "Confidential Information") are
valuable, special and unique assets of the
4
<PAGE>
Company and its affiliates. Employee will not, during or after his term of
employment, disclose any of the Confidential Information to any person, firm,
corporation, association, or any other entity for any reason or purpose
whatsoever, directly or indirectly, except as may be required pursuant to his
employment hereunder, unless and until such Confidential Information becomes
publicly available other than as a consequence of the breach by Employee of
his confidentiality obligations hereunder. In the event of the termination
of his employment, whether voluntary or involuntary and whether by the
Company or Employee, Employee will deliver to the Company all documents and
data pertaining to the Confidential Information and will not take with him
any documents or data of any kind or any reproductions (in whole or in part)
of any items relating to the Confidential Information.
Section 9. NONCOMPETITION. Until one year after termination of
Employee's employment with the Company for any reason, whether voluntary or
involuntary, Employee will not (i) engage directly or indirectly, alone or as
a shareholder, partner, officer, director, employee or consultant of any
other business organization, in any business activities which relate to the
acquisition and consolidation of dental practices which were either conducted
by the Company at the time of Employee's termination or "Proposed to be
Conducted" (as defined herein) by the Company at the time of such termination
(the "Designated Industry"), (ii) divert to any competitor of the Company in
the Designated Industry any customer of Employee, or (iii) solicit or
encourage any officer, employee, or consultant of the Company to leave its
employ for employment by or with any competitor of the Company in the
Designated Industry. The parties hereto acknowledge that Employee's
noncompetition obligations hereunder will not preclude Employee from (i)
owning less than 5% of the common stock of any publicly traded corporation
conducting business activities in the Designated Industry or (ii) serving as
an officer, director, stockholder or employee of an entity engaged in the
healthcare industry whose business operations are not competitive with those
of the Company. "Proposed to be Conducted", as used herein, shall mean those
business activities which are the subject of a formal, written business plan
approved by the Board of Directors prior to termination of Employee's
employment and which the Company takes material action to implement within 12
months of the termination of Employee's employment. Employee will continue
to be bound by the provisions of this Section 9 until their expiration and
will not be entitled to any compensation from the Company with respect
thereto. If at any time the provisions of this Section 9 are determined to
be invalid or unenforceable, by reason of being vague or unreasonable as to
area, duration or scope of activity, this Section 9 will be considered
divisible and will become and be immediately amended to only such area,
duration and scope of activity as will be determined to be reasonable and
enforceable by the court or other body having jurisdiction over the matter;
and Employee agrees that this Section 9 as so amended will be valid and
binding as though any invalid or unenforceable provision had not been
included herein. The parties hereto acknowledge and agree that the provisions
of this Section 9 shall not apply if this Agreement is terminated pursuant to
Section 6(d) hereof; provided, further, however, that this Section 9 shall
apply if this Agreement is terminated pursuant to Section 6(b)(iv) hereof
notwithstanding that such termination shall also constitute a termination of
this Agreement pursuant to Section 6(d) hereof.
5
<PAGE>
Section 10. GENERAL.
(a) NOTICES. All notices and other communications hereunder will be
in writing or by written telecommunication, and will be deemed to have been
duly given if delivered personally or if mailed by certified mail, return
receipt requested or by written telecommunication, to the relevant address
set forth below, or to such other address as the recipient of such notice
or communication will have specified to the other party hereto in
accordance with this Section 10(a):
If to the Company, to: with a copy to:
Pentegra Dental Group, Inc. Jackson Walker L.L.P.
2999 N. 44th Street, Suite 650 901 Main Street, Suite 6000
Phoenix, Arizona 85018 Dallas, Texas 75202
Attn: CHIEF EXECUTIVE OFFICER Attn: James S. Ryan, III
Fax No.: (602) 952-0544 Fax No.: (214) 953-5822
If to Employee, to:
------------------------
------------------------
------------------------
------------------------
(b) WITHHOLDING; NO OFFSET. All payments required to be made by the
Company under this Agreement to Employee will be subject to the withholding
of such amounts, if any, relating to federal, state and local taxes as may
be required by law. No payment under this Agreement will be subject to
offset or reduction attributable to any amount Employee may owe to the
Company or any other person.
(c) EQUITABLE REMEDIES. Each of the parties hereto acknowledges and
agrees that upon any breach by Employee of his obligations under any of
Sections 8 and 9 hereof, the Company will have no adequate remedy at law,
and accordingly will be entitled to specific performance and other
appropriate injunctive and equitable relief.
(d) SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid or unenforceable, such provision will be fully severable
and this Agreement will be construed and enforced as if such illegal,
invalid or unenforceable provision never comprised a part hereof; and the
remaining provisions hereof will remain in full force and effect and will
not be affected by the illegal, invalid or unenforceable provision or by
its severance herefrom. Furthermore, in lieu of such illegal, invalid or
unenforceable provision, there will be added automatically as part of this
Agreement a provision as similar in its terms to such
6
<PAGE>
illegal, invalid or unenforceable provision as may be possible and be
legal, valid and enforceable.
(e) WAIVERS. No delay or omission by either party hereto in
exercising any right, power or privilege hereunder will impair such right,
power or privilege, nor will any single or partial exercise of any such
right, power or privilege preclude any further exercise thereof or the
exercise of any other right, power or privilege.
(f) COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which will be deemed an original, and all of which
together will constitute one and the same instrument.
(g) CAPTIONS. The captions in this Agreement are for convenience of
reference only and will not limit or otherwise affect any of the terms or
provisions hereof.
(h) REFERENCE TO AGREEMENT. Use of the words "herein," "hereof,"
"hereto" and the like in this Agreement refer to this Agreement only as a
whole and not to any particular subsection or provision of this Agreement,
unless otherwise noted.
(i) BINDING AGREEMENT. This Agreement will be binding upon and inure
to the benefit of the parties and will be enforceable by the personal
representatives and heirs of Employee and the successors of the Company.
If Employee dies while any amounts would still be payable to him hereunder,
such amounts will be paid to Employee's estate. This Agreement is not
otherwise assignable by Employee.
(j) ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties, supersedes all prior agreements and
understandings relating to the subject matter hereof and may not be amended
except by a written instrument hereafter signed by each of the parties
hereto.
(k) GOVERNING LAW. This Agreement and the performance hereof will be
construed and governed in accordance with the laws of the State of Arizona,
without regard to its choice of law principles.
Section 11. BINDING ARBITRATION. Any controversy or claim arising
out of or relating to this Agreement, or the breach thereof, shall be settled
exclusively by arbitration in Phoenix, Arizona, in accordance with the
Commercial Arbitration Rules of the American Arbitration Association then in
effect. Judgment upon the award rendered by the arbitrator(s) may be entered
in, and enforced by, any court having jurisdiction thereof.
7
<PAGE>
EXECUTED as of the date and year first above written.
PENTEGRA DENTAL GROUP, INC.
By: /s/ Kimberlee K. Rozman
------------------------------
Its: Senior Vice President
------------------------------
EMPLOYEE
/s/ James M. Powers, Jr.
------------------------------
James M. Powers, Jr.
8
<PAGE>
EXHIBIT A
BONUS
Commencing with the fiscal year of the Company beginning April 1, 1999
and ending March 31, 2000, Employee shall be eligible to receive an annual
cash bonus in an amount equal to up to 25% of his base salary in the event
that the Company experiences at least 20% or greater growth in earnings per
share on a fiscal year to year basis. For purposes of determining the
applicable year's earnings per share, the cash bonus payable hereunder and
under all other similar agreements between the Company and its officers shall
be included prior to such determination.
<TABLE>
<CAPTION>
Percentage Increase in Bonus as a Percentage
Earnings Per Share Of Annual Base Salary
<S> <C>
20.0-22.5% 5%
Over 22.5-25.0% 10%
Over 25.0% to 27.5% 15%
Over 27.5% to 30.0% 20%
Over 30.0% 25%
</TABLE>
9
<PAGE>
EXHIBIT B
Upon relocation of the Employee to Phoenix, Arizona and subsequent
relocation by Employee should the headquarters of the Company be moved from
Phoenix, Arizona, Employee shall be entitled to receive reimbursement of the
moving/relocation expenses set forth below:
The Company will reimburse the Employee for all reasonable,
out-of-pocket and adequately documented moving expenses. The term
"reasonable, out-of-pocket and adequately documented moving expenses"
incurred by Employee shall include the following:
1. Expenses incurred by Employee in connection with the sale of
Employee's present principal residence, such as real estate commissions and
closing costs, payable in connection with such sale but not including an
equity loss on the sale of such residence;
2. Expenses in the form of closing costs, but excluding prepayments
and mortgage discount points, incurred by Employee in connection with the
purchase by Employee of a new permanent principal residence in the area where
the Employee is being asked to relocate;
3. Expenses incurred by Employee for the packing and moving of usual
and customary personal property and automobiles of Employee located in the
present principal residence to the Employee's new residence;
4. Expenses incurred by Employee for up to two (2) trips to the
relocation area, of up to three (3) days and nights, for Employee and
Employee's spouse in connection with Employee's efforts to locate a new
permanent residence (such expenses to include airfare, hotel and automobile
rental).
5. Cash reasonably calculated by the Company to negate adverse income
tax consequences to Employee of the foregoing reimbursement.
Total expenses reimbursed by Company to Employee as set forth in
subparagraphs (1) - (5) above shall not exceed the sum of $50,000.
Additionally, If Employee is terminated without cause pursuant to
Section 6(c) hereof following the consummation by Acquiror Group of Liberty
Practice Acquisitions with more than $10,000,000 in Practice Gross Revenues,
the Company shall pay to Employee a lump sum amount (on the date of such
termination) equal to the amounts paid by the Company to Employee as set
forth above (i.e., if Employee receives the sum of $50,000 set forth above
for relocation to Phoenix, Arizona and tax consequences of such
reimbursement, upon termination of Employee pursuant to Section 6(c),
Employee shall again receive the sum of $50,000).
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED
FROM THE COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 697
<SECURITIES> 0
<RECEIVABLES> 4,851
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,900
<PP&E> 4,704
<DEPRECIATION> (317)
<TOTAL-ASSETS> 19,019
<CURRENT-LIABILITIES> 2,455
<BONDS> 502
0
0
<COMMON> 8
<OTHER-SE> 16,054
<TOTAL-LIABILITY-AND-EQUITY> 19,019
<SALES> 16,173
<TOTAL-REVENUES> 16,173
<CGS> 14,909
<TOTAL-COSTS> 14,909
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (79)
<INCOME-PRETAX> 1,343
<INCOME-TAX> 375
<INCOME-CONTINUING> 968
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 968
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>