<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 31,
1998 REGISTRATION NO. 333-66475
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
WISDOM HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
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<S> <C> <C>
DELAWARE 8099 95-4710504
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
WISDOM HOLDINGS, INC.
222 NORTH SEPULVEDA BOULEVARD, SUITE 740
EL SEGUNDO, CALIFORNIA 90245-4340
(310) 765-2400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
MICHAEL T. FIORE
CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER
WISDOM HOLDINGS, INC.
222 NORTH SEPULVEDA BOULEVARD, SUITE 740
EL SEGUNDO, CALIFORNIA 90245-4340
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
WITH COPIES TO:
RICHARD J. BABCOCK, ESQ. ROBERT L. GROSSMAN, ESQ.
ROBERT I. NEWTON, ESQ. GREENBERG TRAURIG, P.A.
MCDERMOTT, WILL & EMERY 1221 BRICKELL AVENUE
1301 DOVE STREET, SUITE 500 MIAMI, FLORIDA 33131
NEWPORT BEACH, CALIFORNIA 92660
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement
and the satisfaction or waiver of all other conditions to the mergers described
in this Registration Statement.
------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
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[GENTLE DENTAL LOGO] [DCA LOGO]
MERGERS PROPOSED--YOUR VOTE IS VERY IMPORTANT
CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE .
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
GENTLE DENTAL COMMON STOCK TRADING SYMBOL: THE NASDAQ SMALLCAP
MARKET-REGISTERED TRADEMARK---"GNTL"
DENTAL CARE ALLIANCE COMMON STOCK TRADING SYMBOL: THE NASDAQ NATIONAL
MARKET-REGISTERED TRADEMARK--- "DENT"
We are--
- - Gentle Dental Service Corporation, a Washington corporation.
- - Dental Care Alliance, Inc., a Delaware corporation.
The Mergers--
- - The Boards of Directors of Gentle Dental and Dental Care Alliance have agreed
on a combination that will create one of the largest dental practice
management companies in the nation.
- - Gentle Dental and Dental Care Alliance will each become a wholly-owned
subsidiary of a new Delaware company named "Wisdom Holdings, Inc."
- - Gentle Dental shareholders will receive one share of the new company's common
stock for each share of Gentle Dental common stock they own immediately prior
to the mergers and one share of preferred stock with the same designations for
each share of Gentle Dental preferred stock they own.
- - Dental Care Alliance stockholders will receive 1.67 shares of the new
company's common stock for each share of Dental Care Alliance common stock
they own immediately prior to the mergers.
- - The new company will have affiliated dental practices in California, Florida,
Georgia, Hawaii, Idaho, Michigan, Oregon, Pennsylvania and Washington.
We cannot complete the combination unless the stockholders of both of our
companies approve it. Gentle Dental and Dental Care Alliance will each hold a
meeting of its stockholders to vote on the Agreement and Plan of Reorganization
and Merger. Your vote is very important. Whether or not you plan to attend your
stockholder meeting, please take the time to vote by completing and mailing the
enclosed proxy card to us. If you sign, date and mail your proxy card without
indicating how you want to vote, your proxy will be counted as a vote in favor
of the merger agreement. Not returning your card or not instructing your broker
how to vote any shares held for you in "street name" will have the same effect
as a vote against the merger agreement.
The dates, times and places of the meetings are as follows:
FOR GENTLE DENTAL FOR DENTAL CARE ALLIANCE
SHAREHOLDERS: STOCKHOLDERS:
, 1999 a.m., local time , 1999 a.m., local time
This document provides you with detailed information about these meetings and
the proposed combination. You can also get information about us from publicly
available documents that we have filed with the Securities and Exchange
Commission. We encourage you to read this entire document carefully.
We strongly support the mergers and join with members of our Boards of Directors
in enthusiastically recommending that you vote in favor of the merger agreement.
JOINT PROXY STATEMENT-PROSPECTUS DATED , 1999
AND FIRST MAILED TO STOCKHOLDERS ON , 1999
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[GENTLE DENTAL LOGO]
GENTLE DENTAL SERVICE CORPORATION
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
El Segundo, California
, 1999
TO THE SHAREHOLDERS OF
GENTLE DENTAL SERVICE CORPORATION:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Gentle Dental
Service Corporation will be held on , , 1999, a.m.,
local time, at , El Segundo, California, for the purpose of
considering and voting upon the following matters, all as set forth in the
accompanying document:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Reorganization and Merger, dated as of October 15, 1998, by
and among Wisdom Holdings, Inc., a newly formed Delaware corporation,
Wisdom Holdings Acquisition Corp. I, a newly formed Delaware corporation,
Wisdom Holdings Acquisition Corp. II, a newly formed Delaware
corporation, Gentle Dental Service Corporation, a Washington corporation,
and Dental Care Alliance, Inc., a Delaware corporation, and the
consummation of the transactions contemplated by that agreement. Pursuant
to that agreement, Gentle Dental and Dental Care Alliance will become
wholly-owned subsidiaries of Wisdom Holdings, Inc. and the stockholders
of Gentle Dental and Dental Care Alliance will each receive shares of
stock of the new company, upon the terms and subject to the conditions
set forth in that agreement.
2. To transact such other business as may properly be brought before the
special meeting or any adjournments or postponements of the special
meeting.
The Board of Directors has fixed the close of business on December 7, 1998 as
the record date for determining shareholders entitled to notice of and to vote
at the special meeting and any adjournments or postponements of the special
meeting. The holders of record on the record date of each series of Gentle
Dental preferred stock are entitled to notice of and to vote as separate classes
regarding the matters to be voted upon at the special meeting. Holders of Gentle
Dental Series D preferred stock are entitled to vote with the holders of Gentle
Dental common stock, together as a single class, on all matters at the special
meeting and also to vote regarding the merger as a separate class. The holders
of Gentle Dental Series D preferred stock are the only Gentle Dental preferred
shareholders entitled to vote on matters other than the merger that may be voted
upon at the special meeting.
BY ORDER OF THE BOARD OF DIRECTORS
[SIGNATURE]
Michael T. Fiore
CO-CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND PRESIDENT
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. IF YOU ATTEND
THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE
PREVIOUSLY RETURNED YOUR PROXY CARD.
<PAGE>
[DENTAL CARE ALLIANCE LOGO]
DENTAL CARE ALLIANCE, INC.
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Sarasota, Florida
, 1999
TO THE STOCKHOLDERS OF
DENTAL CARE ALLIANCE, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Dental Care
Alliance, Inc., will be held on , 1999, a.m., local time, at
, Sarasota, Florida, for the purposes of considering and voting
upon the following matters, all as set forth in the accompanying Joint Proxy
Statement-Prospectus:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Reorganization and Merger, dated as of October 15, 1998, by
and among Wisdom Holdings, Inc., a newly formed Delaware corporation,
Wisdom Holding Acquisitions Corp. I, a newly formed Delaware corporation,
Wisdom Holding Acquisitions Corp. I, a newly formed Delaware corporation,
Gentle Dental Service Corporation, a Washington corporation, and Dental
Care Alliance, Inc., a Delaware corporation, and the consummation of the
transactions contemplated by that agreement. Pursuant to that agreement,
Dental Care Alliance and Gentle Dental will become wholly-owned
subsidiaries of Wisdom Holdings, Inc. and the stockholders of Dental Care
Alliance and Gentle Dental will each receive shares of stock of the new
company, upon the terms and subject to the conditions set forth in that
agreement.
2. To transact such other business as may properly be brought before the
special meeting or any adjournments or postponements of the special
meeting.
The Board of Directors has fixed the close of business on December 8, 1998 as
the record date for determining stockholders entitled to notice of and to vote
at the special meeting and any adjournments or postponements of the special
meeting.
BY ORDER OF THE BOARD OF DIRECTORS
[SIGNATURE]
Dr. Steven R. Matzkin
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND
PRESIDENT
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE
PREVIOUSLY RETURNED YOUR PROXY CARD.
<PAGE>
TO FIND ANY ONE OF THE PRINCIPAL SECTIONS IDENTIFIED BELOW, SIMPLY BEND THE
DOCUMENT SLIGHTLY TO EXPOSE THE BLACK TABS AND OPEN THE DOCUMENT TO THE TAB
WHICH CORRESPONDS TO THE TITLE OF THE SECTION YOU WISH TO READ.
TABLE OF CONTENTS
SUMMARY
RISK FACTORS
THE MEETINGS
THE MERGERS
INFORMATION ABOUT OUR COMPANIES
ADDITIONAL INFORMATION
FINANCIAL INFORMATION
APPENDICES
<PAGE>
TABLE CONTENTS
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<S> <C>
SUMMARY
The Companies............................................................................................. 1
The Stockholders' Meetings................................................................................ 1
The Mergers............................................................................................... 1
General................................................................................................... 1
Our Reasons for the Mergers............................................................................... 1
Exchange of Shares........................................................................................ 2
Opinions of Financial Advisors............................................................................ 3
Our Recommendations to Stockholders....................................................................... 3
Record Date and Voting Rights............................................................................. 3
Appraisal Rights.......................................................................................... 3
Stockholders' Agreement................................................................................... 3
Interests of Directors and Officers in the Merger that Are Different from Your Interests.................. 4
Management and Operations after the Mergers............................................................... 4
Certain Differences in the Rights of Stockholders......................................................... 4
What We Need to do to Complete the Mergers................................................................ 5
Termination of the Merger Agreement; Expenses............................................................. 5
Waiver and Amendment...................................................................................... 5
Accounting Treatment...................................................................................... 5
Regulatory Approvals...................................................................................... 5
Certain Federal Income Tax Consequences................................................................... 6
Risk Factors.............................................................................................. 6
Selected Unaudited Comparative Per Share Data............................................................. 7
Summary Pro Forma Combined Financial Data................................................................. 8
Price Range of Common Stock and Dividends................................................................. 11
RISK FACTORS
Forward-Looking Statements May Not Prove Accurate......................................................... 12
We May Not Be Able to Successfully Integrate Our Operations............................................... 12
We May Not Be Able to Successfully Manage and Maintain Our Growth......................................... 12
We Depend Upon the Operations of Our Affiliated Dental Practices.......................................... 12
We May Not Be Able to Obtain Acceptable Financing......................................................... 13
We May Not Be Able to Attract and Retain Professionals, Management or Staff............................... 13
Competition............................................................................................... 13
We Depend Upon Third Party Payors......................................................................... 14
We Are Subject to Risks of Managed Care and Capitated Managed Dental Care Contracts....................... 14
We Depend Upon Certain Key Personnel...................................................................... 15
We Are Subject to Default Risks Associated with Notes from and Advances to Affiliated Professional
Associations............................................................................................ 15
We Are Subject to an Adverse Earnings Impact Associated with Management Agreements and Other Intangible
Assets.................................................................................................. 15
Government Regulation..................................................................................... 16
We Are Subject to the Risk of Lawsuits Related to Our Affiliations with Dental Practices.................. 19
We Are Subject to Risks Related to Our Geographic Concentration........................................... 19
Shares Eligible for Future Sale Could Adversely Affect Our Stock Price and Ability to Raise Capital....... 19
No Prior Market; Possible Volatility of Stock Price....................................................... 19
Certain Anti-Takeover Provisions.......................................................................... 20
</TABLE>
i
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PAGE
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<S> <C>
Year 2000 Risks and Preparedness.......................................................................... 20
THE MEETINGS
Gentle Dental Special Meeting............................................................................. 21
General................................................................................................. 21
Matters to be Considered................................................................................ 21
Proxies................................................................................................. 21
Solicitation of Proxies................................................................................. 21
Record Date and Voting Rights........................................................................... 22
Recommendation of Gentle Dental Board of Directors...................................................... 23
Independent Auditors.................................................................................... 23
Dental Care Alliance Special Meeting...................................................................... 23
General................................................................................................. 23
Matters to be Considered................................................................................ 23
Proxies................................................................................................. 23
Solicitation of Proxies................................................................................. 24
Record Date and Voting Rights........................................................................... 24
Recommendation of Dental Care Alliance Board of Directors............................................... 25
Independent Auditors.................................................................................... 25
THE MERGERS
General................................................................................................... 26
Background of the Mergers................................................................................. 26
Recommendation of the Gentle Dental Board of Directors and Reasons for the Mergers........................ 29
Recommendation of the Dental Care Alliance Board of Directors and Reasons for the Mergers................. 30
Opinion of Gentle Dental's Financial Advisor.............................................................. 32
Opinion of Dental Care Alliance's Financial Advisors...................................................... 37
Structure of the Mergers.................................................................................. 44
Exchange of Stock; Treatment of Options and Other Rights to Acquire Capital Stock......................... 44
Exchange of Certificates; Fractional Shares............................................................... 46
Effective Time............................................................................................ 47
Representations and Warranties............................................................................ 48
Conduct of Business Pending the Mergers and Other Agreements.............................................. 48
Conditions to Consummation of the Mergers................................................................. 51
Regulatory Approvals Required for the Mergers............................................................. 53
Certain Federal Income Tax Consequences................................................................... 53
Accounting Treatment...................................................................................... 55
Termination of the Merger Agreement....................................................................... 55
Waiver and Amendment of the Merger Agreement.............................................................. 56
Employee Benefits and Plans............................................................................... 56
Stock Exchange Listing.................................................................................... 57
Expenses.................................................................................................. 57
Interests of Certain Persons in the Merger................................................................ 57
Restrictions on Resales by Affiliates..................................................................... 58
The Stockholders' Agreement............................................................................... 59
OPERATIONS AND MANAGEMENT OF WISDOM HOLDINGS AFTER THE MERGERS
Operations................................................................................................ 61
Executive Officers........................................................................................ 61
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ii
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<S> <C>
Directors................................................................................................. 62
Principal Stockholders of Wisdom Holdings After the Mergers............................................... 63
Information About Gentle Dental........................................................................... 65
General................................................................................................. 65
Selected Consolidated Financial Data.................................................................... 66
Gentle Dental's Management's Discussion and Analysis of Financial Condition and Results of Operations... 67
Results of Operations................................................................................. 67
Year Ended December 31, 1996 Compared to Year Ended December 31, 1997................................. 67
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30, 1998................. 68
Liquidity and Capital Resources....................................................................... 70
Recent Developments................................................................................... 72
Year 2000 Compliance.................................................................................. 72
Certain Transactions Regarding Gentle Dental.......................................................... 73
Gentle Dental's Principal Shareholders.................................................................... 78
Gentle Dental's Management and Additional Information................................................... 81
Directors and Executive Officers...................................................................... 81
Classified Board of Directors......................................................................... 83
Board Committees...................................................................................... 83
Additional Information................................................................................ 83
Information About Dental Care Alliance.................................................................... 83
General................................................................................................. 83
Dental Care Alliance Selected Consolidated Financial Data............................................... 86
Dental Care Alliance's Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................................ 87
Overview.............................................................................................. 87
Acquisitions.......................................................................................... 91
Results of Operations................................................................................. 92
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended September 30, 1997........... 92
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996........................... 93
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995............................... 94
Seasonality........................................................................................... 94
Quarterly Financial Information....................................................................... 94
Liquidity and Capital Resources....................................................................... 95
Inflation............................................................................................. 96
Year 2000 Compliance.................................................................................. 96
Dental Care Alliance's Management and Additional Information............................................ 98
Directors and Executive Officers...................................................................... 98
Executive Compensation................................................................................ 98
Option Grants......................................................................................... 100
Employment Agreements................................................................................. 101
Certain Transactions Regarding Dental Care Alliance................................................... 102
Dental Care Alliance's Principal Stockholders......................................................... 104
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iii
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DESCRIPTION OF WISDOM HOLDINGS CAPITAL STOCK
Wisdom Holdings Common Stock.............................................................................. 105
Wisdom Holdings Preferred Stock........................................................................... 105
DESCRIPTION OF GENTLE DENTAL CAPITAL STOCK
Gentle Dental Common Stock................................................................................ 106
Gentle Dental Preferred Stock............................................................................. 106
DESCRIPTION OF DENTAL CARE ALLIANCE CAPITAL STOCK
Dental Care Alliance Common Stock......................................................................... 110
Dental Care Alliance Preferred Stock...................................................................... 110
CERTAIN DIFFERENCES BETWEEN WASHINGTON AND DELAWARE CORPORATE LAWS
Amendment of Articles/Certificates of Incorporation....................................................... 111
Right to Call Special Meeting of Stockholders............................................................. 111
Indemnification of Officers, Directors and Employees...................................................... 112
Provisions Affecting Control Share Acquisitions and Business Combinations................................. 112
Mergers, Sales of Assets and Other Transactions........................................................... 114
Action Without a Meeting.................................................................................. 114
Class Voting.............................................................................................. 115
Transactions with Officers or Directors................................................................... 115
Dissenters' or Appraisal Rights........................................................................... 116
Dividends................................................................................................. 116
ADDITIONAL INFORMATION
Dissenters' or Appraisal Rights........................................................................... 117
Legal Matters............................................................................................. 118
Experts................................................................................................... 118
Stockholder Proposals..................................................................................... 119
Where You Can Find More Information....................................................................... 120
Forward-Looking Statements................................................................................ 122
INDEX OF FINANCIAL STATEMENTS
Wisdom Holdings, Inc...................................................................................... F-1
Gentle Dental Service Corporation......................................................................... F-1
Dental Care Alliance, Inc................................................................................. F-1
Capitol Dental Care, Inc. and Dental Maintenance of Oregon, P.C........................................... F-1
APPENDIX
Appendix A -- Agreement and Plan of Reorganization and Merger............................................. A-1
Appendix B -- Salomon Smith Barney Inc. Fairness Opinion.................................................. B-1
Appendix C -- Raymond James & Associates, Inc. Fairness Opinion........................................... C-1
Appendix D -- Form of Stockholders' Agreement............................................................. D-1
Appendix E -- Washington Business Corporation Act -- Dissenters' Rights Law............................... E-1
</TABLE>
iv
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SUMMARY
THIS BRIEF SUMMARY HIGHLIGHTS SELECTED INFORMATION DESCRIBED MORE FULLY
ELSEWHERE IN THIS DOCUMENT. IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT IS
IMPORTANT TO YOU. YOU SHOULD CAREFULLY READ THIS ENTIRE DOCUMENT, APPENDICES AND
THE OTHER DOCUMENTS TO WHICH THIS DOCUMENT REFERS IN ORDER TO FULLY UNDERSTAND
THE MERGER AGREEMENT. SEE "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 120.
THE COMPANIES (PAGE 61)
GENTLE DENTAL SERVICE CORPORATION
222 North Sepulveda Boulevard
Suite 740
El Segundo, California 90245-4340
Gentle Dental Service Corporation is a dental practice management company
incorporated in Washington. Gentle Dental provides management services to dental
practices in California, Florida, Hawaii, Idaho, Oregon and Washington. At
September 30, 1998, our total assets were approximately $104.9 million, and our
total shareholders' equity was approximately $43.0 million.
DENTAL CARE ALLIANCE, INC.
1343 Main Street, 7th Floor
Sarasota, Florida 34236
Dental Care Alliance is a dental practice management company incorporated in
Delaware. Dental Care Alliance provides management and licensing services to
dental practices in Florida, Georgia, Indiana, Pennsylvania and Michigan. At
September 30, 1998, our total assets were approximately $33.9 million and our
total stockholders' equity was approximately $27.1 million.
THE STOCKHOLDERS' MEETINGS (PAGE 21)
GENTLE DENTAL SHAREHOLDERS. The Gentle Dental special meeting will be held on
, 1999 at 9:00 a.m., local time, at . At the
Gentle Dental special meeting, you will be asked:
1. to approve the Agreement and Plan of Reorganization and Merger which
provides for the combination of our company with Dental Care Alliance.
2. to act on any other items that may be submitted to a vote at the meeting.
DENTAL CARE ALLIANCE STOCKHOLDERS. The Dental Care Alliance special meeting
will be held on , , 1999 at 9:00 a.m., local time, at
. At the Dental Care Alliance special meeting, you will be
asked:
1. to approve the Agreement and Plan of Reorganization and Merger which
provides for the combination of our company with Gentle Dental; and
2. to act on any other items that may be submitted to a vote at the special
meeting.
THE MERGERS (PAGE 26)
WE HAVE ATTACHED THE MERGER AGREEMENT TO THIS DOCUMENT AS APPENDIX A WHICH
AGREEMENT IS INCORPORATED HEREIN BY THIS REFERENCE AND WHICH DESCRIBES THE
COMBINATION BETWEEN OUR COMPANIES. PLEASE READ THE MERGER AGREEMENT. IT IS THE
LEGAL DOCUMENT THAT GOVERNS THE MERGERS.
GENERAL
We propose a combination in which Gentle Dental and Dental Care Alliance will
each merge with a separate wholly-owned subsidiary of Wisdom Holdings, Inc., a
newly-formed Delaware corporation. As a result of these mergers, each of our
companies will become wholly-owned subsidiaries of Wisdom Holdings, Inc. We hope
to complete the mergers by February 28, 1999.
OUR REASONS FOR THE MERGERS (PAGES 29 AND 30)
Our companies are proposing to combine because we believe for example, that
- - together we can create a larger and more stable company that will provide
significant benefits to our stockholders
- - the larger size of the new company should help us to reduce duplicate costs
1
<PAGE>
- - the new company can do a better job of increasing our revenues than we could
if we did not merge
- - the combination between Gentle Dental and Dental Care Alliance will strengthen
our position as a competitor in the dental practice management industry, which
is evolving, consolidating and growing more competitive.
In reaching these beliefs and arriving at our decisions to recommend the mergers
to our stockholders, we considered a number of factors. For example, we
considered
- - our familiarity with our businesses, operations, financial conditions,
earnings and prospects
- - our ability to successfully combine and integrate our operations
- - our perception of the value of the consideration in the mergers to our
stockholders
- - our due diligence investigations of the other's businesses
- - the advice of our financial and legal advisors and of our independent
auditors.
EXCHANGE OF SHARES (PAGE 44)
GENTLE DENTAL SHAREHOLDERS. Following the mergers, each of your shares of
Gentle Dental common stock will automatically become exchangeable for one share
of the new company's common stock and each share of Gentle Dental preferred
stock will automatically become exchangeable for one share of the new company's
preferred stock, with the same rights, preferences and privileges as to the new
company as each share of preferred stock had as to Gentle Dental. For example,
if you owned ten shares of Gentle Dental common stock, after the mergers you
will exchange your old Gentle Dental certificates for ten shares of the new
company's common stock.
For more information on how this exchange procedure works, see "Exchange of
Certificates; Fractional Shares" on page 46 of this document.
DENTAL CARE ALLIANCE STOCKHOLDERS. Following the mergers, each of your shares
of Dental Care Alliance common stock will automatically become exchangeable for
1.67 shares of the new company's common stock. The total number of shares you
receive will therefore be equal to 1.67 times the number of shares of Dental
Care Alliance common stock you own. The new company will not issue fractional
shares. Instead, you will receive the value of any fractional share in cash,
based on the market value of Gentle Dental's common stock. For example, if you
owned ten shares of Dental Care Alliance common stock, after the mergers you
will exchange your old Dental Care Alliance certificates for 16 shares of the
new company's common stock and a check for seven-tenths multiplied by the
average of the closing sale prices of Gentle Dental common stock for the five
consecutive trading days prior to the Gentle Dental merger.
For more information on how this exchange procedure works, see "Exchange of
Certificates; Fractional Shares" on page 46 of this document.
Prior to completion of the mergers, there has been no public market for the new
company's common stock. As a result, the value of the consideration received by
the stockholders of Gentle Dental and Dental Care Alliance is based upon the
trading value of Gentle Dental's common stock. See "Price Range of Common Stock
and Dividends" at page 11.
Based on the exchange ratio in the merger for Dental Care Alliance shares, which
is 1.67, the market value of the consideration that Dental Care Alliance
stockholders will receive in the merger for each share of Dental Care Alliance
common stock would be $9.50, based on the average of the closing bid and ask
prices for Gentle Dental's common stock on October 15, 1998 and based
on the average of the closing bid and ask prices for Gentle Dental's common
stock on , 1998. Of course, the market price of Gentle Dental and
Dental Care Alliance common stock will fluctuate prior to the mergers, while the
exchange ratio is fixed.
You should obtain current stock price quotations for Gentle Dental common stock
and Dental Care Alliance common stock. These quotations are available from your
stockbroker, in major newspapers such as THE WALL STREET JOURNAL and on the
2
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Internet. To review the price ranges of common stock of Gentle Dental and Dental
Care Alliance, please see page 11.
OPINIONS OF FINANCIAL ADVISORS (PAGES 32 AND 37)
GENTLE DENTAL SHAREHOLDERS. Salomon Smith Barney Inc. has delivered to the
Gentle Dental Board of Directors its opinion that, as of October 15, 1998, the
exchange ratio of the common shares of Dental Care Alliance for common shares of
Wisdom Holdings is fair to Gentle Dental from a financial point of view. We have
attached this opinion to this document as Appendix B. You should read this
document completely to understand the assumptions made, matters considered and
limitations of the review made by Salomon Smith Barney Inc. in providing its
opinion.
DENTAL CARE ALLIANCE STOCKHOLDERS. Raymond James & Associates, Inc. has
delivered to the Dental Care Alliance Board of Directors its opinion that, as of
October 15, 1998, the exchange ratio of the common shares of Dental Care
Alliance for common shares of Wisdom Holdings is fair to the holders of Dental
Care Alliance common shares from a financial point of view. We have attached
this opinion to this document as Appendix C. You should read this document
completely to understand the assumptions made, matters considered and
limitations of the review made by Raymond James & Associates, Inc. in providing
its opinion.
OUR RECOMMENDATIONS TO STOCKHOLDERS (PAGES 29 AND 30)
GENTLE DENTAL SHAREHOLDERS. The Board of Directors of Gentle Dental believes
that the merger agreement is fair to you and in your best interests, and
recommends that you vote "FOR" the proposal to approve the merger agreement.
DENTAL CARE ALLIANCE STOCKHOLDERS. The Board of Directors of Dental Care
Alliance believes that the merger agreement is fair to you and in your best
interests, and unanimously recommends that you vote "FOR" the proposal to
approve the merger agreement.
RECORD DATE AND VOTING RIGHTS (PAGE 24)
GENTLE DENTAL SHAREHOLDERS. You can vote on the merger agreement at the meeting
of Gentle Dental shareholders if you owned Gentle Dental common stock or Gentle
Dental preferred stock at the close of business on December 7, 1998. You can
cast one vote regarding the Agreement and Plan of Reorganization and Merger for
each share of Gentle Dental common stock and one vote for each share of Gentle
Dental preferred stock that you owned at that time.
DENTAL CARE ALLIANCE STOCKHOLDERS. You can vote on the Agreement and Plan of
Reorganization and Merger at the meeting of Dental Care Alliance stockholders if
you owned Dental Care Alliance common stock at the close of business on December
8, 1998. You can cast one vote for each share of Dental Care Alliance common
stock that you owned at that time.
APPRAISAL RIGHTS (PAGE 116)
GENTLE DENTAL SHAREHOLDERS. Washington law permits you to dissent from the
merger and have the fair value of your stock appraised by a court and paid to
you in cash. In order to do this, you must follow certain procedures, including
filing certain notices. Also, you must not vote your shares in favor of the
mergers if you wish to receive a cash payment for your shares.
You will not receive any stock in the new company if you dissent and follow all
of the required procedures. Instead, you will only receive the value of your
stock in cash. The value of your stock will be the fair value of your stock
immediately prior to the mergers, without giving effect to the anticipated
combination. The relevant sections of Washington law governing this process are
attached to this document as Appendix E.
DENTAL CARE ALLIANCE STOCKHOLDERS. Delaware law does not provide you with
dissenters' appraisal rights in the mergers.
STOCKHOLDERS' AGREEMENT (PAGE 59)
Certain officers, directors and significant shareholders of Gentle Dental and
certain officers and
3
<PAGE>
directors of Dental Care Alliance have entered into a Stockholders' Agreement in
which they have agreed to vote "FOR" adoption and approval of the merger
agreement. As of , 1998, the Gentle Dental officers, directors and
significant shareholders who have executed the Stockholders' Agreement represent
approximately % of the total voting power of Gentle Dental common stock and
approximately %, % and % of the total voting power of Gentle Dental
Series A, Series C and Series D preferred stock.
As of , 1998, the Dental Care Alliance officers and directors who
have executed a Stockholders' Agreement represent approximately % of the
total voting power of Dental Care Alliance common stock. We have attached a copy
of the form of the Stockholders' Agreement to this document as Appendix D.
INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGERS THAT ARE DIFFERENT FROM YOUR
INTERESTS (PAGE 57)
Some of our directors and officers have interests in the mergers that are
different from, or in addition to, their interests as stockholders in our
companies. These interests exist because of agreements with Gentle Dental or
Dental Care Alliance, including provisions in employment agreements and rights
that certain officers have under retention, incentive or benefit and
compensation plans maintained by Gentle Dental or Dental Care Alliance.
Wisdom Holdings, Inc. has agreed to assume responsibility for these agreements
and plans. Some of these agreements and plans will provide the officers with
severance benefits if their employment with Wisdom Holdings, Inc. is terminated
after the merger. See "The Mergers--Interests of Certain Persons in the Mergers"
at page of this document. The members of our boards knew about these
additional interests, and considered them, when they approved the merger
agreement.
MANAGEMENT AND OPERATIONS AFTER THE MERGERS (PAGE 61)
The present management teams of our companies will share the responsibility of
managing Wisdom Holdings, Inc. The Board of Directors of Wisdom Holdings, Inc.
will initially be composed of eight directors. Five will come from Gentle Dental
and three will come from Dental Care Alliance. The Gentle Dental directors will
include:
- - Michael T. Fiore, Co-Chairman, President and Chief Executive Officer of Gentle
Dental;
- - Robert Finzi;
- - Eric Green;
- - Wayne Posey; and
- - Paul H. Keckley.
The Dental Care Alliance directors will include:
- - Dr. Steven R. Matzkin, Chairman, President and Chief Executive Officer of
Dental Care Alliance;
- - Robert F. Raucci; and
- - Curtis Lee Smith, Jr.
Mr. Fiore will be Co-Chairman of the Board of Directors and Chief Executive
Officer. Dr. Matzkin will be Co-Chairman of the Board of Directors and President
and Chief Dental Officer.
While no assurances can be made, we expect to achieve cost savings and
additional revenue opportunities that should have a beneficial effect on our
earnings per share. We also expect to recognize charges to earnings related to
expenses and costs of integrating our two companies in both 1998 and 1999.
CERTAIN DIFFERENCES IN THE RIGHTS OF STOCKHOLDERS (PAGE 107)
The rights of Gentle Dental shareholders are currently governed by the
Washington Business Corporation Act, the Amended and Restated Articles of
Incorporation of Gentle Dental and the Gentle Dental By-laws. The rights of
Dental Care Alliance stockholders are currently governed by the Delaware General
Corporation Law, the Dental
4
<PAGE>
Care Alliance Restated Certificate of Incorporation and the Dental Care Alliance
By-laws. Upon our completion of the mergers, you will become stockholders of the
new company, and your rights will be governed by the Delaware General
Corporation Law and by the new company's certificate of incorporation and
by-laws.
WHAT WE NEED TO DO TO COMPLETE THE MERGERS (PAGE 51)
The completion of the mergers depends on a number of conditions being met.
Where law permits, Gentle Dental or Dental Care Alliance could decide to
complete the mergers even though one or more of these conditions have not been
met. We cannot be certain when (or if) the conditions to the mergers will be
satisfied or waived, or that the mergers will be completed.
TERMINATION OF THE MERGER AGREEMENT; EXPENSES (PAGE 55)
We can agree at any time to terminate the merger agreement without completing
the mergers, even if the stockholders of both companies have approved it. Also,
either of us can decide, without the consent of the other, to terminate the
merger agreement under certain circumstances.
In the event the mergers are not completed, each party will pay its own
expenses, except that we will evenly divide registration fees that we will have
to pay to the Securities and Exchange Commission. Also, in the event the mergers
are not completed because the merger agreement is terminated under its terms for
a breach, the breaching party will be liable to the non-breaching party for an
amount up to the actual out-of-pocket costs and expenses of the non-breaching
party. However, in the event that:
- - either of our boards of directors fails to recommend the mergers or withdraws
or modifies a recommendation in a manner adverse to the other party, other
than a failure to recommend following a termination permitted by the
agreement; or
- - either of our companies accepts an acquisition proposal from a third party
the party that fails to recommend, withdraws or modifies a recommendation or the
party that accepts a third party acquisition proposal will pay the other party a
termination fee equal to $1.5 million.
WAIVER AND AMENDMENT (PAGE 56)
We can agree to amend the merger agreement and each of us can waive our right to
require the other party to adhere to the terms and conditions of the merger
agreement, where the law allows. However, we may not do so after our
stockholders approve the mergers, if the amendment or waiver reduces the
consideration that will be received by Gentle Dental shareholders or Dental Care
Alliance stockholders, unless the affected stockholders approve the amendment or
waiver.
ACCOUNTING TREATMENT (PAGE 55)
We expect the combination of our companies through the mergers to qualify as a
"pooling of interests." This means that, for accounting and financial reporting
purposes, we will treat our companies as if they had always been one company.
While the parties expect to account for the mergers as a pooling-of-interests,
the Securities and Exchange Commission could take a different view and require
the new company to use purchase accounting.
REGULATORY APPROVALS (PAGE 53)
Notification of the combination is being given to the U.S. Department of Justice
and the Federal Trade Commission. The mergers cannot be completed until a
waiting period has expired or is earlier terminated without objection to the
mergers by these governmental entities.
In addition, certain state and other regulatory authorities will need to approve
or be notified of the mergers before we can complete them.
We have filed, or soon will file, all of the required applications or notices
with these regulatory agencies.
5
<PAGE>
As of the date of this document, we have not yet received the required
approvals. While we do not know of any reason why we would not be able to obtain
the necessary approvals in a timely manner, we cannot be certain when or if we
will get them.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES (PAGE 53)
GENTLE DENTAL SHAREHOLDERS. We expect that your exchange or conversion of
shares of Gentle Dental common or Series D preferred stock for shares of common
or Series D preferred stock of the new company generally will not cause you to
recognize any gain or loss for purposes of United States federal income tax.
DENTAL CARE STOCKHOLDERS. We expect that your exchange of shares of Dental Care
Alliance common stock for shares of common stock of the new company generally
will not cause you to recognize any gain or loss for purposes of United States
federal income tax. You will, however, have to recognize gain in connection with
any cash received instead of fractional shares.
While we will receive legal opinions about the federal income tax treatment of
our stockholders, these opinions will not bind the Internal Revenue Service,
which could take a different view.
THIS TAX TREATMENT MAY NOT APPLY TO CERTAIN GENTLE DENTAL SHAREHOLDERS AND
CERTAIN DENTAL CARE ALLIANCE STOCKHOLDERS, INCLUDING THE GENTLE DENTAL
SHAREHOLDERS WHO DISSENT FROM THE MERGERS. DETERMINING THE ACTUAL TAX
CONSEQUENCES OF THE MERGERS TO YOU CAN BE COMPLICATED. THEY WILL DEPEND ON YOUR
SPECIFIC SITUATION AND ON VARIABLES NOT WITHIN OUR CONTROL. YOU MAY WISH TO
CONSULT YOUR OWN TAX ADVISOR FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF
THE MERGERS.
RISK FACTORS (PAGE 12)
In deciding whether to vote for the approval of the merger agreement, you should
carefully evaluate the information provided in the section entitled "Risk
Factors" in addition to the other information described in this document.
6
<PAGE>
SELECTED UNAUDITED COMPARATIVE PER SHARE DATA
The following table shows information about our income per share and book value
per share, and similar information reflecting the mergers (which we refer to as
"pro forma" information). In presenting the comparative pro forma information
for certain time periods, we assumed that we had been merged throughout these
periods. The information below does not include the pro forma impact of other
acquisitions which are included in the pro forma financial information beginning
on page 8.
We also assumed that we will treat our companies as if they had always been
combined for accounting and financial reporting purposes (a method known as
"pooling of interests" accounting). We expect that we will incur reorganization
and restructuring expenses as a result of combining our companies. We also
anticipate that the mergers will provide the new company with financial benefits
that include reduced operating expenses and the opportunity to earn more
revenue. The pro forma information, while helpful in illustrating the financial
characteristics of the new company under one set of assumptions, does not
attempt to predict or suggest future results.
The information in the following table is based on the historical financial
information which is included elsewhere in this document or incorporated by
reference to information that we have presented in our prior Securities and
Exchange Commission filings.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------- SEPTEMBER 30,
1995 1996 1997 1998
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
INCOME (LOSS) PER SHARE--BASIC
Dental Care Alliance, Inc.--Historical............................... $ 0.02 $ -- $ 0.07 $ 0.36
Dental Care Alliance, Inc.--Equivalent pro forma..................... $ 0.07 $ (0.42) $ (0.52) $ 0.27
Gentle Dental Service Corporation--Historical........................ $ 0.19 $ (1.18) $ (0.91) $ 0.08
Combined--Pro forma.................................................. $ 0.04 $ (0.25) $ (0.31) $ 0.16
INCOME (LOSS) PER SHARE--DILUTED
Dental Care Alliance, Inc.--Historical............................... $ 0.02 $ -- $ 0.07 $ 0.35
Dental Care Alliance, Inc.--Equivalent pro forma..................... $ 0.07 $ (0.42) $ (0.52) $ 0.25
Gentle Dental Service Corporation--Historical........................ $ 0.19 $ (1.18) $ (0.91) $ 0.07
Combined--Pro forma.................................................. $ 0.04 $ (0.25) $ (0.30) $ 0.15
CASH DIVIDENDS DECLARED PER SHARE
Dental Care Alliance, Inc............................................ $ -- $ -- $ -- $ --
Gentle Dental Service Corporation.................................... $ -- $ -- $ -- $ --
Combined............................................................. $ -- $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------- -------------
<S> <C> <C> <C> <C>
BOOK VALUE PER COMMON SHARE
Dental Care Alliance, Inc.--Historical............................... $ 3.52 $ 3.86
Dental Care Alliance, Inc.--Equivalent pro forma..................... $ 3.82(1) $ 4.71
Gentle Dental Service Corporation--Historical........................ $ 2.57 $ 3.49
Combined--Pro forma.................................................. $ 2.29 $ 2.82
</TABLE>
- ------------------------
1) The DCA equivalent pro forma amounts were calculated by multiplying the
combined pro forma amounts by the 1.67 exchange rate.
7
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following pro forma financial data presents the combined results of
Gentle Dental and Dental Care Alliance, which are expected to combine in a
transaction expected to be accounted for as a pooling of interests. The pro
forma financial data has been derived from the consolidated financial statements
of the companies and should be read in conjunction with such statements, the
notes related thereto and each of the companies' "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
herein.
The following summary pro forma combined financial data presented below are
unaudited and were prepared by management of the companies on the same basis as
the audited financial statements included elsewhere herein and, in the opinion
of management of the companies, include all adjustments necessary to present
fairly the information set forth herein and give effect to the mergers between
Gentle Dental Service Corporation and Dental Care Alliance, Inc. as if they had
occurred on September 30, 1998 using the pooling-of-interests method of
accounting. The pro forma financial data for the years ended December 31, 1997
and the nine months ended September 30, 1998 include the results of all
practices acquired (from an accounting point of view) as if the acquisitions had
occurred on January 1, 1997. Additionally, such results reflect the impact of
Gentle Dental's private placement that occurred in May and June of 1998 as if
the private placement occurred on January 1, 1997 and the effect of the amended
management agreements with certain professional corporations. The summary pro
forma combined financial and operating data is not necessarily indicative of the
actual results of operations or financial position that would have been achieved
had such transactions been completed at the dates specified above, nor are the
statements necessarily indicative of the new company's future results of
operations or financial position.
8
<PAGE>
WISDOM HOLDINGS, INC.
SUMMARY PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------------- SEPTEMBER 30,
1995 1996 1997 1998
--------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Dental group net patient service revenue.............................. $ -- $ 3,701 $ 132,380 $ 105,002
Net management fees (support services revenue and management fees).... 10,557 12,349 15,638 22,686
--------- --------- ---------- -------------
Net revenues........................................................ 10,557 16,050 148,018 127,688
Clinical salaries and benefits........................................ -- 1,717 61,468 50,046
Practice nonclinical salaries and benefits............................ 2,819 4,801 24,346 20,760
Dental supplies and lab expenses...................................... 1,633 3,007 15,740 14,479
Practice occupancy expenses........................................... 911 1,670 8,559 7,469
Practice selling, general and administrative expenses................. 1,311 1,900 12,837 11,022
Corporate selling, general and administrative expenses................ 2,513 3,259 7,723 7,202
Corporate restructure and merger costs................................ -- -- 1,809 --
Depreciation and amortization......................................... 503 1,017 5,898 4,855
--------- --------- ---------- -------------
Total operating expenses............................................ 9,690 17,371 138,380 115,833
--------- --------- ---------- -------------
Operating income (loss)............................................. 867 (1,321) 9,638 11,855
Interest expense, net................................................. (284) (728) (4,715) (2,792)
Other expense, net.................................................... (92) (48) (211) (13)
--------- --------- ---------- -------------
Income (loss) before income taxes and minority
interest.......................................................... 491 (2,097) 4,712 9,050
Income tax expense/(benefit).......................................... 234 (619) 1,897 3,621
Minority interest..................................................... 9 8 -- --
--------- --------- ---------- -------------
Net income (loss)................................................... 248 (1,486) 2,815 5,429
Dividends on redeemable convertible preferred stock................... -- (246) (100) --
Adjustment to redemption value of common redeemable and preferred
stock............................................................... 86 (282) (45) (15)
--------- --------- ---------- -------------
Net income (loss) attributable to common stock...................... $ 334 $ (2,014) $ 2,670 $ 5,414
--------- --------- ---------- -------------
--------- --------- ---------- -------------
Net income (loss) per share:
Basic................................................................. $ 0.04 $ (0.25) $ 0.17 $ 0.26
Diluted............................................................... $ 0.04 $ (0.25) $ 0.14 $ 0.24
Weighted average common shares outstanding:
Basic................................................................. 7,713 8,101 16,176 20,738
Diluted............................................................... 7,833 8,101 18,723 23,022
</TABLE>
9
<PAGE>
WISDOM HOLDINGS, INC.
SUMMARY PRO FORMA COMBINED BALANCE SHEET DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
Working capital.................................................................................... $ 12,740
Intangible assets--net............................................................................. 94,401
Total assets....................................................................................... 148,075
Long-term debt, excluding current maturities....................................................... 55,814
Redeemable common stock............................................................................ 2,095
Shareholders' equity............................................................................... $ 70,267
</TABLE>
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<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
GENERAL. Currently, there is no public market for the shares of the new
company's common stock and there can be no assurance that a public market will
develop after the mergers. The price ranges of Gentle Dental and Dental Care
Alliance common stock are provided below to assist you in assessing the value of
common stock you currently hold and what the excepted value of the new company's
common stock may be if a public market were to develop following the mergers.
GENTLE DENTAL. Gentle Dental's common stock is listed on the Nasdaq Small Cap
Market and traded under the symbol "GNTL." The following table sets forth, since
February 13, 1997, the date Gentle Dental's common stock commenced trading, the
high and low bid prices per share of Gentle Dental's common stock, as reported
by the Nasdaq Small Cap Market. Gentle Dental issued 1.5 million shares of its
common stock at $5.00 per share pursuant to its initial public offering.
<TABLE>
<CAPTION>
PRICE RANGE OF COMMON
STOCK
----------------------
HIGH LOW
--------- ---
<S> <C> <C>
1997
First Quarter: (February 13, 1997 -
March 31, 1997)..................... $ 5 1/8 $ 4
Second Quarter...................... 5 1/2 3 3/4
Third Quarter....................... 16 1/2 4 3/4
Fourth Quarter...................... 16 3/8 7 3/4
1998
First Quarter....................... $ 10 5/8 $ 7 1/4
Second Quarter...................... 12 1/2 7 1/4
Third Quarter....................... 9 3/8 5 1/4
Fourth Quarter (through December 18,
1998)............................. 8 3/8 5 1/2
</TABLE>
Gentle Dental has never paid any dividends on its common stock. Gentle
Dental anticipates that future earnings will be retained for development of its
business and, accordingly, does not anticipate paying regular cash dividends in
the foreseeable future. There are certain restrictions contained in Gentle
Dental's debt agreements and in the merger agreement that restrict the ability
of Gentle Dental to pay dividends.
DENTAL CARE ALLIANCE. Dental Care Alliance's common stock is listed on the
Nasdaq National Market under the symbol "DENT." The following table sets forth,
since November 4, 1997, the date Dental Care Alliance's common stock commenced
trading, the high and low bid prices per share of Dental Care Alliance's common
stock, as reported by the Nasdaq National Market. Dental Care Alliance issued
2.0 million shares of its common stock at $12.00 per share pursuant to its
initial public offering.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
1997
Fourth Quarter: (November 4, 1997 -
December 31, 1997)................. $ 13 7/8 $ 9
1998
First Quarter...................... $ 13 1/8 $ 8
Second Quarter..................... 15 3/4 11
Third Quarter...................... 12 3/8 8 1/2
Fourth Quarter (through December
18, 1998)........................ 12 9 1/4
</TABLE>
Dental Care Alliance has never paid any dividends on its common stock.
Dental Care Alliance anticipates that future earnings will be retained for
development of its business and, accordingly, does not anticipate paying regular
cash dividends in the foreseeable future. There are certain restrictions
contained in Dental Care Alliance's debt agreements and in the merger agreement
that restrict the ability of Dental Care Alliance to pay dividends.
11
<PAGE>
RISK FACTORS
IN ADDITION TO THE INFORMATION CONTAINED ELSEWHERE IN THIS JOINT PROXY
STATEMENT-PROSPECTUS OR INCORPORATED HEREIN BY REFERENCE, GENTLE DENTAL
SHAREHOLDERS AND DENTAL CARE ALLIANCE STOCKHOLDERS CONSIDERING THIS PROPOSAL TO
APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION AND MERGER SHOULD CAREFULLY
CONSIDER THE FOLLOWING FACTORS, AMONG OTHERS, BEFORE MAKING ANY FINAL DECISION.
FORWARD-LOOKING STATEMENTS MAY NOT PROVE ACCURATE
When used or incorporated by reference in this document, the words
"anticipate," "estimate," "expect," "project," "believe" and similar words or
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks, uncertainties and assumptions, including those set
forth below. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, expected or projected. Several key
factors that have a direct bearing on our ability to attain our goals are
discussed below.
WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE OUR OPERATIONS
Because of inherent uncertainties associated with integrating combining
companies, there can be no assurance that the new company will be able to
realize fully the operating efficiencies Gentle Dental and Dental Care Alliance
currently expect to realize as a result of the combination. Each of Gentle
Dental and Dental Care Alliance conducts business and maintains separate
administrative operations in different regions of the United States and there
can be no assurance that we will be able to successfully integrate such
operations or that such operating efficiencies or successful integration will be
realized in the time frame currently anticipated.
WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE AND MAINTAIN OUR GROWTH
Gentle Dental and Dental Care Alliance each are experiencing growth in
existing and new markets through affiliations with additional dental practices
and through expanding operations of existing affiliated dental practices. Our
ability to manage and maintain our growth will depend on many factors, including
our ability to successfully:
- identify, attract and retain desirable affiliation targets;
- negotiate favorable affiliation terms;
- obtain acceptable financing to fund our growth;
- complete affiliations in a timely manner;
- integrate newly affiliated dental practices;
- hire and train personnel to accommodate expanded operations;
- establish, maintain and expand new and existing payor and customer
relationships; and
- manage initial periods of negative or limited contributions to our
operating results that often occur when we enter new markets.
There can be no assurance that we will be able to accomplish these
objectives. Failure to meet one or more of these objectives could have a
material adverse effect on our business, financial condition and results of
operations.
WE DEPEND UPON THE OPERATIONS OF OUR AFFILIATED DENTAL PRACTICES
We receive fees for services provided to affiliated dental practices under
management agreements and, except as permitted by applicable law we do not
generally directly employ dentists or control the
12
<PAGE>
professional dental aspects of the practices which require a license to practice
dentistry. Our profitability is dependent on the revenue and expenses of the
affiliated dental practices. Any material loss of revenue or increase in the
expenses of the affiliated dental practices could have a material adverse effect
on the new company.
From time to time, we enter into or amend management agreements and the
affiliated dental practices enter into or amend employment agreements with
dentists, which may have a material impact on the revenue and expenses of the
affiliated dental practices. Gentle Dental's management agreements with the
affiliated dental practices generally have terms of 40 years and Dental Care
Alliance's management agreements generally have terms of 25 years. However,
certain of Dental Care Alliance's management agreements, which account for
approximately 2.3% of the new company's pro forma revenues for the year ended
December 31, 1997, and 3.7% of its pro forma revenues for the nine months ended
September 30, 1998, terminate between 1998 and 2005. Any breach, expiration or
termination of management agreements could have a material adverse effect on the
new company.
WE MAY NOT BE ABLE TO OBTAIN ACCEPTABLE FINANCING
Our expansion strategy will require substantial funding. Moreover, the
operation of our combined network of affiliated dental practices will require
ongoing working capital and capital expenditures for renovation, expansion and
the addition of dental equipment and technology used to provide dental services.
We expect that capital requirements over the next several years will
substantially exceed cash flow generated from operations and borrowings
available under current credit facilities of Gentle Dental and Dental Care
Alliance. There can be no assurance that we will be able to obtain additional
required capital on satisfactory terms, if at all. The failure to raise the
funds necessary to finance future cash requirements could materially adversely
affect our ability to pursue our expansion strategy and the new company's
business, financial condition and results of operations for future periods. If
additional funds are raised through the issuance of equity securities, dilution
to stockholders may result. If additional funds are raised through the
incurrence of debt, such debt instruments will likely contain restrictive
financial, maintenance and security covenants.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN PROFESSIONALS, MANAGEMENT OR STAFF
A key component of our operating strategy will be to increase profitability
by maximizing patient's use of our affiliated dental practices through extended
hours of operation and the addition of general dentists, specialists, hygienists
and dental assistants. Accordingly, our financial success will be dependent, in
part, upon our ability to attract and retain a sufficient number of qualified
dentists, specialists, hygienists and dental assistants. No assurance can be
given that we will be able to attract qualified dentists, specialists and
clinical staff at acceptable compensation levels, or at all. Failure to
appropriately staff affiliated dental practices could have an adverse effect on
the new company's business, financial condition and results of operations. We
believe that our future success also will depend in part upon our ability to
attract and retain qualified management personnel. Competition for such
personnel is intense and we will compete with numerous other employers, some of
which may have greater financial and other resources. There can be no assurance
that we will be successful in attracting and retaining such personnel.
COMPETITION
We compete with other dental practice management companies seeking to
affiliate with dental practices in the highly competitive dental practice
management industry. We are aware of a number of competitors specializing in the
business of providing comprehensive management services to dental practices and
there are other companies with substantial resources that may decide to enter
the industry. There can be no assurance that we will be able to successfully
identify, attract and retain dental practices and an inability to do so, would
have a material adverse effect on the new company's business, financial
condition and results of operations.
13
<PAGE>
Additionally, the market for general and specialty dental services is highly
fragmented and is characterized by large numbers of individual practitioners and
small group practices competing for individual patients. Competition for the
provision of dental services is highly competitive in the markets in which our
combined network of affiliated dental practices operate and often includes
practitioners who have established practices and reputations. There can be no
assurance that our combined network of affiliated dental practices will be able
to compete effectively in the markets they serve, and an inability to do so
would have a material adverse effect on the new company's business, financial
condition and results of operations.
WE DEPEND UPON THIRD PARTY PAYORS
A significant portion of the payment for services rendered by our affiliated
dental practices is paid by private insurance programs. There is, and has been
in recent years, an ongoing effort by third-party and government payors to
contain and reduce health care and dental care costs, and impose lower
reimbursement rates on health care providers. Such initiatives may result in a
reduction in per-patient and per-procedure revenue from historic levels. In the
event that third-party payors are successful in obtaining lower rates for
specified services, the new company's business, financial condition and results
of operations may be materially adversely affected. Additionally, contracts
between third-party and governmental payors and our affiliated dental practices
typically are short-term arrangements, having terms of one year or less.
Substantially all of these agreements also allow the third-party or governmental
payor to cancel the agreement prior to expiration of its term. Cancellation or
failure to renew or extend one or more material payor agreements could
materially and adversely affect the new company's business, financial condition
and results of operations.
WE ARE SUBJECT TO RISKS OF MANAGED CARE AND CAPITATED MANAGED DENTAL CARE
CONTRACTS
Managed care arrangements typically shift some of the economic risk of
providing patient care from the person who pays for the care to the provider of
the care by capping fees, requiring reduced fees, or paying a set fee per
patient irrespective of the amount of care delivered. There can be no assurance
that managed care arrangements will not become more prevalent in the dental care
field in the future, that the downward pressures on fees associated with managed
care will not increase, or that we will not be adversely affected by growth in
managed dental care.
Under capitated managed dental care contracts, the dentist is typically paid
a predetermined monthly capitation payment amount per patient from the payor in
exchange for providing all necessary covered services to the patients covered
under the arrangement. This arrangement shifts the risks of utilization of such
services to our affiliated dental practices that provide the dental services.
These types of contracts pass most of the financial risk of providing dental
care, including the risk of over-utilization, from the payor to the dentist. Our
success, in part, will be dependent upon our ability to negotiate contracts on
behalf of the affiliated dental practices with health maintenance organizations,
employer groups and other third-party payors, pursuant to which services will be
provided on a risk-sharing or capitated basis by some or all of the affiliated
dental practices. There can be no assurance that the affiliated dental practices
will be able to negotiate satisfactory arrangements on a capitated or other
risk-sharing basis. In addition, to the extent that patients or enrollees
covered by such arrangements require more frequent or extensive care than is
anticipated, we would incur unanticipated costs not offset by additional
revenue. This would reduce operating margins. Health care reforms being
considered at the federal and state levels could result in a mandate that
managed care patients receive certain benefits. No assurance can be given that
the affiliated dental practices will be successful in negotiating adjustments to
capitation rates that will adequately compensate the affiliated dental practices
for performing such procedures. Any such reduction or elimination of earnings
could have a material adverse effect on the new company's business, financial
condition and results of operations.
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WE DEPEND UPON CERTAIN KEY PERSONNEL
The success of the new company will be dependent upon the continued services
of certain of its senior management team, including the Co-Chairman of the Board
and Chief Executive Officer, Michael T. Fiore, and the Co-Chairman of the Board,
President and Chief Dental Officer, Dr. Steven R. Matzkin. The loss of services
of one or both of these individuals could have a material adverse effect on the
new company's business, financial condition and results of operations. There can
be no assurance that these individuals will remain with the new company or that
it will be able to attract and retain other key management personnel.
WE ARE SUBJECT TO DEFAULT RISKS ASSOCIATED WITH NOTES FROM AND ADVANCES TO
AFFILIATED PROFESSIONAL ASSOCIATIONS
Dental Care Alliance has made, and the new company intends to continue to
make, loans to affiliated dental practices to finance the purchase of the dental
assets of affiliated dental practices. These loans are evidenced by notes that
are secured by the dental assets of such affiliated dental practices. They are
personally guaranteed by the dentists who own such affiliated dental practices.
The loans are recorded on Dental Care Alliance's balance sheet as "Notes
Receivable from PAs" until repaid. At December 31, 1997 and September 30, 1998,
Notes Receivable from PAs were $397,462 and $762,430, respectively. "Management
fee receivable from PAs" consist of amounts owed to Dental Care Alliance related
to revenue recorded in accordance with management agreements and is recorded
based upon the net realizable value of patient accounts receivable of the
principal associations. The failure of any of the affiliated dental practices to
repay such notes or advances could have a material adverse effect on the new
company's business, results of operations and financial condition.
Management believes that the total dollar amount outstanding under these
loans will increase in the future as the new company expands its network of
dental practices under management. In addition, the company may advance funds to
affiliated dental practices to cover their expenses in the event that the
revenue retained by any affiliated dental practice after paying management fees
to the new company is not sufficient to pay its expenses. This is often the case
with newly integrated dental practices and occurs from time to time with other
affiliated dental practices. Such advances are recorded on Dental Care
Alliance's balance sheet as "Advances to PAs" until repaid. At December 31, 1997
and September 30, 1998, Advances to PAs were $483,421 and $3,015,900,
respectively. Any decision by the new company to continue to make loans,
receivables or advances to affiliated dental practices or the sustained
inability of affiliated dental practices to pay their expenses could necessitate
adjustments to the management agreements with such affiliated dental practices
or could cause the new company to record additional reserves with respect to
such loans or advances. Either of these events could have a material adverse
effect on the new company's business, results of operations and financial
condition. To date there have been no such downward adjustments to any of the
management agreements, nor do the management agreements provide for any form of
retroactive downward adjustment. The risks disclosed in the risk factor
captioned "Government Regulation" apply to the notes and advances described in
this risk factor.
WE ARE SUBJECT TO AN ADVERSE EARNINGS IMPACT ASSOCIATED WITH MANAGEMENT
AGREEMENTS AND OTHER INTANGIBLE ASSETS
A substantial portion of the new company's assets will consist of management
agreements and other intangible assets. At September 30, 1998, on a pro forma
basis, the new company would have had approximately $148.1 million of total
assets (of which approximately $94.4 million were intangible assets) and
approximately $70.3 million in total stockholders' equity. We expect the amount
of intangible assets to increase further in the future in connection with
additional dental practice affiliations. This increase will have an adverse
impact on earnings as the intangible assets are amortized. In the event of any
sale or liquidation of the new company or a portion of its assets, there can be
no assurance that the recorded value of the management agreements will be
realized. When factors indicate that the amount allocable to one or
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more of the management agreements or other intangible assets should be evaluated
for possible impairment, we may be required to reduce the carrying value of such
management agreements or other intangible assets, which could have a material
adverse effect on the results of operations of the new company during the
periods in which such reductions are recognized.
GOVERNMENT REGULATION
The dental industry is regulated extensively at both the state and federal
levels. Regulatory oversight includes, but is not limited to, considerations of
fee-splitting, corporate practice of dentistry, anti-kickback and anti-referral
legislation and state insurance regulation. Although we believe that the
operations of Gentle Dental and Dental Care Alliance comply in all material
respects with the laws to which they are subject, there can be no assurance that
a review of our business relationships by courts or other regulatory authorities
would not result in determinations that could prohibit or otherwise adversely
affect operations or that the regulatory environment will not change, requiring
us to reorganize, change our methods of reporting revenues and other financial
results or restrict existing or future operations. Any such change could have a
material adverse effect on the new company's business, financial condition and
results of operations.
CORPORATE PRACTICE OF DENTISTRY; FEE SPLITTING. The laws of many states
prohibit dentists from splitting fees with non-dentists and prohibit non-dental
entities from engaging in the practice of dentistry or employing dentists to
practice dentistry. The specific restrictions against the corporate practice of
dentistry as well as the interpretations of those restrictions by state
regulatory authorities vary from state to state. The restrictions are generally
designed to prohibit a non-dental entity from controlling the professional
practice of a dentist, employing dentists to practice dentistry (or, in certain
states, employing dental hygienists or dental assistants), controlling the
content of a dentist's advertising or sharing professional fees. A number of
states limit the ability of a person other than a licensed dentist to own
equipment or offices used in a dental practice. Some of these states allow
leasing of equipment and office space to a dental practice under a bona fide
lease. Some states also limit the number of offices that may be operated by a
single dentist or dental practice. Federal law and the laws of many states also
prohibit dental practitioners from paying any portion of fees received from
dental services in consideration for the referral of a patient. In addition,
many states impose limits on the tasks that may be delegated by dentists to
dental hygienists or other assistants.
The laws regarding fee-splitting and the corporate practice of dentistry and
their interpretation vary from state to state and are enforced by regulatory
authorities with broad discretion. There can be no assurance that the legality
of the Gentle Dental or Dental Care Alliance business or their respective
relationships with affiliated dental practices, or the dentists owning or
employed by such practices, will not be successfully challenged or that the
enforceability of the provisions of any management agreement will not be
limited.
STATE AND FEDERAL FRAUD AND ABUSE, ANTI-KICKBACK AND ANTI-REFERRAL
LAWS. The applicability of federal and state laws relating to fraud and abuse,
kickbacks and referrals to transactions or arrangements in the health care
industry, such as those to which Gentle Dental or Dental Care Alliance is or may
be a party, has been the subject of limited judicial interpretation. There can
be no assurance that judicial or administrative authorities will not find that
such laws prohibit the manner in which Gentle Dental and Dental Care Alliance
currently operate, which could have a material adverse effect on the new
company's business, financial condition or results of operations. In particular,
there can be no assurance that federal or state laws relating to kickbacks,
referrals or fee-splitting will not be construed as prohibiting the compensation
of a dental practice manager based on a percentage of a managed practice's
income or revenues.
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Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for or in order to induce:
- the referral of a person for services;
- the furnishing or arranging for the furnishing of items or services; or
- the purchase, lease or order or arranging or recommending purchasing,
leasing or ordering of any item, reimbursable or otherwise covered under
Medicare, Medicaid or other federal and state health care programs.
These provisions apply to dental services covered under the Medicaid program in
which Gentle Dental and Dental Care Alliance participate. The federal government
has increased scrutiny of joint ventures and other transactions among health
care providers in an effort to reduce potential fraud and abuse related to
Medicare and Medicaid costs. Many states have similar anti-kickback laws, and in
many cases these laws apply to services or items provided to all types of
patients, not just Medicare and Medicaid beneficiaries.
Under current federal law, a physician or dentist is prohibited from
referring Medicare or Medicaid patients for the provision of "designated health
services" by any entity in which the physician or dentist has an ownership or
investment interest, including the physician's or dentist's own group practice,
unless an applicable exception is available. The designated health services
include the provision of:
- clinical laboratory services, radiology and other diagnostic services
(including ultrasound services);
- radiation therapy services;
- physical and occupational therapy services;
- durable medical equipment;
- parenteral and enteral nutrients, equipment and supplies;
- prosthetics, orthotics and prosthetic devices;
- outpatient prescription drugs;
- home health services; and
- inpatient and outpatient hospital services.
A number of states also have similar laws that prohibit referrals by
physicians, dentists or other health care providers for a broad range of
services (including x-rays) to all patients (not just patients covered by
Medicare, Medicaid or other governmentally sponsored health care plans) if the
dentist, physician or other health care provider has certain enumerated
financial relationships with the entity receiving the referral, unless an
exception applies. Such prohibitions could restrict our ability to integrate
affiliated dental practices and carry out the development of our combined
network of affiliated dental practices.
Noncompliance with, or violation of, either the anti-kickback provisions or
restrictions on referrals can result in exclusion from the Medicare and Medicaid
programs as well as civil and criminal penalties. Similar penalties apply for
violations of state law. We make every effort to comply with the anti-kickback
and anti-referral laws. However, if such laws were construed in a manner that
prohibits the operations of Gentle Dental or Dental Care Alliance or the
affiliated practices, the new company's business, financial condition and
results of operations could be materially adversely affected.
STATE INSURANCE LAWS AND REGULATIONS. There are certain regulatory risks
associated with negotiating and administering managed care and capitation
contracts. The application of state insurance laws to reimbursement arrangements
is an unsettled area of law and is subject to interpretation by regulators with
broad discretion. As Gentle Dental or Dental Care Alliance or the affiliated
dental practices contract with third-party payors for certain
non-fee-for-service arrangements, we may become subject to state insurance laws.
In the event that we are determined to be engaged in the business of insurance,
we could be required
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either to seek licensure as an insurance company or to change the form of our
relationships with third-party payors and may become subject to regulatory
enforcement actions. In such event, the new company's business, financial
condition and results of operations may be materially adversely affected.
Dedicated Dental Systems, Inc., a wholly-owned subsidiary of Gentle Dental,
operates under a license issued by the California Department of Corporations
under the California Knox-Keene Act Health Care Service Plan Act of 1975. The
Knox-Keene Act and the regulations promulgated thereunder subject entities which
are licensed as healthcare service plans in California to substantial regulation
by the California Department of Corporations. In addition, licensees under the
Knox-Keene Act are required to:
- file periodic financial data and other information (which generally become
available to the public);
- maintain substantial tangible net equity on their balance sheets; and
- maintain adequate levels of medical, financial and operating personnel
dedicated to fulfilling the licensee's statutory and regulatory
requirements.
The California Department of Corporations is empowered by law to take
enforcement actions against licensees that fail to comply with such
requirements. Any material non-compliance with the Knox-Keene Act and the
regulations promulgated thereunder, could have a material adverse effect on the
new company's business, financial condition and results of operations.
Managed Dental Care of Oregon, Inc., and Capitol Dental Care, Inc., each a
wholly owned subsidiary of Gentle Dental, provide capitated dental services
under the Oregon Health Plan pursuant to contracts with the State of Oregon
Office of Medical Assistance Programs. Both Managed Dental Care and Capitol
Dental Care are subject to substantial regulation by the Office of Medical
Assistance Programs with respect to all aspects of their operations. By
regulation, and pursuant to their contracts with the Office of Medical
Assistance Programs, Managed Dental Care and Capitol Dental Care are required
to:
- maintain sound financial management procedures;
- maintain protections against insolvency;
- generate periodic financial reports for submission to the Office of
Medical Assistance Programs;
- establish and maintain restricted reserve funds; and
- maintain net worth in contractually specified amounts.
Failure to meet these requirements is grounds for termination of a contract.
The contracts may also be terminated if funding for the Oregon Health Plan from
federal, state or other sources is not obtained, or is withdrawn, reduced or
limited. Each contract has a one-year term, and there is no guarantee that it
will be renewed or extended. Further, the combined annual revenue generated by
Managed Dental Care and Capitol Dental Care account for approximately 12.3% of
the new company's pro forma revenues for the year ended December 31, 1997 and
approximately 10.4% of its pro forma revenues for the nine months ended
September 30, 1998. Default under either Managed Dental Care's or Capitol Dental
Care's contract with the Office of Medical Assistance Programs, a reduction or
elimination of federal, state or other funding or a refusal to renew or extend
one or both of the contracts could have a material adverse effect on the new
company's business, financial condition and results of operations.
REFORM INITIATIVES. The United States Congress and state legislatures have
considered various types of health care reform, including comprehensive
revisions to the current health care system. It is uncertain what legislative
proposals will be adopted in the future, if any, or what actions federal or
state legislatures or third-party payors may take in anticipation of or in
response to any health care reform proposals or legislation. Health care reform
legislation adopted by Congress or the legislatures of states in which we do
business, downward pressure on reimbursement amounts paid by governmental
payors, dependence on the appropriations process for payment by such payors, as
well as changes in federal and state regulations could have a material adverse
effect on our operations. Changes in the health care industry, such as the
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growth of managed care organizations and provider networks, may result in lower
payment levels for the services of dentists and lower profitability for our
affiliated dental practices which could have a material adverse effect on the
new company's business, financial condition and results of operations.
WE ARE SUBJECT TO THE RISK OF LAWSUITS RELATED TO OUR AFFILIATIONS WITH DENTAL
PRACTICES
In recent years, dentists have become subject to an increasing number of
lawsuits alleging malpractice and related legal theories. Due to the nature of
our business, we may from time to time become involved as a defendant in
malpractice lawsuits brought against affiliated dental practices or dentists
employed by affiliated dental practices. In addition, we could be involved in
litigation in which it is alleged that we have been negligent in performing our
duties under our management agreements. Gentle Dental and Dental Care Alliance
maintain professional and general liability insurance in amounts deemed
appropriate based upon assessment of historical claims and the nature and risks
of our business. There can be no assurance, however, that an existing or future
claim or claims will not exceed the limits of available insurance coverage, that
any insurer will remain solvent and able to meet its obligations to provide
coverage for any such claim or claims, or that such coverage will continue to be
available or available with sufficient limits and at a reasonable cost to insure
adequately and economically our operations in the future. A judgment against us
that exceeds our insurance coverage could have a material adverse effect on the
new company's business, financial condition and results of operations.
WE ARE SUBJECT TO RISKS RELATED TO OUR GEOGRAPHIC CONCENTRATION
Our growth strategy contemplates affiliation with or development of dental
practices in selected geographic markets. This strategy of focused expansion
within selected markets increases the risk that adverse economic or regulatory
developments in one or more of these markets may have a material adverse effect
on the new company's business, financial condition and results of operations. In
addition, we are subject to a broad range of antitrust laws that prohibit
anti-competitive conduct, including price fixing, concerted refusals to deal and
divisions of markets. Among other things, these laws may limit our ability to
enter into management agreements with separate practice groups that compete with
one another in the same geographic market. These laws may also prevent
affiliations of dental practices if such affiliations substantially lessen
competition or tend to create a monopoly.
SHARES ELIGIBLE FOR FUTURE SALE COULD ADVERSELY AFFECT OUR STOCK PRICE AND
ABILITY TO RAISE CAPITAL
Sales of substantial amounts of the new company's common stock in the public
market, or the availability of such shares for future sale, could adversely
affect the market price of the new company's common stock and could impair its
ability to raise additional capital by offering its equity securities. Of the
20,715,607 shares of its common stock that we expect to be outstanding following
the mergers, 11,088,339 shares will be "restricted securities" as defined in
Rule 144 under the Securities Act of 1933, as amended, or will be restricted
under Rule 145 of such Act. All other shares are or will be freely tradable
under federal securities laws. Holders of shares of the new company's
common stock, including shares underlying certain options that can be converted
into or exercised for its common stock, are entitled to certain rights with
respect to the registration of such shares under the Securities Act of 1933, as
amended. Following the mergers, the new company also expects to register an
aggregate of 2,417,500 shares reserved for past or future option grants under
the Securities Act of 1933, as amended.
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Although the common stock of Gentle Dental and Dental Care Alliance are
currently publicly traded on the Nasdaq SmallCap Market-Registered Trademark-
and the Nasdaq National Market, respectively, there is currently no public
market for the new company's common stock. In connection with the mergers, the
new company has applied to the Nasdaq National Market-Registered Trademark- for
listing of its common stock. However, there can be no assurance that an active
public market for the common stock will develop after the mergers are complete
or, if a trading market does develop, that it will continue or that stockholders
will be able to resell their shares, if at all, without considerable delay or
impact on the sales price. The market price of the new
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company's common stock could be subject to significant fluctuations in response
to variations in financial results or announcements of material events by the
new company or its competitors. Quarterly operating results of the new company,
changes in general conditions in the economy or the dental services industry, or
other developments affecting the new company or its competitors, could cause the
market price of its common stock to fluctuate substantially. In addition, the
equity markets have, on occasion, experienced significant price and volume
fluctuations that have affected the market prices for many companies' securities
and that have often been unrelated to the operating performance of these
companies. Concern about the potential effects of health care reform measures
has contributed to the volatility of stock prices of companies in health care
and related industries and may similarly affect the price of the new company's
common stock following the mergers.
CERTAIN ANTI-TAKEOVER PROVISIONS
Several provisions of the Delaware General Corporation Law, as well as the
new company's Certificate of Incorporation and By-Laws may make a change in
control more difficult to effect, even if in the stockholders' interest. The new
company's By-Laws will provide for a classified board and its Certificate of
Incorporation will allow its Board of Directors to determine the terms of
preferred stock which may be issued by the new company without approval of the
holders of its common stock, and thereby enables the Board of Directors to
inhibit the ability of the holders of the new company's common stock to effect a
change of control of the new company.
YEAR 2000 RISKS AND PREPAREDNESS
Many existing computer programs use only two digits to identify a year in a
data field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000 or
earlier. The Year 2000 issue affects us in that our business is dependent on
information technology, such as management information systems, financial and
accounting systems, and other equipment systems that may have Y2K related
problems. Based upon confirmations received from significant management
information systems, financial and accounting systems software licensors, and
other equipment systems that may have Y2K related problems are currently Year
2000 compliant or are expected to be Year 2000 compliant by June 1999. We are in
the process of verifying that our other information technology systems will be
Year 2000 compliant. We expect that we will incur internal staff costs as well
as consulting and other expenses related to Year 2000 system preparations. The
failure of our information technology systems to be Year 2000 compliant could
have a material adverse effect on the new company's business, financial
condition or results of operations.
We also have certain material relationships with vendors and third-party and
governmental payors who also are dependent on information technology systems. We
have contacted or intend to contact these vendors, third-party and governmental
payors and other third parties with whom we have material relationships to
ensure Year 2000 compliance. Certain of our significant vendors have confirmed
to us that they are or expect to be Year 2000 compliant. However, we anticipate
that many third-party and governmental payors and our smaller vendors may not be
Year 2000 compliant. While we do not expect the noncompliance of our smaller
vendors will have a material adverse effect on Wisdom Holdings' business,
financial condition or results of operations, the noncompliance of any of our
significant vendors, third-party or governmental payors could have a material
adverse effect on Wisdom Holdings' business, financial condition or results of
operations.
Although we believe that the steps we are taking will be adequate to ensure
that we will not be materially affected by the Year 2000 problem, there can be
no assurance that these actions will protect us from the risks associated with
the Year 2000 problem. The analysis of, and preparation for, the Year 2000 and
related problems necessarily rely on a variety of assumptions about future
events, and there can be no assurance that we will accurately predict which
future events or that any remedial and contingency plans that may be adopted
will adequately address such future events. See "Information About Gentle
Dental-- Year 2000 Compliance" and "Information About Dental Care Alliance--Year
2000 Compliance."
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THE MEETINGS
GENTLE DENTAL SPECIAL MEETING
GENERAL
This document is first being mailed by Gentle Dental to the holders of its
common stock and preferred stock on or about , 1999, and is
accompanied by the notice of the special meeting of shareholders of Gentle
Dental and a form of proxy that is solicited by the Board of Directors of Gentle
Dental for use at the Gentle Dental special meeting to be held on ,
1999, at a.m., local time, , El Segundo, California, and at any
adjournments or postponements thereof.
MATTERS TO BE CONSIDERED
At the Gentle Dental special meeting, Gentle Dental shareholders will be
asked to consider and vote on the proposal to approve an Agreement and Plan of
Reorganization and Merger, dated as of October 15, 1998, as amended, by and
among Wisdom Holdings, Inc., Wisdom Holdings Acquisition Corp. I, Wisdom
Holdings Acquisition Corp. II, Gentle Dental and Dental Care Alliance, and the
transactions contemplated thereby, and any such other matters as may properly be
submitted to a vote at the Gentle Dental special meeting. A copy of the merger
agreement is attached as APPENDIX A. Gentle Dental shareholders may also be
asked to vote upon a proposal to adjourn or postpone the Gentle Dental special
meeting, which adjournment or postponement could be used for the purpose, among
others, of allowing additional time for the soliciting of additional votes to
approve the merger agreement and the transactions contemplated thereby.
PROXIES
The accompanying form of proxy is for use at the Gentle Dental special
meeting if a Gentle Dental shareholder will be unable or does not wish to attend
in person. A Gentle Dental shareholder may revoke his or her proxy and reclaim
his or her right to vote up to and including the date of the meeting. To do so,
submit to the Secretary of Gentle Dental a properly executed proxy of a later
date or written notice revoking the proxy, or attend the Gentle Dental special
meeting and vote in person. Written notices of revocation and other
communications with respect to the revocation of Gentle Dental proxies should be
addressed to Gentle Dental Service Corporation, 222 North Sepulveda Boulevard,
Suite 740, El Segundo, California 90245-4340, Attention: Corporate Secretary.
All shares represented by valid proxies received pursuant to this solicitation,
and not revoked before they are exercised, will be voted in the manner specified
therein. If nothing is specified, the proxies will be voted in favor of the
approval of the merger agreement and the transactions contemplated thereby. The
Gentle Dental Board of Directors is unaware of any other matters that may be
presented for action at the Gentle Dental special meeting. If other matters do
properly come before the Gentle Dental special meeting, however, it is intended
that shares represented by proxies will be voted in the discretion of the
proxyholders, provided that no proxy that has been voted against approval and
adoption of the merger agreement will be voted in favor of any adjournment or
postponement of the Gentle Dental special meeting for the purpose of soliciting
additional proxies.
SOLICITATION OF PROXIES
The entire cost of soliciting the proxies from the Gentle Dental
shareholders will be borne by Gentle Dental. In addition to the solicitation of
the proxies by mail, Gentle Dental will request banks, brokers and other record
holders to send proxies and proxy material to the beneficial owners of the stock
and secure their voting instructions, if necessary. Gentle Dental will reimburse
such record holders for their reasonable expenses in so doing. If necessary,
Gentle Dental may use several of its regular employees, who will not be
specially compensated, to solicit proxies from shareholders, either personally
or by telephone, telegram, facsimile, or special delivery letter.
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RECORD DATE AND VOTING RIGHTS
Pursuant to the provisions of the Washington Business Corporation Act, and
the rules of the Nasdaq Small Cap Market, December 7, 1998 has been fixed as the
record date for determination of Gentle Dental shareholders entitled to notice
of and to vote at the Gentle Dental special meeting. Holders of shares of Gentle
Dental capital stock of record that are such holders at the close of business on
the Gentle Dental record date will be entitled to notice of and to vote on all
matters at the Gentle Dental special meeting. In addition, holders of Gentle
Dental Series A preferred stock and Gentle Dental Series C preferred stock at
the Gentle Dental record date will be entitled to notice of and to vote at the
Gentle Dental special meeting regarding the merger agreement and the
transactions contemplated thereby. At the close of business on the Gentle Dental
record date, there were shares of Gentle Dental common stock outstanding
held by approximately holders of record, 100 shares of Gentle Dental
Series A preferred stock held by one holder of record, 100 shares of Gentle
Dental Series C preferred stock held by one holder of record and shares of
Gentle Dental Series D preferred stock held by holders of record. The
presence, in person or by proxy, of shares of Gentle Dental capital stock
representing a majority of such shares considered as a single class, outstanding
and entitled to vote on the Gentle Dental record date is necessary to constitute
a quorum at the Gentle Dental special meeting.
Shares of Gentle Dental capital stock present in person at the Gentle Dental
special meeting but not voting, and shares of Gentle Dental Capital Stock for
which Gentle Dental has received proxies but with respect to which holders of
such shares have abstained, will be counted as present at the Gentle Dental
special meeting for purposes of determining the presence or absence of a quorum
for the transaction of business. Brokers who hold shares of Gentle Dental common
stock in nominee or "street" name for customers who are the beneficial owners of
such shares are prohibited from giving a proxy to vote shares held for such
customers with respect to the matters to be voted upon at the Gentle Dental
special meeting without specific instructions from such customers. Shares
represented by proxies returned by a broker holding such shares in "street" name
will be counted for purposes of determining whether a quorum exists, even if
such shares are not deemed "broker non-votes" because they are voted in matters
where discretionary voting by the broker is not allowed under applicable laws.
The affirmative vote of a majority of the outstanding shares of Gentle
Dental common stock and Gentle Dental Series D preferred stock entitled to vote,
voting together as single class, is required to approve the merger agreement and
the transactions contemplated thereby. In addition, the vote of a majority of
the outstanding shares of each of the Gentle Dental Series A preferred stock,
Gentle Dental Series C preferred stock and Gentle Dental Series D preferred
stock entitled to vote, voting as separate classes, is required to approve the
merger agreement and the transactions contemplated thereby. Each share of Gentle
Dental capital stock is entitled to one vote regarding the merger agreement and
the transactions contemplated thereby.
ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS VOTES AGAINST
APPROVAL OF THE MERGER AGREEMENT. ACCORDINGLY, THE GENTLE DENTAL BOARD OF
DIRECTORS URGES GENTLE DENTAL SHAREHOLDERS TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED, POSTAGE-PAID
ENVELOPE.
As of the Gentle Dental record date, directors and executive officers of
Gentle Dental beneficially owned shares of Gentle Dental common stock,
representing approximately % of the common stock entitled to vote, 100 shares
of Gentle Dental Series A preferred stock, representing all of the Series A
preferred stock entitled to vote, 100 shares of Gentle Dental Series C preferred
stock, representing all of the Gentle Dental Series C preferred stock entitled
to vote, and shares of Gentle Dental Series D preferred stock,
representing approximately % of the Gentle Dental Series D preferred stock
entitled to vote. It is currently expected that each such director and executive
officer of Gentle Dental will vote the shares of Gentle Dental capital stock
beneficially owned by him or her which such director or officer is entitled to
vote for approval of the Agreement and the transactions contemplated thereby.
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For additional information with respect to beneficial ownership of Gentle
Dental common stock and preferred stock by persons and entities owning more than
5% of such stock and more detailed information with respect to beneficial
ownership of Gentle Dental common stock and preferred stock by directors and
executive officers of Gentle Dental, see "Gentle Dental's Principal
Shareholders" on page 77.
RECOMMENDATION OF GENTLE DENTAL BOARD OF DIRECTORS
The Gentle Dental Board of Directors has approved the merger agreement and
the transactions contemplated thereby. The Gentle Dental Board of Directors
believes that the merger agreement and the transactions contemplated thereby are
in the best interests of Gentle Dental and the Gentle Dental shareholders and
recommends that the Gentle Dental shareholders vote "FOR" approval of the merger
agreement and the transactions contemplated thereby. See "The
Mergers--Recommendation of the Gentle Dental Board and Reasons for the Mergers"
on page .
INDEPENDENT AUDITORS
A representative of KPMG Peat Marwick LLP, independent certified public
accountants of Gentle Dental, will be present at the Gentle Dental special
meeting to respond to appropriate questions raised at such meeting.
DENTAL CARE ALLIANCE SPECIAL MEETING
GENERAL
This document is first being mailed by Dental Care Alliance to the holders
of its common stock on or about , 1999, and is accompanied by the
notice of the Dental Care Alliance special meeting and a form of proxy that is
solicited by the Board of Directors of Dental Care Alliance for use at the
special meeting of Dental Care Alliance stockholders to be held on ,
, 1999, at a.m., local time, at , Sarasota, Florida,
and at any adjournments or postponements thereof.
MATTERS TO BE CONSIDERED
The purpose of the Dental Care Alliance special meeting is to take action
with respect to the approval of the merger agreement and the transactions
contemplated thereby and any such other matters as may be properly submitted to
a vote at the Dental Care Alliance special meeting. A copy of the merger
agreement is attached as APPENDIX A. Dental Care Alliance stockholders may also
be asked to vote upon a proposal to adjourn or postpone the Dental Care Alliance
special meeting, which adjournment or postponement could be used for the
purpose, among others, of allowing additional time for the solicitation of
additional votes to approve the merger agreement and the transactions
contemplated thereby.
PROXIES
The accompanying form of proxy is for use at the Dental Care Alliance
special meeting if a Dental Care Alliance stockholder will be unable to attend
in person. A Dental Care Alliance stockholder may revoke his or her proxy and
reclaim his or her right to vote up to and including the date of the meeting. To
do so, submit to the Secretary of Dental Care Alliance a properly executed proxy
of a later date or written notice revoking the proxy or attend the Dental Care
Alliance special meeting and vote in person. Written notices of revocation and
other communications with respect to the revocation of Dental Care Alliance
proxies should be addressed to Dental Care Alliance, Inc., 1343 Main Street, 7th
Floor, Sarasota, Florida 34236, Attention: Corporate Secretary. All shares
represented by valid proxies received pursuant to this solicitation, and not
revoked before they are exercised, will be voted in the manner specified
therein. If nothing is specified, the proxies will be voted in favor of approval
of the merger agreement and the transactions contemplated thereby. The Dental
Care Alliance Board of Directors is unaware of any other
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matters that may be presented for action at the Dental Care Alliance special
meeting. If other matters do properly come before the Dental Care Alliance
special meeting, however, it is intended that shares represented by proxies will
be voted in the discretion of the proxy holders, provided that no proxy that is
voted against approval and adoption of the merger agreement will be voted in
favor of any adjournment or postponement of the Dental Care Alliance special
meeting for the purpose of soliciting additional proxies.
SOLICITATION OF PROXIES
The entire cost of soliciting the proxies from the Dental Care Alliance
stockholders will be borne by Dental Care Alliance. In addition to the
solicitation of the proxies by mail, Dental Care Alliance will request banks,
brokers and other record holders to send proxies and proxy material to the
beneficial owners of the stock and secure their voting instructions, if
necessary. Dental Care Alliance will reimburse such record holders for their
reasonable expenses in so doing. If necessary, Dental Care Alliance may use
several of its regular employees, who will not be specially compensated, to
solicit proxies from Dental Care Alliance stockholders, either personally or by
telephone, telegram, facsimile or special delivery letter.
RECORD DATE AND VOTING RIGHTS
Pursuant to the provisions of the Delaware General Corporation Law, the
Dental Care Alliance By-laws, as amended, and the rules of the Nasdaq National
Market, December 8, 1998 has been fixed as the record date for determination of
Dental Care Alliance stockholders entitled to notice of and to vote at the
Dental Care Alliance special meeting. Accordingly, only Dental Care Alliance
stockholders of record at the close of business on the Dental Care Alliance
record date will be entitled to notice of and to vote at the Dental Care
Alliance special meeting. At the close of business on the Dental Care Alliance
record date, there were 7,031,197 shares of Dental Care Alliance common stock
outstanding held by approximately holders of record. The presence, in
person or by proxy, of shares of Dental Care Alliance common stock representing
a majority of such shares outstanding and entitled to vote on the Dental Care
Alliance record date is necessary to constitute a quorum at the Dental Care
Alliance special meeting.
Shares of Dental Care Alliance common stock present in person at the Dental
Care Alliance special meeting but not voting, and shares of Dental Care Alliance
common stock for which Dental Care Alliance has received proxies but with
respect to which holders of such shares have abstained, will be counted as
present at the Dental Care Alliance special meeting for purposes of determining
the presence or absence of a quorum for the transaction of business. Brokers who
hold shares of Dental Care Alliance common stock in nominee or "street" name for
customers who are the beneficial owners of such shares are prohibited from
giving a proxy to vote shares held for such customers with respect to the
matters to be considered and voted upon at the Dental Care Alliance special
meeting without specific instructions from such customers. Broker non-votes will
be counted for purposes of determining whether a quorum exists.
The affirmative vote of the holders of a majority of the outstanding shares
of Dental Care Alliance common stock entitled to vote is required to approve the
merger agreement and the transactions contemplated thereby. Each share of Dental
Care Alliance common stock is entitled to one vote.
ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS VOTES AGAINST
SUCH APPROVAL AND ADOPTION. ACCORDINGLY, THE DENTAL CARE ALLIANCE BOARD OF
DIRECTORS URGES DENTAL CARE ALLIANCE STOCKHOLDERS TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
As of the Dental Care Alliance record date, directors and executive officers
of Dental Care Alliance beneficially owned 2,205,579 shares of Dental Care
Alliance common stock, representing approximately % of common stock entitled
to vote. It is currently expected that each such director and executive officer
of Dental Care Alliance will vote the shares of Dental Care Alliance common
stock beneficially owned by him or her which such director or officer is
entitled to vote for approval of the merger agreement and the transactions
contemplated thereby.
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For additional information with respect to beneficial ownership of Dental
Care Alliance common stock by persons and entities owning more than 5% of such
stock and more detailed information with respect to beneficial ownership of
Dental Care Alliance common stock by directors and executive officers of Dental
Care Alliance, see "Information about Dental Care Alliance--Dental Care Alliance
Principal Stockholders" on page .
RECOMMENDATION OF DENTAL CARE ALLIANCE BOARD OF DIRECTORS
The Dental Care Alliance Board of Directors has unanimously approved the
merger agreement and the transactions contemplated thereby. The Dental Care
Alliance Board of Directors believes that the merger agreement and the
transactions contemplated thereby are in the best interests of Dental Care
Alliance and the Dental Care Alliance stockholders and recommends that the
Dental Care Alliance stockholders vote "FOR" approval of the merger agreement
and the transactions contemplated thereby. See "The Mergers--Recommendation of
the Dental Care Alliance Board of Directors and Reasons for the Mergers" on page
.
INDEPENDENT AUDITORS
A representative of PricewaterhouseCoopers, LLP, independent certified
public accountants of Dental Care Alliance, will be present at the Dental Care
Alliance special meeting to respond to appropriate questions raised at such
meeting.
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THE MERGERS
THE FOLLOWING SUMMARY OF THE MATERIAL TERMS AND PROVISIONS OF THE MERGER
AGREEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT,
WHICH IS ATTACHED AS APPENDIX A TO THIS DOCUMENT. THE MERGER AGREEMENT ALSO IS
ATTACHED AS AN EXHIBIT TO THE CURRENT REPORTS ON FORM 8-K, DATED OCTOBER 15,
1998 AND FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1998,
BY EACH OF GENTLE DENTAL AND DENTAL CARE ALLIANCE.
GENERAL
The Boards of Directors of Wisdom Holdings, Inc., Gentle Dental and Dental
Care Alliance have each approved the merger agreement, which provides for the
merger of (a) Wisdom Holdings Acquisition Corp. I, a Delaware corporation and
wholly-owned subsidiary of Wisdom Holdings, Inc. with and into Gentle Dental and
(b) Wisdom Holdings Acquisition Corp. II, a Delaware corporation and
wholly-owned subsidiary of Wisdom Holdings, Inc. with and into Dental Care
Alliance at the effective time of the mergers. With certain limited exceptions
described below, each share of common stock of Gentle Dental outstanding at the
effective time will be exchanged into the right to receive one share of the
common stock of Wisdom Holdings and each share of common stock of Dental Care
Alliance outstanding at the effective time will be exchanged into the right to
receive 1.67 shares of Wisdom Holdings common stock. Each outstanding share of
Gentle Dental Series A preferred stock, Series B preferred stock, Series C
preferred stock and Series D preferred stock outstanding at the effective time,
will be exchanged for one share of Wisdom Holdings Series A preferred stock,
Series B preferred stock, Series C preferred stock and Series D preferred stock
respectively. At the effective time of the mergers, each of Gentle Dental and
Dental Care Alliance will become wholly-owned subsidiaries of Wisdom Holdings.
BACKGROUND OF THE MERGERS
The managements of Gentle Dental and Dental Care Alliance have, from time to
time, considered the possibility of acquisitions and strategic combinations with
other dental practice management companies and their potential strategic fit
with such companies based on the following considerations:
- the businesses conducted thereby;
- economic considerations;
- their management and employee cultures; and
- the geographic location and breadth of their businesses.
Since Dental Care Alliance's initial public offering in November 1997,
Dental Care Alliance has had a number of conversations with companies in the
dental practice management industry to discuss potential business combinations
with prospective strategic partners. The Dental Care Alliance Board of Directors
believed that Dental Care Alliance's planned expansion of its business could be
enhanced significantly through strategic combinations with appropriate existing
dental practice management companies. The Dental Care Alliance Board of
Directors also believed that there would be a trend toward increasing
consolidation within the dental practice management industry. Dental Care
Alliance's acquisition in December 1997 of Marketplace Dental, Inc., a dental
practice management company with six practices under management at the time of
the acquisition, exemplified its beliefs.
From January to July 1998, and prior to meeting with management of Gentle
Dental, Dental Care Alliance's management and Raymond James & Associates, Inc.
met with management of six dental practice management companies to discuss
potential business combinations. One discussion terminated because no agreement
could be reached as to relative valuations. One discussion terminated because
Dental Care Alliance determined that if it were to enter into a business
combination with this company, it would not be able to pool the operating
results of that company with its own, and that such a transaction would be
dilutive to Dental Care Alliance's earnings. Two transactions were not pursued
as the companies were not profitable and the business combinations would have
been dilutive to Dental Care Alliance's earnings. Discussions with another
company stopped because of potential management integration
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problems and differences in business philosophy. Dental Care Alliance's
management suspended discussion with the sixth potential company as a result of
an anticipated acquisition by that company which was expected to result in a
change of management and other changes to the company's operations. No
discussions are ongoing at this time.
On July 15, 1998, Mr. Fiore, Dr. Matzkin and certain members of the Boards
of Directors of Gentle Dental and Dental Care Alliance met informally to discuss
issues effecting the industry, the companies and their respective businesses,
their perception of consolidation within the industry and the benefits of
strategic combinations. At a board meeting held the same day, Dental Care
Alliance's Board of Directors was advised of preliminary discussions. Mr. Fiore
and Dr. Matzkin met again on July 20, 1998 to further discuss the businesses of
Gentle Dental and Dental Care Alliance and to pursue the possibility of a
strategic alliance between the companies. As a result of these meetings, the
companies preliminarily determined that a combination could be beneficial to
each of them and their respective stockholders in view of the characteristics of
the companies' business and geographic locations, the accelerating trend toward
consolidation in the industry generally and the larger company that would be
created as a result of the combination. In order to facilitate further
discussions between the two companies, Gentle Dental and Dental Care Alliance
entered into a standard form confidentiality agreement on July 24, 1998. To
assist with negotiation and analysis of the proposed combination of the two
companies, Gentle Dental and Dental Care Alliance retained Salomon Smith Barney
Inc. and Raymond James & Associates, Inc. as their financial advisors,
respectively.
On August 17, 1998, Dr. Matzkin visited Gentle Dental's corporate
headquarters in El Segundo, California, and met with Mr. Fiore to further
discuss the potential combination of the companies. As part of the meetings and
discussions, Dr. Matzkin also visited the offices of four dental practices
managed by Gentle Dental to gain additional understanding of Gentle Dental's
management relationship with its affiliated dental practices. On August 25,
1998, certain directors and members of senior management of the companies and
their respective investment advisors met at Dental Care Alliance's corporate
headquarters in Sarasota, Florida, to discuss issues relating to the potential
business combination of the two companies and began discussions regarding the
terms and structure of a proposed transaction.
Over a period of three days in early September 1998, certain members of
senior management of Dental Care Alliance met with certain members of senior
management of Gentle Dental, at Gentle Dental's corporate headquarters, to
conduct due diligence and to visit additional dental offices managed by Gentle
Dental. Over this period, members of Dental Care Alliance's senior management
also reviewed Gentle Dental's material contracts, including material acquisition
agreements. Over an additional three day period later in September 1998, certain
members of Gentle Dental's senior management met with certain members of Dental
Care Alliance's senior management at Dental Care Alliance's corporate
headquarters to conduct due diligence on Dental Care Alliance and to visit
certain dental offices managed by Dental Care Alliance. Over this period,
members of Gentle Dental's senior management also reviewed Dental Care
Alliance's material contracts, including material acquisiton agreements.
Following the due diligence investigation and office visits conducted by the
companies, members of senior management of both Gentle Dental and Dental Care
Alliance met with each other and their respective investment advisors on
September 22nd, 23rd and 24th at the New York offices of the Sprout Group to
finalize their discussions regarding the terms and structure of the proposed
combination transaction between the two companies. In addition to all these
meetings, numerous discussions were held telephonically.
During September 1998, management of the two companies continued business
due diligence and senior management for each company reported its findings to
its Boards of Directors. As the results of this due diligence were favorable,
each company's board of directors decided to pursue negotiations.
Throughout early October 1998, Mr. Fiore and Dr. Matzkin negotiated terms of
definitive agreements documenting the proposed combination of the two companies
and each routinely briefed members of their boards of directors and senior
management as to the status of the negotiations. During this period, legal
advisors for each of Gentle Dental and Dental Care Alliance conducted legal due
diligence on the other
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company. As part of the negotiation process, management and the Board of
Directors of each of Gentle Dental and Dental Care Alliance considered how they
would value each company for purposes of the mergers. Because the common shares
of neither company were consistently traded in significant volume, the parties
believed that the market price of each respective company's common shares was
not an accurate indicator of the company's value. Instead, the parties agreed to
a fixed ratio for exchange of the shares of each company with the new company
based on, among other things, their relative earnings. The parties considered
the potential negative aspects of having a fixed exchange ratio, such as the
exchange ratio would not be adjusted to account for the fact that subsequent
changes in earnings levels or market value. However, management and the Boards
of Directors of Gentle Dental and Dental Care Alliance acknowledged that each
company expected to grow its relative revenues by additional affiliations with
dental practices prior to the consummation of the mergers. The parties believed
that a fixed ratio would be less complicated and more consistent with their view
that future acquisitions should benefit the stockholders of the new company,
rather than only Gentle Dental's or Dental Care Alliance's stockholders.
On October 13, 1998, the Board of Directors of Dental Care Alliance met to
discuss and review the terms of the proposed business combination and the
various transactions contemplated as a result of the combination. The Dental
Care Alliance Board of Directors did not reach a final decision in its October
13 meeting, and scheduled a meeting to be held on October 15, 1998, to further
review the terms of the proposed combination.
On October 14, 1998, members of the Gentle Dental Board of Directors met to
review the terms of the proposed business combination and to discuss the various
transactions contemplated by the proposed combination. The Gentle Dental Board
of Directors reviewed in detail the terms of the proposed combination, the due
diligence investigation undertaken by Gentle Dental (with the assistance of
legal counsel and Salomon Smith Barney Inc.) and the fairness opinion provided
by Salomon Smith Barney Inc. regarding the fairness to Gentle Dental of the
ratio of exchange of the common shares of Dental Care Alliance for common shares
of Wisdom Holdings, as contemplated by the merger agreement. The Gentle Dental
Board of Directors also considered certain concerns raised by one of Gentle
Dental's officers who is a director, the "dissenting director," as to, among
other things, the due diligence investigation and information considered by the
Gentle Dental Board of Directors in connection with the mergers, and the
valuation of Dental Care Alliance. After a discussion and review of the terms of
the merger agreement and the related documents previously presented to the
Gentle Dental Board of Directors, the Gentle Dental Board of Directors (with the
dissenting director dissenting) approved and authorized the execution of the
merger agreement and the related agreements and transactions contemplated by the
merger agreement. [Following the October 14 meeting, the dissenting director
informed Gentle Dental that he desired to spend more time with his family and
pursue charitable interests and began discussing modification to his employment
relationship with Gentle Dental. See "Information About Gentle Dental--Gentle
Dental's Management's Discussion and Analysis of Financial Condition and Results
of Operations--Certain Transactions Regarding Gentle Dental" at page 75.]
On October 15, 1998, the Dental Care Alliance Board of Directors met several
times to keep updated as to the merger negotiations and to discuss and review
the terms of the proposed business combination. The Dental Care Alliance Board
of Directors also reviewed the fairness opinion provided to Dental Care Alliance
by Raymond James & Associates, Inc. regarding the fairness to the stockholders
of Dental Care Alliance of the ratio of exchange of the common shares of Dental
Care Alliance for common shares of Wisdom Holdings, as contemplated by the
merger agreement. After further discussion and review of the terms of the merger
agreement and the related documents previously presented to the Dental Care
Alliance Board of Directors, the Dental Care Alliance Board of Directors
authorized and approved the execution of the merger agreement and the related
agreements and transactions contemplated by the merger agreement.
During the evening of October 15, 1998, the parties executed the merger
agreement and the parties announced the proposed business combination on the
morning of October 16, 1998.
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The Gentle Dental Board of Directors held a telephonic meeting on November
13, 1998 to review concerns raised subsequent to the October 14, 1998 board
meeting by the dissenting director regarding the mergers, which concerns were
substantially similar to those addressed at the October 14, 1998 board meeting
but included additional concerns regarding operational issues following the
mergers. Following the November 14 meeting, the dissenting director, with the
assistance of Gentle Dental, continued to review matters pertaining to the
mergers that he felt required further consideration. On December 23, 1998, the
dissenting director informed Gentle Dental that he had completed his review,
that his concerns had been satisfactorily addressed and that he now supports the
proposed mergers. Additionally, the dissenting director executed a Stockholders
Agreement in which he agreed to vote his shares "For" adoption and approval of
the merger agreement.
RECOMMENDATION OF THE GENTLE DENTAL BOARD OF DIRECTORS AND REASONS FOR THE
MERGERS
The Gentle Dental Board of Directors believes that the merger agreement is
fair to, and in the best interests of, Gentle Dental and the Gentle Dental
shareholders. Accordingly, the Gentle Dental Board of Directors has approved the
merger agreement, and recommends that the Gentle Dental shareholders vote for
the approval and adoption of the merger agreement, the mergers and the
agreements and transactions contemplated by the merger agreement.
The Gentle Dental Board of Directors believes that the consummation of the
mergers described in the merger agreement presents a unique opportunity to
create one of the largest dental practice management companies in the United
States, with a significant presence on both the East Coast and the West Coast.
In reaching its decision to approve the merger agreement, the mergers and
the agreements and transactions contemplated by the merger agreement, the Gentle
Dental Board of Directors consulted with Gentle Dental's management, as well as
with its financial and legal advisors and considered a variety of factors,
including the following positive factors:
- The Board of Directors' familiarity with and review of Gentle Dental's
business, operations, financial condition, earnings and prospects.
- The anticipated effectiveness of the mergers in implementing and
accelerating Gentle Dental's strategy to become one of the largest dental
practice management companies in the United States, the depth of its
management team and the ability of the combined company's management team
to successfully integrate the operations of Gentle Dental and Dental Care
Alliance.
- The business, operations, financial condition, earnings and prospects of
Dental Care Alliance. In making its determination, the Board of Directors
took into account the results of Gentle Dental's due diligence review of
Dental Care Alliance's business as well as the views of the dissenting
director. See "--Background of the Mergers."
- The scale, scope and strength of the operations of the combined company
relative to Gentle Dental on a stand alone basis, in that the combined
company would provide improved stability of financial and business
operations as a result of anticipated increased cash flow and earnings,
increased access to capital and increased attractiveness to dental
practices which are affiliation candidates.
- The structure of the combination and the terms of the merger agreement and
the Stockholders' Agreements, which were reciprocal in nature, including
the fact that the fixed ratio for the exchange of shares of Gentle Dental
for shares of Wisdom Holdings provides certainty as to the number of
shares of Wisdom Holdings' common stock and preferred stock to be issued
to Gentle Dental's shareholders in the mergers and that as to Gentle
Dental the mergers intended to qualify as either a reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended, or as a
transfer to a controlled corporation qualifying under Section 351 of the
Code, and for "pooling-of-interests" accounting treatment.
- The proposed arrangements with existing members of senior management of
Gentle Dental and Dental Care Alliance, including that Mr. Fiore would
serve as Co-Chairman of the Board and Chief Executive Officer of the
combined company after the mergers and Dr. Matzkin would serve as Co-
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Chairman, President and Chief Dental Officer of the combined company after
the mergers. See "Operations and Management of Wisdom Holdings after the
Merger."
- The written opinion of Salomon Smith Barney Inc. that, as of October 15,
1998, the ratio for the exchange of common shares of Dental Care Alliance
for common shares of Wisdom Holdings was fair from a financial point of
view to Gentle Dental. See "--Opinion of Gentle Dental's Financial
Advisor."
- The belief of Gentle Dental's senior management and the Board of Directors
that Gentle Dental and Dental Care Alliance share a compatible business
culture and that their respective managements possess complementary skills
and expertise.
Gentle Dental's Board of Directors also considered certain countervailing
factors in evaluating the mergers. Such countervailing factors included the
following:
- The expenses and operational difficulties of integrating the
geographically separated businesses of Gentle Dental and Dental Care
Alliance.
- The dilution of Gentle Dentals' shareholders that would occur as a result
of the proposed merger.
- The potential negative aspects of a fixed exchange ratio.
- Dental Care Alliances' lack of a sustained record of growth and
profitability.
After considering the above and other possible countervailing factors
associated with the mergers, the Gentle Dental Board of Directors determined
that the perceived benefits of the mergers to its shareholders outweighed those
countervailing factors.
The foregoing discussion of the information and factors considered by the
Gentle Dental Board of Directors is not intended to be exhaustive but includes
all material factors considered by the Gentle Dental Board of Directors. In
reaching its determination to approve and recommend the mergers, the Board of
Directors did not assign any relative or specific weights to the foregoing
factors, and individual directors may have given differing weights to different
factors. The Gentle Dental Board of Directors recommends that Gentle Dental
shareholders vote for approval and adoption of the merger agreement.
RECOMMENDATION OF THE DENTAL CARE ALLIANCE BOARD OF DIRECTORS AND REASONS FOR
THE MERGERS
The Dental Care Alliance Board of Directors has approved and adopted the
merger agreement and believes that as to Dental Care Alliance the mergers are
fair to and in the best interests of Dental Care Alliance and its stockholders.
Accordingly, the Dental Care Alliance Board of Directors has unanimously
approved the merger agreement and unanimously recommends that the stockholders
vote for the approval of the merger agreement and the consummation of the
transactions contemplated thereby. See "Background of the Merger" and "Opinion
of Dental Care Alliance's Financial Advisor."
The terms of the merger agreement, including the ratio for the exchange of
common shares of Dental Care Alliance for common shares of Wisdom Holdings, are
the result of arm's length negotiations between representatives of Gentle Dental
and Dental Care Alliance. In reaching its decision to approve the merger
agreement, the Dental Care Alliance Board of Directors, with the assistance of
Dental Care Alliance's outside financial and legal advisors, considered the
financial, legal and other aspects of the proposed merger and the fairness of
the ratio for the exchange of common shares of Dental Care Alliance for common
shares of Wisdom Holdings. The Board of Directors concluded that the merger
agreement and the mergers contemplated by the merger agreement are fair to and
in the best interests of Dental Care Alliance and its stockholders. In reaching
its decision to authorize Dental Care Alliance to enter into the merger
agreement and to recommend to its stockholders the adoption of the merger
agreement, the Dental Care Alliance Board of Directors considered a number of
factors, both from a short-term and long-term perspective, including, without
limitation, those set forth in "--Background of the Mergers," "-- Opinion of
Dental Care Alliance's Financial Advisor" and the following:
- Information concerning and/or familiarity with the business, results of
operations, financial condition, competitive position and prospects of
Dental Care Alliance and Gentle Dental, including the recent trading
price, volume and price to earnings ratio of each of their common stock,
their
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historical financial data, customary statistical measurements of financial
performance, potential growth and profitability, both as separate and
combined entities, and the business risks associated therewith, and the
future prospects for the combined company's capital stock.
- The fact that Dental Care Alliance's stockholders would receive
approximately 46.5% of the equity on a fully diluted basis in a company
that it is estimated will have significantly greater annual revenues than
Dental Care Alliance would have on a stand alone basis, which would make
it one of the largest companies in the industry, as opposed to Dental Care
Alliance's annualized revenues of approximately $50 million.
- The current and prospective environment in which Dental Care Alliance
operates, including national and local economic conditions, the
competitive environment for dental practice management companies and other
similar businesses generally and the perceived trend toward increasing
consolidation in the industry and the competitive effects of such
increased consolidation on smaller practice management companies such as
Dental Care Alliance.
- The perceived value to be received by holders of Dental Care Alliance
common stock pursuant to the merger agreement in relation to the
historical trading prices of Dental Care Alliance common stock.
- The financial and other significant terms of the proposed mergers, and the
review by Dental Care Alliance with its legal and financial advisors of
the provisions of the merger agreement.
- The similar management philosophies of Dental Care Alliance and Gentle
Dental and the officers and directors of Gentle Dental who would remain
with the new company after the mergers, including the synergistic
capabilities and complimentary areas of expertise of Dental Care
Alliance's and Gentle Dental's respective Chief Executive Officers.
- The extent to which Dental Care Alliance's executive officers would have
control over dental practice management for the combined company and
Dental Care Alliance personnel, as well as provide assistance to Gentle
Dental's managed practices, while benefiting from economies of scale and
Gentle Dental's administrative expertise.
- The written opinion of Raymond James & Associates, Inc. that, as of the
date of such opinion, the ratio for the exchange of common shares of
Dental Care Alliance for common shares of Wisdom Holdings was fair to the
stockholders of Dental Care Alliance from a financial point of view. See
"--Opinion of Dental Care Alliance's Financial Advisor."
- The Dental Care Alliance Board of Directors' belief that the analyses of
Raymond James & Associates, Inc. supported the Board of Directors'
conclusion that as to Dental Care Alliance the mergers are fair to the
Dental Care Alliance stockholders from a financial point of view. See "--
Opinion of Dental Care Alliance's Financial Advisor."
- The geographic concentration and vertical integration of Gentle Dental's
dental practices under management, as well as the geographic scope of the
combined company.
- The belief of the Board of Directors that the receipt of the new company's
common stock in the mergers generally will permit holders of common stock
to defer any federal income tax liability associated with appreciation of
the value of their stock (see "--Certain Federal Income Tax Consequences")
and to become stockholders of the combined company.
- The alternative strategic courses available to Dental Care Alliance,
including remaining independent and exploring other potential business
combination transactions and the potential values that could be derived
therefrom See "Background of the Mergers".
Dental Care Alliance's Board of Directors also considered certain
countervailing factors in evaluating the mergers. Such countervailing factors
included the following:
- Gentle Dental's lack of a sustained record of growth and profitability.
- The dilution of Dental Care Alliance's stockholders that would occur as a
result of the proposed merger.
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- The shifting of operational control away from Dental Care Alliance's
current management and the relocation of the new company's corporate
headquarters and operations from Florida to California.
- The potential negative aspects of a fixed exchange ratio.
In the judgment of the Dental Care Alliance Board of Directors, these
countervailing factors, neither individually nor collectively outweighed the
benefits anticipated to be gained for Dental Care Alliance and its stockholders
from proceeding with the merger.
In view of the variety of factors considered by the Dental Care Alliance
Board of Directors in connection with its evaluation of the mergers, the Dental
Care Alliance Board of Directors did not find it practicable to, and did not,
quantify or otherwise assign relative weights to the factors listed above.
OPINION OF GENTLE DENTAL'S FINANCIAL ADVISOR
On July 24, 1998, the Gentle Dental Board of Directors retained Salomon
Smith Barney Inc. to act as its financial advisor in connection with a possible
business combination transaction with Dental Care Alliance. In connection with
their engagement, the Gentle Dental Board of Directors instructed Salomon Smith
Barney Inc. to evaluate the fairness, from a financial point of view, to Gentle
Dental of the exchange ratio of the common shares of Dental Care Alliance for
common shares of Wisdom Holdings. At the October 14, 1998 meeting of the Gentle
Dental Board of Directors, Salomon Smith Barney Inc. delivered an oral opinion
(which opinion was subsequently confirmed by delivery of a written opinion dated
October 15, 1998) to the Board of Directors to the effect that, as of the date
of such opinion and based upon the various qualifications and assumptions set
forth therein, the exchange ratio of the common shares of Dental Care Alliance
for common shares of Wisdom Holdings was fair, from a financial point of view,
to Gentle Dental.
THE FULL TEXT OF SALOMON SMITH BARNEY INC.'S WRITTEN OPINION DATED OCTOBER
15, 1998 IS ATTACHED AS APPENDIX B TO THIS DOCUMENT AND IS INCORPORATED HEREIN
BY REFERENCE. GENTLE DENTAL SHAREHOLDERS ARE URGED TO READ THIS OPINION IN ITS
ENTIRETY FOR ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITS OF THE REVIEW BY SALOMON SMITH BARNEY INC. IN ARRIVING AT ITS OPINION.
THE SUMMARY OF THE OPINION OF SALOMON SMITH BARNEY INC. SET FORTH IN THIS
DOCUMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION.
Salomon Smith Barney Inc.'s opinion is directed only to the fairness, from a
financial point of view, to Gentle Dental of the exchange ratio of the common
shares of Dental Care Alliance for common shares of Wisdom Holdings and is not
intended and does not constitute a recommendation to any shareholder of Gentle
Dental as to how such shareholder should vote at the special meeting. No
limitations were imposed by the Gentle Dental Board of Directors upon Salomon
Smith Barney Inc. with respect to the investigations made or procedures followed
by it in rendering its opinion. Although Salomon Smith Barney Inc. evaluated the
financial terms of the mergers and participated in discussions concerning the
determination of the exchange ratio mentioned above, Salomon Smith Barney Inc.
was not asked to and did not recommend such exchange ratio, which was the result
of arm's length negotiations between Gentle Dental and Dental Care Alliance.
In connection with rendering its opinion, Salomon Smith Barney Inc., among
other things:
- reviewed the merger agreement;
- held discussions with certain senior officers and other representatives
and advisors of Gentle Dental and certain senior officers and other
representatives and advisors of Dental Care Alliance concerning the
business, operations and prospects of Gentle Dental and Dental Care
Alliance;
- examined certain publicly available business and financial information
relating to Gentle Dental and Dental Care Alliance as well as certain
financial forecasts and other data for Gentle Dental and Dental Care
Alliance, which were provided by the respective managements of Gentle
Dental and Dental Care Alliance, including information relating to certain
strategic implications and operational benefits anticipated from the
mergers;
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- reviewed the financial terms of the mergers as set forth in the merger
agreement in relation to, among other things: current and historical
market prices and trading volumes of the Gentle Dental common stock and
the Dental Care Alliance common stock; the respective companies'
historical and projected earnings and the capitalization and financial
condition of Gentle Dental and Dental Care Alliance;
- reviewed, to the extent publicly available, the financial terms of certain
other similar recently effected transactions that Salomon Smith Barney
Inc. considered comparable to the mergers and analyzed certain financial,
stock market and other publicly available information relating to the
businesses of other companies whose operations Salomon Smith Barney Inc.
considered relevant in evaluating those of Gentle Dental and Dental Care
Alliance; and
- evaluated the potential pro forma financial impact of the mergers on
Gentle Dental.
In addition, Salomon Smith Barney Inc. conducted such other studies,
analyses, inquiries and investigations as it deemed appropriate.
In rendering its opinion, Salomon Smith Barney Inc. assumed and relied,
without independent verification, upon the accuracy and completeness of all
financial and other information and data publicly available or furnished to or
otherwise reviewed by or discussed with it. With respect to financial forecasts
and other information and data provided to or otherwise reviewed by or discussed
with Salomon Smith Barney Inc., the managements of Gentle Dental and Dental Care
Alliance advised Salomon Smith Barney Inc. that such forecasts and other
information and data were reasonably prepared reflecting the best currently
available estimates and judgments of the respective managements of Gentle Dental
and Dental Care Alliance as to the future financial performance of Gentle Dental
and Dental Care Alliance and the strategic implications and operational benefits
anticipated to result from the mergers. Salomon Smith Barney Inc. assumed, with
the consent of the Gentle Dental Board of Directors, that the mergers will be
treated as a "pooling-of-interests" in accordance with generally accepted
accounting principles and as tax-free reorganizations for federal income tax
purposes.
The opinion of Salomon Smith Barney Inc., as set forth therein, relates to
the relative values of Gentle Dental and Dental Care Alliance. Salomon Smith
Barney Inc. did not express any opinion as to what the value of the Wisdom
Holdings common stock actually will be when issued to Gentle Dental shareholders
pursuant to the mergers or the price at which the Wisdom Holdings common stock
will trade subsequent to the mergers. Salomon Smith Barney Inc. did not make,
and was not provided with, an independent evaluation or appraisal of the assets
or liabilities (contingent or otherwise) of Gentle Dental or Dental Care
Alliance nor did Salomon Smith Barney Inc. make any physical inspection of the
properties or assets of Gentle Dental or Dental Care Alliance. Salomon Smith
Barney Inc. was not requested to consider, and Salomon Smith Barney Inc.'s
opinion does not address, the relative merits of the mergers as compared to any
alternative business strategies that might exist for Gentle Dental or the effect
of any other transaction in which Gentle Dental might engage.
In preparing its opinion, Salomon Smith Barney Inc. performed a variety of
financial and comparative analyses. The summary of such analyses set forth below
does not purport to be a complete description of the analyses performed and
factors considered by Salomon Smith Barney Inc. in arriving at its opinion. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analyses or summary description. Salomon Smith Barney
Inc. believes that its analyses must be considered as a whole, and that
selecting portions of its analyses or of the summary set forth below, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying Salomon Smith Barney Inc.'s opinion. In arriving at its
fairness determination, Salomon Smith Barney Inc. considered the results of all
such reviews, calculations and analyses. The analyses were prepared solely for
the purpose of Salomon Smith Barney Inc. providing its opinion to the Gentle
Dental Board of Directors as to the fairness, from a financial point of view, to
Gentle Dental of the exchange ratio described above. The analyses performed by
Salomon Smith Barney Inc. are not necessarily indicative of actual values,
trading values or actual future results which might be achieved, all of which
may be significantly more or less favorable than suggested by such analyses. As
described above, certain of the analyses performed by
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Salomon Smith Barney Inc. relied on forecasts of future financial performance
provided by the managements of Gentle Dental and Dental Care Alliance. Forecasts
of future financial performance are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such forecasts. Accordingly, because such forecasts are inherently subject to
substantial uncertainty, none of Gentle Dental, Dental Care Alliance, Salomon
Smith Barney Inc. or any other person assumes responsibility for the accuracy of
such forecasts.
Salomon Smith Barney Inc.'s opinion was necessarily based on the information
made available to it, and financial, stock market and other conditions and
circumstances existing and disclosed to Salomon Smith Barney Inc. as of the date
of its opinion.
The following is a summary of the material financial analyses performed by
Salomon Smith Barney Inc. in connection with the preparation of its opinion.
These analyses were presented to the Gentle Dental Board of Directors at its
meeting on October 14, 1998.
COMPARABLE COMPANY ANALYSIS. Salomon Smith Barney Inc. reviewed and
compared certain actual and estimated financial, operating and stock market
information of Dental Care Alliance with that of the following group of four
publicly traded companies in the dental practice management industry that
Salomon Smith Barney Inc. believed to be comparable in certain relevant respects
to Dental Care Alliance: Gentle Dental, American Dental Partners, Inc., Coast
Dental Services, Inc. and Monarch Dental Corp. Salomon Smith Barney Inc.
calculated certain financial multiples for Dental Care Alliance and each of the
selected companies, including, among others:
- market value multiples as of October 10, 1998 based on estimated calendar
years 1998 and 1999 earnings per share ("EPS");
- enterprise value (market value, plus total debt, less cash) multiples as
of October 10, 1998 based on last 12 months ("LTM") earnings before
interest, taxes, depreciation and amortization;
- enterprise value multiples as of October 10, 1998 based on last quarter
annualized ("LQA") EBITDA; and
- enterprise value multiples as of October 10, 1998 based on pro forma LQA
EBITDA (giving effect to recent acquisitions).
Salomon Smith Barney Inc. calculated the average of the foregoing multiples
and then calculated the high and low ranges of such multiples by multiplying
such average by 1.15 (to derive the high end) and .85 (to derive the low end).
EPS estimates for the selected companies mentioned above were obtained from
reports published by the First Call Corporation.
The results of applying the foregoing high and low range of multiples for
the four publicly traded companies mentioned above to corresponding financial
data for Dental Care Alliance are summarized in the following table:
SUMMARY RESULTS OF COMPARABLE COMPANY ANALYSIS
<TABLE>
<CAPTION>
EQUITY REFERENCE RANGE OF A SHARE
RANGE OF OF
ANALYSIS MULTIPLES DENTAL CARE ALLIANCE COMMON STOCK
- ----------------------------------------------------------- ----------------- ----------------------------------
<S> <C> <C>
Estimated calendar 1998 EPS................................ 15.3x to 20.7x $ 7.96 to $10.76
Estimated calendar 1999 EPS................................ 10.5x to 14.3x $ 7.59 to $10.27
LTM EBITDA................................................. 8.5x to 11.5x $ 4.56 to $ 5.82
LQA EBITDA................................................. 7.1x to 9.5x $ 6.82 to $ 8.88
Pro forma LQA EBITDA....................................... 7.1x to 9.5x $ 8.47 to $11.11
</TABLE>
Salomon Smith Barney Inc. noted that none of the four publicly traded
companies mentioned above was identical to Dental Care Alliance and that,
accordingly, any analysis of these companies necessarily
34
<PAGE>
involved complex considerations and judgments concerning differences in
financial and operating characteristics and other factors that would necessarily
affect the public trading values of these companies.
SELECTED GENTLE DENTAL MERGER AND ACQUISITION TRANSACTIONS ANALYSIS. Using
publicly available information, Salomon Smith Barney Inc. analyzed the purchase
price and implied transaction value multiples paid in 12 selected transactions
involving the acquisition or proposed acquisition of all or part of certain
companies in the practice management industry since November 1996. The 12
transactions selected were:
- the acquisition of Valley Forge Dental Associates. Inc. by Monarch Dental
Corporation;
- the acquisition of MedCath Incorporated by KKR 1996 Fund, L.P. and Welsh,
Carson, Anderson & Stowe VII, L.P.;
- the acquisition of First Physician Care, Inc. by PhyCor, Inc.;
- the acquisition of Spectrum Emergency Care, Inc. by Laidlaw Inc.;
- the acquisition of Talbert Medical Management Holdings Corporation by
MedPartners, Inc.;
- the acquisition of Health Partners, Inc. by FPA Medical Management, Inc.;
- the acquisition of EmCare Holdings Inc. by Laidlaw Inc.;
- the acquisition of OccuSystems, Inc. by CRA Managed Care, Inc.;
- the acquisition of InPhyNet Medical Management Inc. by MedPartners, Inc.;
- the acquisition of American Ophthalmic Incorporated by Physicians Resource
Group, Inc.;
- the acquisition of AHI Healthcare Systems, Inc. by FPA Medical Management,
Inc.; and
- the acquisition of STAT Healthcare, Inc. by American Medical Response,
Inc.
Salomon Smith Barney Inc. compared purchase prices in the foregoing selected
transactions as a multiple of, among other things, LTM net income, and
transaction values as multiples of, among other things, LTM earnings before
interest and taxes ("EBIT"), LTM EBITDA, LQA EBITDA and estimated forward years
EPS. All multiples for the foregoing selected transactions were based on
information available at the time of announcement of the selected transaction.
Salomon Smith Barney Inc. calculated the average of the foregoing multiples and
then calculated the high and low ranges of such multiples by multiplying such
average by 1.15 (to derive the high end) and .85 (to derive the low end). The
results of applying the foregoing high and low range of multiples for the
foregoing selected transactions to corresponding financial data for Dental Care
Alliance are summarized in the following table:
SUMMARY RESULTS OF MERGER AND ACQUISITIONS TRANSACTIONS ANALYSIS
<TABLE>
<CAPTION>
RANGE OF EQUITY REFERENCE RANGE OF A SHARE
TYPE OF ANALYSIS MULTIPLES DENTAL CARE ALLIANCE COMMON STOCK
- ----------------------------------------------------------- ----------------- ---------------------------------
<S> <C> <C>
LTM net income............................................. 30.4x to 41.2x $ 8.16 to $11.04
LTM EBIT................................................... 17.7x to 23.9x $ 7.15 to $ 9.33
LTM EBITDA................................................. 11.7x to 15.9x $ 5.92 to $ 7.67
LQA EBITDA................................................. 12.6x to 17.0x $ 11.39 to $15.07
Estimated calendar year 1998 EPS........................... 21.1x to 28.5x $ 10.96 to $14.83
</TABLE>
Salomon Smith Barney Inc. noted that none of the selected transactions was
identical to the transactions contemplated by the merger agreement and that,
accordingly, and analysis of the selected transactions necessarily involved
complex considerations and judgments concerning differences in the financial and
operating characteristics and other factors that would necessarily affect the
value of Dental
35
<PAGE>
Care Alliance versus the acquisition values of the companies to which Dental
Care Alliance was being compared.
DISCOUNTED CASH FLOW ANALYSIS. Salomon Smith Barney Inc. calculated the
estimated free cash flows of Dental Care Alliance for the five fiscal years from
1999 through 2003, based on internal estimates of the management of Dental Care
Alliance. Salomon Smith Barney Inc. then calculated estimated terminal values
(as of December 31, 2003) by applying terminal value multiples of 6.5x, 7.5x and
8.5x to Dental Care Alliance's estimated fiscal year 2003 EBITDA. The sum of the
free cash flows for the covered period and the range of terminal values were
then discounted to present using discount rates of 15.0%, 17.5% and 20.0%. This
analysis was performed using estimated free cash flows and estimated fiscal year
2003 EBITDA under two scenarios, one assuming that the acquisitions contemplated
by Dental Care Alliance's forecasted business plans were consummated and the
other assuming that such acquisitions were not consummated.
Assuming the above-described acquisitions were not consummated, this
analysis indicated the following results:
- a present value of Dental Care Alliance's common equity (after subtracting
net debt) of $9.17, $10.08 and $10.99 on the basis of terminal value
EBITDA multiples of 6.5x, 7.5x and 8.5x, respectively, using a discount
rate of 15.0%;
- a present value of Dental Care Alliance's common equity (after subtracting
net debt) of $8.43, $9.25 and $10.06 on the basis of terminal value EBITDA
multiples of 6.5x, 7.5x and 8.5x, respectively, using a discount rate of
17.5%; and
- a present value of Dental Care Alliance's common equity (after subtracting
net debt) of $7.77, $8.51 and $9.25 on the basis of terminal value EBITDA
multiples of 6.5x, 7.5x and 8.5x, respectively, using a discount rate of
20.0%.
Assuming the above-described acquisitions were consummated, this analysis
indicated the following results:
- a present value of Dental Care Alliance's common equity (after subtracting
net debt) of $11.50, $12.73 and $13.97 on the basis of terminal value
EBITDA multiples of 6.5x, 7.5x and 8.5x, respectively, using a discount
rate of 15.0%;
- a present value of Dental Care Alliance's common equity (after subtracting
net debt) of $10.52, $11.63 and $12.74 on the basis of terminal value
EBITDA multiples of 6.5x, 7.5x and 8.5x, respectively, using a discount
rate of 17.5%; and
- a present value of Dental Care Alliance's common equity (after subtracting
net debt) of $9.66, $10.66 and $11.65 on the basis of terminal value
EBITDA multiples of 6.5x, 7.5x and 8.5x, respectively, using a discount
rate of 20.0%.
CONTRIBUTION ANALYSIS. Salomon Smith Barney Inc. analyzed the respective
contributions of Gentle Dental and Dental Care Alliance to, among other things,
the estimated revenues, EBIT, EBITDA and net income of the combined company for
calendar years 1998 and 1999, based on internal estimates of the managements of
Gentle Dental and Dental Care Alliance and assuming that the acquisitions
contemplated by each of Gentle Dental's and Dental Care Alliance's respective
business plans are consummated. This analysis indicated that:
- in the estimated calendar year 1998, Gentle Dental would have contributed
approximately 71.6% of revenues, 58.5% of EBITDA, 47.3% of EBIT and 33.8%
of net income, and Dental Care Alliance would have contributed
approximately 28.4% of revenues, 41.5% of EBITDA, 52.7% of EBIT and 66.2%
of net income, of the combined company; and
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<PAGE>
- in the estimated calendar year 1999, Gentle Dental would have contributed
approximately 74.6% of revenues, 69.0% of EBITDA, 64.8% of EBIT and 50.8%
of net income, and Dental Care Alliance would have contributed
approximately 25.4% of revenues, 31.0% of EBITDA, 35.2% of EBIT and 49.2%
of net income, of the combined company.
Based on the exchange ratios applicable to the mergers, current stockholders
of Gentle Dental and Dental Care Alliance would own approximately 53.5% and
46.5%, respectively, of the equity of Wisdom Holdings upon consummation of the
mergers, on a fully diluted basis.
OTHER ANALYSES. Salomon Smith Barney Inc. conducted such other analyses as
it deemed necessary, including reviewing selected investment research reports
on, and earnings estimates for, Gentle Dental and Dental Care Alliance, and
analyzing available information regarding the stock ownership profile of Gentle
Dental and Dental Care Alliance.
Salomon Smith Barney Inc. is an internationally recognized investment
banking firm and was engaged as financial advisor to Gentle Dental in connection
with the mergers because of its experience and expertise and its familiarity
with Gentle Dental. As part of its investment banking business, Salomon Smith
Barney Inc. is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes.
Pursuant to the terms of Salomon Smith Barney Inc.'s engagement, Gentle
Dental has agreed to pay Salomon Smith Barney Inc. for its services in
connection with the mergers an aggregate financial advisory fee based on a
percentage of the aggregate transaction value. The fee payable to Salomon Smith
Barney Inc. is currently estimated to be approximately $1.0 million,
approximately $260,000 of which is due and payable and the balance of which is
contingent upon completion of the mergers. Gentle Dental has also agreed to
reimburse Salomon Smith Barney Inc. for reasonable travel and other
out-of-pocket expenses incurred by Salomon Smith Barney Inc. in performing its
services, including the fees and expenses of its legal counsel, and to indemnify
Salomon Smith Barney Inc. and related persons against certain liabilities,
including liabilities under the federal securities laws, arising out of Salomon
Smith Barney Inc.'s engagement. Salomon Smith Barney Inc. and its affiliates may
actively trade or hold the securities of Gentle Dental and Dental Care Alliance
for their own account or for the account of customers and, accordingly, may at
any time hold a long or short position in such securities.
Salomon Smith Barney Inc. has not previously provided investment banking
services to Gentle Dental. However, Salomon Smith Barney Inc. and its affiliates
(including Citigroup Inc. and its affiliates) may maintain ordinary course,
arms' length relationships with Gentle Dental or Dental Care Alliance.
OPINION OF DENTAL CARE ALLIANCE'S FINANCIAL ADVISOR
Pursuant to an engagement letter dated August 22, 1998, Dental Care Alliance
retained Raymond James & Associates, Inc. in connection with its consideration
of the mergers because of Raymond James & Associates, Inc.'s qualifications,
expertise and reputation, as well as its prior investment banking relationship
with Dental Care Alliance. In connection with such engagement, Dental Care
Alliance requested Raymond James & Associates, Inc. to render an opinion as to
whether the exchange ratio applicable to shares of Dental Care Alliance common
stock, as of the date of such opinion, was fair to stockholders of Dental Care
Alliance from a financial point of view. Raymond James & Associates, Inc. is a
nationally recognized investment banking firm, and as part of its investment
banking business, Raymond James & Associates, Inc. is regularly engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes.
THE FULL TEXT OF THE WRITTEN OPINION OF RAYMOND JAMES & ASSOCIATES, INC.,
DATED OCTOBER 15, 1998, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED
AND LIMITS ON THE SCOPE OF REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX C TO THIS
DOCUMENT. DENTAL CARE ALLIANCE STOCKHOLDERS ARE URGED TO READ THIS OPINION IN
ITS
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<PAGE>
ENTIRETY. RAYMOND JAMES & ASSOCIATES, INC.'S OPINION, WHICH IS ADDRESSED TO THE
DENTAL CARE ALLIANCE BOARD OF DIRECTORS, IS DIRECTED ONLY TO THE FAIRNESS OF THE
EXCHANGE RATIO APPLICABLE TO SHARES OF DENTAL CARE ALLIANCE COMMON STOCK TO
DENTAL CARE ALLIANCE STOCKHOLDERS FROM A FINANCIAL POINT OF VIEW AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY DENTAL CARE ALLIANCE STOCKHOLDER AS TO HOW
SUCH STOCKHOLDER SHOULD VOTE AT THE DENTAL CARE ALLIANCE SPECIAL MEETING AND
DOES NOT ADDRESS ANY OTHER ASPECT OF THE PROPOSED MERGERS OR ANY RELATED
TRANSACTION. RAYMOND JAMES & ASSOCIATES, INC. HAS CONSENTED TO THE SUMMARIZATION
OF ITS OPINION IN, AND ATTACHMENT OF ITS OPINION TO, THIS DOCUMENT. THE SUMMARY
OF THE OPINION OF RAYMOND JAMES & ASSOCIATES, INC. SET FORTH IN THIS DOCUMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Raymond
James & Associates, Inc. believes that its analyses must be considered as a
whole and that selecting portions of its analyses, without considering the
analyses taken as a whole, would create an incomplete view of the process
underlying the analyses set forth in its opinion. In addition, Raymond James &
Associates, Inc. considered the results of all such analyses and did not assign
relative weights to any of the analyses, so the ranges of valuations resulting
from any particular analysis described below should not be taken to be Raymond
James & Associates, Inc.'s view of the actual value of Dental Care Alliance or a
combination of Dental Care Alliance and Gentle Dental.
In performing its analyses, Raymond James & Associates, Inc. made numerous
assumptions with respect to industry performance, general business, economic and
regulatory conditions and other matters, many of which are beyond the control of
Dental Care Alliance or Gentle Dental. The analyses performed by Raymond James &
Associates, Inc. are not necessarily indicative of actual values, trading values
or actual future results which might be achieved, all of which may be
significantly more or less favorable than suggested by such analyses. Such
analyses were prepared solely as part of Raymond James & Associates, Inc.'s
analysis of the fairness of the exchange ratio applicable to shares of Dental
Care Alliance to Dental Care Alliance stockholders from a financial point of
view and were provided to the Dental Care Alliance Board of Directors. The
analyses do not purport to be appraisals or to reflect the prices at which a
company might be sold. In addition, as described below, the opinion of Raymond
James & Associates, Inc. was one of many factors taken into consideration by the
Dental Care Alliance Board of Directors in making its determination to approve
the mergers. Consequently, the analyses described below should not be viewed as
determinative of the Dental Care Alliance Board of Directors' or Dental Care
Alliance management's opinion with respect to the value of Dental Care Alliance
or a combination of Dental Care Alliance and Gentle Dental, or of whether the
Dental Care Alliance Board of Directors or Dental Care Alliance management would
have been willing to agree to a different exchange ratio. Dental Care Alliance
placed no limits on the scope of the analysis performed, or opinion expressed,
by Raymond James & Associates, Inc.
In connection with rendering its opinion, Raymond James & Associates, Inc.
has, among other things:
- reviewed the annual report to stockholders on Form 10-K filed April 1,
1998, the quarterly reports to stockholders on Forms 10-Q filed May 14,
1998 and August 14, 1998, and other publicly available financial
information of Dental Care Alliance;
- reviewed the annual report to stockholders on Form 10-K filed May 29, 1998
and amended August 3, 1998, the quarterly reports to stockholders on Forms
10-Q filed May 15, 1998 and August 14, 1998, and other publicly available
financial information of Gentle Dental;
- reviewed certain non-public information prepared by the management of
Dental Care Alliance, including financial statements, financial
projections, and other financial and operating data concerning Dental Care
Alliance;
- reviewed certain non-public information prepared by the management of
Gentle Dental, including financial statements, financial projections, and
other financial and operating data concerning Gentle Dental;
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- discussed the past and current operations and financial condition and the
prospects of Dental Care Alliance and Gentle Dental with senior executives
of Dental Care Alliance and Gentle Dental, respectively;
- reviewed publicly available financial and stock market data with respect
to certain other companies in lines of business generally comparable to
those of Dental Care Alliance and Gentle Dental;
- considered the pro forma effects of the mergers on Dental Care Alliance's
financial statements and reviewed certain estimates of synergies prepared
by the managements of Dental Care Alliance and Gentle Dental;
- reviewed the historical market prices of the Dental Care Alliance common
stock and the Gentle Dental common stock;
- compared the financial terms of the mergers with the financial terms of
certain other mergers which are generally comparable to the mergers;
- reviewed a draft of the merger agreement; and
- conducted other financial analyses, studies, and investigations, and
considered other information as Raymond James & Associates, Inc. deemed
necessary or appropriate.
In connection with its review, Raymond James & Associates, Inc. has not
assumed any responsibility for independent verification for any of the
information reviewed by Raymond James & Associates, Inc. for the purpose of the
opinion and has relied on its being complete and accurate in all material
respects. In addition, Raymond James & Associates, Inc. has not made or received
any independent evaluation or appraisal of any of the assets or liabilities
(contingent or otherwise) of Dental Care Alliance and Gentle Dental, nor has
Raymond James & Associates, Inc. been furnished with any such evaluation or
appraisal. With respect to the financial forecasts, estimates, projections, pro
forma effects, calculations of synergies and other information referred to
below, Raymond James & Associates, Inc. has assumed, at the direction of Dental
Care Alliance and Gentle Dental, that they have been reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of Dental Care Alliance and Gentle Dental, and Raymond James &
Associates, Inc. has relied upon each party to advise Raymond James &
Associates, Inc. promptly if any such information previously provided to or
discussed with Raymond James & Associates, Inc. became inaccurate or was
required to be updated during the period of the review. In addition, Raymond
James & Associates, Inc. has assumed, with the consent of Dental Care Alliance
and Gentle Dental, that the mergers will be accounted for as a
"pooling-of-interests" under generally accepted accounting principles and that
the mergers will be considered tax-free reorganizations for tax purposes.
PRESENTATION BY RAYMOND JAMES & ASSOCIATES, INC. The following summarizes
the material financial analyses presented by Raymond James & Associates, Inc. to
the Dental Care Alliance Board of Directors at its meetings on October 13 and
15, 1998, which were considered by Raymond James & Associates, Inc. in rendering
the opinion described below. This summary is not a complete description of the
analyses underlying the opinion of Raymond James & Associates, Inc. or of
information presented at meetings between Raymond James & Associates, Inc. and
representatives of Dental Care Alliance held in advance of the consideration by
the Dental Care Alliance Board of Directors of the mergers.
HISTORICAL STOCK PERFORMANCE ANALYSIS. Raymond James & Associates, Inc.
described for the Dental Care Alliance Board of Directors the relative range of
implied exchange ratios which would have resulted from the application of
historical share prices for Dental Care Alliance common stock and Gentle Dental
common stock for the time period beginning November 4, 1997, when Dental Care
Alliance common stock began trading in the public market, and ending on October
12, 1998, the day prior to Raymond James & Associates, Inc.'s presentation to
the Dental Care Alliance Board of Directors. These implied Dental Care Alliance
exchange ratios were calculated by dividing the price per share for Dental Care
Alliance common
39
<PAGE>
stock by the price per share for Gentle Dental common stock. During the time
period used for the analysis, the implied exchange ratio applicable to Dental
Care Alliance shares of common stock ranged from 0.83 to 1.81. This range of
implied Dental Care Alliance Exchange Ratios compares to the Dental Care
Alliance Exchange Ratio in the Agreement of 1.67.
PRECEDENT TRANSACTION ANALYSIS. Raymond James & Associates, Inc. also
presented to the Dental Care Alliance Board of Directors a summary of a
precedent transaction analysis which compared four key financial ratios for
seven selected precedent healthcare company combinations announced during the
three year period prior to October 13, 1998 to the same four key financial
ratios projected for the mergers. The precedent combinations consisted of:
- Monarch Dental Corp. combining with Valley Forge Dental;
- KKR Partners II, L.P. combining with Medcath, Inc.;
- Laidlaw, Inc. combining with Emcare Holdings, Inc.;
- Concentra combining with CRA Managed Care, Inc.;
- MedPartners, Inc. combining with Inphynet Medical Management, Inc.;
- Physicians Resource Group, Inc. combining with Equivision, Inc.; and
- FPA Medical Management, Inc. combining with Sterling Healthcare Group,
Inc.
Raymond James & Associates, Inc. examined the following four key financial
ratios for these seven selected precedent healthcare company combinations:
- target company enterprise value to target company net sales;
- target company enterprise value to target company EBITDA;
- target company enterprise value to target company EBIT; and
- target company equity value to target company net income.
Net sales, EBITDA, EBIT and net income were calculated by annualizing the
financial statistics for the last quarter reported prior to the consummation of
the precedent company combinations.
The precedent transaction analysis resulted in a target company enterprise
value to target company net sales ratio range of 0.8 to 2.2 for the seven
precedent combinations. This range compares to a projected enterprise value to
net sales ratio of 2.3 for Dental Care Alliance under the mergers. The precedent
transaction analysis resulted in a target company enterprise value to target
company EBITDA ratio range of 6.9 to 17.5 for the seven precedent combinations.
This range compares to a projected enterprise value to EBITDA ratio of 11.3 for
Dental Care Alliance under the merger of Dental Care Alliance contemplated by
the merger agreement. The precedent transaction analysis resulted in a target
company enterprise value to target company EBIT ratio range of 12.4 to 21.0 for
the seven precedent combinations. This range compares to a projected enterprise
value to EBIT ratio of 13.8 for Dental Care Alliance under the mergers. The
precedent transaction analysis resulted in a target company equity value to
target company net income ratio range of 20.9 to 39.7 for the seven precedent
combinations. This range compares to a projected equity value to company net
income ratio of 21.4 for Dental Care Alliance under the mergers. Net sales,
EBITDA, EBIT and net income for Dental Care Alliance were calculated by
annualizing Dental Care Alliance's reported financial statistics for its second
fiscal quarter of 1998.
COMPARABLE COMPANIES ANALYSIS. Raymond James & Associates, Inc. also
presented to the Dental Care Alliance Board of Directors a summary financial
comparison of Dental Care Alliance and Gentle Dental to 31 public practice
management companies, including multi-specialty physician practice management
companies, single specialty physician management companies, and dental and
orthodontic practice
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management companies. For comparative purposes, Raymond James & Associates, Inc.
organized these companies into three groups:
- public dental practice management companies,
- public dental and orthodontic practice management companies,
- all public practice management companies which include multi-specialty
physician, single specialty physician, and dental and orthodontic practice
management companies.
Raymond James & Associates, Inc. then compared the following four key financial
ratios for these three groupings of comparable companies to the same
corresponding ratios for Dental Care Alliance under the mergers:
- enterprise value to sales;
- enterprise value to EBITDA;
- enterprise value to EBIT; and
- equity value to net income.
Sales, EBITDA, EBIT and net income were calculated for Dental Care Alliance,
Gentle Dental and the comparable companies by annualizing the latest quarterly
financial statistics that have been publicly reported.
The comparable companies analysis using the public dental practice
management company grouping resulted in an enterprise value to sales ratio range
of 0.4 to 1.9, an enterprise value to EBITDA ratio range of 2.6 to 9.4, an
enterprise value to EBIT ratio range of 3.1 to 14.1 and an equity value to net
income ratio range of 6.3 to 24.2. These ranges compare to a projected
enterprise value to sales ratio of 2.3 for Dental Care Alliance under the
mergers, a projected enterprise value to EBITDA ratio of 11.3 for Dental Care
Alliance under the mergers, a projected enterprise value to EBIT ratio of 13.8
for Dental Care Alliance under the mergers and a projected equity value to net
income ratio of 21.4 for Dental Care Alliance under the mergers.
The comparable companies analysis using the public dental and orthodontic
practice management company grouping resulted in an enterprise value to sales
ratio range of 0.3 to 2.1, an enterprise value to EBITDA ratio range of 2.6 to
9.4, an enterprise value to EBIT ratio range of 3.1 to 14.1, and an equity value
to net income ratio range of 6.3 to 24.2. These ranges compare to a projected
enterprise value to sales ratio of 2.3 for Dental Care Alliance under the
mergers, a projected enterprise value to EBITDA ratio of 11.3 for Dental Care
Alliance under the mergers, a projected enterprise value to EBIT ratio of 13.8
for Dental Care Alliance under the mergers and a projected equity value to net
income ratio of 21.4 for Dental Care Alliance under the mergers.
The comparable companies analysis for the all public practice management
company grouping resulted in an enterprise value to sales ratio range of 0.3 to
3.4, an enterprise value to EBITDA ratio range of 0.0 to 26.9, an enterprise
value to EBIT ratio range of 0.0 to 14.1, and an equity value to net income
ratio range of 2.9 to 24.2. These ranges compare to a projected enterprise value
to sales ratio of 2.3 for Dental Care Alliance under the proposed mergers, a
projected enterprise value to EBITDA ratio of 11.3 for Dental Care Alliance
under the proposed mergers, a projected enterprise value to EBIT ratio of 13.8
for Dental Care Alliance under the proposed mergers and a projected equity value
to net income ratio of 21.4 for Dental Care Alliance under the proposed mergers.
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DENTAL CARE ALLIANCE DISCOUNTED CASH FLOW ANALYSIS. Raymond James &
Associates, Inc. presented to the Dental Care Alliance Board of Directors the
results of a discounted cash flow analysis for fiscal years 1999 to 2002 to
estimate the present value of the stand-alone unleveraged free cash flows that
Dental Care Alliance is expected to generate if Dental Care Alliance performs in
accordance with certain internal management forecasts. For purposes of this
analysis, unleveraged free cash flows were defined as unleveraged net income
plus depreciation plus amortization less capital expenditures less investment in
working capital. Raymond James & Associates, Inc. performed its analyses based
on financial forecasts and assumptions provided to it by Dental Care Alliance.
Raymond James & Associates, Inc. used the year 2002 as the terminal year for
the analysis and calculated terminal values for Dental Care Alliance by applying
a range of multiples of EBITDA to the projected fiscal year 2002 EBITDA for
Dental Care Alliance. These multiples ranged from 4.0 to 8.1. The unleveraged
projected free cash flows and terminal values were then discounted using a range
of discount rates from 11.70% to 15.70%. Based on this analysis, the implied
equity values for Dental Care Alliance ranged from approximately $7.97 to $19.34
per share. This range of per share values compares to the projected price per
share to owners of Dental Care Alliance common stock of $10.12 under the
proposed mergers based on the exchange ratio applicable to shares of Dental Care
Alliance common stock of 1.67 in the merger agreement and the closing price of
Gentle Dental common stock of $5.625 per share on October 12, 1998.
IMPLIED EQUITY VALUE RATIO ANALYSIS BASED ON DISCOUNTED CASH FLOWS FOR
DENTAL CARE ALLIANCE AND GENTLE DENTAL. Raymond James & Associates, Inc.
presented to the Dental Care Alliance Board of Directors the summary of an
analysis comparing the ratios of the implied equity values for Dental Care
Alliance derived from the Dental Care Alliance discounted cash flow analysis
described above to the implied equity values for Gentle Dental derived from a
discounted cash flow analysis for Gentle Dental. Raymond James & Associates,
Inc. compared these implied equity value ratios to the projected implied equity
value ratio under the mergers. The implied equity value ratio analysis resulted
in a range of ratios of 42.1% / 57.9% to 52.1% / 47.9% for Dental Care Alliance
and Gentle Dental, respectively. This range of ratios compares to a projected
implied equity value ratio for each company under the mergers of 46.5% / 53.5%
for Dental Care Alliance and Gentle Dental, respectively, assuming conversion of
Gentle Dental's preferred stock and subordinate convertible debt into common
stock and treating all outstanding options, warrants and put rights for Dental
Care Alliance and Gentle Dental using the treasury stock method for the
calculation of common stock equivalents.
PRO FORMA ACCRETION (DILUTION) ANALYSIS. Using forecasts and assumptions
for the forecasts provided by Dental Care Alliance and Gentle Dental, Raymond
James & Associates, Inc. presented to the Dental Care Alliance Board of
Directors the summary of an analysis which compared estimated pro forma earnings
per share for the combined company for fiscal year 1999 to the earnings per
share of Dental Care Alliance on a stand alone basis. The analysis assumed
Dental Care Alliance acquired Gentle Dental and included estimated cost savings
from the synergies of the mergers which were estimated by Dental Care Alliance
and Gentle Dental and provided to Raymond James & Associates, Inc. Raymond James
& Associates, Inc. has relied upon this estimate in its analysis and has not
undertaken any independent verification of the cost savings amount. The pro
forma accretion dilution analysis showed that the mergers would lead to
projected fiscal year 1999 combined company pro forma earnings per share greater
than the Dental Care Alliance internally forecasted earnings per share on a
stand alone basis.
SUMMARY OF RELATIVE FINANCIAL STATISTICS ANALYSIS. Raymond James &
Associates, Inc. also presented to the Dental Care Alliance Board of Directors a
comparative summary of financial statistics for Dental Care Alliance and Gentle
Dental. This analysis examined annualized projected third quarter 1998 net
revenues, current estimated gross patient revenue run rate, annualized projected
third quarter 1998 EBITDA, current estimated EBITDA run rate, annualized third
quarter 1998 projected EBIT and
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annualized third quarter projected net income. The projected and estimated
financial statistics were provided to Raymond James & Associates, Inc. by Dental
Care Alliance and Gentle Dental.
The summary of relative financial statistics analysis provided the following
results. The annualized projected third quarter 1998 net revenues translates to
approximately 21.7% and 78.3% of the total pro forma combined net revenue for
Dental Care Alliance and Gentle Dental, respectively. The current estimated
gross patient revenue run-rate translates to approximately 27.7% and 72.3% of
total pro forma combined gross patient revenue run-rate for Dental Care Alliance
and Gentle Dental, respectively. The annualized projected third quarter 1998
EBITDA translates to approximately 38.8% and 61.2% of the total combined pro
forma annualized projected third quarter EBITDA for Dental Care Alliance and
Gentle Dental, respectively. The current estimated EBITDA run-rate translates to
approximately 36.6% and 63.4% of total pro forma combined EBITDA run-rate for
Dental Care Alliance and Gentle Dental, respectively. The projected annualized
EBIT for the third quarter of fiscal year 1998 translates to approximately 46.7%
and 53.3% of the total pro forma combined EBIT for Dental Care Alliance and
Gentle Dental, respectively. The projected annualized net income for the third
quarter of fiscal year 1998 translates to approximately 56.9% and 43.1% of the
total pro forma combined net income for Dental Care Alliance and Gentle Dental,
respectively. All of the above percentages compare to the ownership percentages
calculated using the Dental Care Alliance exchange ratio of 1.67 described in
the merger agreement of approximately 46.5% and approximately 53.5% for Dental
Care Alliance and Gentle Dental, respectively, assuming conversion of Gentle
Dental's preferred stock and convertible subordinate notes into common stock and
treating all outstanding options, warrants and put rights for Dental Care
Alliance and Gentle Dental using the treasury stock method for the calculation
of common stock equivalents.
OPINION OF RAYMOND JAMES & ASSOCIATES, INC. At the October 13 and 15, 1998
meetings of the Dental Care Alliance Board of Directors, Raymond James &
Associates, Inc. gave its oral and written opinion that, as of such date and
based upon and subject to various qualifications and assumptions described with
respect to its opinion, the Dental Care Alliance exchange ratio of 1.67 was fair
from a financial point of view to the Dental Care Alliance stockholders.
Raymond James & Associates, Inc. is actively involved in the investment
banking business and regularly undertakes the valuation of investment securities
in connection with public offerings, private placements, business combinations
and similar mergers. In the past, Raymond James & Associates, Inc. has performed
certain investment banking services for Dental Care Alliance, including in
connection with its initial public offering, and has received customary fees for
such services. Raymond James & Associates, Inc. has acted as financial advisor
to the Dental Care Alliance Board of Directors in connection with the mergers
and will receive a fee upon the consummation thereof, which fee is contingent
upon the value of the mergers. The fee payable to Raymond James & Associates,
Inc. is currently estimated to be approximately $1 million. Dental Care Alliance
has also agreed to reimburse Raymond James & Associates, Inc. for reasonable
travel and other out-of-pocket expenses incurred by Raymond James & Associates,
Inc. in performing its services, including the fees of its legal counsel and to
indemnify Raymond James & Associates, Inc. and related persons against certain
liabilities, including liabilities arising under the federal securities laws and
arising out of Raymond James & Associates, Inc.'s engagement. In the ordinary
course of business, Raymond James & Associates, Inc. may trade in the securities
of Dental Care Alliance and Gentle Dental for its own account and for the
accounts of Raymond James & Associates, Inc.'s customers and, accordingly, may
at any time hold a long or short position in such securities.
Raymond James & Associates, Inc.'s opinion was based on economic, market,
and other conditions as in effect on, and the information available to it as of,
the date of its opinion. Raymond James & Associates, Inc. did not express any
opinion as to the price range or range of prices at which the Wisdom Holdings
common stock might trade subsequent to the mergers.
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STRUCTURE OF THE MERGERS
FORMATION OF WISDOM HOLDINGS. Prior to the execution of the merger
agreement, Wisdom Holdings was formed as a Delaware corporation and subsequently
formed two acquisition subsidiaries, Wisdom Holdings Acquisition Corp. I and
Wisdom Holdings Acquisition Corp. II, in order to effectuate the mergers. The
Certificate of Incorporation of Wisdom Holdings authorizes 50,000,000 shares of
Wisdom Holdings common stock and 30,000,000 shares of Wisdom Holdings preferred
stock and contains provisions with respect to indemnity of directors, officers
and others to reflect the current provisions of the Delaware General Corporation
Law. Additionally, the Wisdom Holdings Certificate of Incorporation and the
By-Laws of Wisdom Holdings, as amended, provide for a staggered board of
directors comprised of between and members. The form of the Wisdom
Holdings Certificate of Incorporation is set forth as Exhibit 3.1 to the
Registration Statement of which this document is a part, and the form of the
Wisdom Holdings By-Laws is set forth as Exhibit 3.2 to the Registration
Statement. The description of such documents herein are qualified in their
entirety by reference to such Exhibits. See "Where You Can Find More
Information."
THE GENTLE DENTAL MERGER. Subject to the terms and conditions of the merger
agreement, simultaneously with the Dental Care Alliance merger and in accordance
with the Washington Business Corporation Act, at the effective time of the
Gentle Dental merger, Wisdom Holdings Acquisition Corp. I will merge with and
into Gentle Dental. Gentle Dental will be the surviving corporation in the
merger, and will continue its corporate existence under the Washington Business
Corporation Act. At the effective time, the separate corporate existence of
Wisdom Holdings Acquisition Corp. I will terminate. As a result of the Gentle
Dental merger, the Articles of Incorporation of Gentle Dental and the By-Laws of
Gentle Dental existing prior to the Gentle Dental merger will be the Articles of
Incorporation and the By-Laws in place immediately after the Gentle Dental
merger.
THE DENTAL CARE ALLIANCE MERGER. Subject to the terms and conditions of the
merger agreement, simultaneously with Gentle Dental merger and in accordance
with the Delaware General Corporation Law, at the effective time of the Dental
Care Alliance merger, Wisdom Holdings Acquisition Corp. II will merge with and
into Dental Care Alliance. Dental Care Alliance will be the surviving
corporation in the Dental Care Alliance merger, and will continue its corporate
existence under the Delaware General Corporation Law. At the effective time, the
separate corporate existence of Wisdom Holdings Acquisition Corp. II will
terminate. As a result of the Dental Care Alliance merger, the Certificate of
Incorporation of Dental Care Alliance and the By-Laws of Dental Care Alliance
existing prior to the Dental Care Alliance merger will be the Certificate of
Incorporation and the By-Laws of Dental Care Alliance immediately after the
Dental Care Alliance merger.
EXCHANGE OF STOCK; TREATMENT OF OPTIONS AND OTHER RIGHTS TO ACQUIRE CAPITAL
STOCK
THE GENTLE DENTAL EXCHANGE. At the effective time of the Gentle Dental
merger, each share of Gentle Dental common stock outstanding, other than such
shares in respect of which dissenters' rights, shall have been properly demanded
in accordance with Chapter 23B.13 of the Washington Business Corporation Act
will be exchangeable into one share of Wisdom Holdings common stock.
Notwithstanding any other provision of the merger agreement, dissenting
shares will not be exchanged for shares of Wisdom Holdings common stock. Holders
of dissenting shares will be entitled to payment of the appraised value of such
dissenting shares in accordance with the provisions of Chapter 23B.13 of the
Washington Business Corporation Act, provided that if any dissenting shareholder
subsequently delivers a written withdrawal of such holder's demand for appraisal
of such shares, or if any holder fails to establish such holder's entitlement to
dissenters' rights as provided in Chapter 23B.13 of the Washington Business
Corporation Act, such holder or holders will forfeit the right to appraisal of
such shares of Gentle Dental common stock and each of such shares will thereupon
be deemed to have been exchanged for Wisdom
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Holdings common stock on the terms provided in the merger agreement. See
"Dissenters' Appraisal Rights."
Each stock option or other right to acquire Gentle Dental common stock
granted under Gentle Dental's option plans or other such rights that are
outstanding and unexercised immediately prior to the effective time of the
Gentle Dental merger will be converted automatically at the effective time into,
and will become, a stock option or other right to purchase Wisdom Holdings
common stock, and will continue, to the extent applicable, to be governed by the
terms of the Gentle Dental option plans or other applicable requirements. The
Gentle Dental option plans will be assumed by Wisdom Holdings. In each case, the
number of shares of Wisdom Holdings common stock subject to the option or other
right will be equal to the number of shares of Gentle Dental common stock
subject to the Gentle Dental option or right and the exercise price per share of
Wisdom Holdings common stock subject to the Wisdom Holdings option or right will
be equal to the exercise price per share of Gentle Dental common stock under the
Gentle Dental option or right. The duration and other terms of each such Wisdom
Holdings option or right will be substantially the same as the prior Gentle
Dental option or right.
If, prior to the effective time of the Gentle Dental merger, the outstanding
shares of Gentle Dental capital stock are increased, decreased, changed into or
exchanged for a different number or kind of shares or securities as a result of
a reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split or other similar change in capitalization, an
appropriate and proportionate adjustment will be made to the exchange ratio of
shares of Gentle Dental capital stock for shares of Wisdom Holdings capital
stock.
Each share of Gentle Dental Series A preferred stock issued and outstanding
prior to the effective time of the Gentle Dental merger shall be converted into
and exchanged for one share of Wisdom Holdings Series A preferred stock. The
terms of the Wisdom Holdings Series A preferred stock will be substantially the
same as the terms of the Gentle Dental Series A preferred stock. Each share of
Gentle Dental Series B preferred stock issued and outstanding prior to the
effective time of the Gentle Dental merger shall be converted into and exchanged
for one share of Wisdom Holdings Series B preferred stock. The terms of the
Wisdom Holdings Series B preferred stock will be substantially the same as the
terms of the Gentle Dental Series B preferred stock. Each share of Gentle Dental
Series C preferred stock issued and outstanding prior to the effective time
shall be converted into and exchanged for one share of Wisdom Holdings Series C
preferred stock. The terms of the Wisdom Holdings Series C preferred stock will
be substantially the same as the terms of the Gentle Dental Series C preferred
stock. Each share of Gentle Dental Series D preferred stock issued and
outstanding prior to the effective time of the Gentle Dental merger shall be
converted into and exchanged for one share of Wisdom Holdings Series D preferred
stock. The terms of the Wisdom Holdings Series D preferred stock will be
substantially the same as the terms of the Gentle Dental Series D preferred
stock. See Description of "Wisdom Holdings Capital Stock and Certain Differences
Between Washington and Delaware Laws." See "--Exchange of Certificates;
Fractional Shares."
THE DENTAL CARE ALLIANCE EXCHANGE. At the effective time of the Dental Care
Alliance merger, each share of Dental Care Alliance common stock outstanding
will be converted into and exchanged for the right to receive a number of shares
of Wisdom Holdings common stock equal to the exchange ratio (1.67) applicable to
such shares, subject to customary antidilution adjustments as provided in the
merger agreement and described below. Because the exchange ratio is fixed and
because the market price of Dental Care Alliance common stock (prior to the
effective time of the Dental Care Alliance merger) is subject to fluctuation,
the value of the shares of Wisdom Holdings common stock that holders of Dental
Care Alliance common stock will receive in the Dental Care Alliance merger may
increase or decrease prior to and following the Dental Care Alliance merger.
Each stock option and warrant to acquire Dental Care Alliance common stock
granted under Dental Care Alliance's option plans, or otherwise, outstanding and
unexercised immediately prior to the effective
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time of the Dental Care Alliance merger, will be converted automatically at the
effective time into, and will become, a stock option or warrant to purchase
Wisdom Holdings common stock and will continue to be governed by the terms of
the applicable Dental Care Alliance option plan. The Dental Care Alliance option
plans will be assumed by Wisdom Holdings. In each case, (a) the number of shares
of Wisdom Holdings common stock subject to the Wisdom Holdings option or warrant
will be equal to the product of the number of shares of Dental Care Alliance
common stock multiplied by the Dental Care Alliance exchange ratio, rounded to
the nearest whole share, and (b) the exercise price per share of Wisdom Holdings
common stock subject to the Wisdom Holdings option or warrant will be equal to
the exercise price per share divided by the Dental Care Alliance exchange ratio
applicable to shares of Dental Care Alliance common stock, rounded to the
nearest whole cent. The duration and other terms of each such Wisdom Holdings
option or warrant will be substantially the same as the prior Dental Care
Alliance option, except that pursuant to the Dental Care Alliance option plans,
the exercisability of all options under such plans accelerate.
If, prior to the effective time of the Dental Care Alliance merger, the
outstanding shares of Dental Care Alliance common stock are increased,
decreased, changed into or exchanged for a different number or kind of shares or
securities as a result of a reorganization, recapitalization, reclassification,
stock dividend, stock split, reverse stock split, or other similar change in
capitalization, an appropriate and proportionate adjustment will be made to the
exchange ratio applicable to shares of Dental Care Alliance common stock.
EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES
At or prior to the effective time of the mergers, Wisdom Holdings will
deposit, or cause to be deposited, with , or another bank or trust
company reasonably acceptable to each of Gentle Dental and Dental Care Alliance,
which shall act as exchange agent for the Gentle Dental merger, for the benefit
of the holders of certificates of Gentle Dental common stock, certificates
representing the shares of Wisdom Holdings capital stock to be issued pursuant
to the merger agreement in exchange for outstanding shares of Gentle Dental
capital stock.
As soon as is practicable after the effective time of the Gentle Dental
merger, a form of transmittal letter will be mailed by the exchange agent to the
holders of Gentle Dental capital stock. The form of transmittal letter will
contain instructions with respect to the surrender of certificates representing
Gentle Dental capital stock.
At or prior to the effective time of the mergers, Wisdom Holdings will
deposit, or cause to be deposited, with TranSecurities International, Inc., 2510
North Pines, Suite 202, Spokane, WA 99206, or another bank or trust company
reasonably acceptable to each of Gentle Dental and Dental Care Alliance, which
shall act as exchange agent for the Dental Care Alliance merger, for the benefit
of the holders of certificates of Dental Care Alliance common stock,
certificates representing the shares of Wisdom Holdings common stock and cash in
lieu of any fractional shares to be issued and delivered pursuant to the merger
agreement in exchange for outstanding shares of Dental Care Alliance common
stock.
As soon as is practicable after the effective time of the Dental Care
Alliance merger, a form of transmittal letter will be mailed by the exchange
agent to the holders of Dental Care Alliance common stock. The form of
transmittal letter will contain instructions with respect to the surrender of
certificates representing Dental Care Alliance common stock.
NEITHER GENTLE DENTAL CAPITAL STOCK NOR DENTAL CARE ALLIANCE COMMON STOCK
SHOULD BE RETURNED WITH THE ENCLOSED PROXY CARD OR FORWARDED TO THE EXCHANGE
AGENT UNLESS AND UNTIL THE GENTLE DENTAL SHAREHOLDER OR THE DENTAL CARE ALLIANCE
STOCKHOLDER RECEIVES A FORM OF TRANSMITTAL LETTER FOLLOWING THE EFFECTIVE TIME
OF THE APPLICABLE MERGER.
Until the certificates representing Gentle Dental capital stock and Dental
Care Alliance common stock, as the case may be, are surrendered for exchange
after the effective time of the applicable merger,
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dividends or other distributions declared after the effective time, if any, will
accrue but not be paid with respect to Wisdom Holdings common stock or Wisdom
Holdings preferred stock, as the case may be, for which their shares have been
exchanged. When such certificates are surrendered, any unpaid dividends or other
distributions will be paid, without interest. After the effective time of the
applicable merger, there will be no transfers on the stock transfer books of
Gentle Dental of shares of Gentle Dental capital stock or of Dental Care
Alliance of shares of Dental Care Alliance common stock issued and outstanding
immediately prior to the effective time of the applicable merger. If
certificates representing shares of Gentle Dental capital stock or Dental Care
Alliance common stock are presented after the effective time, they will be
canceled and exchanged for the relevant certificate representing the applicable
shares of Wisdom Holdings common stock or Wisdom Holdings preferred stock.
No fractional shares of Wisdom Holdings common stock will be issued to any
holder of Dental Care Alliance common stock upon consummation of the Dental Care
Alliance merger. For each fractional share that would otherwise be issued,
Wisdom Holdings will pay cash in an amount equal to such fraction multiplied by
the average of the closing sale prices of Gentle Dental common stock as reported
on the Nasdaq Small Cap Market for the five consecutive trading days immediately
preceding the date of the effective time of the Gentle Dental merger. No
interest will be paid or accrued on the cash in lieu of fractional shares
payable to holders of such certificates.
Neither Gentle Dental, Dental Care Alliance, Wisdom Holdings, nor any other
person, will be liable to any former holder of Gentle Dental capital stock or
Dental Care Alliance common stock for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
If a certificate for Gentle Dental capital stock or Dental Care Alliance
common stock has been lost, stolen or destroyed, the exchange agent will issue
the consideration properly payable in accordance with the merger agreement upon
receipt of appropriate evidence as to such loss, theft or destruction,
appropriate evidence as to the ownership of such certificate by the claimant,
and appropriate and customary indemnification.
For a description of the Wisdom Holdings capital stock and a description of
the differences between the rights of the holders of Gentle Dental capital stock
and Dental Care Alliance common stock, on the one hand, and holders of Wisdom
Holdings capital stock, on the other. See "Certain Differences Between
Washington and Delaware Corporate Laws."
EFFECTIVE TIME
The effective time of the mergers will be as set forth in the certificate of
merger that will be filed with the Secretary of State of the State of Washington
and the certificate of merger that will be filed with the Secretary of State of
the State of Delaware on the closing date of the mergers. The closing date will
occur on a date to be specified by the parties, but no later than five business
days after the satisfaction or waiver (subject to applicable law) of the latest
to occur of the conditions precedent to the mergers set forth in Article IX of
the merger agreement. Gentle Dental and Dental Care Alliance each anticipate
that the mergers will be consummated during the fiscal quarter ending March 31,
1999. However, the consummation of the mergers could be delayed if there is a
delay in obtaining requisite regulatory approvals. There can be no assurances as
to if or when such approvals will be obtained or that the mergers will be
consummated. If the mergers are not effected on or before March 31, 1999, the
merger agreement may be terminated by either Gentle Dental or Dental Care
Alliance, unless the failure to effect the mergers by such date is due to the
failure of the party seeking to terminate the merger agreement to perform or
observe the covenants and agreements of such party set forth therein. See
"--Conditions to Consummation of the Mergers" and "--Regulatory Approvals
Required for the Mergers."
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REPRESENTATIONS AND WARRANTIES
The merger agreement contains representations and warranties of Gentle
Dental, on the one hand, and Dental Care Alliance, on the other, as to, among
other things:
- the corporate organization and existence of each party and its
subsidiaries (including that each is duly organized, validly existing and
in good standing with the corporate power and authority to own or lease
its properties and assets and to carry on its business as currently
conducted);
- the capitalization of each party (including the number of shares of
capital stock authorized, the number of shares and rights to acquire
shares outstanding and the number of shares reserved for issuance);
- ownership of outstanding shares of capital stock by each party of its
subsidiaries;
- the corporate power and authority of each party to execute and deliver the
merger agreement and to consummate the transactions contemplated thereby;
- the compliance of the merger agreement with (a) the certificate or
articles of incorporation and by-laws or code of regulations, as
applicable, of each party, (b) applicable law and (c) material agreements,
including the absence of events of default or acceleration thereunder;
- absence of any required governmental and third-party approvals other than
those specified in the merger agreement;
- the timely filing of required regulatory reports and other regulatory
matters;
- each party's financial statements and filings with the Securities and
Exchange Commission (including that such information is a fair
presentation of the financial condition and results of operations thereof
and is in compliance with Generally Accepted Accounting Principles);
- the absence of certain changes in each party's business since December 31,
1997;
- the absence of legal proceedings and injunctions;
- the filing and accuracy of each party's tax returns and the absence of
other tax liabilities;
- each party's employee benefit plans and related matters (including
operation and administration of such plans in accordance with applicable
law);
- each party's compliance with applicable law;
- the absence of material defaults under material contracts;
- the absence of undisclosed liabilities;
- insurance;
- the absence of environmental liabilities;
- "Year 2000" risk management plan;
- the assets of each party; and
- qualification of the mergers as reorganizations under Section 368(a) of
the Internal Revenue Code or transfers to a controlled corporation
pursuant to Section 351 of the Code and for "pooling-of-interests"
accounting treatment.
CONDUCT OF BUSINESS PENDING THE MERGERS AND OTHER AGREEMENTS
Pursuant to the merger agreement, prior to the effective time of the
mergers, each of Gentle Dental and Dental Care Alliance have agreed to, and to
cause their respective subsidiaries to do the following:
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- conduct its business in the usual, regular and ordinary course consistent
with past practice and use reasonable best efforts to maintain and
preserve intact its business organization and assets and maintain their
rights, franchises and existing relationships with customers, suppliers,
employees and business associates and retain the services of its
employees;
- take no action which would adversely affect or delay the ability of either
Gentle Dental or Dental Care Alliance or any of their subsidiaries to
perform its covenants and agreements under the merger agreement or that is
reasonably likely to have a material adverse effect on it or its
subsidiaries taken as a whole;
- use its reasonable best efforts in good faith to take or cause to be taken
all actions and do or cause to be done all things necessary, proper or
advisable under applicable laws so as to permit consummation of the
mergers as promptly as practicable and otherwise to enable consummation of
the transactions contemplated by the merger agreement;
- cooperate in obtaining necessary permits, consents, approvals and
authorizations of all third parties and any court, administrative agency,
department, or commission or other federal, state or local government
authority or instrumentality; and
- upon request, to furnish to the other party all information concerning
itself and its subsidiaries, directors, officers and stockholders and such
other matters as may be necessary or advisable in connection with the
transactions contemplated by the merger agreement.
Wisdom Holdings common stock to be issued in the mergers is to be approved
for listing on the Nasdaq National Market, subject to official notice of
issuance, prior to the effective time of the mergers. Gentle Dental and Dental
Care Alliance have also agreed that the combined company will provide employee
benefit plans from and after the effective time with respect to Gentle Dental
and Dental Care Alliance personnel, as the case may be, who remain as employees
of the combined company and that the new benefit plans covering employees of
both parties who continue to be employed by the combined company shall be no
less favorable in the aggregate than those provided to similarly situated
employees of Wisdom Holdings or its subsidiaries.
Subject to applicable law, each of Gentle Dental and Dental Care Alliance
has further agreed to give the other party access during normal business hours
throughout the period prior to the effective time of the mergers to all of its
properties, books and records and to furnish such other information as the
requesting party may reasonably request subject to the restrictions and for the
purposes set forth in the merger agreement.
Wisdom Holdings has agreed to take, prior to the effective time of the
mergers, such action as required to amend and restate the Wisdom Holdings
Certificate of Incorporation to state the rights, preferences and privileges of
Wisdom Holdings preferred stock which will be substantially similar to the
rights, preferences and privileges of Gentle Dental preferred stock.
In addition, except as expressly contemplated by the merger agreement or
specified in a schedule thereto, each of Gentle Dental and Dental Care Alliance
has agreed that without the consent of the other party, it and its subsidiaries
will not, among other things:
- conduct its business and the business of it subsidiaries other than in the
ordinary and usual course or fail to use reasonable best efforts to
preserve intact their business organizations and assets and maintain their
rights, franchises and existing relations with customers, suppliers,
employees and business associates, take any action that would adversely
affect or delay its ability to perform any of their obligations on a
timely basis under the merger agreement, or take any action that is
reasonably likely to have a material adverse effect on it or its
subsidiaries;
- other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money;
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- issue, sell, adjust, split, combine, reclassify or otherwise permit to
become outstanding any additional shares of capital stock; make, declare
or pay any dividend or make any other distribution on, or directly or
indirectly redeem, purchase or otherwise acquire, any shares of its
capital stock or any securities or obligations convertible into or
exchangeable for any shares of its capital stock;
- sell, transfer, mortgage, encumber or otherwise dispose of or discontinue
any of its assets, deposits, business or properties other than in the
ordinary course and in a transaction that is not material to it and its
subsidiaries taken as a whole;
- acquire (other than by way of foreclosures or acquisitions of control in a
bona fide fiduciary capacity or in satisfaction of debts previously
contracted in good faith, in each case in the ordinary and usual course of
business consistent with past practice) all or any portion of, the assets,
business, deposits or properties of any other entity;
- make any capital expenditures other than capital expenditures in the
ordinary course of business consistent with past practice in amounts not
exceeding $50,000 individually or $100,000 in the aggregate;
- except for transactions in the ordinary course of business consistent with
past practice, enter into or terminate any material contract, or amend or
modify in any material respect, any of its existing material contracts;
- enter into or amend or renew any employment, consulting, severance or
similar agreements or arrangements with any director, officer or employee
of it or its subsidiaries or grant any salary or wage increase or increase
any employee benefit (including incentive or bonus payments), except for
(a) normal individual increases in compensation to employees in the
ordinary course of business consistent with past practice, (b) other
changes that are required by applicable law, (c) actions taken to satisfy
previously disclosed contractual obligations or (d) grants of awards to
newly hired employees consistent with past practice;
- enter into, establish, adopt or amend (except as may be required by
applicable law or to satisfy previously disclosed contractual obligations
existing as of the date of the merger agreement) any pension, retirement,
stock purchase, savings, profit sharing, deferred compensation,
consulting, bonus, group insurance or other employee benefit, incentive or
welfare contract, plan or arrangement, or any trust agreement (or similar
arrangement) related thereto, in respect of any director, officer or
employee of it or its subsidiaries, or take any action to accelerate the
vesting or exercisability of any compensation or benefits payable
thereunder;
- solicit, encourage or authorize any individual, corporation or other
entity to solicit from any third party any inquiries or proposals relating
to the disposition of its business or assets, or the acquisition of its
voting securities, or the merger of it or any of its subsidiaries with any
corporation or other entity other than as provided by the merger agreement
(and each party will promptly notify the other of all of the relevant
details relating to all inquiries and proposals which it may receive
relating to any of such matters);
- settle any claim, action or proceeding involving money damages, except in
the ordinary course of business consistent with past practice;
- take any action that would prevent or impede the mergers from qualifying
(a) for "pooling-of-interests" accounting treatment or (b) as
reorganizations within the meaning of Section 368 of the Internal Revenue
Code or as transfers to a controlled corporation qualifying under Section
351 of the Code;
- amend its Articles or Certificate of Incorporation, as the case may be, or
its By-Laws, as the case may be;
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- knowingly take any action that is intended or may reasonably be expected
to result in any of its representations and warranties set forth in the
merger agreement being or becoming untrue in any material respect at any
time prior to the effective time of the mergers, or in any of the
conditions to the mergers set forth in the merger agreement not being
satisfied or in a material violation of any provision of the merger
agreement, except, in every case, as may be required by applicable law or
regulation;
- implement or adopt any change in its accounting principles, practices or
methods, other than as may be required by Generally Accepted Accounting
Principles; or
- agree to, or make any commitment to, take any of the actions listed above.
CONDITIONS TO CONSUMMATION OF THE MERGERS
Each party's obligations to effect the mergers are subject to the
satisfaction or waiver, where permissible, of the following conditions at or
prior to the effective time of such mergers:
- the merger agreement and the transactions contemplated thereby shall have
been adopted and approved by the respective requisite affirmative votes of
the holders of Gentle Dental capital stock and Dental Care Alliance common
stock entitled to vote thereon;
- the shares of Wisdom Holdings capital stock, as the case may be, that are
to be issued to Gentle Dental shareholders and Dental Care Alliance
stockholders upon consummation of the mergers shall have been authorized
for listing on the Nasdaq National Market, subject to official notice of
issuance;
- the approvals of any governmental authority shall have been obtained and
will remain in full force and effect and all statutory waiting periods
with respect to such approvals will have expired;
- the Registration Statement, of which this document is a part, shall have
become effective and no stop order suspending the effectiveness will have
been issued and no proceedings for that purpose will have been initiated
or threatened by the Securities and Exchange Commission;
- permits and other authorizations under state securities laws necessary to
consummate the transaction contemplated hereby and to issue the shares of
capital stock to be issued in the mergers shall have been received and be
in full force and effect;
- as of the effective time of the mergers, the employment agreements of
certain officers of Gentle Dental and Dental Care Alliance as set forth
the merger agreement shall have been terminated and new employment
agreements shall be entered into between the new company and such officers
in a form mutually agreed to by Gentle Dental and Dental Care Alliance;
provided, however, the employment agreement for Steven R. Matzkin and
certain other agreements shall contain provisions substantially similar to
the applicable provisions of the Memorandum of Terms, dated October 15,
1998, attached to the merger agreement and incorporated therein.
- no statute, rule, regulation, order, injunction or decree shall have been
enacted, issued, promulgated, enforced or entered by any court,
administrative agency or commission or other governmental authority or
instrumentality which prohibits consummation of the mergers;
- Gentle Dental shall have received all requisite consents held by third
parties to the transactions contemplated by the mergers and/or waivers to
certain redemption or conversion rights, or conversion price or redemption
price adjustments or change in control rights or acceleration rights;
- Gentle Dental and Dental Care Alliance each shall have received an opinion
of McDermott, Will & Emery, in form and substance reasonably satisfactory
to Gentle Dental and Dental Care Alliance, dated as of the closing date of
the merger agreement, substantially to the effect that, on the basis of
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facts, representations and assumptions set forth in such opinion which are
consistent with the state of facts existing at the effective time of the
mergers:
- each of the mergers constitute (a) a "reorganization" within the
meaning of Section 368 of the Internal Revenue Code and Wisdom Holdings
and, respectively, Gentle Dental and Wisdom Holdings Acquisition Corp.
I and Dental Care Alliance and Wisdom Holdings Acquisition Corp. II
will each be a party to the reorganization within the meaning of
Section 368(b) of the Internal Revenue Code or (b) a transfer to a
controlled corporation qualifying under Section 351 of the Internal
Revenue Code; and
- no gain or loss will be recognized by shareholders of Gentle Dental who
receive shares of Wisdom Holdings common stock or Wisdom Holdings
preferred stock in exchange for shares of Gentle Dental common stock or
Gentle Dental preferred stock or by stockholders of Dental Care
Alliance who receive shares of Wisdom Holdings common stock in exchange
for shares of Dental Care Alliance common stock, except with respect to
cash received in lieu of fractional share interests;
- Gentle Dental and Dental Care Alliance shall have received a letter from
their respective independent accountants, addressed to Gentle Dental or
Dental Care Alliance, as the case may be, to the effect that the mergers
will qualify for "pooling-of-interests" accounting treatment; except that
while these pooling letters are a condition to closing, there can be no
assurance that the Securities and Exchange Commission will not come to a
different conclusion and require the new company to account for the
mergers under the purchase method of accounting;
- the representations and warranties of the other party to the merger
agreement shall be true and correct as of the date of the merger agreement
and (except to the extent such representations and warranties speak as of
an earlier date) as of the closing date as though made on the closing
date, provided that for purposes of this condition, such representations
and warranties will be deemed to be true and correct unless the failure or
failures of such representations and warranties to be so true and correct,
individually or in the aggregate, would have a material adverse effect on
such party;
- counsel to Dental Care Alliance shall have delivered to Gentle Dental its
opinion and counsel to Gentle Dental shall have delivered to Dental Care
Alliance its opinion, dated as of the effective time, in each case dated
as of the effective time of the mergers;
- Gentle Dental and Dental Care Alliance shall each have received a letter
from the new company independent auditors dated as of the date on which
the Registration Statement, of which this document is a part, shall become
effective, and a date shortly prior to the effective time, in accordance
with Statement of Accounting Standards No. 72;
- Wisdom Holdings, and its acquisition subsidiaries, shall have adopted all
resolutions necessary and sufficient to effectuate the appointment of
directors set forth in the merger agreement;
- Gentle Dental and Dental Care Alliance shall each have achieved the
analysts' financial expectations for the quarter ended September 30, 1998
set forth in the merger agreement; and
- each party shall have performed in all material respects all obligations
required to be performed by it under the merger agreement on or prior to
the closing date.
No assurance can be provided as to if or when the approvals of any
regulatory authority necessary to consummate the mergers will be obtained or
whether all of the other conditions precedent to the mergers will be satisfied
or waived by the party permitted to do so. If the mergers are not effected on or
before March 31, 1999, the merger agreement may be terminated by either Gentle
Dental or Dental Care Alliance, unless the failure to effect the mergers by such
date is due to the failure of the party seeking to terminate the merger
agreement to perform or observe covenants and agreements of such party set forth
therein.
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REGULATORY APPROVALS REQUIRED FOR THE MERGERS
Gentle Dental and Dental Care Alliance have agreed to use their best efforts
to obtain all regulatory approvals required to consummate the transactions
contemplated by the merger agreement and intend to complete the filing of
applications and notifications to obtain such approvals of any governmental
authority promptly after the date of this document or have completed the filing
of such applications and notifications prior to such date. The mergers cannot
proceed in the absence of the approvals of any government authority. There can
be no assurance as to the date of any such approvals or the absence of any
litigation challenging such approvals. There can likewise be no assurance that
the Federal Trade Commission, United States Department of Justice or any state
attorney general will not attempt to challenge the mergers on antitrust grounds,
or, if such a challenge is made, as to the result thereof.
Gentle Dental and Dental Care Alliance are not aware of any other material
governmental approvals or actions that are required prior to the parties'
consummation of the mergers other than those described below. It is presently
contemplated that if any such additional governmental approvals or actions are
required, such approvals or actions will be sought. There can be no assurance,
however, that any such additional approvals or actions will be obtained.
Certain other approvals, notices or consents may be required from certain
regulatory authorities in connection with the changes, as a result of the
mergers, including the Nasdaq National Market, the Nasdaq SmallCap Market,
certain other securities exchanges, the National Association of Securities
Dealers, Inc. and certain other self-regulatory agencies.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material United States federal income tax
consequences of the mergers to Gentle Dental shareholders and Dental Care
Alliance stockholders. The summary is based on the Internal Revenue Code of
1986, as amended, Treasury regulations thereunder, and administrative rulings
and court decisions in effect as of the date hereof, all of which are subject to
change at any time, possibly with retroactive effect. This summary is not a
complete description of all of the consequences of the mergers and, in
particular, may not address United States federal income considerations
applicable to stockholders subject to special treatment under United States
federal income tax law. In addition, no information is provided herein with
respect to the tax consequences of the mergers under applicable foreign, state
or local laws.
GENTLE DENTAL SHAREHOLDERS AND DENTAL CARE ALLIANCE STOCKHOLDERS ARE URGED
TO CONSULT THEIR TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF THE MERGERS TO
THEM.
GENERAL. In connection with the filing of the Registration Statement, of
which this document is a part, each of Gentle Dental and Dental Care Alliance
will receive an opinion of McDermott, Will & Emery, counsel to Gentle Dental and
Dental Care Alliance, dated the date thereof, addressing the United States
federal income tax consequences of the mergers described below. Such opinions
will be rendered on the basis of facts, representations and assumptions set
forth or referred to in such opinions that are consistent with the expected
state of facts existing at the effective time of the mergers. In rendering those
opinions, McDermott, Will & Emery will require and rely upon factual
representations contained in certificates of officers of Wisdom Holdings, Gentle
Dental and Dental Care Alliance and may rely on representations of others. The
opinions are to the effect that, for United States federal income tax purposes:
- Each of the Gentle Dental merger and the Dental Care Alliance merger
constitutes (A) a reorganization within the meaning of Section 368(a)
of the Code and Wisdom Holdings, Gentle Dental, Wisdom Holdings
Acquisition Corp. I, Dental Care Alliance and Wisdom Holdings
Acquisition Corp. II will each be a party to the reorganization within
the meaning of
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Section 368(b) of the Code or (B) transfers to a controlled corporation
qualifying under Section 351 of the Code, and
- No gain or loss will be recognized by shareholders of Gentle Dental who
receive shares of Wisdom Holdings common stock or Wisdom Holdings
Series D preferred stock in exchange for shares of Gentle Dental common
stock or Gentle Dental Series D preferred stock or by stockholders of
Dental Care Alliance who receive shares of Wisdom Holdings common stock
in exchange for shares of Dental Care Alliance common stock, except
with respect to cash received in lieu of fractional share interests of
Wisdom Holdings.
Neither tax opinion to be delivered in connection with the mergers is
binding on the Internal Revenue Service or the courts, and the parties do not
intend to request a ruling from the Internal Revenue Service with respect to the
mergers. Accordingly, there can be no assurance that the Internal Revenue
Service will not challenge the conclusions reflected in such opinions or that a
court will not sustain such challenge.
The receipt of a cash payment in respect of dissenting shares by a
dissenting Gentle Dental shareholder will be a taxable event for United States
federal income tax purposes, and any such shareholder should consult his or her
tax advisor with respect to the tax consequences of such a cash payment in his
or her individual situation. Based upon the current ruling position of the
Internal Revenue Service, cash received by a Dental Care Alliance stockholder in
lieu of a fractional share interest in Wisdom Holdings common stock will be
treated as received in redemption of such fractional share interest, and a
Dental Care Alliance stockholder should generally recognize capital gain or loss
for United States federal income tax purposes measured by the difference between
the amount of cash received and the portion of the tax basis of the
stockholder's Dental Care Alliance common stock allocable to such fractional
share interest. Such gain or loss will be a long-term capital gain or loss if
the holding period for such share of Dental Care Alliance common stock is
greater than one year at the effective time of the Dental Care Alliance merger.
The adjusted tax basis of the Wisdom Holdings common stock or Series D
preferred stock received by a Gentle Dental or Dental Care Alliance stockholder
pursuant to the mergers will be the same as that stockholder's adjusted tax
basis in the Gentle Dental common stock, Gentle Dental Series D preferred stock
or Dental Care Alliance common stock, as the case may be, surrendered in
exchange therefor. The holding period of Wisdom Holdings common stock or Wisdom
Holdings Series D preferred stock received by a Gentle Dental or Dental Care
Alliance stockholder (including a fractional share interest deemed received and
redeemed as described above) will include the holding period of the Gentle
Dental common stock, Gentle Dental Series D preferred stock or Dental Care
Alliance common stock surrendered in exchange therefor, provided that the
surrendered stock was held as a capital asset at the effective time of the
mergers. If a Gentle Dental or Dental Care Alliance stockholder has differing
bases or holding periods in respect of his Gentle Dental or Dental Care Alliance
stock, he should consult his own tax advisor prior to the mergers with regard to
identifying the bases or holding periods of particular shares of Wisdom Holdings
common stock or Wisdom Holdings Series D preferred stock received in the
mergers. None of Wisdom Holdings, Gentle Dental and Dental Care Alliance will
recognize any gain or loss as a result of the mergers.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Under the backup withholding
rules, a holder of Wisdom Holdings common stock or Wisdom Holdings Series D
preferred stock may be subject to backup withholding at a rate of 31% with
respect to dividends, unless the stockholder (a) is a corporation or comes
within certain other exempt categories and, when required, demonstrates that
fact or (b) provides a correct taxpayer identification number and certifies as
to no loss of exemption from backup withholding on the substitute Form W-9 that
will be included as part of the transmittal letter and otherwise complies with
the applicable requirements of the backup withholdings rules. Any amount
withheld under those rules will be credited against the stockholder's federal
income tax liability or refunded, provided the appropriate information is
furnished to the Internal Revenue Service. A Wisdom Holdings stockholder who
does not
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provide Wisdom Holdings with his or her correct taxpayer identification number
or who otherwise does not establish an exemption, in addition to being subject
to backup withholding at the rate of 31% with respect to dividends, may be
subject to penalties imposed by the Internal Revenue Service. The information
reporting rules will apply to dividends on Wisdom Holdings common stock and
Wisdom Holdings Series D preferred stock unless the stockholder is a corporation
or is otherwise exempt from those rules.
It is a condition to consummation of the mergers that Gentle Dental and
Dental Care Alliance receive the above-described tax opinion from McDermott,
Will & Emery. We can waive these conditions. In the event that either of these
conditions is waived, the companies will amend this document and resolicit their
stockholders. See "--Conditions to Consummation of the Mergers."
ACCOUNTING TREATMENT
The parties anticipate that the mergers will be accounted for as
"pooling-of-interests" transactions under Generally Accepted Accounting
Principles. Under such method of accounting, Gentle Dental shareholders and
Dental Care Alliance stockholders will be deemed to have combined their existing
voting common stock interests by virtue of the exchange of shares of Gentle
Dental capital stock into (in the case of Gentle Dental shareholders), or the
exchange of the shares of Dental Care Alliance common stock (in the case of
Dental Care Alliance stockholders), for shares of Wisdom Holdings common stock.
Accordingly, the book value of the assets, liabilities and stockholders' equity
of each of Gentle Dental and Dental Care Alliance, as reported on its respective
consolidated balance sheet, will be carried over to the consolidated balance
sheet of Wisdom Holdings and no goodwill will be created. Wisdom Holdings will
be able to include in its consolidated income the consolidated income of both
companies for the entire fiscal year in which the mergers occur; however,
certain expenses incurred to effect the mergers must be treated as current
charges against income rather than adjustments to the balance sheet.
It is a condition to consummation of the mergers that Gentle Dental and
Dental Care Alliance receive a letter from their respective independent
accountants to the effect that the combining companies qualify, as of the
closing date of the mergers, for use of the pooling-of-interests method of
accounting for the mergers. We can waive this condition. In the event either of
these conditions is waived, the companies will amend this document and resolicit
their stockholders. See "--Conditions to Consummation of the Mergers."
The unaudited pro forma financial information contained in this document has
been prepared assuming that the transaction will qualify as a
"pooling-of-interests." See "Summary--Selected Unaudited Comparative Per Share
Data" and "Unaudited Pro Forma Condensed Combined Financial Information."
TERMINATION OF THE MERGER AGREEMENT
The merger agreement provides that the mergers may be terminated at any time
prior to the effective time, whether before or after approval by holders of
Gentle Dental common stock and Dental Care Alliance common stock:
- by mutual consent of Gentle Dental and Dental Care Alliance, if the Board
of Directors of each so determines by a vote of a majority of the members
of its entire Board of Directors;
- by either the Gentle Dental Board of Directors or Dental Care Alliance
Board of Directors (provided that the terminating party is not then in
material breach of any representation, warranty, covenant or other
agreement contained in the merger agreement) if there has been a breach by
the other party of any of the covenants or agreements or any of the
representations or warranties set forth in the merger agreement, which
breach is not cured within 30 days following written notice to the party
committing such breach provided that such breach would be reasonably
likely to result in a material adverse effect;
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- by either the Gentle Dental Board of Directors or Dental Care Alliance
Board of Directors if the mergers are not consummated on or before March
31, 1999, except by a party to the extent that the failure to be
consummated arises out of or results from the knowing action or inaction
of such party to the detriment of the other;
- by either the Gentle Dental Board of Directors or Dental Care Alliance
Board of Directors by a vote of a majority of the members of its entire
Board of Directors if any governmental authority has denied approval of
the mergers and such denial has become final and non-appealable or any
governmental authority has issued a final non-appealable order enjoining
or otherwise prohibiting the consummation of the transactions contemplated
by the merger agreement;
- by either Gentle Dental or Dental Care Alliance if any approval of the
stockholders of Gentle Dental or Dental Care Alliance required for
consummation of the mergers shall have not been obtained by reason of the
failure to obtain the required vote at a duly held meeting of stockholders
or any adjournment or postponement thereof; or
- by written notice of Gentle Dental or Dental Care Alliance if either
receives an acquisition proposal that meets certain parameters described
more fully in the merger agreement and outside counsel advises that to
proceed with the mergers would violate either the fiduciary duty of the
Board of Directors of either company to its respective stockholders, and
Gentle Dental or Dental Care Alliance decides to accept the acquisition
proposal; provided, however, that notice is received by the
non-terminating party at least two days prior to the determination to
accept such proposal.
In addition, in the event the mergers are not completed because the merger
agreement is terminated under its terms for a breach, the breaching party shall
be liable to the non-breaching party for an amount up to the actual
out-of-pocket costs and expenses of the non-breaching party. If, however, either
the Gentle Dental Board or the Dental Care Alliance Board of Directors fails to
recommend the mergers due to any reason other than a termination as permitted
above or either Gentle Dental or Dental Care Alliance accepts an acquisition
proposal from a third party, the party that fails to recommend under such
circumstances or the party that accepts a third party acquisition proposal shall
pay the other party a termination fee equal to $1.5 million.
Whether or not the mergers are consummated, all fees and expenses incurred
in connection with the mergers and the transactions contemplated thereby will be
paid by the party incurring such expenses.
WAIVER AND AMENDMENT OF THE MERGER AGREEMENT
At any time prior to the effective time, any provision of the merger
agreement may be (a) waived by the party benefited by the provision or (b)
amended or modified by an agreement in writing between the parties to the merger
agreement, except, following the meetings of the respective stockholders of
Gentle Dental and Dental Care Alliance, the merger agreement may not be amended
if such amendment would violate either the Washington Business Corporation Act
or the Delaware General Corporation Law or reduce the consideration to be
received by the stockholders of Gentle Dental or Dental Care Alliance.
EMPLOYEE BENEFITS AND PLANS
Wisdom Holdings will:
- provide former employees of both Gentle Dental and Dental Care Alliance
who remain as employees of Wisdom Holdings or any of its subsidiaries with
employee benefit plans no less favorable in the aggregate than those
provided to similarly situated employees of Wisdom Holdings or its
subsidiaries, including, but not limited to, allowing such employees to
participate in Wisdom Holdings' stock option plan or plans in accordance
with the policies of Wisdom Holdings with respect to such stock option
plan or plans, and
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- with respect to former employees of Gentle Dental or Dental Care Alliance
who remain as employees of Wisdom Holdings or any of its subsidiaries,
cause each employee benefit plan of Wisdom Holdings or its subsidiaries in
which such employees are eligible to participate to take into account for
purposes of eligibility and vesting thereunder the service of such
employees with Gentle Dental or Dental Care Alliance (as applicable) as if
such service were with Wisdom Holdings or its subsidiaries, to the same
extent such service was credited under a comparable plan of Gentle Dental
or Dental Care Alliance (as applicable).
Wisdom Holdings has agreed to pay all accrued bonuses for 1998 to former
employees of Gentle Dental or Dental Care Alliance (as applicable) in accordance
with Gentle Dental's or Dental Care Alliance's past practices. After the
effective time, Gentle Dental's and Dental Care Alliance's benefit plans (as
applicable) will be governed, managed and/or terminated by Wisdom Holdings, all
within Wisdom Holdings' sole discretion.
Following the effective time, Wisdom Holdings will deliver to the
participants in the option plans of Gentle Dental and Dental Care Alliance a
notice setting forth such participant's rights pursuant thereto. The grants
pursuant to these option plans shall continue in effect on the same terms and
conditions (after giving effect to the mergers), and Wisdom Holdings has agreed
to comply with the terms of each of these plans to ensure that stock options
granted under such plans that qualified as incentive stock options prior to the
effective time continue to qualify as incentive stock options.
Wisdom Holdings has also agreed to take all corporate action necessary to
reserve for issuance a sufficient number of shares of Wisdom Holdings common
stock for delivery under each Gentle Dental option plan and Dental Care Alliance
option plan assumed in accordance with the merger agreement. As soon as
practicable after the effective time, Wisdom Holdings will file a registration
statement covering such shares and shall use its best efforts to maintain the
effectiveness of such registration statement or registration statements (and
maintain the current status of the prospectus or prospectuses contained therein)
for so long as such options remain outstanding.
STOCK EXCHANGE LISTING
Wisdom Holdings has agreed to cause the shares of Wisdom Holdings common
stock to be issued in the mergers to be approved for listing on the Nasdaq
National Market. It is a condition to the consummation of the mergers that such
shares of Wisdom Holdings common stock be authorized for listing on Nasdaq,
subject to official notice of issuance.
EXPENSES
The merger agreement provides that each of Gentle Dental and Dental Care
Alliance will pay its own expenses in connection with the mergers and the
transactions contemplated thereby.
INTERESTS OF CERTAIN PERSONS IN THE MERGERS
Due to the benefits received by certain affiliates of Gentle Dental and
Dental Care Alliance in connection with the mergers, as described below, the
interests of these affiliates may be different from the interests of the
stockholders of Gentle Dental and Dental Care Alliance generally. Stockholders
should consider such affiliates' interests in the mergers in connection with
such affiliates' recommendations of the mergers.
SEVERANCE ARRANGEMENTS. In anticipation of the consummation of the mergers,
certain executive officers of Gentle Dental and Dental Care Alliance will
execute employment agreements with Wisdom Holdings, each of which becomes
effective at the effective time of the mergers. Each employment agreement with
Wisdom Holdings shall be assumed by Wisdom Holdings and expressly supersedes any
employment agreement between such person and Gentle Dental or Dental Care
Alliance, as the case may
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be. In addition, each Gentle Dental or Dental Care Alliance executive officer
will have waived his rights to payments or other benefits which would otherwise
vest at the effective time under any agreement with Gentle Dental or Dental Care
Alliance. The terms and conditions, including severance arrangements, of
employment agreements with Wisdom Holdings for Messrs. Van Eerden, Olan and
Nichols will remain substantially similar to the previous employment agreements
with Gentle Dental and Dental Care Alliance, as the case may be. The employment
agreements with Wisdom Holdings for Mr. Fiore and Dr. Matzkin will have certain
modifications from the previous employment agreement with Gentle Dental and
Dental Care Alliance, respectively. See "Information About Gentle
Dental--Certain Transactions Regarding Gentle Dental" for a summary of the terms
of Mr. Fiore's employment agreement and new agreement with Wisdom Holdings. See
"Information About Dental Care Alliance--Employment Agreements" for a summary of
the terms of Dr. Matzkin's employment agreement and new agreement with Wisdom
Holdings.
STOCK-BASED RIGHTS. The merger agreement provides that, at the effective
time, each outstanding stock option to acquire shares of Gentle Dental common
stock granted under the Gentle Dental option plans or Dental Care Alliance
common stock under Dental Care Alliance option plans, each warrant and other
right to acquire Gentle Dental common stock or Dental Care Alliance common
stock, held by certain executive officers and directors, will cease to represent
the right to acquire shares of Gentle Dental common stock or Dental Care
Alliance common stock and will be converted into and become a right with respect
to shares of Wisdom Holdings common stock. Any such option plans existing at the
effective time will be assumed by Wisdom Holdings.
REGISTRATION RIGHTS. All of the affiliates of Wisdom Holdings will receive
registration rights as to all shares of Wisdom Holdings common stock held by
them following the effective time and all shares underlying any options,
warrants, convertible securities and other rights to purchase or acquire shares
of Wisdom Holdings common stock.
STOCKHOLDERS' AGREEMENT. As of September 30, 1998, directors and executive
officers of Gentle Dental and their affiliates may be deemed to be beneficial
owners of approximately 56.58% of the outstanding shares of Gentle Dental
capital stock. Holders of more than 50% of the Gentle Dental capital stock,
including shares held by certain executive officers and directors, have executed
Stockholders' Agreements whereby they agree to vote or direct the vote of all
such outstanding shares of Gentle Dental capital stock over which they have
voting control in favor of the approval and adoption of the merger agreements
and the transactions contemplated thereby. As of September 30, 1998, directors
and executive officers of Dental Care Alliance and their affiliates may be
deemed to be beneficial owners of approximately 31.3% of the outstanding shares
of Dental Care Alliance common stock. Any holder of more than 50% of the Dental
Care Alliance common stock, including shares held by certain executive officers
and directors, will execute Stockholders' Agreements whereby each will vote or
direct the vote of all such outstanding shares of Dental Care Alliance common
stock over which each has voting control in favor of the approval and adoption
of the merger agreement and the transactions contemplated thereby. See "The
Merger-- Stockholders' Agreement."
PERFORMANCE SHARES. Mr. Fiore and Grant M. Sadler have purchased certain
shares of Gentle Dental common stock, subject to the right of Gentle Dental to
repurchase the unvested portion of such shares in the event certain performance
criteria are not achieved in 1997 and 1998. Such performance criteria were not
achieved in 1997 and as a result 16,691 of Mr. Fiore's shares of Gentle Dental
common stock and 112,755 of Mr. Sadler's shares are now subject to the
repurchase option. With respect to 1998, the number of performance shares
subject to the repurchase option for Messrs. Fiore and Sadler, are 16,691 and
112,755, respectively, in the event such performance criteria are not achieved
in 1998.
58
<PAGE>
RESTRICTIONS ON RESALES BY AFFILIATES
The issuance of shares of Wisdom Holdings common stock to holders of Gentle
Dental common stock and Dental Care Alliance common stock in the mergers have
been registered under the Securities Act of 1933, as amended. The shares of
Wisdom Holdings common stock issued in the mergers may be traded freely without
restrictions by those stockholders not deemed to be "affiliates" of Gentle
Dental or Dental Care Alliance as that term is defined under the Securities Act.
An affiliate of Gentle Dental or Dental Care Alliance, as defined by the rules
promulgated pursuant to the Securities Act, is a person who, directly or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with, Gentle Dental or Dental Care Alliance. Any subsequent
transfer of such shares of Wisdom Holdings, however, by any person who is an
affiliate of Gentle Dental or Dental Care Alliance at the time the mergers are
submitted for vote of the holders of Gentle Dental capital stock and Dental Care
Alliance common stock, respectively, will, under existing law, require:
- the further registration under the Securities Act of the shares of Wisdom
Holdings common stock to be transferred;
- compliance with Rule 145 promulgated under the Securities Act (permitting
limited sales under certain circumstances); or
- the availability of another exemption from registration.
The foregoing restrictions are expected to apply to the directors and
executive officers of Gentle Dental and Dental Care Alliance and the holders of
10% or more of any class of Gentle Dental capital stock or the Dental Care
Alliance common stock (and to certain relatives or the spouse of any such person
and any trusts, estates, corporations or other entities in which any such person
has a 10% or greater beneficial or equity interest).
Stock transfer instructions will be given by Wisdom Holdings to its transfer
agent with respect to the Wisdom Holdings common stock to be received by persons
subject to the restrictions described above, and the certificates for such stock
will be appropriately legended.
The Securities and Exchange Commission guidelines regarding qualifying for
the "pooling-of-interests" method of accounting also limit sales of shares of
the acquiring and acquired company by affiliates of either company in a business
combination. These Securities and Exchange Commission guidelines provide further
that the "pooling-of-interests" method of accounting generally will not be
challenged on the basis of sales by affiliates of the acquiring or acquired
company if such affiliates do not dispose of any of the shares of the
corporation they own or shares of a corporation they receive in connection with
a merger during the period beginning 30 days before the merger and ending when
financial results covering at least 30 days of post-merger operations of the
combined entity have been published.
Each of Gentle Dental and Dental Care Alliance has agreed in the merger
agreement to use its best efforts to cause each person who is an affiliate (for
purposes of Rule 145 and for purposes of qualifying the mergers for
"pooling-of-interests" accounting treatment) of such party to deliver to the
other party an "affiliate representation letter" intended to ensure compliance
with the Securities Act and preserve the ability to treat the mergers as a
"pooling-of-interests."
Wisdom Holdings has agreed in the merger agreement to use its best efforts
to publish, not later than 90 days after the end of the first month after the
effective time in which there are at least 30 days of post-merger combined
operations, combined sales and net income figures as contemplated by and in
accordance with the terms of the Securities and Exchange Commission's Accounting
Series Release No. 135.
THE STOCKHOLDERS' AGREEMENT
Gentle Dental and Dental Care Alliance have each entered into a
Stockholders' Agreement with certain significant stockholders and current
directors and or officers. These stockholders, holding in the
59
<PAGE>
aggregate shares representing approximately % of the total voting power of
Gentle Dental capital stock and % of the total voting power of Dental Care
Alliance common stock as of their respective record dates, each have agreed, as
a condition to Gentle Dental and Dental Care Alliance entering into the merger
agreement to vote or to cause to be voted, or to execute a written consent with
respect to, all of such stockholder's shares of common stock then held of record
or beneficially owned, directly or indirectly, in favor of adoption and approval
of the merger agreement and the mergers at every meeting of stockholders at
which such matters are considered and at every adjournment thereof and in
connection with every proposal to take action by written consent with respect
thereto.
Each Stockholders' Agreement also provides that the stockholder will not,
and will not permit any entity under its control to, deposit any of such
stockholder's shares in a voting trust or subject any such shares to any
agreement, arrangement or understanding with respect to the voting of such
shares inconsistent with the Stockholders' Agreement entered into by that
stockholder.
The Stockholders' Agreements will terminate upon the earlier to occur of the
completion of the mergers (except for certain provisions which will survive the
completion of the mergers) and the date on which the merger agreement is
terminated in accordance with its terms.
The Stockholders' Agreement binds the action of the signatories thereto only
in their capacity as Gentle Dental and Dental Care Alliance stockholders. Those
directors of Gentle Dental and Dental Care Alliance who signed stockholders'
agreement are not and could not be contractually bound to abrogate their
fiduciary duties as directors of Gentle Dental and Dental Care Alliance.
Accordingly, while such stockholders/directors are, under the stockholders'
agreement executed by them, contractually bound to vote as Gentle Dental and
Dental Care Alliance stockholders in favor of the mergers, their fiduciary
duties as Gentle Dental and Dental Care Alliance directors nevertheless require
them to act in their capacity as directors in the best interest of Gentle Dental
or Dental Care Alliance, as the case may be, when they decided to approve
mergers. In addition, such stockholders/directors will continue to be free to
exercise their fiduciary duties as Gentle Dental and Dental Care Alliance
directors with respect to any decisions they may take in connection with the
mergers or otherwise. In addition, such stockholders are not prohibited from
voting their shares in favor of other acquisition proposals, should any such
proposals be brought to such stockholders for a vote.
60
<PAGE>
OPERATIONS AND MANAGEMENT OF WISDOM HOLDINGS
AFTER THE MERGERS
OPERATIONS
From and after the effective time, each of Gentle Dental and Dental Care
Alliance will be a wholly-owned operating subsidiary of Wisdom Holdings. The
primary business operations conducted by each of the companies, including
existing relationships with affiliated dental practices, will continue following
the mergers. These operations will be conducted by Gentle Dental and Dental Care
Alliance as wholly-owned subsidiaries of the new holding company. However,
certain management functions will be centralized at the new holding company.
In addition, the $30.0 million of Gentle Dental convertible subordinated
debt will be transferred to and become an obligation of the new company. It is
also anticipated that the new company will become a guarantor and obligor of
Gentle Dental's $45.0 million credit facility. For a discussion of the treatment
of outstanding securities of the companies as a result of the mergers, see
"Exchange of Stock; Treatment of Options and Other Rights to Acquire Capital
Stock" at page 44.
Wisdom Holdings' main corporate offices will be located at the current
offices of Gentle Dental in El Segundo, California. Wisdom Holdings' East Coast
regional office will be located at the current corporate offices of Dental Care
Alliance in Sarasota, Florida. Wisdom Holdings' West Coast regional office will
be located in Vancouver, Washington. Wisdom Holdings expects that decisions as
to the continuing employment of Gentle Dental and Dental Care Alliance
employees, (except for certain rights retained by Dr. Matzkin for a period of
four years from the effective time with respect to the termination of employment
of certain executive officers of Wisdom Holdings who were previously employed by
Dental Care Alliance) and the continuing operation of business at each of its
facilities, will be made on a case-by-case basis after the effective time based
upon its evaluation of the combined operations of the two companies.
EXECUTIVE OFFICERS
Pursuant to the terms and conditions of the merger agreement, from and after
the effective time, the following individuals will be executive officers of
Wisdom Holdings:
<TABLE>
<CAPTION>
EXECUTIVE OFFICER AGE POSITION WITH WISDOM HOLDINGS PRESENT POSITION
- ----------------------------------- --- ---------------------------------- ----------------------------------
<S> <C> <C> <C>
Michael T. Fiore................... 44 Co-Chairman and Chief Executive Co-Chairman of the Board, Chief
Officer Executive Officer and President
of Gentle Dental
Dr. Steven R. Matzkin.............. 40 Co-Chairman, President and Chief Chairman, Chief Executive Officer
Dental Officer and President of Dental Care
Alliance
L. Theodore Van Eerden............. 43 Chief Development Officer/ Executive Vice President, Chief
Executive Vice President and Development Officer, Secretary
Secretary and Director of Gentle Dental
Grant M. Sadler.................... 52 Senior Vice President/ Development Vice Chairman of the Board of
Gentle Dental
Norman R. Huffaker................. 52 Chief Financial Officer and Chief Financial Officer of Gentle
Treasurer Dental
Randy Henry........................ 48 Chief Operating Officer Chief Operating Officer of Gentle
Dental
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
EXECUTIVE OFFICER AGE POSITION WITH WISDOM HOLDINGS PRESENT POSITION
- ----------------------------------- --- ---------------------------------- ----------------------------------
<S> <C> <C> <C>
David P. Nichols................... 40 Vice President of Finance/East Chief Financial Officer of Dental
Care Alliance
Mitchell B. Olan................... 40 Vice President of Operations/ East Chief Operating Officer of Dental
Care Alliance
Kevin Webb......................... 39 Vice President of Operations/ Vice President of Gentle Dental
Northwest
Arnold Albert...................... 48 Vice President of Operations/ Vice President of Gentle Dental
Northern California
Kenneth Davis...................... 46 Vice President of Operations/ Vice President of Gentle Dental
Southwest
</TABLE>
For more information concerning each of the executive officers of Wisdom
Holdings, see "Gentle Dental's Management and Additional Information" and
"Dental Care Alliance's Management and Additional Information."
DIRECTORS
Wisdom Holdings' Board of Directors is, and at the effective time will be,
comprised of eight members. The following individuals have been elected as the
initial directors of Wisdom Holdings:
<TABLE>
<CAPTION>
DIRECTOR AGE PRESENT POSITION
- ----------------------------------------- --- -----------------------------------------------------------------
<S> <C> <C>
Robert Finzi............................. 45 Director of Gentle Dental
Michael T. Fiore......................... 44 Co-Chairman of the Board, Chief Executive Officer and President
of Gentle Dental
Eric Green............................... 37 Director of Gentle Dental
Paul H. Keckley.......................... 48 Director of Gentle Dental
Steven R. Matzkin, D.D.S................. 40 Chairman, Chief Executive Officer and
President of Dental Care Alliance
H. Wayne Posey........................... 59 Director of Gentle Dental
Robert F. Raucci......................... 42 Director of Dental Care Alliance
Curtis Lee Smith, Jr..................... 70 Director of Dental Care Alliance
</TABLE>
For information on each of the directors of Wisdom Holdings who presently
are directors or executive officers of Gentle Dental or Dental Care Alliance,
see "Gentle Dental's Management and Other Information" and "Dental Care
Alliance's Management and Other Information."
Wisdom Holdings' Board of Directors will be comprised of three classes of
directors. The first class will serve until the annual meeting of stockholders
held in 2000 and will initially consist of and
. The second class of directors shall serve until the annual
meeting of stockholders held in 2001 and shall initially consist of
and . The third class of directors shall
serve until the annual meeting of stockholders held in 2002 and shall initially
consist of and . All subsequent terms of
each class of directors after such class first stands for re-election shall
expire at the third succeeding annual meeting of stockholders after their
election.
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<PAGE>
PRINCIPAL STOCKHOLDERS OF WISDOM HOLDINGS AFTER THE MERGERS
The following table sets forth certain information regarding the beneficial
ownership of Wisdom Holdings common stock as of November 30, 1998, giving effect
to the mergers as if completed on such date, by (a) each person we believe will
own benefically more than five percent of the Wisdom Holdings common stock, (b)
each director of Wisdom Holdings, and (c) the named executive officers of Wisdom
Holdings listed in the table.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL PERCNTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) OUTSTANDING SHARES OWNED
- --------------------------------------------------------------- ---------------------- --------------------------
<S> <C> <C>
Sprout Capital VII L.P. and certain related entities (2)(3).... 3,169,658 14.25%
SRM Trust (4).................................................. 2,553,677 12.33%
CB Capital Investors, L.P. (5)(6).............................. 2,714,431 11.59%
Michael T. Fiore (7)(8)........................................ 356,772 1.72%
Dr. Steven R. Matzkin (4)(9)................................... 2,543,958 12.28%
L. Theodore Van Eerden (7)(10)................................. 43,275 *
Norman R. Huffaker (7)(11)..................................... 5,564 *
Randy Henry (7)................................................ -- *
Grant M. Sadler (7)(12)........................................ 395,541 1.91%
David P. Nichols (4)(13)....................................... 96,152 *
Mitchell B. Olan (4)(14)....................................... 268,728 1.30%
Robert Finzi (7)(15)........................................... 3,169,658 14.25%
Eric Green (7)(16)............................................. 2,714,431 11.59%
Paul H. Keckley (7)(17)........................................ 1,800 *
H. Wayne Posey (7)(18)......................................... 31,799 *
Robert F. Raucci (4)(19)....................................... 42,505 *
Curtis Lee Smith, Jr. (4)(19).................................. 763,145 3.68%
All directors and officers as a group (17 persons) (20)........ 12,987,005 39.89%
</TABLE>
- ------------------------
*Less than one percent
(1) Unless otherwise noted, it is believed that all persons named in the table
have sole voting and investment power with respect to all shares of Wisdom
Holdings common stock beneficially owned by them.
(2) The address of this beneficial owner is c/o The Sprout Group, 3000 Sand
Hill Road, Bldg. 3, Suite 170, Menlo Park, CA 94025, Attention: Robert
Finzi.
(3) Consists of 1,649,562 shares presently held, in part, by each of Sprout
Capital VII, L.P., DLJ First ESC L.L.C., Sprout Growth II, L.P., The Sprout
CEO Fund, L.P. and DLJ Capital Corp. 380,033 shares issuable upon
conversion of the same number of shares of Series D preferred stock; and
1,140,063 shares issuable upon the conversion of the outstanding principal
amounts of convertible notes. DLJ Capital Corp. is the Managing General
Partner of each of The Sprout CEO Fund, L.P., Sprout Growth II, L.P. and
Sprout Capital VII, L.P. and has voting and investment control over the
shares held by each of these three shareholders. DLJ Capital Corp. is a
wholly-owned subsidiary of Donaldson, Lufkin & Jenrette, Inc., which has
voting and investment control over DLJ Capital Corp. DLJ LBO Plans
Management Corporation is the manager of DLJ First ESC L.L.C. and has
voting
63
<PAGE>
and investment control over the shares held by DLJ First ESC L.L.C. DLJ LBO
Plans Management Corporation is an indirect wholly-owned subsidiary of DLJ,
Inc., which has voting and investment control over DLJ LBO Plans Management
Corporation.
(4) The address of this beneficial owner is c/o Dental Care Alliance, Inc.,
1343 Main Street, 7th floor, Sarasota, Florida 34236. Theodore L. Koenig is
the sole trustee of SRM '93 Children's Trust and has sole voting and
investment control with respect to such shares.
(5) The address of this beneficial owner is c/o CB Capital Investors, Inc., 380
Madison Ave., 12th Floor, New York, NY 10017, Attention: Eric Green.
(6) Consists of 1,085,767 shares issuable upon conversion of the same number of
shares of Series D preferred stock, and 1,628,664 shares issuable upon the
conversion of the outstanding principal amounts of convertible notes. The
general partner of C.B. Capital Investors, L.P. is C.B. Capital Investors,
Inc., a wholly-owned subsidiary of the Chase Manhattan Bank, which has
voting and investment control over C.B. Capital Investors, L.P.
(7) The address of this beneficial owner is 222 North Sepulveda Boulevard,
Suite 740, El Segundo, California 90245.
(8) Includes 16,691 shares currently subject to repurchase by Wisdom Holdings
and 16,691 shares subject to repurchase by Wisdom Holdings in January 1999
if certain performance targets are not met, all at $0.45 per share.
(9) Includes 13,360 shares issuable upon exercise of options exercisable within
60 days after November 30, 1998.
(10) Includes 27,700 shares subject to options exercisable within 60 days after
November 30, 1998 and 2,875 shares subject to an exercisable warrant.
(11) Includes 5,564 shares subject to options exercisable within 60 days after
November 30, 1998.
(12) Includes 110,255 shares currently subject to repurchase by Wisdom Holdings
and 110,255 shares subject to repurchase by Wisdom Holdings in January
1999 if certain performance targets are not met, all at $0.225 per share.
Also includes 80,223 shares subject to repurchase by Wisdom Holdings at a
price of $0.225 per share, which rights lapse at a rate of 2,431 shares
per month until August 31, 2001, at which time Wisdom Holdings' rights
will have lapsed as to all such 80,223 shares.
(13) Includes 96,152 shares subject to options exercisable within 60 days after
November 30, 1998.
(14) Includes 13,360 shares issuable upon exercise of options exercisable
within 60 days after November 30, 1998.
(15) Includes 3,169,658 shares beneficially owned by Sprout Capital VII, L.P.
and certain related entities. Mr. Finzi, as a general partner of a general
partner of entities within this group, may be deemed to share voting and
dispositive power with respect to such shares. Mr. Finzi disclaims
beneficial ownership of these shares. These shares consist of 1,649,562
shares of Wisdom Holdings common stock presently held, in part, by each of
Sprout Capital VII L.P., DLJ First ESC L.L.C., Sprout Growth II, L.P.,
I.C. The Sprout CEO Fund, L.P. and DLJ Capital Corp.; 380,033 shares
issuable upon conversion of the same number of shares of Series D
preferred stock; and 1,140,063 shares issuable upon the conversion of the
outstanding principal of convertible notes. DLJ Capital Corp. is the
Managing General Partner of each of The Sprout CEO Fund, L.P., Sprout
Growth II, L.P. and Sprout Capital VII L.P. and has voting and investment
control over the shares held by each of these three shareholders. DLJ
Capital Corp. is a wholly-owned subsidiary of Donaldson, Lufkin &
Jenrette, Inc., which has voting and investment control over DLJ Capital
Corp. DLJ LBO Plans Management Corporation is the manager of DLJ First ESC
L.L.C. and has voting and investment control over the hares held by DLJ
First ESC L.L.C. DLJ LBO Plans Management Corporation is an
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<PAGE>
indirect wholly-owned subsidiary of DLJ, Inc., which has voting and
investment control over DLJ LBO Plans Management Corporation.
(16) Includes 2,714,431 shares beneficially owned by CB Capital Investors, L.P.
Mr. Green, as an affiliate of CB Capital Investors, L.P., may be deemed to
share voting and dispositive power with respect to such shares. Mr. Green
disclaims beneficial ownership of these shares, which shares consist of
1,085,767 shares issuable upon conversion of the same number of shares of
Series D preferred stock and 1,628,664 shares issuable upon the conversion
of the outstanding principal amounts of convertible notes.
(17) Consists of 1,800 shares subject to options exercisable within 60 days
after November 30, 1998.
(18) Includes 5,564 shares subject to options exercisable within 60 days after
November 30, 1998.
(19) Includes 83,501 shares subject to options exercisable within 60 days of
November 30, 1998.
(20) Includes 4,234,527 shares issuable upon conversion of the same number of
shares of Series D preferred stock: shares issuable upon the
conversion of the outstanding principal amounts of convertible notes;
2,875 shares issuable upon exercise of outstanding warrants; shares
issuable upon options presently exercisable or exercisable within 60 days
after November 30, 1998; 126,946 shares subject to repurchase by Wisdom
Holdings and 126,946 shares subject to repurchase by Wisdom Holdings in
early 1999 if certain performance targets are not met. Also includes
80,223 shares subject to repurchase by Wisdom Holdings at a price of
$0.225 per share, which repurchase rights lapse at a rate of 2,431 shares
per month until August 31, 2001, at which time Wisdom Holdings' repurchase
rights will have lapsed as to all such 80,223 shares.
INFORMATION ABOUT GENTLE DENTAL
GENERAL
Gentle Dental is one of the largest providers of dental practice management
services to multi-specialty dental practices in the United States. Gentle Dental
provides management services to dental practices at [18] dental offices with
[321] dentists, including [91] specialists and [820] operatories in selected
markets in California, Washington, Oregon, Idaho and Hawaii. As part of a
multi-specialty dental care delivery network, Gentle Dental provides management
services to dental practices under long-term management service agreements.
Under the terms of the management service agreements, Gentle Dental, among other
things, bills and collects patient receivables and provides all administrative
support services to affiliated dental practices. The dentists employed through
Gentle Dental's network of affiliated dental practices provide comprehensive
general dentistry services and offer specialty dental services, which include
orthodontics, periodontics, endodontics, pedodontics, prosthodontics, oral
surgery and oral pathology. Gentle Dental's practice management services
facilitate the delivery of convenient, high quality, comprehensive and
affordable dental care. Gentle Dental seeks to build geographically dense dental
practice networks in selected markets through a combination of affiliating with
existing dental practices and selectively developing new dental offices. Gentle
Dental is incorporated in Washington and has operated as a dental practice
management company since its inception in December 1992. Gentle Dental's
executive offices are located at 222 North Sepulveda Boulevard, Suite 740, El
Segundo, California, and the telephone number is (310) 765-2400.
65
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data has been prepared by
Gentle Dental based on Gentle Dental's Consolidated Financial Statements for the
years ended December 31, 1995, 1996 and 1997 and the nine month periods ended
Sepember 30, 1997 and 1998. The financial data presented below for the nine
month periods ended September 30, 1997 and 1998 and at September 30, 1998 are
unaudited and were prepared by management of Gentle Dental on the same basis as
the audited Consolidated Financial Statements included herein and, in the
opinion of management of Gentle Dental, include all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the information set
forth therein. The results for the nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1998 or future periods. The following information should be read in
conjunction with "Gentle Dental Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and other financial information relating to Gentle Dental included
elsewhere and incorporated by reference herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Dental group net patient service revenue.................. $ -- $ 3,701 $ 29,327 $ 19,810 $ 67,534
Net management fees....................................... 9,781 10,712 14,076 10,148 1,408
--------- --------- --------- --------- ---------
Net revenues............................................ 9,781 14,413 43,403 29,958 68,942
Clinical salaries and benefits............................ -- 1,493 13,701 9,246 30,762
Practice nonclinical salaries and benefits................ 2,418 4,279 8,177 5,764 10,028
Dental supplies and lab expenses.......................... 1,633 2,830 6,271 4,545 8,000
Practice occupancy expenses............................... 911 1,563 3,527 2,395 3,814
Practice selling, general and administrative.............. 1,311 1,805 4,912 3,169 6,434
Corporate selling, general and administrative............. 2,153 2,998 5,700 3,868 4,531
Corporate restructure and merger costs.................... -- -- 1,809 -- --
Depreciation and amortization............................. 482 990 1,847 1,282 2,877
--------- --------- --------- --------- ---------
Total operating expenses................................ 8,908 15,958 45,944 30,269 66,446
--------- --------- --------- --------- ---------
Operating income (loss)................................. 873 (1,545) (2,541) (311) 2,496
Interest expense, net..................................... (290) (749) (653) (362) (1,820)
Other (expense)/income--net............................... (92) (48) (74) 19 (11)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and minority
interest.............................................. 491 (2,342) (3,268) (654) 665
Income tax expense/(benefit).............................. 234 (655) (81) -- 19
--------- --------- --------- --------- ---------
Net income (loss)....................................... 257 (1,687) (3,187) (654) 646
Dividends on redeemable convertible preferred stock....... -- (240) (932) (829) --
Accretion of redeemable common stock...................... -- (91) (34) (27) (15)
--------- --------- --------- --------- ---------
Net income (loss) attributable to common stock.......... $ 257 $ (2,018) $ (4,153) $ (1,510) $ 631
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per share:
Basic..................................................... $ 0.19 $ (1.18) $ (0.91) $ (0.38) $ 0.08
Diluted................................................... $ 0.19 $ (1.18) $ (0.91) $ (0.38) $ 0.07
Shares outstanding:
Basic..................................................... 1,380 1,707 4,559 3,931 8,196
Other information:
Diluted................................................... 1,380 1,707 4,559 3,931 9,500
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
1998
(UNAUDITED)
----------------
<S> <C>
Balance Sheet Data:
Working capital................................................................................. $ 2,222
Total assets.................................................................................... 104,924
Long-term debt, including current maturities.................................................... 47,270
Redeemable common stock......................................................................... 2,095
Shareholders' equity............................................................................ 43,039
</TABLE>
GENTLE DENTAL'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of Gentle Dental should be read in conjunction with Gentle Dental's
audited financial statements and the notes thereto included elsewhere in this
document.
RESULTS OF OPERATIONS
Gentle Dental reports dental practice net patient revenue and associated
clinical salaries and benefits costs in those instances where Gentle Dental
meets certain specific consolidation requirements established by the Emerging
Issues Task Force of the Financial Accounting Standards Board. In those
instances where such consolidation requirements are not met, Gentle Dental
reports net management fees revenue and does not record any associated clinical
salaries and benefits costs. Through December 31, 1997, certain affiliations in
Oregon and Washington (representing a significant portion of overall net patient
revenues) were not included within Gentle Dental's consolidated financial
statements, as the consolidation requirements described above were not met. As
of January 1, 1998, Gentle Dental entered into new management service agreements
with such affiliations. Consequently, all of the dental practices affiliated
with Gentle Dental, except one, are now accounted for under the consolidation
requirements described above. The remaining dental practice, acquired effective
April 1, 1997, has not met the Emerging Issues Task Force consolidation
requirements.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
DENTAL PRACTICE NET PATIENT SERVICE REVENUE AND NET MANAGEMENT FEES. Dental
practice net patient revenue increased from $3.7 million for the year ended
December 31, 1996 to $29.3 million for the year ended December 31, 1997. This
692% growth was due to five affiliations completed in 1996 and six affiliations
completed in 1997, representing 23 clinical locations. These affiliations have
management agreements that meet the Emerging Issues Task Force consolidation
requirements.
Net management fee revenue represents management services to certain
unconsolidated affiliated dental practices. Net management fees revenue
increased 31.4% from $10.7 million for the year ended December 31, 1996 to $14.1
million for the year ended December 31, 1997. This growth was primarily a result
of three affiliations completed in 1997. Also, approximately 15.0% of the
increase in support services revenue was attributable to increases in the
percentages of patient revenue payable under the management agreements with the
Washington and Oregon affiliated dental practices, from 50.0% to 51.0% and 50.0%
to 53.0%, respectively.
CLINICAL SALARIES AND BENEFITS. Clinical salaries and benefits costs
include all patient service provider staff compensation and related payroll
costs at the consolidated dental practices, including dentists, hygienists and
dental assistants. Clinical salaries and benefits increased from $1.5 million
for the year ended December 31, 1996 to $13.7 million for the year ended
December 31, 1997. Practice clinical salaries and benefits as a percentage of
dental practice net patient revenue for the years ended December 31, 1996
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and 1997 were 40.3% and 46.7%, respectively. The affiliation of dental practices
with Gentle Dental in 1996 and 1997 contributed to these increases.
PRACTICE NONCLINICAL SALARIES AND BENEFITS. Practice nonclinical salaries
and benefits costs include all staff compensation and related payroll costs at
the dental facilities other than dentists, hygienists and dental assistants.
Total nonclinical salary costs increased 91% from $4.3 million for the year
ended December 31, 1996 to $8.2 million for the year ended December 31, 1997.
This increase was primarily due to the addition of costs from affiliations
completed during 1996 and 1997.
DENTAL SUPPLIES AND LAB EXPENSES. Dental supplies and lab costs increased
122% from $2.8 million for the year ended December 31, 1996 to $6.3 million for
the year ended December 31, 1997. This increase was primarily due to the
addition of costs from affiliations completed during 1996 and 1997.
PRACTICE OCCUPANCY EXPENSES. Practice occupancy expenses increased 126%
from $1.6 million for the year ended December 31, 1996 to $3.5 million for the
year ended December 31, 1997. This increase was primarily due to the addition of
costs from affiliations completed during 1996 and 1997.
PRACTICE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. These costs include
general office, advertising, professional services (excluding dentistry), travel
and entertainment, local taxes, insurance, and other miscellaneous costs at the
dental facilities. Practice selling, general and administrative expenses
increased 172% from $1.8 million for the year ended December 31, 1996 to $4.9
million for the year ended December 31, 1997. This increase was primarily due to
the addition of costs from affiliations completed during 1996 and 1997.
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Corporate selling,
general and administrative expenses increased 90.1% from $3.0 million for the
year ended December 31, 1996 to $5.7 million for the year ended December 31,
1997. The increase in these expenses is the result of putting the infrastructure
in place to accommodate expected future growth, a substantial part of which
occurred in 1997. In addition to such expenses incurred during the year ended
December 31, 1997, Gentle Dental recorded $1.8 million in expenses associated
with the merger of Gentle Dental with GMS Dental Group, Inc. and Gentle Dental's
related restructuring plan.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
the years ended December 31, 1996 and 1997 was $1.0 million $1.8 million,
respectively. This increase was primarily due to the addition of costs from
affiliations completed during 1996 and 1997.
INTEREST EXPENSE. Interest expense decreased from 12.8% from $749,000 for
the year ended December 31, 1996 to $653,000 for the year ended December 31,
1997. This decrease resulted from the repayment by Gentle Dental of $4.4 million
in debt with the proceeds from Gentle Dental's initial public offering which was
partly offset by additional debt incurred to complete dental practice
affiliations in 1997.
PROVISION FOR INCOME TAXES. For the years ended December 31, 1996 and 1997,
Gentle Dental recognized tax benefits resulting from its taxable losses for
those years. In 1996, the effective tax rate for the tax benefit was lower than
the statutory rate due to the tax-free merger structure of certain dental
practice affiliations. As a result, the amortization of certain intangible
assets reduced earnings, but was not deductible for tax purposes. In 1997, the
tax benefit was reduced primarily by the valuation allowance for the net
operating loss carry-forward.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
DENTAL PRACTICE NET PATIENT SERVICE REVENUE AND NET MANAGEMENT FEES. Dental
practice net patient revenue increased from $19.8 million for the nine months
ended September 30, 1997 to $67.5 million for the nine months ended September
30, 1998, an increase of 241%. Of this growth, approximately $25.0 million is
due to five affiliations completed during the second half of 1997 and ten
affiliations completed
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during the nine months ended September 30, 1998, representing forty-nine current
clinical locations. These affiliations have management services agreements that
meet the Emerging Issues Task Force consolidation requirements. The remaining
growth of $22.7 million is due to consolidating the operating results of certain
Oregon and Washington affiliations during 1998 as a result of their new
management services agreements dated January 1, 1998 meeting the EITF criteria
for consolidation.
Net management fees decreased from $10.1 million for the nine months ended
September 30, 1997 to $1.4 million for the nine months ended September 30, 1998.
This decrease is directly related to Gentle Dental consolidating the operating
results of the Oregon and Washington affiliations discussed above, thereby
eliminating management fees revenue in the consolidated financial statements.
Currently, there is one remaining affiliation that does not meet the Emerging
Issues Task Force criteria for consolidation.
CLINICAL SALARIES AND BENEFITS. Clinical salaries and benefits increased
233% from $9.2 million for nine months ended September 30, 1997 to $30.8 million
for the nine months ended September 30, 1998. Of this growth, approximately
$11.5 million is due to five affiliations completed during the second half of
1997 and ten affiliations completed during the nine months ended September 30,
1998, representing forty-nine current clinical locations. These affiliations
have management services agreements that meet the Emerging Issues Task Force
consolidation requirements. The remaining growth of $10.1 million is due to
consolidating the operating results of certain Oregon and Washington
affiliations during 1998.
Practice clinical salaries and benefits as a percentage of dental practice
net patient revenue for the nine months ended September 30, 1997 and 1998 were
47.7% and 45.6%, respectively. Consolidating the operating results of the Oregon
and Washington affiliations and the affiliation of dental practices with Gentle
Dental in the second half of 1997 and the nine months ended September 30, 1998
contributed to this percentage decrease.
PRACTICE NONCLINICAL SALARIES AND BENEFITS. Practice nonclinical salaries
and benefits costs increased 73.9% from $5.8 million for the nine months ended
September 30, 1997 to $10.0 million for the nine months ended September 30,
1998. This increase was primarily due to the addition of costs from affiliations
completed during the second half of 1997 and during the nine months ended
September 30, 1998.
DENTAL SUPPLIES AND LAB EXPENSES. Dental supplies and lab costs increased
76.0% from $4.5 million for nine months ended September 30, 1997 to $8.0 million
for the nine months ended September 30, 1998. This increase was primarily due to
the addition of costs from affiliations completed during the second half of 1997
and the nine months ended September 30, 1998.
PRACTICE OCCUPANCY EXPENSES. Practice occupancy expenses increased 59.2%
from $2.4 million for the nine months ended September 30, 1997 to $3.8 million
for the nine months ended September 30, 1998. This increase was primarily due to
the addition of costs from affiliations completed during the second half of 1997
and the nine months ended September 30, 1998.
PRACTICE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Practice selling,
general and administrative expenses increased 103% from $3.2 million for the
nine months ended September 30, 1997 to $6.4 million for the nine months ended
September 30, 1998. This increase was primarily due to the addition of costs
from affiliations completed during the second half of 1997 and the nine months
ended September 30, 1998.
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Corporate selling,
general and administrative expenses increased 17.1% from $3.9 million for the
nine months ended September 30, 1997 to $4.5 million for the nine months ended
September 30, 1998. The increase in these expenses is the result of putting the
infrastructure in place to accommodate expected future growth.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
the nine months ended September 30, 1997 and 1998 was $1.3 million and $2.9
million, respectively. This increase was primarily
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due to the addition of costs from affiliations completed during the second half
of 1997 and the nine months September 30, 1998.
INTEREST EXPENSE, NET. Interest expense increased from $362,000 for the
nine months ended September 30, 1997 to $1.8 million for the nine months ended
September 30, 1998. This increase in interest expense was due to additional debt
incurred under Gentle Dental's credit facility and private placement to complete
certain dental practice affiliations.
PROVISION FOR INCOME TAXES. For the nine months ended September 30, 1997
Gentle Dental recognized no tax benefit resulting from its taxable loss as the
probable utilization of any loss carryforwards was uncertain. For the nine
months ended September 30, 1998, Gentle Dental did not accrue a provision for
income taxes as management believes that Gentle Dental will be able to utilize
available federal and state tax loss carryforwards. The income tax expense
recorded during the nine months ended September 30, 1998 represents incidental
filing fees for various federal and state income tax returns.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, Gentle Dental's cash and cash equivalents were $1.8
million, representing a $1.5 million increase in cash and cash equivalents
available at December 31, 1997 of $302,000. Working capital at September 30,
1998 of $2.2 million represents a decrease of $616,000 from working capital of
$2.8 million at December 31, 1997. The decrease is the result of the use of
working capital for acquisitions.
Net cash provided by operations was $902,000 and $174,000 for the nine
months ended September 30, 1997 and 1998, respectively. The reduction of net
cash provided by operating activities during the nine months ended September 30,
1998 was directly attributable to the reduction of accounts payable and accrued
liabilities outstanding at December 31, 1997. The significant level of such
liabilities at December 31, 1997 was attributed to merger and restructure plan
related costs between Gentle Dental and GMS Dental Group, Inc. as a result of
the merger effective in November 1997. The remaining liabilities related to the
restructuring amounted to $195,000 at September 30, 1998. Net cash used in
investing activities, principally dental practice affiliations, was $9.0 million
and $42.6 million for the nine months ended September 30, 1997 and 1998,
respectively. Net cash provided from financing activities was $6.0 million and
$44.0 million for the nine months ended September 30, 1997 and 1998,
respectively. The increase in net cash provided by financing activities during
the nine months ended September 30, 1998 was primarily attributed to the $45
million private placement completed during 1998 as further discussed below.
On January 1, 1998, Gentle Dental and certain Washington and Oregon
affiliated dental practices entered into asset purchase and management service
agreements. Under the terms of such agreements, Gentle Dental acquired all of
the fixed assets and assumed certain liabilities of such affiliated dental
practices. In exchange, Gentle Dental gave consideration of $1.7 million in
addition to the assumption of certain liabilities, which was offset by Gentle
Dental's $1.7 million receivable from such affiliated dental practices. In
addition, Gentle Dental is required to pay $575,000 in cash over 18 monthly
installments.
During the nine months ended September 30, 1998, Gentle Dental acquired
substantially all of the assets of 27 dental office locations, including cash,
accounts receivable, supplies and fixed assets. Additionally, Gentle Dental
acquired all of the outstanding capital stock of Managed Dental Care of Oregon,
Inc., a dental care entity that contracts with the Oregon Health Plan. Gentle
Dental also acquired all of the outstanding capital stock of Dedicated Dental
Systems, Inc., a Bakersfield, California company which owns and operates eleven
staff model dental offices under a license granted within the California
Knox-Keene Health Care Service Plan Act of 1975. All such affiliations have been
accounted for using the purchase method of accounting.
Gentle Dental's credit facility provides for a maximum credit line of $45
million. Gentle Dental intends to use the credit facility for working capital
requirements, to purchase non-professional dental practice assets of additional
dental practices that Gentle Dental may seek to affiliate with, and to purchase
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operating assets for existing affiliated dental practices. The ability of Gentle
Dental to incur indebtedness under the credit facility is subject to delivery of
customary opinions, certificates and closing documents by Gentle Dental. The
revolving feature of the credit facility expires on September 30, 2001, at which
time it will convert into a four year term loan to be repaid in 16 equal
quarterly installments. Principal amounts owed under the credit facility bear
interest, at Gentle Dental's option at varying margins over LIBOR (1%-1.75%) or
the prime rate (0.5%-1%), at Gentle Dental's option, based on the level of
Gentle Dental's leverage ratio. The credit facility requires Gentle Dental to
pay an unused commitment fee in an amount of ranging from 0.375% to 0.750% per
annum (depending on amounts of unused available credit) on the average daily
amount by which the bank commitment under the credit facility exceeds the
aggregate amount of all loans then outstanding. The credit facility contains
several covenants including (i) restrictions on the ability of Gentle Dental to
incur indebtedness and repurchase, or make dividends with respect to, its
capital stock; and (ii) requirements relating to maintenance of a specified net
worth and compliance with specified financial ratios. In addition, the credit
facility requires Gentle Dental to notify the lenders prior to making any
acquisition and to obtain the consent of the lenders prior to making
acquisitions with purchase prices exceeding $12 million or when cash
consideration exceeds $7.5 million. The credit facility also requires Gentle
Dental to convert to a holding company that owns no assets other than the stock
of its subsidiaries on or before July 31, 1999. Gentle Dental's obligations
under the credit facility are guaranteed by each of its non-dental insurance
business subsidiaries. The obligations of Gentle Dental under the credit
facility and the subsidiaries under the guarantees are secured by a security
interest in the equipment, fixtures, inventory, receivables, subsidiary stock,
certain debt instruments, accounts and general intangibles of each of such
entities.
On June 3, 1998, Gentle Dental completed a $45 million private placement,
consisting of $30 million of subordinated notes and $15 million of preferred
stock of Gentle Dental. The subordinated notes have eight year terms and are
convertible into shares of Gentle Dental common stock at $9.21 for each share of
common stock issuable upon conversion of outstanding principal and accrued but
unpaid interest on such subordinated notes. If certain events of default occur,
the subordinated notes then outstanding will automatically convert into shares
of Gentle Dental Series B preferred stock at a rate of one share of Gentle
Dental Series B preferred stock for each thousand dollars in outstanding
principal and accrued but unpaid interest on the subordinated notes, subject to
adjustment for stock splits, reverse splits, stock dividends, reorganizations
and the like. The subordinated notes and all outstanding shares of Gentle Dental
preferred stock shall be automatically converted into Gentle Dental common stock
(or, in the case of the Gentle Dental Series A preferred stock and Gentle Dental
Series C preferred stock, redeemed at nominal cost) if the rolling 21-day
average closing market price of the common stock on 20 out of any 30 consecutive
trading days is more than $15.73 on or prior to May 18, 1999, more than $16.85
on or prior to May 18, 2000, or more than $17.98 at any time thereafter.
The presently authorized series of Gentle Dental preferred stock include the
following series: 100 shares of Gentle Dental Series A preferred stock, all of
which is issued and outstanding; 70,000 shares of Gentle Dental Series B
preferred stock, none of which is presently outstanding but which will be issued
automatically upon conversion of the then outstanding subordinated notes; 100
shares of Gentle Dental Series C preferred stock, all of which is issued and
outstanding; and 2,000,000 shares of Gentle Dental Series D preferred stock of
which 1,628,663 shares are issued and outstanding. The shares of convertible
Gentle Dental Series B preferred stock are convertible into shares of Gentle
Dental common stock at the rate of 108.58 shares of Gentle Dental common stock
for each share of Gentle Dental Series B preferred stock, and the shares of
Gentle Dental Series D preferred stock are convertible into shares of Gentle
Dental common stock on a share for share basis, in each case subject to
adjustment for stock splits, reverse splits, stock dividends, reorganizations
and the like. The Gentle Dental Series A preferred stock and Series C preferred
stock are not convertible.
Gentle Dental believes that proceeds from its existing credit facility and
cash flow from operations, if any, will be sufficient to fund its operations for
the near future. Gentle Dental also believes that such funds
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will be sufficient to complete a number of other future dental practice
affiliations and any possible future consideration from existing affiliations.
However, to execute its long term business strategy, Gentle Dental will require
substantial additional funding through additional long-term or short-term
borrowing arrangements or through the public or private issuance of additional
debt or equity securities to affiliate new practices and to expand and maintain
existing affiliated practices. There can be no assurance that any such financing
will be available to Gentle Dental or will be available on terms acceptable to
Gentle Dental.
RECENT DEVELOPMENTS
On October 30, 1998, Gentle Dental acquired all of the issued and
outstanding shares of capital stock of Capitol Dental Care, Inc., an Oregon
corporation, and purchased substantially all of the assets of Dental Maintenance
of Oregon, P.C., an Oregon professional corporation, and entered into a
management agreement with Dental Maintenance of Oregon, P.C., whereby Gentle
Dental would provide management and administrative service to the dental
practice. As consideration for purchase of the stock of Capitol Dental Care,
Inc., Gentle Dental issued a promissory note in the amount of $800,000, bearing
interest at the annual rate of 8% and payable in equal quarterly installments of
principal and interest. As consideration for purchase of the assets of Dental
Maintenance of Oregon, P.C., Gentle Dental paid $6.0 million in cash, and issued
a $1.7 million promissory note payable in equal quarterly installments of
principal and interest over a three year term with an annual interest rate of
8%. Dental Management of Oregon, P.C., can earn additional cash consideration if
its earnings increase over a two-year period based on a formula described in the
acquisition agreements.
Capitol Dental Care, Inc. provides capitated dental services under the
Oregon Health Plan governed by a contract with the State of Oregon Office of
Medical Assistance Programs. Dental Maintenance of Oregon, P.C. is a dental
practice with nine offices which provides professional dental care to patients
and which also subcontracts with Capitol Dental Care, Inc. to provide
professional dental services to beneficiaries under the Oregon Health Plan.
In connection with certain completed affiliation transactions, Gentle Dental
agreed to pay to the sellers possible future consideration in the form of cash
and Gentle Dental capital stock. The amount of future consideration payable by
Gentle Dental under earn-outs is generally computed based upon financial
performance of the affiliated dental practices during certain specified periods.
Gentle Dental accrues for earn-out payments with respect to prior practice
acquisitions when such amounts are probable and reasonably estimable. As of
September 30, 1998, Gentle Dental had accrued $1.8 million for future earn-out
payments, of which $578,000 is included in additional paid-in capital for
anticipated stock issuances while the remaining accrual for anticipated cash
payments is included in other current liabilities. For those acquisitions with
earn-out provisions, Gentle Dental estimates the total maximum earn-out to be
paid, including amounts already accrued, is between $15 and $20 million from
November, 1998 to December, 2002, of which up to $15 million is expected to be
paid in cash.
A total of 254,901 outstanding shares of Gentle Dental common stock issued
at a price of $.45 per share and 339,246 outstanding shares of Gentle Dental
common stock issued at a price of $.225 per share are subject to, under certain
events, repurchase by Gentle Dental at cost. One-half of these shares are
currently subject to repurchase as a result of Gentle Dental's failure to
achieve certain specified performance targets during 1997 and are expected to be
repurchased in the future.
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year in a
data field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000 or
earlier. The Year 2000 issue affects us in that the dental practice management
business is dependent on computer applications, such as management information
systems and financial and accounting systems.
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In order to address the Year 2000 issues facing Gentle Dental, management
initiated a program to prepare Gentle Dental's computer systems and applications
for the Year 2000. As to the primary focus of its Year 2000 plans, Gentle Dental
has converted its affiliated dental practices to target systems identified and
believed to be Year 2000 compliant. Gentle Dental has divided its Year 2000 plan
into five phases, and charts its progress in each of the phases, expressed as an
approximate percentage of completion of that phase:
<TABLE>
<CAPTION>
APPROXIMATE
PHASE PERCENTAGE COMPLETED
- ------------------------------------------------------------------------ ---------------------
<S> <C>
Awareness............................................................... 100%
Assessment.............................................................. 100%
Renovation.............................................................. 60%
Validation.............................................................. 50%
Implementation.......................................................... 50%
</TABLE>
Pursuant to its Year 2000 plan, Gentle Dental expects to substantially
complete validation of its mission critical systems and the computer-related
interactive vendor systems by December 31, 1998 and complete all validation by
June 1999. In addition, Gentle Dental expects to complete all phases of its Year
2000 plan by June 30, 1999.
Gentle Dental expects to incur internal staff costs as well as consulting
and other expenses related to infrastructure enhancements necessary to prepare
for the Year 2000. Validation and conversion of primary system applications and
hardware is expected to cost approximately $500,000, all of which will be
incurred in fiscal year 1999.
As part of its Year 2000 plan, Gentle Dental is not only undertaking the
infrastructure and facilities enhancement and testing necessary to ensure that
it adequately prepared for the Year 2000, but is also communicating with its
vendors upon whose services it relies and third-party payors to ensure that such
vendors and third-party payors are taking appropriate steps to address their
Year 2000 issues. Gentle Dental is also preparing contingency plans to try to
minimize the harm to it in the event that it or any or all of the third parties
with which it interacts is unable to attain Year 2000 compliance in certain
applications according to Gentle Dental's Year 2000 plan. The contingency plans
being prepared are system and application specific and are intended to ensure
that in the event that one or more of such systems and/or applications fails by
or at the Year 2000, Gentle Dental will be able to engage in its core business
functions in spite of such failure. Gentle Dental's most likely worst case Year
2000 scenario would be that it experiences significant delays in billing and
collecting professional fees due its affiliated dental practices. This delay
would directly impact the ability of the affiliated dental practices to pay the
management fees due the company. A material delay in receipt of fees due Gentle
Dental would affect its cash flow and could have a material adverse effect on
its business, financial condition or results of operations.
Although Gentle Dental believes that its Year 2000 plan and other steps
being taken are adequate to ensure that it will not be materially affected by
the Year 2000 problem, there can be no assurance that the Year 2000 plan and
Gentle Dental's other Year 2000 remedial and contingency plans will fully
protect it from the risks associated with the Year 2000 problem. The analysis
of, and preparation for, the Year 2000 and related problems necessarily rely on
a variety of assumptions about future events, and there can be no assurance that
management has accurately predicted such future events or that the remedial and
contingency plans for Gentle Dental will adequately address such future events.
In the event that the business of Gentle Dental or Gentle Dental's vendor or
patients are disrupted as a result of the Year 2000 problem such disruption
could have a material adverse effect on Gentle Dental.
CERTAIN TRANSACTIONS REGARDING GENTLE DENTAL
The outstanding capital stock of certain professional corporations located
in Oregon and Washington is owned in whole or in part by Dany Y. Tse and Gerald
R. Aaron, each of a director and/or executive
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officer of Gentle Dental. Gentle Dental is a party to certain management
agreements with each of these professional corporations pursuant to which Gentle
Dental earns a significant portion of its revenues. Effective January 1, 1998,
Gentle Dental entered into agreements to amend these management agreements to
conform them to the existing management agreements of dental practices
historically affiliated with GMS Dental Group, Inc. and to increase Gentle
Dental's control over these professional corporations. As consideration for
entering into the amended management agreements, Gentle Dental agreed to pay to
the Oregon and one of the Washington professional corporations or certain of
their respective designated dental practitioners, in the aggregate, the
following:
- approximately $1.7 million in cash offset by approximately $1.7 million of
Gentle Dental receivables due from such professional corporations;
- the right to receive an aggregate of either $575,000 in cash in 18 equal
monthly installments or options to acquire 230,000 shares of Gentle Dental
common stock at an exercise price of $8.375 per share, subject to five
year vesting, plus options to acquire an aggregate of 110,000 shares of
Gentle Dental common stock exercisable at $8.375 per share, subject to
five year vesting; and
- future cash or options subject to five year vesting in amounts to be
determined according to a formula based upon the operating revenues of
such Oregon and Washington professional corporations for fiscal years
ending December 31, 1998 and 1999.
On May 31, 1996, Gentle Dental executed a modification of its former loan
and security agreement with Silicon Valley Bank. In connection with the
modification, 14 officers, directors, and shareholders of Gentle Dental
including Dr. Tse, Dr. Wong and Mr. Van Eerden, provided continuing personal
guarantees on $1,000,000 of Gentle Dental's indebtedness to Silicon Valley Bank
in connection with a $1,000,000 increase in availability under such credit
facility. In consideration for the personal guarantees, Gentle Dental issued
warrants to purchase an aggregate total of 115,000 shares of Gentle Dental
common stock at $7.50 per share. Each guarantor received warrants to purchase
1,150 shares of Gentle Dental common stock for each $10,000 of indebtedness
guaranteed. All of these guarantees terminated in February 1997 upon the
repayment of the loan.
On April 1, 1997, Mr. Fiore was granted stock options by GMS Dental Group,
Inc. exercisable for 750,000 shares of GMS Dental Group, Inc. common stock at an
aggregate exercise price of $150,000. On the same date, Mr. Fiore exercised the
options for all such shares. The exercise price was paid in the form of a
secured promissory note in the principal amount of $150,000 which bears annual
interest at the rate of 6.84% compounded annually. All unpaid principal and
accrued interest becomes due and payable to Gentle Dental on March 31, 2001. In
the merger of GMS Dental Group, Inc. with and into Gentle Dental, the shares
purchased on exercise of Mr. Fiore's options were converted into 333,816 shares
of Gentle Dental common stock. Of these shares, 300,434 shares are subject to a
four year vesting schedule under which 25% of the shares vested on April 1, 1998
and the remaining shares vest in equal amounts over the next 36 months. All
unvested shares are subject to repurchase by Gentle Dental at $0.45 per share
upon termination of Mr. Fiore's service to Gentle Dental for cause. The unvested
shares will become fully vested in the event Mr. Fiore's service to Gentle
Dental is terminated for any reason other than for cause. Of the remaining
33,382 shares of Gentle Dental common stock held by Mr. Fiore, one half are
currently subject to repurchase by Gentle Dental at $0.45 per share because
Gentle Dental's EBITDA (excluding CEO salary and related expense) for 1997 did
not exceed $4,723,500. The second half of the remaining shares are subject to
repurchase by Gentle Dental at the same price if, among other things, Gentle
Dental's EBITDA (excluding CEO salary and related expense) for 1998 does not
exceed $12,683,250, and a portion of the second half will be subject to
repurchase if such EBITDA does not exceed $16,911,000.
In 1996, Mr. Sadler purchased from GMS Dental Group, Inc. 888,681 shares of
GMS Dental Group, Inc. common stock for $88,868. The purchase price was paid in
part in the form of a secured promissory note in the principal amount of
$87,911, which bears interest at the rate of 6.84%, compounded annually. All
unpaid principal and accrued interest on such promissory note becomes due and
payable on August 31, 2000. In the merger of GMS Dental Group, Inc. with and
into Gentle Dental, the foregoing shares were
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converted into 395,541 shares of Gentle Dental common stock. Of these shares,
175,031 shares are subject to a four year vesting schedule under which one
fourth of the shares vested immediately upon issuance, another one fourth vested
on October 11, 1997 and the remaining shares vest in equal amounts over the next
36 months thereafter. All unvested shares are subject to repurchase by Gentle
Dental at $0.225 per share upon termination of Mr. Sadler's service to Gentle
Dental for any reason. In addition, 110,255 shares of common stock held by Mr.
Sadler are currently subject to repurchase by Gentle Dental at $0.225 per share
because Gentle Dental's EBITDA (excluding CEO salary and related expense) for
1997 did not exceed $4,723,500. Another 110,255 shares are subject to repurchase
by Gentle Dental at the same price if, among other things, Gentle Dental's
EBITDA (excluding CEO salary and related expense) for 1998 does not exceed
$12,683,250, and a portion of those shares will be subject to repurchase if such
EBITDA does not exceed $16,911,000.
An additional 340,255 shares of common stock held by certain other former
GMS Dental Group, Inc. stockholders (including 42,060 shares held by Sprout
Capital VII and certain related entities) are also subject to repurchase by
Gentle Dental at an average price of $0.37 per share ($.45 per share for Sprout
Capital VII L.P. and certain related entities). One half of the shares are
currently subject to repurchase because Gentle Dental's EBITDA (excluding CEO
salary and related expense) for 1997 did not exceed $4,723,500. The second half
of the shares are subject to repurchase if, among other things, Gentle Dental's
EBITDA (excluding CEO salary and related expense) for 1998 does not exceed
$12,683,250, and a portion of the second half will be subject to repurchase if
such EBITDA does not exceed $16,911,000.
Gentle Dental has entered into employment agreements, dated as of June 1,
1998, with Michael T. Fiore, Gentle Dental's President and Chief Executive
Officer, and with L. Theodore Van Eerden, its Executive Vice President and Chief
Development Officer. Under these employment agreements, the annual base salaries
of Messrs. Fiore and Van Eerden are $250,000 and $140,000, respectively. The
executive officers are also entitled to participate in bonus plans maintained or
established by Gentle Dental. The employment agreements for Mr. Fiore and Mr.
Van Eerden are "at-will" in that either the employee or Gentle Dental can
terminate the employee's employment at any time for any reason, with or without
cause. Mr. Fiore and Mr. Van Eerden are each entitled to severance payments
based on their base salaries for 18 months and 12 months, respectively, if their
employment is terminated by Gentle Dental without "cause" or if they voluntarily
terminate their employment for "good reason."
For purposes of each of the employment agreements, "cause" means
- the employee's continuous and willful inattention to employee's duties
after at least one written notice has been given to employee and employee
has been given an opportunity to correct the problem within thirty days
after such notice;
- any breach by employee of certain sections of the employment agreement
relating to covenants of non-solicitation, non-competition and
confidentiality;
- any act committed by employee with respect to the property or the business
of Gentle Dental which constitutes gross recklessness, willful or gross
misconduct or fraud; or
- criminal conduct which has caused material injury to Gentle Dental and
which could reasonably result in conviction of a felony which involves
fraud, dishonesty or moral turpitude.
The employee shall not be considered to have been terminated for "cause" if
terminated by Gentle Dental solely:
- as a result of employee's bad judgment or negligence;
- because of any act or omission believed by employee in good faith to have
been in or not opposed to the best interests of Gentle Dental (without the
intent of gaining directly or indirectly a profit to which employee was
not legally entitled) and reasonably believed by employee not to have been
improper or unlawful;
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- because of an act or omission for which a determination could properly
have been made by the Board of Directors that employee met the applicable
standard of conduct prescribed for indemnification or reimbursement under
the bylaws or charter of Gentle Dental, or the laws of the State of
Washington, in each case in effect at the time of such acts or omissions;
or
- because of any act or omission for which notice of termination is given
more than twelve months after the earliest date on which a non-employee
director of Gentle Dental who is not a party to such act or omission knew
or should have known of such act or omission.
For purposes of each of the employment agreements, "good reason" shall mean
termination of employee's employment by employee within thirty days following:
- any relocation of Gentle Dental's executive offices where employee is
employed at a new location which is in excess of 25 miles from its current
location;
- a demotion in position from the employee's positions with Gentle Dental as
of the date the employment agreement was executed; or
- the assignment of duties and responsibilities of materially lesser status,
dignity and character, or a substantial reduction in the nature or status
of employee's duties and responsibilities.
Gentle Dental also entered into an employment agreement, dated as of July 1,
1998, with Dany Y. Tse, DMD, Gentle Dental's Co-Chairman of the Board and
President of Clinical Services Council. Under that employment agreement, Dr.
Tse's annual base salary was $243,000. The employment agreement for Dr. Tse
provided for an initial term through June 30, 2003, subject to a renewal term
through June 30, 2008, and further provided that Dr. Tse may not be terminated
without cause prior to April 30, 2002 and that after April 30, 2002, Dr. Tse's
employment will be at-will. Pursuant to his employment agreement, if Dr. Tse
voluntarily terminated his employment for "good reason" prior to July 1, 2001,
he would have been entitled to enter into a 12-month consulting agreement at his
base salary; upon termination of the 12-month consulting agreement, Dr. Tse
would have been entitled to severance payments for 24 months based on his base
salary. If Dr. Tse voluntarily terminated his employment for "good reason" after
July 1, 2001, Dr. Tse would have been entitled to enter into a 12-month
consulting agreement at his base salary; upon termination of the 12-month
consulting agreement, Dr. Tse would have been entitled to severance payments for
12 months based on his base salary. If Gentle Dental terminated Dr. Tse's
employment without "cause" after April 30, 2002, Dr. Tse would have been
entitled to receive severance payments based on his base salary for the period
through June 30, 2003.
In the event that:
- Dr. Tse's employment with Gentle Dental is terminated by Gentle Dental for
any reason other than "cause",
- Dr. Tse's employment with Gentle Dental is terminated by Employee for
"good reason",
- Dr. Tse's employment with Gentle Dental is terminated because of death or
physical disability within the meaning of Section 22(e)(3) of the Internal
Revenue Code of 1986, or
- a "change in control" of Gentle Dental occurs,
all shares of Gentle Dental's common stock subject to outstanding options or
shares subject to restrictions held by Dr. Tse at the time of the event shall be
fully vested as of the date of such event.
On December 23, 1998, Gentle Dental and Dr. Tse entered into a Separation
Agreement and Mutual Release whereby Dr. Tse resigned as an employee, officer
and director of Gentle Dental effective as of December 31, 1998. The separation
agreement supersedes and replaces all post-termination obligations of either
party under Dr. Tse's employment agreement. Pursuant to the separation
agreement, Dr. Tse will provide consulting services to the new company from
January 1, 1999 through December 31, 2000. Dr. Tse shall be paid aggregated
consulting payments of $257,580 and $273,035 payable in equal monthly
installments less applicable taxes for the years 1999 and 2000, respectively.
Further, from January 1, 2001
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through June 30, 2003, Dr. Tse shall be paid aggregated severance payments of
$289,417, $306,782 and $162,594 payable in equal monthly installments less
applicable taxes for the years 2001, 2002 and 2003, respectively. Additionally,
all stock options to purchase Gentle Dental common stock granted to Dr. Tse will
be fully vested and exercisable on December 31, 1998. With respect to the stock
options granted to Dr. Tse prior to 1998, those options will be exercisable
until March 31, 1999. With respect to the stock options granted to Dr. Tse in
1998, those options will be exercisable until March 31, 2001.
The above-described transactions with related parties were on terms the
Gentle Dental Board of Directors believed to be fair to Gentle Dental and no
less favorable to Gentle Dental than terms that could have been obtained from an
unrelated party. Future transactions between Gentle Dental and affiliated dental
practices controlled by officers, directors, and principal shareholders of
Gentle Dental will be carried out pursuant to a related party transaction policy
adopted by the Gentle Dental Board of Directors. The policy provides that any
transaction between Gentle Dental and (a) an officer, director, or principal
shareholder of Gentle Dental or (b) any entity that is controlled by officers,
directors, or principal shareholders of Gentle Dental must be approved by at
least a majority of the members of the Gentle Dental Board of Directors who do
not have an interest in the transaction. The terms of such transactions must be
no less favorable to Gentle Dental than those that are generally available from
unaffiliated third parties.
It is anticipated that upon consummation of the mergers, Mr. Fiore will
enter into a three-year employment agreement with the combined company that will
have substantially the same terms and provisions as contained in his existing
employment agreement with Gentle Dental, but will entitle Mr. Fiore to severance
payments based on his base salary for a period 36 months if he is terminated
without cause or if he terminates his employment for good reason.
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GENTLE DENTAL'S PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Gentle Dental common stock as of November 30, 1998 by (a) each
person known by Gentle Dental to own beneficially more than five percent of
Gentle Dental common stock, (b) each director of Gentle Dental, and (c) the
Chief Executive Officer and each other executive officer listed in the table.
Except as otherwise noted, Gentle Dental believes the persons listed below have
sole investment and voting power with respect to the Gentle Dental common stock
owned by them. On November 30, 1998, there were 9,022,490 shares of Gentle
Dental common stock outstanding.
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED BENEFICIALLY OWNED
- --------------------------------------------------------------------------------- ----------- -------------------
<S> <C> <C>
Sprout Capital VII L.P. and certain related entities(2) ......................... 3,169,658 30.07%
3000 Sand Hill Road
Bldg. 3, Suite 170
Menlo Park, CA 94025
CB Capital Investors, L.P.(3).................................................... 2,714,431 23.13%
Accel V L.P. and certain related entities(4) .................................... 814,246 8.74%
c/o Accel Partners
428 University Avenue
Palo Alto, CA 94301
Bessemer Venture Partners GMS(5) ................................................ 610,684 6.61%
83 Walnut Street
Wellesley Hills, MA 02181
Michael T. Fiore(6).............................................................. 356,772 3.95%
Dany Y. Tse, DMD(7).............................................................. 629,378 6.88%
Grant M. Sadler(8)............................................................... 395,541 3.98%
L. Theodore Van Eerden(9)........................................................ 43,275 *
Norman R. Huffaker(10)........................................................... 5,564 *
Randy Henry...................................................................... -- *
Gerald R. Aaron, DDS(11)......................................................... 11,250 *
Kenneth D. Hooten(12)............................................................ 200,000 2.19%
Paul H. Keckley(13).............................................................. 1,800 *
Craig W. Wong, DMD(14)........................................................... 91,100 1.01%
Wayne Posey(15).................................................................. 31,799 *
Robert Finzi(16)................................................................. 3,169,658 *
Kathleen D. La Porte(17)......................................................... 3,169,658 30.07%
Eric Green(18)................................................................... 2,714,431 23.13%
All directors and officers as a group (18 persons)(19)........................... 9,075,498 39.28%
</TABLE>
- ------------------------
* Less than one percent.
(1) Unless otherwise indicated the address of each named person listed in the
table is 222 North Sepulveda Boulevard, Suite 740, El Segundo, California
90245.
(2) Consists of 1,649,562 shares presently held, in part, by each of Sprout
Capital VII, L.P., DLJ First ESC, L.L.C., Sprout Growth II, L.P., The
Sprout CEO Fund, L.L.P. and DLJ Capital Corp., 380,033
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shares issuable upon conversion of the same number of shares of Series D
preferred stock and 1,140,063 shares issuable upon the conversion of the
outstanding principal amount of convertible notes. DLJ Capital Corp. is the
Managing General Partner of each of The Sprout CEO Fund, L.L.P., Sprout
Growth II, L.P. and Sprout Capital VII, L.P. and has voting and investment
control over the shares held by each of these three shareholders. DLJ
Capital Corp. is a wholly-owned subsidiary of Donaldson, Lufkin & Jenrette,
Inc., which has voting and investment control over DLJ Capital Corp. DLJ
LBO Plans Management Corporation is the manager of DLJ First ESC, L.L.C.
and has voting and investment control over the shares held by DLJ First
ESC, L.L.C. DLJ LBO Plans Management Corporation is an indirect
wholly-owned subsidiary of DLJ, Inc., which has voting and investment
control over DLJ LBO Plans Management Corporation.
(3) Consists of 1,085,767 shares issuable upon conversion of the same number of
shares of Series D preferred stock and 1,628,664 shares issuable upon the
conversion of the outstanding principal amount of a convertible note. The
general partner of C.B. Capital Investors, L.P. is C.B. Capital Investors,
Inc., a wholly-owned subsidiary of the Chase Manhattan Bank, which has
voting and investment control over C.B. Capital Investors, L.P.
(4) Consists of 524,708 shares presently held, in part, by each of Accel V
L.P., Accel Internet/Strategic Technology Fund L.P., Accel Investors '96
L.P., Ellmore C. Patterson Partners and Accel Keiretsu V L.P.; 72,383
shares issuable upon conversion of the same number of shares of Series D
preferred stock; and 217,155 shares issuable upon the conversion of the
outstanding principal amount of convertible notes. Arthur C. Patterson, ACP
Family Partnership L.P., James R. Swartz, James W. Breyer, The Breyer 1995
Trust dated 10/4/95, Eugene D. Hill, Swartz Family Partnership L.P., Luke
B. Evnin, and G. Carter Sednaoui share control of the entities described in
this footnote and disclaim beneficial ownership of the shares held by these
entities except to the extent of their respective pecuniary interests.
(5) Consists of 393,530 shares presently held by Bessemer Ventures Partners
GMS; 54,288 shares issuable upon conversion of the same number of shares of
Series D preferred stock and 162,866 shares issuable upon conversion of the
outstanding principal amount of convertible notes. Bessemer Venture
Partners IV L.P. is the Managing Partner of Bessemer Venture Partners GMS,
and has voting and investment control over the shares held by Bessemer
Ventures Partners GMS. Deer IV & Co. LLC is the General Partner of Bessemer
Venture Partners IV L.P. and has voting and investment control over
Bessemer Venture Partners IV L.P. In October 1998, Bessemer Venture
Partners GMS distributed these securities to its partners on a pro rata
basis, according to partial interest.
(6) Includes 16,691 shares currently subject to repurchase by Gentle Dental and
16,691 shares subject to repurchase by Gentle Dental in January 1999 if
certain performance targets are not met, all at $0.45 per share.
(7) Includes 89,800 shares issuable upon exercise of options exercisable within
60 days after November 30, 1998, 34,500 shares subject to an exercisable
warrant and 3,500 shares held by Dr. Tse's wife.
(8) Includes 110,255 shares currently subject to repurchase by Gentle Dental
and 110,255 shares subject to repurchase by Gentle Dental in January 1999
if certain performance targets are not met, all at $0.225 per share. Also
includes 80,223 shares subject to repurchase by Gentle Dental at a price of
$0.225 per share, which rights lapse at a rate of 2,431 shares per month
until August 31, 2001, at which time Gentle Dental's rights will have
lapsed as to all such 80,223 shares.
(9) Includes 40,400 shares issuable upon exercise of options exercisable within
60 days after November 30, 1998, and 2,875 shares subject to an exercisable
warrant.
(10) Includes 5,564 shares issuable upon exercise of options exercisable within
60 days after November 30, 1998.
(11) Includes 9,000 shares issuable upon exercise of options exercisable within
60 days after November 30, 1998.
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(12) Includes 200,000 shares beneficially owned by ServiceMaster Venture Fund
L.L.C. of which 100,000 shares are issuable upon exercise of a warrant.
Mr. Hooten, as a Vice President of The ServiceMaster Company, which
manages ServiceMaster Venture Fund L.L.C., may be deemed to share voting
and dispositive power with respect to such shares. Mr. Hooten disclaims
beneficial ownership of these shares.
(13) Includes 1,800 shares issuable upon exercise of options exercisable within
60 days after November 30, 1998.
(14) Includes 3,200 shares issuable upon exercise of options exercisable within
60 days of November 30, 1998, and 6,900 shares issuable upon exercise of a
warrant.
(15) Includes 5,564 shares issuable upon exercise of options exercisable within
60 days after November 30, 1998.
(16) Includes 3,169,658 shares beneficially owned by Sprout Capital VII, L.P.
and certain related entities. Mr. Finzi and Ms. La Porte, as general
partners of a general partner of entities within this group, may be deemed
to share voting and dispositive power with respect to such shares. Mr.
Finzi and Ms. La Porte each disclaims beneficial ownership of these
shares.
(17) Includes 2,714,431 shares beneficially owned by CB Capital Investors, L.P.
Mr. Green, as an affiliate of CB Capital Investors, L.P., may be deemed to
share voting and dispositive power with respect to such shares. Mr. Green
disclaims beneficial ownership of these shares.
(18) Includes 1,592,471 shares issuable upon conversion of the same number of
shares of Series D preferred stock; 3,148,748 shares issuable upon the
conversion of the outstanding principal amount of convertible notes;
155,328 shares issuable upon exercise of options exercisable within 60
days after November 30, 1998; 144,275 shares issuable upon exercise of
warrants; 147,976 shares currently subject to repurchase by the Gentle
Dental; and 105,916 shares subject to repurchase by Gentle Dental if
certain performance targets are not met.
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GENTLE DENTAL'S MANAGEMENT AND ADDITIONAL INFORMATION
DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to the executive officers and directors of Gentle
Dental is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------- --- ------------------------------------------------------------------------
<S> <C> <C>
Michael T. Fiore.................. 44 Co-Chairman of the Board, Chief Executive Officer and President
Grant M. Sadler................... 51 Vice Chairman of the Board and Co-Founder
L. Theodore Van Eerden............ 42 Executive Vice President, Chief Development Officer and Director
Norman R. Huffaker................ 51 Chief Financial Officer
Gerald R. Aaron, DDS.............. 51 Director
Eric Green........................ 37 Director
Robert Finzi...................... 45 Director
Kenneth D. Hooten................. 35 Director
Arthur G. Kaiser, DDS............. 53 Director
Paul H. Keckley................... 48 Director
Kathleen D. La Porte.............. 36 Director
H. Wayne Posey.................... 59 Director
Craig W. Wong, DMD................ 42 Director
</TABLE>
MICHAEL T. FIORE. Mr. Fiore has served as Co-Chairman of the Board, Chief
Executive Officer and President of Gentle Dental since November 1997. Before
joining Gentle Dental in November 1997, Mr. Fiore was the Chief Executive
Officer, President and a director of GMS Dental Group, Inc. from April 1997 to
October 1997. From 1986 to March 1996, Mr. Fiore served in various management
positions at Salick Health Care, Inc., a provider of diagnostic and therapeutic
services to patients with catastrophic illness, principally in the areas of
cancer and kidney failure, including serving as a director, Executive Vice
President and Chief Operating Officer, and as President of its principal
subsidiary, Comprehensive Cancer Centers, Inc.
GRANT M. SADLER. Mr. Sadler has been Vice-Chairman of the Board since
November 1997. Prior to joining Gentle Dental in November 1997, Mr. Sadler
founded and served as the Chief Executive Officer, President and Secretary of
GMS Dental Group, Inc. from its inception in October 1996 to April 1997, at
which time he vacated those positions and assumed the position of Chairman of
the Board and served in that capacity until November 1997. Prior to GMS Dental
Group, Inc. Mr. Sadler served as President of Group Management Services, Inc., a
dental group consulting practice formed by Mr. Sadler in 1991.
L. THEODORE VAN EERDEN. Mr. Van Eerden has served as Executive Vice
President, Chief Development Officer and as a director since November 1997. He
served as Chief Financial Officer from March 1996 until November 1997. Before
joining Gentle Dental as Chief Financial Officer in March 1996, Mr. Van Eerden
was Vice President--Administration for HOSTS Corporation, a Vancouver,
Washington company that provides proprietary educational software products and
instructional delivery systems to schools throughout the United States. From
April 1993 to April 1994, Mr. Van Eerden was Director of Development for The
ServiceMaster Company where he focused on mergers and acquisitions and new
business development. Before that, Mr. Van Eerden was Vice President and Chief
Financial Officer of Medical SafeTec, Inc., a manufacturer of medical waste
destruction equipment. Prior to Medical
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SafeTec, Inc., Mr. Van Eerden served in various positions with ServiceMaster
focusing on mergers and acquisitions.
NORMAN R. HUFFAKER. Mr. Huffaker has served as Chief Financial Officer of
Gentle Dental since November 1997. Prior to joining Gentle Dental in November
1997, Mr. Huffaker served as Chief Financial Officer of GMS Dental Group, Inc.
from December 1996 to November 1997. Mr. Huffaker previously served as Vice
President of Finance for Community Dental Services, Inc. (SmileCare Dental
Group), an Irvine, California based dental HMO and staff model practice company.
Prior to employment at SmileCare Dental Group, Mr. Huffaker was Senior Vice
President of Finance at Abbey/Foster, a national home health care business.
GERALD R. AARON, DDS. Dr. Aaron has been a director of Gentle Dental since
December 1996. He has been certified as a pediatric dentist since 1976 and has
been employed since 1991 by the Professional Corporation in Washington, which is
affiliated with Gentle Dental.
ERIC GREEN. Mr. Green has been a director of Gentle Dental since June 4,
1998. Mr. Green has been a Managing Director of Chase Capital Partners since
February 1998. From 1990 to 1997, he was a member of the merchant banking group
of Banque Paribas in various capacities, including managing director responsible
for mezzanine investments. Previously, Mr. Green was employed at GE Capital and
the General Electric Company.
ROBERT FINZI. Mr. Finzi has been a director of Gentle Dental since November
1997 and served as a director of GMS Dental Group, Inc. from October 1996 until
Gentle Dental's merger with GMS Dental Group, Inc. in November 1997. Since May
1991, Mr. Finzi has been a Vice President of the Sprout Group, a division of DLJ
Capital Corporation, which is the managing general partner of Sprout Capital
VII, L.P. and Sprout Growth II, L.P., and an affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation. Mr. Finzi is also a general partner of the
general partner of a series of investment funds managed by the Sprout Group and
a limited partner of the general partner of ML Venture Partners II, L.P. From
1984 to 1991, Mr. Finzi was a Vice President of Merrill Lynch Venture Capital.
Mr. Finzi serves on the board of directors of the Cerplex Group and six
privately held companies.
KENNETH D. HOOTEN. Mr. Hooten has been a director of Gentle Dental since
June 1996. Since 1995, Mr. Hooten has been Vice President of The ServiceMaster
Company responsible for managing the ServiceMaster Ventures Group, an internal
venture capital firm. From 1990 to 1995, Mr. Hooten served as Vice President of
Lasalle Partners Ltd., a real estate company.
ARTHUR G. KAISER, DDS. Dr. Kaiser has been a director of Gentle Dental
since September 10, 1998. Dr. Kaiser has been the President and a director of
Dedicated Dental Services, Inc. since December 1986. Dr. Kaiser is a licensed
dentist in California.
PAUL H. KECKLEY. Mr. Keckley has been a director of Gentle Dental since
December 1996. Since 1994, he has been Vice President Strategic Development at
PhyCor, Inc. Mr. Keckley previously served as a director of PhyCor, Inc., and
from 1985 to 1994 he was President of The Keckley Group, a market research and
strategic planning firm for hospitals, health systems, medical practices and
health maintenance organizations.
KATHLEEN D. LA PORTE. Ms. La Porte has been a director of Gentle Dental
since November 1997 and served as a director of GMS Dental Group, Inc. from
October 1996 until the GMS Dental Group, Inc. merger. From January 1993 to the
present, Ms. La Porte has been affiliated with the Sprout Group, a division of
DLJ Capital Corporation, which is the managing general partner of Sprout Capital
II, L.P. and Sprout Growth II, L.P. and an affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation. Ms. La Porte has served as a general partner of
the Sprout Group since December 1993. From August 1987 to January 1993, Ms. La
Porte was a principal at Asset Management Company, a venture capital firm
focused on early stage health care and technology investments. Ms. La Porte
currently serves on the board of
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directors of FemRx, Hall Kinion, Onyx Pharmaceuticals and Lynx Therapeutics and
two privately held companies.
H. WAYNE POSEY. Mr. Posey has been a director of Gentle Dental since
November 1997 and served as a director of GMS Dental Group, Inc. from December
1996 until Gentle Dental's merger with GMS Dental Group, Inc. Since its
inception in 1994, Mr. Posey has served as President, Chief Executive Officer,
director, and a member of the executive committee of ProMedCo. Mr. Posey was a
healthcare consultant from 1975 until 1994, most recently as the principal in
charge of the healthcare services division of McCaslin & Company, P.C., a public
accounting and consulting company in Fort Worth, Texas.
CRAIG W. WONG, DMD. Dr. Wong has been a director of Gentle Dental since
March 1995. Dr. Wong has been an oral and maxillofacial surgeon licensed to
practice in the states of Washington and Oregon since 1986. Dr. Wong serves as
the Chief of the Department of Oral and Maxillofacial Surgery for the affiliated
dental practices in Oregon and Washington. Dr. Wong also serves as Section Chief
of Oral and Maxillofacial Surgery for the Veterans Administration Medical Center
in Portland, Oregon.
CLASSIFIED BOARD OF DIRECTORS
Gentle Dental's Restated Articles of Incorporation provide for three classes
of directors. Directors Sadler, Van Eerden and Aaron have been appointed to
serve in Class III until the meeting of shareholders in 1999; directors La
Porte, Hooten, Keckley and Wong have been appointed to serve in Class I until
the annual meeting of shareholders in 2000; and directors Fiore, Finzi, Posey
and Kaiser have been appointed as Class II directors and will serve until the
meeting of shareholders in 2001. A vacancy exists for a Class III director as a
result of a resignation. No director has been appointed to fill this vacancy.
After these directors' terms expire, newly elected directors shall serve for a
three-year term or until their successors are duly elected and qualified or
until they resign, become disqualified or disabled, or are otherwise removed.
BOARD COMMITTEES
Gentle Dental's Board of Directors maintains an Executive Committee, an
Audit Committee and a Compensation Committee. The Executive Committee,
consisting of directors Finzi, Fiore, La Porte and Van Eerden, has all of the
authority of the Board of Directors except as limited by applicable law. The
Audit Committee, consisting of directors La Porte and Posey, oversees actions
taken by Gentle Dental's independent auditors, and reviews Gentle Dental's
internal controls. The Compensation Committee, consisting of directors Finzi,
Keckley and Posey, reviews the compensation levels of Gentle Dental's employees
and makes recommendations to Gentle Dental's board regarding compensation.
ADDITIONAL INFORMATION
Certain information relating to executive compensation, various benefit
plans (including stock option plans), certain relationships and related
transactions and other related matters as to Gentle Dental is incorporated by
reference or set forth in Gentle Dental's Annual Report on Form 10-KSB, as
amended, for the year ended December 31, 1997, incorporated herein by reference.
Shareholders desiring copies of such documents may contact Gentle Dental at its
address or telephone number indicated under "Where You Can Find More
Information."
INFORMATION ABOUT DENTAL CARE ALLIANCE
GENERAL
Dental Care Alliance, Inc. was formed on October 23, 1996 to effect a
reorganization among Dental Care Alliance, Golden Care Holdings, the predecessor
to Dental Care Alliance which was incorporated in 1993, and Dental Care
Alliance's majority owned subsidiaries. Dental Care Alliance provides management
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and licensing services to dental practices in Florida, Georgia, Michigan and
Indiana. As of September 30, 1998, Dental Care Alliance provided management and
licensing services to a total of 55 managed dental centers operated by 38
professional corporations and associations. Management and administrative
services provided to dental practices include financial, accounting, billing,
assistance in obtaining third-party financing, training and education of dental
professionals, efficiency and productivity enhancement, recruiting, human
resource management, team building, marketing, advertising, purchasing,
collection, assistance with management information services, quality assurance,
patient scheduling and other services, as well as the provision of management
and administrative personnel. Licensing services include marketing, advertising
and purchasing. Dental Care Alliance does not provide dental services. Dental
Care Alliance currently is expanding in Florida, Georgia, Michigan and Indiana
and intends to expand selectively into new markets.
The professional associations employ and maintain full control over the
general dental and specialty dental practitioners (such as orthodontists,
periodontists, endodontists and oral surgeons), hygienists and other dental
professionals and set standards of care in order to promote the provision of
high quality dental care. The individual professional associations are
responsible for compliance with state and local regulations of the practice of
dentistry and with licensing and certification requirements, and each
professional association is responsible for acquiring and maintaining
professional liability insurance.
Almost all of its management agreements provide that Dental Care Alliance:
- assist in the identification of areas in which the performance of the
managed dental centers and their dental professionals can be improved to
increase revenues and operating income;
- provide, maintain and repair all offices, equipment and furnishings;
- employ all non-professional personnel necessary for the operation of the
managed dental centers;
- provide payroll services;
- implement standard business systems and procedures and provide or
facilitate systems and efficiencies training;
- order all general business inventory and supplies required by the managed
dental centers and handle accounts payable;
- establish and maintain information systems and provide accounting and
bookkeeping services;
- monitor compliance with rules and regulations applicable to the managed
dental centers' business;
- provide marketing assistance; and
- provide assistance in billing and collections, all to the extent permitted
by law.
These management agreements also provide that the professional associations
are responsible for, among other things:
- employing and supervising all dentists and dental hygienists;
- complying with all laws, rules and regulations relating to dentists and
dental hygienists;
- participating in quality assurance/utilization review programs;
- maintaining proper dental patient records;
- obtaining and maintaining professional liability insurance with limits of
not less than $300,000 per claim and aggregate policy limits of not less
than $1.0 million; and
- any other requirements to carry out the practice of dentistry.
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As compensation for its management services under the standard management
agreements, the professional associations pay Dental Care Alliance a management
fee equal to 67%-74% of the net collected revenues earned by the professional
association. Dental Care Alliance pays all of the operating and nonoperating
expenses incurred by the professional associations except for:
- salaries and benefits to the dentists and dental hygienists;
- licensing fees paid to Dental Care Alliance;
- debt and asset carrying costs related to the acquisition of the dental
practice; and
- any other direct cost to the professional association not covered under
the management agreement.
Dental Care Alliance divides the geographic areas in which it operates into
regions, each of which is under the supervision of one or more dentists. The
primary purpose of these dental directors is to promote the provision of high
quality dental care and to refine operating efficiencies at the managed dental
centers. Dental directors continually monitor and evaluate the performance of
the dentists and the managed dental centers within their region by identifying
operational inefficiencies and implementing solutions to address these
inefficiencies. Each dental director performs periodic spot checks in which the
performance of each managed dental center is scrutinized in detail. The dental
directors also assist the professional associations in their region with hiring,
training and supervision of dental professionals. Dental Care Alliance believes
that close relationships among the dental directors, the professional
associations they supervise and Dental Care Alliance allow for the
identification of specific inefficiencies, the quick remediation of such
inefficiencies and the realization of the benefits produced by Dental Care
Alliance's management approach.
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DENTAL CARE ALLIANCE
SELECTED CONSOLIDATED FINANCIAL DATA
Dental Care Alliance commenced operations in November 1993. The following
selected consolidated financial data at December 31, 1993 and for the year then
ended are derived from the unaudited Consolidated Financial Statements of the
predecessors of Dental Care Alliance. The following selected consolidated
financial data at December 31, 1994, 1995, 1996 and 1997 and for the years then
ended are derived from the Consolidated Financial Statements of Dental Care
Alliance and its predecessors which have been audited by PricewaterhouseCoopers
LLP, independent certified public accountants. The financial data presented
below for the nine month periods ended September 30, 1997 and 1998 and at
September 30, 1998 are unaudited and were prepared by management of Dental Care
Alliance on the same basis as the audited Consolidated Financial Statements
included elsewhere herein, and, in the opinion of management of Dental Care
Alliance, include all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the information set forth therein. The
results for the nine months ended September 30, 1998 are not necessarily
indicative of the results to be expected for the year ending December 31, 1998
or future periods. The following information should be read in conjunction with
"Dental Care Alliance's Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and other financial information relating to Dental Care Alliance included
elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- ---------------------
1994 1995 1996 1997 1997 1998
1993 --------- --------- --------- --------- --------- ----------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Management fees............... $ 83,700 $ 673,304 $ 513,705 $1,289,828 $7,588,193 $4,692,756 $19,661,806
Consulting and licensing
fees........................ -- 42,763 262,769 347,600 290,885 216,284 465,315
----------- --------- --------- --------- --------- --------- ----------
Total revenues............ 83,700 716,067 776,474 1,637,428 7,879,078 4,909,040 20,127,121
Managed dental center
expenses(1):
Staff salaries and
benefits.................. -- -- -- 223,657 2,021,497 1,294,446 5,449,512
Dental supplies............. -- -- -- 79,448 650,444 391,315 1,393,777
Laboratory fees............. -- -- -- 98,222 971,024 627,610 2,176,457
Marketing................... -- -- -- 38,128 414,519 263,031 734,273
Occupancy................... -- -- -- 106,501 998,141 614,980 2,192,823
Other....................... -- -- -- 57,182 851,631 585,621 1,389,025
----------- --------- --------- --------- --------- --------- ----------
Total managed dental
center expenses......... -- -- -- 603,138 5,907,256 3,777,003 13,335,867
----------- --------- --------- --------- --------- --------- ----------
83,700 716,067 776,474 1,034,290 1,971,822 1,132,037 6,791,254
Salaries and benefits......... 8,339 408,716 400,669 521,683 786,795 557,528 1,223,020
General and administrative.... 16,064 204,901 234,577 260,558 600,657 313,054 1,316,869
Advisory services(2).......... -- -- 127,768 -- -- 87,062 --
Depreciation and
amortization................ -- 15,150 22,106 27,654 163,681 -- 698,827
----------- --------- --------- --------- --------- --------- ----------
Operating income (loss)... 59,297 87,300 (8,646) 224,395 420,689 174,393 3,552,538
Interest income (expense),
net......................... -- 22,584 6,494 20,781 263,568 45,809 513,931
----------- --------- --------- --------- --------- --------- ----------
Income (loss) before
income taxes and
minority interest....... 59,297 109,884 (2,152) 245,176 684,257 220,202 4,066,469
Provision for income taxes.... -- 19,919 -- 35,500 263,952 84,943 1,567,591
Minority interest............. -- 2,440 8,654 7,674 -- -- --
----------- --------- --------- --------- --------- --------- ----------
Net income (loss)......... $ 59,297 $ 87,525 $ (10,806) $ 202,002 $ 420,305 $ 135,259 $2,498,878
----------- --------- --------- --------- --------- --------- ----------
----------- --------- --------- --------- --------- --------- ----------
</TABLE>
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<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- ---------------------
1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- ----------
1993
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Adjustment to redemption value
of common and preferred
securities.................. -- 39,951 85,709 (191,237) (10,500) (10,500) --
Cumulative preferred stock
dividend.................... -- -- -- (6,485) (100,000) (90,000) --
----------- --------- --------- --------- --------- --------- ----------
Net income (loss) applicable
to common stock............. $ 59,297 $ 127,476 $ 74,903 $ 4,280 $ 309,805 $ 34,759 $2,498,878
----------- --------- --------- --------- --------- --------- ----------
----------- --------- --------- --------- --------- --------- ----------
Net income (loss) per common
share:
Basic....................... $ .02 $ -- $ 0.07 $ 0.01 $ 0.36
Diluted..................... $ .02 $ -- $ 0.07 $ 0.01 $ 0.35
Weighted average common shares
outstanding
Basic....................... 3,791,610 3,829,029 4,610,331 4,169,197 6,985,295
Diluted..................... 3,864,291 3,907,492 4,697,809 4,256,666 7,084,768
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------- AT SEPTEMBER 30,
1994 1995 1996 1997 1998
1993 --------- --------- --------- ---------- ----------------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......... $ 144,497 $ 113,385 $ 98,676 $ 965,853 $19,756,744 $ 10,895,164
Total assets............. 187,203 466,820 524,543 3,122,939 28,554,487 33,926,724
Long-term debt, including
current maturities..... 22,100 209,437 163,745 214,002 1,012,111 3,099,693
Redeemable common and
preferred securities... -- -- -- 1,593,799 -- --
Stockholders' equity..... 47,845 118,400 296,837 632,385 24,553,825 27,149,441
</TABLE>
- ------------------------------
(1) Effective October 1996, Dental Care Alliance revised the terms of all of its
12 then existing management agreements such that Dental Care Alliance is
responsible for the payment of all non-professional expenses of the managed
dental centers. Ten management agreements were also revised to base Dental
Care Alliance's management fee from a percentage of net profits at each
professional association to a percentage of net patient revenues from each
professional association. Accordingly, prior to these revisions to such 12
management agreements, all non-professional expenses of the managed dental
centers and related revenues were reflected in each professional
associations financial statements. See "Dental Care Alliance's" Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(2) Represents non-cash charges for warrants issued in consideration for certain
financial advisory services.
DENTAL CARE ALLIANCE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
With respect to management services it provides to dental practices, Dental
Care Alliance enters into management agreements with professional associations
that own the practices. Dental Care Alliance commenced operations in November
1993 by providing management and licensing services to five dental practices
located in Sarasota, Palmetto, Largo, Port Charlotte and Venice, Florida. In
1994, Dental Care Alliance entered into its first management agreement for a
newly developed practice located in Englewood, Florida and entered into a
management agreement to manage an additional existing practice in Fort Myers,
Florida. In 1995, Dental Care Alliance entered into four new management
agreements, two of which were with respect to newly developed practices located
in Kissimmee and Bradenton, Florida and the remaining two of which were with
respect to existing practices located in Sarasota and Port Richey, Florida.
Dental Care Alliance entered into four additional management agreements in 1996
to manage practices located in Orlando, Tampa, Ocoee and Clearwater, Florida. In
addition, Dental Care Alliance terminated its management agreements with respect
to the managed dental centers at Palmetto and Venice in 1995 and in Port Richey
in 1996. In 1997, Dental Care Alliance entered into seventeen additional
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management agreements to manage five practices in Michigan and 12 in Florida. As
of September 30, 1998, Dental Care Alliance provided management and licensing
services to 55 managed dental centers, 35 of which are located in Florida, nine
of which are located in Michigan, eight of which are located in Georgia, and
three of which are located in Indiana.
Prior to October 1996, the management fee paid to Dental Care Alliance
pursuant to the management agreements had been equal to a percentage ranging
from 50-90% of the net profits of the individual managed dental centers plus
reimbursement to Dental Care Alliance of its non-professional expenses.
Effective October 1996, Dental Care Alliance revised all of its 12 then existing
management agreements. Ten of these agreements were revised such that Dental
Care Alliance would earn management fees based on 74% of total net patient
revenues and so that payment would be based on cash collected minus any patient
refunds and Dental Care Alliance would assume responsibility for the payment of
the non-professional expenses of the managed dental centers. The remaining two
management agreements continued to have management fee structures based upon
50-55% of the net profit, as defined, of the two managed dental centers. Since
then, virtually all management agreements have been similar in form to the
revised agreements mentioned above, except that management fees have ranged from
67% to 74% of the net collected revenues.
Dental Care Alliance will seek to cause future management agreements to be
on terms substantially similar to those of the standard management agreements.
The method by which Dental Care Alliance manages the revenue and profitability
of managed dental centers is fundamentally the same, regardless of whether the
management agreement with any particular professional association provides for a
management fee based upon net profits or net patient revenue. In the "net
profits" type of management agreement, both the professional association owner
and Dental Care Alliance share proportionally in the favorable impact of any
initiatives. In the "net patient revenues" type of management agreement, the
cost benefits resulting from such initiatives accrue to the party responsible
for such costs and both parties share proportionally in revenue enhancements.
Period to period comparisons of Dental Care Alliance's results of operations set
forth below should be considered in light of the significant changes in Dental
Care Alliance's growth and in recognition of revenues and expenses resulting
from the revisions to the management agreements in October 1996.
Dental Care Alliance believes that certain of the management agreements are
material to Dental Care Alliance as a whole. The managed dental center in Flint,
Michigan, contributed approximately 14% of Dental Care Alliance's aggregate
revenue in 1997 and may contribute in excess of 10% of Dental Care Alliance's
aggregate revenue in 1998. Further, the professional association located in Port
Charlotte, Florida contributed approximately 18% and 9% to Dental Care
Alliance's revenues in 1996 and 1997. The management agreement for the managed
dental center in Flint has a term of 25 years and provides for a management fee
equal to 74% of the net collected revenues earned by the associated professional
association. The management agreement for the managed dental center in Port
Charlotte expires in 2003 and provides for a management fee of 55% of the net
profits of the associated professional association. In addition, the Port
Charlotte management agreement provides that the professional association may,
during the period commencing on October 20, 1998 and ending 90 days thereafter,
terminate the agreement by paying Dental Care Alliance an amount equal to
$185,460 less the amount by which the aggregate fees paid to Dental Care
Alliance pursuant to such management agreement during either or both of the
successive one year periods following October 20, 1996 exceeds $100,000, and
satisfying other conditions set forth therein. The professional association has
indicated that it intends to exercise its option to terminate the agreement
effective February 1, 1999. Dental Care Alliance earned fees of $121,900 for the
year ended December 31, 1997 and $95,700 for the nine months ended September 30,
1998.
All patient revenues are billed to patients and providers under the
authority and identification numbers of the individual professional
associations. Patient revenues and receivables are recorded on the accounts of
the professional associations. Funds are dispersed initially to pay all the
professional costs of the professional associations. Thereafter, funds are
disbursed to Dental Care Alliance under the terms of
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the management agreements. Any remaining funds are retained by the professional
association. If funds are insufficient to pay Dental Care Alliance under the
terms of the relevant management agreement, a payable from the professional
association to Dental Care Alliance is recorded on Dental Care Alliance's books.
Dental Care Alliance also enters into license agreements with each Dental
Center pursuant to which Dental Care Alliance provides licensing and advertising
services to the Dental Centers. In return for such services, Dental Care
Alliance has collected fees generally ranging from $800 to $1,000 per month from
each managed dental center and $600 from each licensed dental center.
Historically, in connection with the execution of a management agreement, a
professional association has typically acquired both the dental and the
non-dental assets of a managed dental center. Dental Care Alliance has either
made loans to the acquiring professional association or has assisted the
professional association in obtaining third-party financing to purchase such
assets. Recently, Dental Care Alliance has begun acquiring certain of the
non-dental assets of managed dental centers while the professional associations
acquire the dental assets of such managed dental centers. In addition, due to
changing market conditions, Dental Care Alliance has begun compensating
professional associations for the execution of management agreements.
Dental Care Alliance from time to time has made loans to newly formed
professional associations with which it has entered into management agreements
to purchase the dental assets of the related dental practices. In return the
professional associations execute promissory notes to Dental Care Alliance in
the amount of such loans. At September 30, 1998, the total outstanding balance
of such loans was $762,430. The notes underlying such loans generally have terms
ranging from two to ten years, bear interest at rates ranging between 8.5% and
18.5% and are secured by the assets of the related dental practice. The
professional associations to which such loans are made are newly formed and have
no assets other than the assets of the dental practices being acquired and no
liabilities other than the liabilities relating to the loans. In addition,
Dental Care Alliance from time to time makes working capital advances to
individual professional associations, although it is not obligated contractually
or otherwise to make such advances. The extension of loans and advances to the
professional associations by Dental Care Alliance is not considered upon
entering into management agreements with Dental Care Alliance. Extension of any
such loans or advances is entirely within Dental Care Alliance's discretion.
These advances are due within 12 months of issuance, bear interest at 8.5%,
subject to adjustment based on changes in the rates at which Dental Care
Alliance may borrow from its lenders. All advances made to professional
associations are guaranteed by the relevant professional association owner,
although there is no independent collateral for these working capital advances.
A repayment default under such advances is also a default under the relevant
management agreement which permits Dental Care Alliance, among other things, to
liquidate the assets of the dental practice. At September 30, 1998, the total
outstanding balance of such advances was $3,015,900. There have been no
revisions to the terms of any such loans or advances. The professional
associations are current in the payment of their loans or advances and Dental
Care Alliance believes that the financial condition of the professional
associations to which it has made loans or advances is satisfactory. Prior to
making any loan or advance, Dental Care Alliance analyzes the collectibility of
the receivables resulting from such loans or advances based on the projected
cash flow of the relevant professional association and the estimated fair market
value of the assets to be owned or owned by such professional association.
Dental Care Alliance, through its obligations under the management agreements,
is able to assess on a periodic basis the collectibility of its receivables
since it has access to the billing and collection information relating to the
professional associations' patient receivables and operational cash flow, and
evaluate on a periodic basis outstanding receivables versus accounts payable and
revenue trends. Accordingly, Dental Care Alliance is in a position to quickly
assess the ability of each professional association to meet its obligations
under the notes and advances. As a result, Dental Care Alliance is able to react
quickly in the event that there is a material change in the creditworthiness of
any of the professional associations. Dental Care Alliance also analyzes any
historical trends of the professional
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associations relating to bad debts or the inability of the professional
associations to generate collectible patient receivables. Dental Care Alliance
assesses the guaranty of its professional association owners for financial
stability and creditworthiness through periodic reviews which include analysis
of credit reports, bank references, personal and business tax returns and
personal financial statements. In addition, the reputation of each professional
association owner in the business community and the length and quality of the
professional associations' relationship with Dental Care Alliance are examined
by Dental Care Alliance to assess the professional association owners as
guarantors of the loans and advances. Dental Care Alliance may modify the terms
of management agreements prospectively if the professional association does not
perform at a level sufficient to repay the advances.
None of the professional association owners are officers, directors or
employees of Dental Care Alliance. Dr. Dennis A. Corona and Dr. Morris Socoloff,
the owners of professional associations operating a majority of the managed
dental centers, own collectively approximately one percent of Dental Care
Alliance common stock. In addition, five managed dental centers in Michigan are
owned by professional associations commonly controlled by Dr. Ross Johnson.
The professional associations are primarily liable for repayment of the
notes and advances to Dental Care Alliance with the professional association
owners being secondarily liable for repayment under the notes and advances. The
professional associations and professional association owners bear the primary
risk under the notes and advances. Dental Care Alliance also bears the risk of
non-payment to the extent that the assets of professional associations or
professional association owners are insufficient to pay the outstanding balances
under the notes or advances upon any default.
The professional associations take reserves against, and, when appropriate,
write-off bad debts on, patient receivables. To date, there have been no
defaults under, or write-offs in connection with, notes receivable from or
advances to professional associations, although there can be no assurance that
there will be no such defaults or write-offs in the future. Although there has
to date been no default or material delinquency under the notes or advances,
Dental Care Alliance has established a reserve for such defaults in the amount
of $120,000 as of September 30, 1998. Dental Care Alliance will consider
establishing reserves against such defaults should future circumstances
demonstrate the need for such reserves.
The management agreements for professional associations that have
acquisition loans from Dental Care Alliance and for most professional
associations with working capital advances provide that the professional
associations must meet their repayment obligations under any outstanding
indebtedness, whether owed to Dental Care Alliance or any third party, prior to
paying any management fees. A default under any such obligation is by its terms
a default under the management agreement. In the event of such a default, Dental
Care Alliance or its designee is entitled to purchase the assets and liabilities
or the capital stock of the relevant professional association at a price equal
to 60% of the annualized gross revenues of such professional association owner
over the previous 24 months, minus any liabilities, including outstanding
indebtedness, if any, to Dental Care Alliance of the professional association at
the date of purchase. In such event, Dental Care Alliance would evaluate
whether, at its option, to have another professional association owner or other
licensed dentist assume control of the practice and continue to generate
management fees or to liquidate the assets of such professional association.
Dental Care Alliance does not consolidate the balance sheets or the
operating results (including revenue and expenses) of the dental practices under
the management agreements since these revenues and expenses are earned and
incurred by the professional associations, not Dental Care Alliance. Dental Care
Alliance has recorded goodwill and other intangible assets in cases where Dental
Care Alliance has paid a professional association in consideration for a
modification to an existing management agreement or entering into new management
agreements. Where Dental Care Alliance acquires the assets of another management
company, such a transaction constitutes a business combination and Dental Care
Alliance recognizes the related goodwill, if any, in accordance with the
purchase method of accounting.
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Prior to October 1996, the majority of Dental Care Alliance's operations
were performed through limited liability companies. Except for the period from
January through September 1994 with respect to one of Dental Care Alliance's
predecessors in interest, Dental Care Alliance's statements of operations prior
to October 1996 do not include a provision for income taxes. Included in Dental
Care Alliance's tax accruals are amounts related to establishing a deferred tax
liability for book/tax differences arising from its reorganization from limited
liability corporation to C corporation status.
In October 1997, Dental Care Alliance expanded its management information
system hardware and software in the corporate office. In 1998, Dental Care
Alliance has begun testing of new dental practice management software in several
of its managed dental centers. It is anticipated that all of the dental
practices currently under management will have installed the new software and,
where necessary, upgraded its hardware requirements. Dental Care Alliance
believes that the cost for the hardware and software will not be in excess of
$500,000. The new software installed at several of the managed dental centers
and the corporate offices have addressed the Year 2000 issues for those systems
under Dental Care Alliance's control. Dental Care Alliance has not determined
the level of preparedness of third parties with which it deals nor the
implications that a failure on their part could have on Dental Care Alliance.
Dental Care Alliance is in the process of making that determination. In
analyzing potential new affiliations, Dental Care Alliance will consider the
cost and timing of a practice's ability to meet the Year 2000 issue before
executing an agreement.
ACQUISITIONS
On December 29, 1997, Dental Care Alliance acquired all of the outstanding
capital stock of Marketplace Dental, Inc. pursuant to the merger of Marketplace
Dental with and into Dental Care Alliance of Florida, Inc., a wholly-owned
subsidiary of Dental Care Alliance. This transaction has been recorded under the
purchase method of accounting.
Pursuant to the merger, Dental Care Alliance acquired all of the assets of
Marketplace Dental. All shares of Marketplace Dental common stock were converted
into the right to receive, in the aggregate, 80,000 shares of common stock of
Dental Care Alliance and an amount in cash of approximately $500,000. In
addition, the merger agreement calls for the issuance of additional common stock
if certain operating results are achieved. Marketplace Dental is a dental
practice management company which manages six dental practices in Palm Beach
County, Florida. The assets consisted primarily of non-dental assets (including
dental equipment) and management agreements.
The effective date specified in the merger agreement was December 1, 1997,
based upon the assumption of defined net assets per the final November 30, 1997
balance sheet. Since the articles of merger were not executed and accepted by
the State of Florida until December 29, 1997, Dental Care Alliance's statement
of operations excludes the revenue and expenses of Marketplace Dental for the
period from December 1, 1997 until December 29, 1997. Had the effective date
been December 1, 1997 as specified in the merger agreement, Dental Care
Alliance's revenues and managed dental center expenses for the year ended
December 31, 1997 would have been as follows (unaudited):
<TABLE>
<S> <C>
Total revenue................................................... $7,970,228
Total managed dental center expenses............................ 5,970,939
</TABLE>
On April 1, 1998, Dental Care Alliance acquired all the outstanding capital
stock of Dental One Associates, Inc. pursuant to a stock purchase agreement
effective March 20, 1998. The assets of Dental One Associates, Inc. consisted
primarily of non-dental assets (including dental equipment) and management
agreements.
The purchase price was (a) $2,400,000 in cash; (b) a promissory note in the
amount of $1,470,510, bearing an annual interest rate equal to 8.5%, payable in
equal quarterly installments of principal and
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interest amortized over a period of five years with a balloon payment for the
remaining principal balance and accrued interest on the third anniversary; and
(c) a promissory note in the amount of $1,200,000, payable in equal monthly
installments over a period of 120 days.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1997
MANAGEMENT FEES. Management fees increased 319.5% from $4.7 million for the
nine months ended September 30, 1997 to $19.7 million for the nine months ended
September 30, 1998. Revenues at existing practices grew ten percent to
approximately $2.8 million, while the balance of the increase relates to the
addition of 43 managed dental centers since January 1, 1997.
CONSULTING AND LICENSING FEES. Consulting and licensing fees increased 115%
from $216,284 for the nine months ended September 30, 1997 to $465,315 for the
nine months ended September 30, 1998. The increase is attributable to the
addition of 43 managed dental centers, offset by the cessation of approximately
$85,000 on four Michigan practices which were converted effective July 1, 1997
into managed dental centers. Income from consulting fees is now included in
management fees.
MANAGED DENTAL CENTER EXPENSES. Managed dental center expenses increased
from $3.8 million for the nine months ended September 30, 1997 to $13.3 million
for the nine months ended September 30, 1998. As a percentage of net patient
revenue at managed dental centers, managed dental center expenses decreased from
56% to 48%. The decrease is due to economies in purchasing of dental supplies
and laboratories (2%), reduced marketing expenditures (1%) in new affiliations
with established reputations and other general and administrative expenses (4%).
SALARIES AND BENEFITS. Salaries and benefits increased 119% from $557,528
for the nine months ended September 30, 1997 to $1.2 million for the nine months
ended September 30, 1998. This increase is attributable primarily to the hiring
of additional personnel in Dental Care Alliance's accounting and business
development departments and regional offices in Michigan, Georgia and Palm
Beach, Florida to administer the additional 43 managed dental centers. As a
percentage of net patient revenue, salaries and benefits decreased from 8% to
5%.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
321% from $313,054 for the nine months ended September 30, 1997 to $1.3 million
for the nine months ended September 30, 1998. This increase is attributable
primarily to opening of regional offices, additional professional costs
associated with the change from a privately-held to publicly-held company and
increased occupancy and travel costs associated with the additional 43 managed
dental centers. As a percentage of the net patient revenue, general and
administrative was 5% for both periods.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 703% from $87,062 for the nine months ended September 30, 1997 to
$698,827 for the nine months ended September 30, 1998. This increase is
attributable to the depreciation on the acquired non-dental assets and
amortization on the management agreements obtained in connection with the 43
additional managed dental centers. As a percentage of net patient revenue,
depreciation and amortization increased from 1% to 3%.
INTEREST INCOME, NET. Interest income, net increased from $45,809 for the
nine months ended September 30, 1997 to $392,955 for the six months ended June
30, 1998. This increase is attributable primarily to earnings on the higher cash
balance associated with Dental Care Alliance's public offering in November 1997.
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YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
MANAGEMENT FEES. Management fees consist of a percentage of the net
realizable patient-related revenue at the majority of the PAs and a percentage
of the net realizable profits earned by the remaining professional associations.
Management fees increased 488% from $1.3 million for the year ended December 31,
1996, to $7.6 million for the year ended December 31, 1997. Of this increase,
$3.1 million is derived from the addition of seventeen managed dental centers
during the year, while the balance primarily relates to the October 1996
revision to the management agreements. Prior to October 1996, Dental Care
Alliance was not responsible for any managed dental center expenses.
CONSULTING AND LICENSING FEES. Consulting and licensing fees consist of
fees earned by Dental Care Alliance for licensing services to all of the dental
centers and consulting services to four managed dental centers in Michigan.
Consulting and licensing fees decreased 16.3% from $347,600 for the year ended
December 31, 1996, to $290,885 for the year ended December 31, 1997. The
decrease is attributable to the cessation of consulting fees on four Michigan
practices which were converted effective July 1, 1997 into managed dental
centers, as income formerly attributable to these consulting fees are now
included in the management fees, offset by the addition of seventeen managed
dental centers in 1997.
MANAGED DENTAL CENTER EXPENSES. Managed dental center expenses consist of
non-professional expenses at the managed dental centers. Managed dental center
expenses increased 879% from $603,138 for the year ended December 31, 1996, to
$5.9 million for the year ended December 31, 1997. Of this increase, $2.3
million is derived from the addition of seventeen managed dental centers, while
the balance relates to the October 1996 revision to the management agreements.
Prior to October 1996, Dental Care Alliance was not responsible for any managed
dental center expenses.
SALARIES AND BENEFITS. Salaries and benefits consist of costs for salaries
and benefits for employees at Dental Care Alliance's corporate and regional
offices. Salaries and benefits increased 50.8% from $521,683 for the year ended
December 31, 1996, to $786,795 for the year ended December 31, 1997. This
increase was attributable primarily to the hiring of additional personnel in
Dental Care Alliance's accounting and business development departments to
administer the additional seventeen managed dental centers.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses
consists of expenses related to the operation of Dental Care Alliance's
corporate and regional offices, such as rent, legal, accounting and travel
expenses. General and administrative expense increased 130.5% from $260,558 for
the year ended December 31, 1996, to $600,657 for the year ended December 31,
1997. This increase was primarily attributable to the establishment of a
regional office in Michigan, increased legal, insurance and other costs required
of a public company, and increased costs associated with expanding Dental Care
Alliance's corporate office to administer the additional seventeen managed
dental centers.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
consists of the depreciation expense on capital assets owned by Dental Care
Alliance and located at either the corporate offices or at managed dental
centers and amortization expense on management agreements or other intangible
assets. Depreciation and amortization expense increased 491.9% from $27,654 for
the year ended December 31, 1996, to $163,681 for the year ended December 31,
1997. This increase was attributable to the depreciation on the acquired
non-dental assets and amortization on the acquired management agreements related
to the seventeen additional managed dental centers, as well as a full year's
amortization on the management agreements capitalized in October 1996.
INTEREST INCOME, NET. Interest income, net increased 1168.3% from $20,781
income for the year ended December 31, 1996, to $263,568 income for the year
ended December 31, 1997. This increase was attributable primarily to earnings on
cash balances associated with Dental Care Alliance's public offering in November
1997.
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YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
MANAGEMENT FEES. Management fees increased 151.1% from $513,705 in 1995 to
$1.3 million in 1996. This increase resulted primarily from the October 1996
revision to the management agreements and, to a significantly lesser extent, the
execution of four new management agreements.
CONSULTING AND LICENSING FEES. Consulting and licensing fees increased
32.3% from $262,769 in 1995 to $347,600 in 1996. This increase was attributable
primarily to an increase in the consulting fees earned from the Michigan
practices, additional license fees earned from four new managed dental centers
and a full year of license fees from four managed dental centers acquired in
1995.
MANAGED DENTAL CENTER EXPENSES. Managed dental center expenses increased
from $0 in 1995 to $603,138 in 1996. This increase was attributable to the
revisions to the management agreements in October 1996. Prior to 1996, Dental
Care Alliance was not responsible for any managed dental center expenses.
SALARIES AND BENEFITS. Salaries and benefits increased 30.2% from $400,669
in 1995 to $521,683 in 1996. This increase was attributable primarily to the
hiring of additional staff at four new managed dental centers.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased
11.1% from $234,577 in 1995 to $260,558 in 1996. This increase was attributable
to increased expense associated with the revised management agreements and the
cost of incorporating and recapitalizing Dental Care Alliance.
ADVISORY SERVICES. Advisory services expense relates to non-cash charges
for warrants issued in consideration of certain advisory services rendered to
Dental Care Alliance by a third party. Advisory services expense decreased from
$127,768 in 1995 to $0 in 1996 as a result of a one time recognition in 1995 of
such expense.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 25.1% from $22,106 in 1995 to $27,654 in 1996. This increase was
attributable to depreciation of additional equipment, amortization of
incorporation costs and amortization of management agreements capitalized in
October 1996 in connection with the revision of the management agreements.
INTEREST INCOME, NET. Interest income, net increased 220.0% from $6,494 in
1995 to $20,781 in 1996. This increase was attributable primarily to earnings on
increased cash balances and earnings on notes receivable from managed dental
centers.
SEASONALITY
Dental Care Alliance historically has experienced seasonal fluctuations in
its quarterly revenue. Specifically, the first and fourth quarters reflect the
highest patient volume, while the third quarter has traditionally had the lowest
patient volume. The managed dental centers in Florida have traditionally
experienced increased patient visits in November through March due to an
increase in the population base during these months, while patient visits
decrease during the summer. Dental Care Alliance began managing additional
managed dental centers in Michigan and Georgia in July 1997 and March 1998,
respectively, and has recently commenced management of additional managed dental
centers in Indiana. Dental Care Alliance expects that the seasonality in Florida
will be offset to some extent by fewer seasonal fluctuations in Michigan,
Georgia and Indiana.
QUARTERLY FINANCIAL INFORMATION
The following table sets forth unaudited quarterly operating results for
each of Dental Care Alliance's last four quarters. This information has been
prepared on a basis consistent with Dental Care Alliance's audited financial
statements and includes all adjustments (consisting only of normal recurring
adjustments)
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that management considers necessary for a fair presentation of the data. These
quarterly results are not necessarily indicative of future results of
operations.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1997 1998 1998 1998
------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Number of managed dental centers(1)..... 20 29 44 49 55
Total revenues.......................... 2,256,950 2,970,035 4,932,971 7,163,744 8,030,406
Managed dental center expenses.......... 1,753,070 2,130,256 3,266,401 4,728,111 5,341,355
Operating income........................ 115,246 246,296 909,898 1,195,913 1,446,727
Net income.............................. 75,648 285,046 700,928 833,813 964,137
</TABLE>
- ------------------------
(1) Presented as of the end of the period.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception and until Dental Care Alliance's public offering on
November 4, 1997, Dental Care Alliance financed its operations primarily through
internal cash flow, the sale of equity securities and commercial bank
borrowings. Net cash provided by operations for the years ended December 31,
1995, 1996 and 1997 and the nine months ended September 30, 1998 was $75,873,
$270,121 $557,767 and $718,050, respectively. Net cash provided by operating
activities for the years ended December 31, 1995, 1996 and 1997 and the nine
months ended September 30, 1998 consisted primarily of net income, adjusted for
non-cash expenses, and increases in accounts payable and accrued liabilities,
offset by increases in consulting and license fee receivables and management
fees receivable.
Cash used in investing activities for the years ended December 31, 1995,
1996 and 1997 and the nine months ended September 30, 1998 was ($5,649),
($487,858), ($2.0 million) and ($13.1 million), respectively. For the year ended
December 31, 1995, payments on notes receivable offset a $20,000 increase in
other assets. For the year ended December 31, 1996, the investing activities
were primarily related to organizational costs associated with the formation of
Dental Care Alliance in October 1996 through a reorganization of its predecessor
entities. For the year ended December 31, 1997, the investing activities
included $1.0 million related primarily to the purchase of management agreements
for the four Michigan managed dental centers and $613,006 related primarily to
the purchase of non-dental assets for three additional managed dental centers
and certain equipment purchases for the corporate office expansion. For the nine
months ended September 30, 1998, the investing activities included $9.3 million
related primarily to the purchase of management agreements, $2.9 million related
to the purchase of non-dental assets, $468,487 related to satisfaction of
outstanding obligations on acquisitions and affiliations and $450,000 related to
an increase in notes receivable to professional associations.
Cash (used in) provided by financing activities for the and the years ended
December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1998
was ($69,926), $1,428,803, $20,572,424 and ($352,543), respectively. In the year
ended December 31, 1995, the financing activities included $45,692 in debt
repayments and $40,000 in dividends on Dental Care Alliance's preferred stock.
For the years ended December 31, 1996, the financing activities were primarily
related to net proceeds on Dental Care Alliance's issuance of preferred stock.
For the year ended December 31, 1997, Dental Care Alliance had $21.2 million in
net proceeds on common stock issuances offset by $466,967 in advances to
professional associations and $167,945 in net repayment of debt. For the nine
months ended September 30, 1998 Dental Care Alliance had $2.3 million in net
proceeds on long-term debt offset by $2.5 million in working capital advances to
professional associations.
In August 1997, Dental Care Alliance entered into a revolving line of credit
which provides for an aggregate of $1.2 million. Under the terms of the credit
agreement, Dental Care Alliance may use up to
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$600,000 of the credit line for the purchase of non-dental assets of dental
centers provided that each borrowing is repaid within 45 days of its drawdown.
The remaining $600,000 may be used for general working capital needs. The
revolving line of credit bears interest at 0.75% per annum above the lender's
prime rate and is payable on demand. Interest only is payable monthly. Amounts
borrowed pursuant to the credit agreement are secured by a first security
interest in most of Dental Care Alliance's assets, including receivables and
equipment. Additionally, any outstanding balances under the working capital line
are guaranteed by Dr. Matzkin.
On May 14, 1998, Dental Care Alliance executed a $15 million revolving note
with NationsBank, N.A. which replaced the credit agreement. The revolving note
is intended to provide funds for the acquisition and affiliation with dental
practices and working capital uses in a revolving line of credit facility. The
note matures in one year, with annual renewals thereafter. Dental Care Alliance,
and its subsidiaries, have pledged substantially all of its assets as
collateral. The note bears interest at 1.75% over LIBOR, payable monthly. Dental
Care Alliance is required to maintain certain financial covenants during the
term of the note. As of September 30, 1998, Dental Care Alliance had $1.0
million outstanding against the revolving note.
Dental Care Alliance previously has made loans to various professional
associations in connection with the professional associations' acquisition of
assets of dental practices and has made working capital advances to various
professional associations for their operations. The loans, which are evidenced
by interest-bearing notes that are payable upon demand, are being paid in
accordance with their terms. Both the loans and advances are generally
personally guaranteed by the professional association owners or secured by
specific assets.
Dental Care Alliance intends to enter into additional management agreements
with respect to, as well as purchase the non-dental assets of, additional
practices. In addition, Dental Care Alliance intends to acquire management
agreements or lend money to professional associations to fund the purchase of
the assets of additional dental practices. Dental Care Alliance plans to finance
these activities through a combination of the available cash, cash flow from
operations, bank financing and issuances of Dental Care Alliance common stock.
On November 4, 1997, Dental Care Alliance completed the public offering of
2,000,000 shares of Dental Care Alliance common stock at $12 per share resulting
in proceeds, net of underwriter commissions and offering costs, of approximately
$21.2 million. Based upon Dental Care Alliance's anticipated needs for
acquisition of non-dental assets of dental practices, working capital and
general corporate purposes, management believes that the combination of existing
cash, cash flow from operations, available credit lines and net proceeds from
its initial public offering will be sufficient to meet its capital requirements
for the next 12 months.
INFLATION
Inflation has not had a significant impact on Dental Care Alliance in the
past nor is it expected to have a significant impact in the foreseeable future.
YEAR 2000 COMPLIANCE
Dental Care Alliance has taken certain measures intended to avoid Year 2000
problems. In evaluating the Year 2000 readiness of its information technology
systems, Dental Care Alliance has taken certain preventive measures. In November
1997, Dental Care Alliance installed a new back-end (corporate office)
information technology system specifically designed to avoid Year 2000 concerns.
Dental Care Alliance continues to update and enhance this system with Year 2000
- -compliant software. The front-end (dental office) information technology
systems vary from office to office, and many of such systems are not Year 2000
compliant. Dental Care Alliance intends to take advantage of Gentle Dental's
in-house
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management information systems staff to resolve these front-end deficiencies. In
addition, it is expected that the new company will integrate an entirely new
front-end package to deal with these deficiencies.
There are also potential Year 2000 problems associated with non-information
technology systems of certain entities with whom Dental Care Alliance conducts
business-related activities: its banks, a co-employer and entities from whom
Dental Care Alliance receives reimbursements, such as insurance companies and
state agencies. The banks and the co-employer have indicated that they have
taken or will take steps to ensure that their systems are Year 2000 compliant.
Dental Care Alliance does not believe that failure of these parties successfully
to rectify Year 2000 problems will materially adversely affect its business,
except to the extent that third party reimbursements are delayed as a result of
Year 2000 problems.
Dental Care Alliance estimates its cost of Year 2000 compliance will
aggregate approximately $500,000.
The most reasonably likely worst case scenario for Dental Care Alliance
resulting from Year 2000 issues are as follows: billing and cash collection will
be delayed if Dental Care Alliance is unable to deliver information
technology-based billings to patients and receive information technology-based
reimbursements from third parties. If Year 2000 problems were to effect Dental
Care Alliance's front-end systems, it would be necessary to bill patients based
upon manual calculation, which could delay cash flows for up to several months.
If this problem were to occur, Dental Care Alliance would attempt to collect
payments from patients at the time of service.
Dental Care Alliance has outlined a contingency plan to deal with potential
Year 2000 problems. First, it has obtained an alternative Year 2000 compliant
front-end system, now being tested, in the event there are unforeseen problems
with installing the front-end system currently utilized by Gentle Dental. In
addition, Dental Care Alliance is maintaining some availability under its loan
agreement in anticipation of any cash flow shortages resulting from Year 2000
problems.
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DENTAL CARE ALLIANCE'S
MANAGEMENT AND ADDITIONAL INFORMATION
DIRECTORS AND EXECUTIVE OFFICERS
Dental Care Alliance's executive officers and directors who will become
executive officers and/or directors of the new company, their ages and positions
with Dental Care Alliance are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Dr. Steven R. Matzkin............... 40 Chairman of the Board, Chief Executive Officer and President
Mr. Mitchell B. Olan................ 40 Vice President, Chief Operating Officer and Director
Mr. David P. Nichols................ 40 Chief Financial Officer
Mr. Curtis Lee Smith, Jr............ 71 Director
Mr. Robert F. Raucci................ 42 Director
</TABLE>
DR. STEVEN R. MATZKIN founded Dental Care Alliance's predecessors in 1992
and 1993 and serves full-time as Dental Care Alliance's Chairman of the Board,
Chief Executive Officer and President. Dr. Matzkin has over 14 years of
experience in the administration and management of dental practices. He
practiced dentistry in Michigan for six years, during which time he owned five
dental practices and managed over 25 dental practices through an affiliate
management company. Dr. Matzkin has also been featured as a guest speaker at
regional practice management conferences, including the national meeting for the
National Association of Dental Plans. Dr. Matzkin earned his BA degree in 1980
from the Indiana School of Biology and his DDS degree in 1984 from Northwestern
University.
MITCHELL B. OLAN has served as Dental Care Alliance's Vice President, Chief
Operating Officer, and as a director since 1994. From 1991 to 1994, Mr. Olan
served in various capacities, including area Vice President and Regional Vice
President at Optioncare Incorporated, a publicly traded national franchiser of
home infusion therapy businesses. From 1980 to 1990, Mr. Olan served in various
capacities, including sales, sales management, general management and
administration with the ORMCO Division of Sybron Corporation. ORMCO is the
leading manufacturer and marketer of dental orthodontic appliances, equipment
and supplies. Mr. Olan earned a BS degree in Business Administration in 1980
from Indiana University School of Business.
DAVID P. NICHOLS has served as Dental Care Alliance's Chief Financial
Officer since 1997. From 1994 until 1997, Mr. Nichols served as Chief Financial
Officer at Biodynamics International, Inc., a publicly traded company in the
biotechnology business. From 1993 until 1994, Mr. Nichols served as Vice
President--Finance of Biodynamics. He was also Managing Director, United States
Operations, of Biodynamics from 1996 until 1997. From 1992 until 1993, Mr.
Nichols served as Chief Financial Officer of KiMed Corporation, a medical device
company. Prior to joining Dental Care Alliance, Mr. Nichols had over sixteen
years experience in the health care field. He served as Chief Financial Officer
of the long term care division of Trizec Corporation, Ltd., and was in public
accounting with the audit divisions of PricewaterhouseCoopers, LLP and Deloitte
& Touche LLP. Mr. Nichols earned his BS degree from the University of Florida in
1979 and a masters degree in Accounting from the University of Florida in 1980.
He is a Certified Public Accountant and a Certified Management Accountant.
CURTIS LEE SMITH, JR. has been a director of Dental Care Alliance since
1996. Beginning in 1987, Mr. Smith served as Chairman of the Board and Chief
Executive Officer of Handex Corporation, an environmental consulting and
remediation company which became a public company in 1989. Handex Corporation
acquired New Horizons Computer Learning Centers, a software training company, in
1994.
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Handex Corporation sold its environmental division in 1996 and now operates as
New Horizons Worldwide, of which Mr. Smith serves as Chairman of the Board and
Chief Executive Officer. Mr. Smith serves as a director of Strategic Diagnostics
I.
ROBERT F. RAUCCI has been a director of Dental Care Alliance since 1996. Mr.
Raucci has been a managing member of Newlight Management, LLC, a technology
oriented venture capital fund, since 1997. Mr. Raucci also has served as
president of RAM Investment Corporation, a venture capital investment and
advisory company, since 1994. Between 1985 and 1994, Mr. Raucci served as a
private equity investment manager for Alliance Capital Management Corporation, a
global investment management company. Mr. Raucci serves as a director of
Acrodyne Communications, Inc., a publicly traded manufacturer and marketer of
television transmitters and translators.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by Dental Care Alliance
during the fiscal years ended December 31, 1996 and 1997 to the executive
officers identified in the table.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------------- ---------------
OTHER ANNUAL SECURITIES
COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) OPTIONS(#)(2) COMPENSATION
- -------------------------------------- --------- --------- ----------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Dr. Steven R. Matzkin ................ 1997 200,000 -- -- 8,000 --
Chairman of the Board 1996 200,000 -- -- -- --
Chief Executive Officer
and President(3)
Mitchell B. Olan ..................... 1997 135,000 -- -- 8,000 --
Vice President, Chief 1996 126,000
Operating Officer and
Director(3)
</TABLE>
- ------------------------
(1) The aggregate amount of perquisites and other personal benefits provided to
such named executive officer is less than 10% of the total annual salary and
bonus of such officer.
(2) All options are exercisable at $12.00 per share of Dental Care Alliance
common stock.
(3) See "Dental Care Alliance's Management and Additional
Information--Employment Agreements" for information regarding current and
future compensation arrangements.
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OPTION GRANTS
The following table sets forth certain information with respect to options
to purchase shares of Dental Care Alliance common stock granted to the executive
officers identified in the table during 1997 and represents all options granted
by Dental Care Alliance to such executive officers during such period. In
accordance with rules promulgated by the Securities and Exchange Commission, the
table also describes the hypothetical gains that would exist for the respective
options based on assumed rates of annual compound stock appreciation of 5% and
10% from the date of grant to the end of the option term. These hypothetical
gains are based on assumed rates of appreciation and, therefore, the actual
gains, if any, on stock option exercises are dependent on the future performance
of Dental Care Alliance common stock, overall stock market conditions, and the
executive officer's continued employment with Dental Care Alliance. As a result,
the amounts reflected in this table may not necessarily be achieved.
OPTION/SAR GRANTS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(2)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME GRANTED (#) FISCAL YEAR (%) ($/SH) DATE 5%($) 10%($)
- ------------------------------------- -------------- --------------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dr. Steven R. Matzkin................ 8,000(3) 11.1 12.00 11/2007 136,827 217,874
Mitchell B. Olan..................... 8,000(3) 11.1 12.00 11/2007 136,827 217,874
</TABLE>
- ------------------------
(1) Dental Care Alliance has not granted any stock appreciation rights. Does not
include information relating to options granted under Dental Care Alliance's
1997 Non-Qualified Stock Option Plan, which options are not granted to
employees of Dental Care Alliance.
(2) Potential realizable value assumes that any shares acquired by the exercise
of options are held until the end of the 10-year term.
(3) Options were granted pursuant to Dental Care Alliance's 1997 Executive
Incentive Compensation Plan in November 1997. All such options are for a
term of ten years and vest 3,000 in May 1998 and the remaining 5,000 in
one-third increments over the next three years.
OPTION EXERCISES. The following table sets forth stock option exercises
during 1997 by the named executive officers, including the value realized upon
exercise. In addition, this table describes the number of unexercised options
and the value of unexercised in-the-money options at the end of the 1997 fiscal
year.
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AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND DECEMBER 31, 1997 OPTION/SAR VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS/SARS AT
OPTIONS/SARS AT DECEMBER 31, 1997
DECEMBER 31, 1997(#) ($)(2)
-------------------- ---------------------
SHARES ACQUIRED ON VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------- ------------------ ---------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Dr. Steven R. Matzkin.......... 0 0 4,667/3,333 $ 0/$0
Mitchell B. Olan............... 163,080(3) 272,768 4,667/3,333 $ 0/$0
</TABLE>
- ------------------------
(1) Dental Care Alliance has not granted any stock appreciation rights. Does not
include information relating to options granted under Dental Care Alliance's
1997 Non-Qualified Stock Option Plan, which options are not granted to
employees of Dental Care Alliance.
(2) At September 30, 1998, the closing market price of a share of Dental Care
Alliance common stock was $10.125 and the value of unexercised in-the-money
options was $0 for the options held by Messrs. Matzkin and Olan.
(3) Such shares were issued pursuant to warrants to purchase 81,540 shares of
Dental Care Alliance common stock granted to Mr. Olan in January 1994 and
warrants to purchase 81,540 shares of Dental Care Alliance common stock
granted to Mr. Olan in October 1996.
EMPLOYMENT AGREEMENTS
Dental Care Alliance has entered into employment agreements with Dr. Steven
R. Matzkin, Chairman of the Board, Chief Executive Officer and President of
Dental Care Alliance, Mitchell B. Olan, Vice President and Chief Operating
Officer of Dental Care Alliance, and David P. Nichols, Chief Financial Officer
of Dental Care Alliance. The employment agreements of Messrs. Matzkin and Olan
were entered into as of October 25, 1996, and are for terms of five years and
four years, respectively. The employment agreement of Mr. Nichols was entered
into as of January 1997 and is for a term of four years. These agreements
provide for annual base salaries to Messrs. Matzkin, Olan and Nichols of
$200,000, $120,000 and $120,000, respectively, subject to increase at Dental
Care Alliance's discretion. Pursuant to the agreements, Dr. Matzkin and Messrs.
Olan and Nichols are entitled to receive 60%, 25% and 15%, respectively, of an
annual bonus pool which is equal to 50% of Dental Care Alliance's net income in
excess of Dental Care Alliance's budgeted net income for each year. Bonuses paid
to Dr. Matzkin, Mr. Olan and Mr. Nichols in any year may not exceed $200,000,
$100,000, and $50,000, respectively. Dr. Matzkin's, Mr. Olan's and Mr. Nichols'
employment agreements entitle them to participate in any stock option plan of
Dental Care Alliance at a level commensurate with their positions. Mr. Olan's
employment agreement entitled him to warrants to purchase 163,080 shares of
common stock for an aggregate exercise price of $272,768. These warrants were
exercised in February 1997. Upon Dental Care Alliance's constructive discharge
of Dr. Matzkin or termination of the employment of Dr. Matzkin without cause, as
specified in his employment agreement, Dr. Matzkin shall be entitled to receive
his base salary for the period commencing on the effective date of the
termination and ending on the later to occur of (x) the second anniversary of
the date of termination or (y) the end of the five-year term of the employment
agreement. Upon Dental Care Alliance's termination of Mr. Olan without cause, as
specified in his employment agreement, Mr. Olan shall be entitled to receive his
base salary for the period commencing on the date of termination and ending on
the date nine months thereafter. Upon Dental Care Alliance's termination of Mr.
Nichols without cause as specified in his employment agreement, Mr. Nichols
shall be entitled to receive his base salary for the period commencing on the
date of termination and ending on the date six months thereafter. Upon
termination with cause or voluntary termination of either Dr. Matzkin, Mr. Olan
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or Mr. Nichols, such executive shall be entitled to receive his base salary
through the effective date of such termination.
Dr. Matzkin's employment agreement also provides that upon termination of
his employment for any reason, if Dental Care Alliance's securities are then
publicly traded, Dr. Matzkin has the right to request that Dental Care Alliance
register, as expeditiously as possible, any or all of Dental Care Alliance
common stock then owned by Dr. Matzkin, including all shares of Dental Care
Alliance common stock issuable pursuant to any derivative securities of Dental
Care Alliance then held by Dr. Matzkin.
The parties anticipate that upon consummation of the mergers, Dr. Matzkin
will enter into a three-year employment agreement with Wisdom Holdings, pursuant
to which Dr. Matzkin shall
- hold the offices of Co-Chairman, President and Chief Dental Officer of
Wisdom Holdings;
- receive a base salary of $245,000 per annum and shall be entitled to
participate in bonus, benefit and stock option plans generally available
to other senior executive officers of the combined company;
- receive an automobile allowance of $1,000 per month;
- be subject to covenants prohibiting disclosure of confidential information
of Wisdom Holdings and competition with, or solicitation of employees of,
Wisdom Holdings; and
- be entitled to severance payments for a period of 36 months if he is
terminated without cause or if he terminates his employment for good
reason.
CERTAIN TRANSACTIONS REGARDING DENTAL CARE ALLIANCE
In 1993, Dr. Matzkin sold four dental practices in Michigan to Dr. David
Ross Johnson, a dental director, for a $237,000 note under which payments
commenced in May 1997. In connection with that sale Profit Dental Management,
Inc., a corporation controlled by Dr. Matzkin, agreed to provide consulting
services to these practices for $18,000 per month until May 1997 and $15,000 per
month thereafter through May 2005. In July 1997, Dental Care Alliance purchased
the right to manage these practices for $846,000 and entered into a global
management agreement pursuant to which it will provide management services to
these practices until 2005. Dental Care Alliance subcontracted the day-to-day
management services to an affiliate of Dr. Johnson, but retains most other
management functions for which it retains 20% of net profits of these practices,
after certain adjustments, and Dr. Johnson's affiliate is paid 80% of such net
profits. Dental Care Alliance also receives $800 per month from each practice as
a licensing fee.
In July 1997, Dental Care Alliance entered into a management agreement with
a professional association in Michigan which was controlled by Dr. Matzkin. As
of September 30, 1997, Dr. Matzkin assigned the ownership of the capital stock
and all rights relating thereto to Dr. David Ross Johnson in consideration for
Dr. Johnson's assumption of all obligations to pay for such capital stock and
all obligations relating to such capital stock.
Certain of the managed dental centers lease their office facilities from
entities controlled by Dr. Matzkin. Such leases terminate at various times
between 2000 and 2004. Managed dental centers and Dental Care Alliance paid rent
pursuant to the leases in the aggregate amount of $193,900 in 1997 and have paid
$111,000 from January 1, 1998 through September 30, 1998. Dr. Matzkin also owns
certain dental laboratories that perform laboratory services for the managed
dental centers, primarily relating to the making of prostheses. In 1997 the
amount paid by the managed dental centers to such laboratories was $133,448 of
which $60,000 was advanced by Dental Care Alliance in 1996 and remains
outstanding at September 30, 1998, while the amount paid from January 1, 1998
through September 30, 1998 was $120,606. Dr. Matzkin owns 33.3% of the capital
stock of Equipment Management Services, an equipment leasing company. Certain
managed dental centers have entered into capitalized equipment leases with
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Equipment Management Services. Amounts paid by such managed dental centers to
Equipment Management Services pursuant to such leases aggregated approximately
$123,000 in 1997 and $20,000 from January 1, 1998 through September 30, 1998.
Dental Care Alliance believes that such arrangements are no less favorable to
such managed dental centers than could have been obtained in arms-length
transactions with unrelated third parties. In addition, Dr. Matzkin has
personally guaranteed an aggregate of approximately $1.6 million of indebtedness
of certain of the managed dental centers. Dental Care Alliance is currently
negotiating with the lenders to whom Dr. Matzkin has given such guarantees to
release Dr. Matzkin from his obligations thereunder and to cause Dental Care
Alliance to guaranty such obligations.
Pursuant to a Stockholders' Agreement among Dental Care Alliance and Dr.
Matzkin, Mr. Smith, Mr. Raucci, the SRM 1993 Children's Trust and Crescent
International Holdings, Inc. initially entered into in connection with the sale
of Dental Care Alliance's Series A preferred stock in October 1996, each
stockholder a party thereto received each of the following:
- "piggyback" registration rights;
- a right of first refusal with respect to a greater than 50% share transfer
by a stockholder prior to an initial public offering meeting certain
conditions;
- co-sale rights to participate on a pro rata basis in certain resales of
Dental Care Alliance common stock by other stockholders party to the
agreement (other than in connection with an initial public offering
meeting certain conditions; and
- participation rights with respect to certain issuances of securities by
Dental Care Alliance made prior to an initial public offering meeting
certain conditions.
In addition, stockholders party to the agreement who are also directors of
Dental Care Alliance, other than Dr. Matzkin, also were granted demand
registration rights under the Stockholders' Agreement. Mitchell B. Olan has been
granted certain "piggyback" registration rights with respect to an aggregate of
163,080 shares of Dental Care Alliance common stock pursuant to an agreement
with Dental Care Alliance. Pursuant to Dr. Matzkin's employment agreement, upon
termination of his employment for any reason, if Dental Care Alliance's
securities are then publicly traded, Dr. Matzkin has the right to request that
Dental Care Alliance register any or all of Dental Care Alliance common stock
then owned by Dr. Matzkin.
Upon consummation of the mergers, each affiliate of Wisdom Holdings,
including the above-mentioned stockholders, will receive, with respect to the
shares issued to such affiliates pursuant to the mergers and the shares issuable
upon exercise of options and warrants held by such affiliates, (a) "piggyback"
registration rights, and (b) one demand registration right per calendar year.
Wisdom Holdings will, however, be obligated to effect no more than one demand
registration during any calendar year. Upon a request for a demand registration
by any affiliate, all other affiliates will be entitled to participate in such
registration with all other affiliates electing to participate pro rata on the
basis of the number of registrable shares held by each participating affiliate.
Further, the combined company will not be required to cause a registration under
the above-described demand registration rights unless the aggregate offering
price of all registrable shares to be registered pursuant to such demand
registration rights, before deduction of underwriting discounts and commissions
exceeds $5,000,000.
For information regarding employment agreements with certain executive
officers and directors, see "--Employment Agreements." Dental Care Alliance has
adopted a policy whereby all transactions between Dental Care Alliance and one
or more of its affiliates must be approved in advance by a majority of Dental
Care Alliance's disinterested directors.
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DENTAL CARE ALLIANCE'S PRINCIPAL STOCKHOLDERS
The following table sets forth, as of September 30, 1998, the number of
shares of Dental Care Alliance common stock which were owned beneficially by (a)
each person known by Dental Care Alliance to own beneficially more than 5% of
Dental Care Alliance common stock, (b) the Chief Executive Officer and the other
most highly paid executive officers who were serving as such at September 30,
1998 and whose compensation for 1997 exceeded $100,000 (see "--Executive
Compensation"), (c) each director and (d) all directors and executive officers
of Dental Care Alliance as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP(2) OUTSTANDING SHARES OWNED
- ------------------------------------------- ---------------------- ----------------------------
<S> <C> <C>
Dr. Steven R. Matzkin(3)................... 1,519,995 21.6%
SRM '93 Children's Trust(4)................ 1,529,148 21.7%
Curtis Lee Smith, Jr.(5)................... 453,640 6.4%
Robert F. Raucci(6)........................ 22,119 *
Mitchell B. Olan(7)........................ 157,582 2.2%
David P. Nichols(8)........................ 52,243 *
Crescent International Holdings
Limited(9)............................... 593,119 8.4%
All directors and executive officers as a
group (6 persons)(10).................... 2,205,579 31.3%
</TABLE>
- ------------------------
* Less than one percent.
(1) Unless otherwise indicated, the address of each of the beneficial owners
identified above is c/o Dental Care Alliance, Inc., 1343 Main Street, 7th
floor, Sarasota, Florida 34236.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days upon the exercise of options or
warrants. Each beneficial owner's percentage ownership is determined by
assuming that options or warrants that are held by such person (but not
those held by any other person) and that are exercisable within 60 days
have been exercised. Unless otherwise noted, Dental Care Alliance believes
that all persons named in the table have sole voting and investment power
with respect to all shares of Dental Care Alliance common stock
beneficially owned by them.
(3) Includes 4,667 shares of Dental Care Alliance common stock issuable upon
exercise of options to purchase shares of Common Stock under the Incentive
Plan, which options will be exercisable within 60 days. Does not include
options to purchase 3,333 shares of Dental Care Alliance Common Stock,
which options are not presently exercisable under the incentive plan.
(4) Theodore L. Koenig is the sole trustee of SRM '93 Children's Trust and has
sole voting and investment control with respect to such shares.
(5) Includes 1,667 shares of Dental Care Alliance common stock issuable upon
exercise of options to purchase shares of common stock under the incentive
plan, which option is exercisable within 60 days of the date hereof.
Excludes 3,333 shares of Dental Care Alliance Common Stock issuable upon
exercise of options granted under the incentive plan, which options are not
currently exercisable.
(6) Includes 1,667 shares of Dental Care Alliance common stock issuable upon
exercise of options to purchase shares of Dental Care Alliance common stock
under the incentive plan, which option is exercisable within 60 days of the
date hereof. Excludes 3,333 shares of common stock issuable upon exercise
of options granted under the incentive plan, which options are not
currently exercisable.
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(7) Includes 4,667 shares of Dental Care Alliance common stock issuable upon
exercise of options to purchase shares of Dental Care Alliance common stock
under the incentive plan, which options will be exercisable within 60 days.
Does not include options to purchase 3,333 shares of Dental Care Alliance
common stock, which options are not presently exercisable under the
incentive plan.
(8) Includes 49,576 shares of Dental Care Alliance common stock issuable upon
exercise of options to purchase shares of Dental Care Alliance common
stock, which options are currently exercisable. Also includes 2,667 shares
of Dental Care Alliance common stock issuable upon exercise of options to
purchase Dental Care Alliance common stock under the incentive plan, which
option is exercisable within 60 days of the date hereof. Does not include
options to purchase 5,333 shares of Dental Care Alliance common stock,
which options are not presently exercisable under the incentive plan.
(9) Camile Saba and John Wolcott are attorneys-in-fact for Crescent
International Holdings Limited, a Greek corporation, and have joint voting
and investment control with respect to such shares.
(10) Includes 64,911 shares of Dental Care Alliance common stock issuable upon
exercise of options to purchase shares of Dental Care Alliance common
stock under the incentive plan, which options are currently exercisable or
will be exercisable within 60 days. Does not include options to purchase
18,665 shares of Dental Care Alliance common stock under the incentive
plan, which options are not presently exercisable.
DESCRIPTION OF WISDOM HOLDINGS CAPITAL STOCK
The following description contains a summary of material features of Wisdom
Holdings' capital stock but does not purport to be complete and is subject in
all respects to the applicable provisions of the Delaware General Corporation
Law, and is qualified in its entirety by reference to Wisdom Holdings'
Certificate of Incorporation.
WISDOM HOLDINGS COMMON STOCK
Each holder of Wisdom Holdings common stock will be entitled to one vote for
each share held on all matters voted upon by stockholders. Stockholders will not
be permitted to cumulate their votes for the election of directors. In the event
of the liquidation, dissolution or distribution of Wisdom Holdings' assets,
holders of Wisdom Holdings common stock will be entitled to share ratably in any
of its remaining assets legally available for distribution to its stockholders
after payment of all liabilities and amounts owed with respect to any
outstanding Wisdom Holdings preferred stock. Holders of Wisdom Holdings common
stock are not entitled to preemptive rights.
WISDOM HOLDINGS PREFERRED STOCK
Under Wisdom Holdings' Certificate of Incorporation, Wisdom Holdings' Board
of Directors is authorized without further stockholder action to provide for the
issuance of up to 30 million shares of Wisdom Holdings preferred stock in one or
more series and to fix the designations, number of shares, dividends, redemption
rights, sinking fund requirements liquidation preferences and other rights,
qualifications, limitations or restrictions of any such series of preferred
stock.
SERIES OF PREFERRED STOCK. Currently, no shares of any series or class of
Wisdom Holdings preferred stock are outstanding. At the effective time of the
mergers, shares of Wisdom Holdings Series A preferred stock, Wisdom Holdings
Series B preferred stock, Wisdom Holdings Series C preferred stock and Wisdom
Holdings Series D preferred stock will be authorized, and the rights,
preferences and privileges of such shares will be substantially identical to the
rights, preferences and privileges of the Gentle Dental Series A preferred
stock, Gentle Dental Series B preferred stock, Gentle Dental Series C preferred
stock and Gentle Dental Series D preferred stock, as the case may be. The
rights, preferences and privileges of the
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outstanding series of each Gentle Dental preferred stock is described below. See
"Description of Gentle Dental Capital Stock--Gentle Dental Preferred Stock."
DESCRIPTION OF GENTLE DENTAL CAPITAL STOCK
The following description contains a summary of material features of the
capital stock of Gentle Dental but does not purport to be complete and is
subject in all respects to the applicable provisions of the Washington Business
Corporation Act, and is qualified in its entirety by reference to the Gentle
Dental's Restated Articles of Incorporation, as amended.
GENTLE DENTAL COMMON STOCK
Each holder of Gentle Dental common stock is entitled to one vote for each
share held on all matters voted upon by shareholders. Shareholders are not
permitted to cumulate their votes for the election of directors. Because Gentle
Dental's Board of Directors is classified into three classes, shareholders elect
only the members of the Board of Directors whose class term is expiring at the
annual meeting and any members of the Board of Directors appointed to one of the
other classes during the term of such other class.
In the event of the liquidation, dissolution or distribution of assets of
Gentle Dental, holders of Gentle Dental common stock will be entitled to share
ratably in any remaining assets of Gentle Dental legally available for
distribution to the shareholders after payment of all liabilities and amounts
owed to shareholders of Gentle Dental preferred stock. Holders of Gentle Dental
common stock are not entitled to preemptive or redemption rights.
At September 30, 1998, Gentle Dental had 8,973,727 shares of Gentle Dental
common stock outstanding. In addition, options to purchase 1,292,304 shares of
Gentle Dental common stock had been granted under Gentle Dental's 1993 Stock
Incentive Plan (including certain option grants assumed in the merger with GMS
Dental Group, Inc.), but not exercised or terminated, leaving 690,390 shares
available for further grants under such plans.
GENTLE DENTAL PREFERRED STOCK
Under the Gentle Dental Articles of Incorporation, the Gentle Dental Board
of Directors is authorized without further shareholder action to provide for the
issuance of up to 30 million shares of Gentle Dental preferred stock in one or
more series and to fix the designations, number of shares, dividends, redemption
rights, sinking fund requirements, liquidation preferences and other rights,
qualifications, limitations or restrictions of any such series of preferred
stock.
As of September 30, 1998, Gentle Dental has designated the following series
of Gentle Dental preferred stock: 100 shares of Gentle Dental Series A preferred
stock, all of which are issued and outstanding; 70,000 shares of Gentle Dental
Series B preferred stock, none of which are presently outstanding, but which
will be issued under certain circumstances that would cause an automatic
conversion with outstanding convertible notes of Gentle Dental into shares of
Gentle Dental Series B preferred stock; 100 shares of Gentle Dental Series C
preferred stock, all of which are issued and outstanding; and 2,000,000 shares
of Gentle Dental Series D preferred stock, of which 1,628,664 shares are issued
and outstanding.
GENTLE DENTAL SERIES A PREFERRED STOCK. The Gentle Dental Series A
preferred stock ranks senior to the Gentle Dental common stock regarding
liquidation, is equal in preference with the Gentle Dental Series C preferred
stock but junior to all other series of Gentle Dental preferred stock. In the
event of any voluntary or involuntary liquidation, dissolution or winding-up of
the affairs of Gentle Dental, holders of Gentle Dental Series A preferred stock
will be entitled to receive, out of assets legally available for distribution to
shareholders before payment to holders of any outstanding stock with a
liquidation
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preference junior to the Gentle Dental Series A preferred stock, an amount equal
to $1.00 per share, subject to adjustment for any recapitalization, subdivision
or recombination. There is no dividend preference for the holders of Gentle
Dental Series A preferred stock. The shares of Gentle Dental Series A preferred
stock have no conversion rights but may be redeemed at the option of Gentle
Dental under certain circumstances and must be redeemed by Gentle Dental under
certain other circumstances, provided Gentle Dental has funds legally available
for such redemption. The holders of outstanding shares of Gentle Dental Series A
preferred stock have the right to elect one member of Gentle Dental's Board of
Directors, which member as of September 30, 1998, was Eric Green. Under certain
circumstances, the holders of Gentle Dental Series A preferred stock will be
entitled to elect one additional individual to the Gentle Dental Board of
Directors.
GENTLE DENTAL SERIES B PREFERRED STOCK. Although there presently are no
shares of Gentle Dental Series B preferred stock outstanding, if certain events
of default on Gentle Dental's 7% Convertible Subordinated Notes occur, the
convertible subordinated notes then outstanding will automatically convert into
shares of Gentle Dental Series B preferred stock at a rate of one share of
Gentle Dental Series B preferred stock for each $1,000 in principal and accrued
but unpaid interest on such convertible subordinated notes, subject to
adjustment for any recapitalization, subdivision or recombination. The Gentle
Dental Series B preferred stock ranks senior to all other classes and series of
equity securities of the corporation presently existing or created in the
future, with respect to dividend rights, rights of redemption, rights of
conversion and liquidation preferences. In the event of a liquidation, holders
of Gentle Dental Series B preferred stock then outstanding will be entitled to
receive, out of assets legally available therefor, an amount per share equal to
the greater of $1,000 or the amount such holder would receive as a holder of
Gentle Dental common stock upon conversion of such holder's Gentle Dental Series
B Preferred into Gentle Dental common stock. The holders of Gentle Dental Series
B preferred stock shall be entitled to receive, when, as and if declared by the
Gentle Dental Board of Directors, a cumulative dividend, which includes the
original cost of a share of Gentle Dental Series B preferred stock of $1,000,
plus an additional amount, which amount varies depending upon, among other
things, (a) whether there exists an event of default under the securities
purchase agreement between Gentle Dental and the holders of Gentle Dental Series
B preferred stock and (b) the interest rate applicable to the convertible
subordinated notes, as determined under such notes, for the dividend period in
question. Upon the occurrence of certain events, Gentle Dental is required to
redeem the outstanding shares of Gentle Dental Series B preferred stock at an
amount per share equal to the greater of $1,000, subject to adjustment for any
recapitalization, subdivision or recombination, or the fair value of such shares
determined in good faith by Gentle Dental and the holders thereof. The holders
of a majority of the outstanding shares of Gentle Dental Series B preferred
stock may elect to have Gentle Dental redeem all such shares any time on or
after the occurrence of an event of default under the securities purchase
agreement between Gentle Dental and the holders of Gentle Dental Series B
preferred stock. The redemption price per share is $1,000, plus accumulated but
unpaid dividends, provided there has not been a change in control. If there is a
change in control of Gentle Dental, the redemption price is equal to $1,010 per
share, plus accumulated but unpaid dividends. In any case, the redemption price
is subject to adjustment for any recapitalization, subdivision or recombination.
Gentle Dental may elect to redeem all or any portion of any Gentle Dental Series
B preferred stock outstanding at a per share price of $1,000, plus any accrued
but unpaid dividends. The holders of such redeemed shares shall be entitled to
receive a warrant initially exercisable for that number of shares of such Gentle
Dental common stock, including accrued and unpaid dividends thereon, into which
such redeemed shares would have been convertible in the event of an optional
conversion by the holders thereof. In the event of a change in control of Gentle
Dental, the redemption price applicable to a company-elected redemption shall be
increased by $10 per share, subject to adjustment for any recapitalization,
subdivision or recombination.
Each holder of shares of Gentle Dental Series B preferred stock may, at such
holder's option and at any time, convert any such share, or the accumulated but
unpaid dividends thereon, into 108.58 shares of Gentle Dental common stock,
subject to certain priced-based and other anti-dilution adjustments. In
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addition, upon the occurrence of certain events and the giving of notice and the
passage of an applicable time period, all shares of Gentle Dental Series B
preferred stock then outstanding shall be deemed automatically converted into
shares of Gentle Dental common stock; provided, such Gentle Dental common stock
is then listed on a national securities exchange or reported by the Nasdaq
National Market and is either registered under the Securities Act or freely
tradable under Rule 144 of the Securities Act within six months of the date of
issuance. In addition to the rights provided under the Washington Business
Corporation Act, holders of Gentle Dental Series B preferred stock are entitled
to vote on all matters, holders of Gentle Dental common stock are entitled to
vote on, together with the common stockholders as a single class. Each share of
Gentle Dental Series B preferred stock shall entitle its holder to the number of
votes the holder would be entitled to as a holder of Gentle Dental common stock
had such holder converted that share of Gentle Dental Series B preferred stock
into shares of Gentle Dental common stock.
GENTLE DENTAL SERIES C PREFERRED STOCK. The Gentle Dental Series C
preferred stock ranks senior to the Gentle Dental common stock, equal to the
Gentle Dental Series A preferred stock and junior to all other classes and
series of equity securities of Gentle Dental presently existing or created in
the future, with respect to rights of redemption and liquidation. In the event
of any voluntary or involuntary liquidation, dissolution or winding-up of the
affairs of Gentle Dental, holders of Gentle Dental Series C preferred stock will
be entitled to receive, out of assets legally available for distribution to
shareholders before payment to holders of any stock with a liquidation
preference junior to the Gentle Dental Series C preferred stock, an amount equal
to $1.00 per share of such Gentle Dental Series C preferred stock, subject to
adjustment in the event of any change in the number and kind of shares of Gentle
Dental Series C preferred stock for any recapitalization, subdivision or
recombination. There is no dividend preference for the holders of Gentle Dental
Series C preferred stock. The shares of Series C preferred stock have no
conversion rights. Upon the occurrence of certain events, the holders of
outstanding shares of Gentle Dental Series C preferred stock shall be entitled
to elect one member of the Gentle Dental Board of Directors. The holders of the
Gentle Dental Series C preferred stock generally are not entitled to a
shareholder's vote, except for a vote required under the Washington Business
Corporation Act or under the Gentle Dental Articles of Incorporation. The
holders of Gentle Dental Series C preferred stock are entitled to a separate
vote on the mergers. The shares of Gentle Dental Series C preferred stock must
be redeemed under certain circumstances at a price per share of $1.00, subject
to adjustment for any recapitalization, subdivision or recombination and subject
to Gentle Dental having funds legally available for such redemption.
GENTLE DENTAL SERIES D PREFERRED STOCK. The Gentle Dental Series D
preferred stock ranks senior to all other classes and series of equity
securities of Gentle Dental presently existing or created in the future,
including the Gentle Dental Series A preferred and Series C preferred stocks,
but ranks junior to the Gentle Dental Series B preferred stock, with respect to
dividend rights, rights of redemption, rights of conversion and liquidation
preference. In the event of a liquidation, holders of Gentle Dental Series D
preferred stock then outstanding will be entitled to receive, out of assets
legally available therefore, an amount per share equal to the greater of $9.21
(subject to adjustment for any recapitalization, subdivision or recombination)
or the amount such holder would receive as a holder of Gentle Dental common
stock received by such holder upon conversion of such holder's Gentle Dental
Series D preferred stock.
The holders of Gentle Dental Series D preferred stock shall be entitled to
receive, when, as and if declared by the Gentle Dental Board of Directors, a
cumulative dividend of $.64 each dividend period, commencing February 17, 1999.
In addition, holders of Gentle Dental Series D preferred stock are also entitled
to participate, on an as converted basis, in any dividends declared and paid on
Gentle Dental common stock. The holders of a majority of the outstanding shares
of Gentle Dental Series D preferred stock may elect to have Gentle Dental redeem
all such shares any time on or after the occurrence of an event of default under
the securities purchase agreement between Gentle Dental and the holders of
Gentle Dental Series D preferred stock. The redemption price per share is $9.21,
plus accumulated but unpaid
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dividends, provided there has not been a change in control. If there is a change
in control, the redemption price is equal to $9.30 per share, plus accumulated
but unpaid dividends. In any case, the redemption price is subject to adjustment
for any recapitalization, subdivision or recombination. Gentle Dental may elect
to redeem all or any portion of the Gentle Dental Series D preferred stock
outstanding at a per share price of $9.21, plus accumulated but unpaid
dividends. The holders of such redeemed shares shall be entitled to receive a
warrant initially exercisable for that number of shares of Gentle Dental common
stock into which such redeemed shares would have been converted in the event of
an optional conversion by the holders thereof. In the event of a change in
control of Gentle Dental, the redemption price applicable to a company-elected
redemption shall be increased by $9.30 per share, subject to adjustment for any
recapitalization, subdivision or recombination.
Each holder of a share of Gentle Dental Series D preferred stock may at any
time and at such holder's option, convert any such share, or the accumulated but
unpaid dividends thereon, into one share of Gentle Dental common stock, subject
to certain price based and other anti-dilution adjustments. In addition, upon
the occurrence of certain events, the giving of notice and the passage of an
applicable time period, all shares of Gentle Dental Series D preferred stock
then outstanding shall be deemed automatically converted into shares of Gentle
Dental common stock; provided, such Gentle Dental common stock is then listed on
a national securities exchange or reported by the Nasdaq National Market and is
either registered under the Securities Act or freely tradable under Rule 144 of
the Securities Act within six months of the date of issuance. In addition to the
rights provided under the Washington Business Corporation Act, the holders of
Gentle Dental Series D preferred stock are entitled to vote on all matters as to
which holders of Gentle Dental common stock are entitled to vote, together with
the common shareholders as a single class. Each share of Gentle Dental Series D
preferred stock shall entitle its holder to the number of votes the holder would
be entitled to as a holder of Gentle Dental common stock had such holder
converted such share of Gentle Dental Series D preferred stock into shares of
Gentle Dental common stock.
7% CONVERTIBLE SUBORDINATED NOTES. On May 18, 1998 Gentle Dental issued
$25,500,000 of convertible subordinated notes and on June 3, 1998, Gentle Dental
issued an additional $4,500,000 of convertible subordinated notes. The
convertible subordinated notes have an 8-year term and are convertible into
shares of Gentle Dental common stock at a conversion rate equal to one share of
common stock for each $9.21 of outstanding principal and accrued but unpaid
interest on such convertible subordinated notes. If certain events of default
occur, the convertible subordinated notes then outstanding will automatically
convert into shares of Gentle Dental Series B preferred stock at a rate of one
share of Gentle Dental Series B preferred stock for each $1,000 in principal of,
and accrued but unpaid interest on the convertible subordinated notes, subject
to adjustment for any recapitalization, subdivision or recombination. Under the
securities purchase agreement between Gentle Dental and the holders of the
convertible subordinated notes, the consent of the holders of a majority of the
Gentle Dental common stock equivalents issuable upon conversion of the
convertible subordinated notes, is required for approval of the mergers. In
addition, Chase Venture Capital Associates, one of the holders of the
convertible subordinated notes, or its successors or assigns, must consent to
the mergers.
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DESCRIPTION OF DENTAL CARE ALLIANCE CAPITAL STOCK
DENTAL CARE ALLIANCE COMMON STOCK
The holders of Dental Care Alliance common stock are entitled to one vote
per share of record on all matters to be voted upon by stockholders and to vote
together as a single class for the election of directors and in respect of other
corporate matters. At a meeting of stockholders at which a quorum is present,
for all matters other than the election of directors, a majority of the votes
cast decides all questions, unless the matter is one upon which a different vote
is required by express provision of law or Dental Care Alliance's Certificate of
Incorporation or By-laws. Directors will be elected by a plurality of the votes
of the shares present at a meeting. There is no cumulative voting with respect
to the election of directors (or any other matter).
The holders of Dental Care Alliance common stock have no preemptive rights
and have no rights to convert their Dental Care Alliance common stock into any
other securities. Subject to the rights of holders of Dental Care Alliance
preferred stock, if any, in the event of a liquidation, dissolution or winding
up of Dental Care Alliance, holders of Dental Care Alliance common stock are
entitled to participate equally and ratably in all assets remaining after
payment of liabilities and distribution of any preferential amount.
The holders of Dental Care Alliance common stock are entitled to receive
ratably such dividends as the Dental Care Alliance Board of Directors may
declare out of funds legally available therefor; when and if so declared,
subject to any preference in favor of outstanding shares of preferred stock, if
any. The payment by Dental Care Alliance of dividends, if any, rests within the
discretion of the Board of Directors and will depend upon Dental Care Alliance's
results of operations, financial condition and capital expenditure plans, as
well as other factors considered relevant by the Dental Care Alliance Board of
Directors.
DENTAL CARE ALLIANCE PREFERRED STOCK
At the effective time of the mergers, no shares of Dental Care Alliance
preferred stock will be outstanding. The Dental Care Alliance Board of
Directors, without further action by the stockholders, is authorized to issue up
to 5 million shares of Dental Care Alliance preferred stock in one or more
series and to fix and determine as to any series all the relative rights and
preferences of shares in such series, including, without limitation, relative
voting, dividend, redemption, liquidation, conversion and other powers,
preferences, rights, qualifications and limitations. The issuance of shares of
Dental Care Alliance preferred stock, or the issuance of rights to purchase such
shares, could be used to discourage an unsolicited acquisition proposal that
some, or a majority, of the Dental Care Alliance stockholders might believe to
be in the best interests of Dental Care Alliance or in which Dental Care
Alliance stockholders might receive a premium for their stock over the then
market price of such stock. In addition, under certain circumstances, the
issuance of Dental Care Alliance preferred stock could adversely affect the
voting power of the holders of Dental Care Alliance common stock.
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CERTAIN DIFFERENCES BETWEEN WASHINGTON
AND DELAWARE CORPORATE LAWS
The Washington Business Corporation Act governs the rights of Gentle Dental
shareholders and the Delaware General Corporation Law governs the rights of
Dental Care Alliance stockholders and will govern the rights of Gentle Dental
shareholders and Dental Care Alliance stockholders who will become stockholders
of Wisdom Holdings upon consummation of the merger. The Washington Business
Corporation Act and the Delaware General Corporation Law differ in many
respects, some of which could materially affect the rights of Gentle Dental
shareholders. These differences are discussed below.
AMENDMENT OF ARTICLES/CERTIFICATES OF INCORPORATION
Under the Washington Business Corporation Act, with certain exceptions,
amendments to a corporation's articles of incorporation must be recommended to
the shareholders by the board of directors, unless the board of directors
determines that because a conflict of interest or other special circumstances
exist it should make no recommendation and the board of directors communicates
the reasons for its determination to the shareholders with the amendment.
Amendments to the Gentle Dental Articles of Incorporation, subject to limited
exceptions, must be approved by a majority of the holders of the outstanding
shares of each class or series of capital stock entitled to vote as a separate
voting group, unless another proportion is specified in the Gentle Dental
Articles of Incorporation, is specified by the Board of Directors as a condition
to its recommendation of such amendment or is called for by a provision of the
Washington Business Corporation Act. Under the Washington Business Corporation
Act and the Gentle Dental Articles of Incorporation, each separate class or
series of capital stock is entitled to a class vote on certain extraordinary
transactions, such as the merger and related transactions described in the
merger agreement. See "--Class Voting" below.
Under the Delaware General Corporation Law, amendments to the Dental Care
Alliance and Wisdom Holdings Certificate of Incorporation require the approval
of stockholders holding a majority of the outstanding shares entitled to vote on
such amendment, and if a class vote on such amendment is required by the
Delaware General Corporation Law, a majority of the outstanding stock of each
such class entitled to vote, unless a greater portion is specified in the
Certificate of Incorporation or by a provision of the Delaware Law. Amendments
to the Dental Care Alliance Certificate of Incorporation governing the number,
term and removal of directors and the calling of special meetings of
stockholders must be approved by at least eighty percent of the holders of the
outstanding shares entitled to vote as a single class. The Wisdom Holdings
Certificate of Incorporation will require the affirmative vote of at least a
majority of the outstanding Wisdom Holdings capital stock to approve an
amendment. Also, under the Delaware General Corporation Law and the Wisdom
Holdings Certificate of Incorporation, each separate class or series of capital
stock will be entitled to a class vote on certain extraordinary transactions.
See "-- Class Voting" below.
RIGHT TO CALL SPECIAL MEETING OF STOCKHOLDERS
The Washington Business Corporation Act provides that a special meeting of
shareholders of a corporation may be called by its board of directors, by
holders of at least 10 percent of all the shares entitled to vote on any issue
proposed to be considered at the proposed special meeting, or by other persons
authorized to do so by the articles of incorporation or bylaws of the
corporation. However, the Washington Business Corporation Act allows the right
of shareholders to call a special meeting to be limited or denied entirely by
provision of the corporation's articles of incorporation. Gentle Dental's Bylaws
provide that its Board of Directors, Chairman of the Board, President, a
majority of the Board of Directors and any shareholder or shareholders holding
in the aggregate one-tenth of the voting power of all shareholders may call a
special meeting.
Under the Delaware General Corporation Law, a special meeting of
stockholders may be called by the board of directors or by any other person
authorized to do so in the certificate of incorporation or the bylaws. The
Dental Care Alliance Certificate of Incorporation provides that special meetings
may be called
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only by the Chairman of the Board of Directors or the Chief Executive Officer or
by the Board of Directors pursuant to a resolution approved by a majority of the
entire Board of Directors. Pursuant to the Wisdom Holdings' Certificate of
Incorporation, only the Wisdom Holdings Board of Directors, an authorized
committee of members of the Board of Directors or any other persons specified in
any amendments to or designations under the Wisdom Holdings' Certificate of
Incorporation may call special meetings of the stockholders.
INDEMNIFICATION OF OFFICERS, DIRECTORS AND EMPLOYEES
Under the Washington Business Corporation Act, if authorized by its articles
of incorporation, a bylaw adopted or ratified by its shareholders generally, or
a resolution adopted or ratified, before or after the event by its shareholders,
a corporation has the power to indemnify a director, officer or employee made a
party to a proceeding, or advance or reimburse expenses incurred in a
proceeding. However, no such indemnification is allowed for any of the
following:
- acts or omissions of a director, officer or employee finally adjudged to
have engaged in intentional misconduct or a knowing violation of the law;
- conduct of a director, officer or employee finally adjudged to be an
unlawful distribution; or
- any transaction with respect to which it was finally adjudged that such
director, officer or employee personally received a benefit in money,
property or services to which the director, officer or employee was not
legally entitled.
The legislative history of the Washington Business Corporation Act suggests
that a corporation may indemnify its directors, officers and employees for
amounts paid in settlement of derivative actions, provided that the director's,
officer's or employee's conduct does not fall within one of the categories set
forth above. The Gentle Dental Articles of Incorporation authorize the
corporation to indemnify any of its directors to the fullest extent permitted by
its By-laws and the Washington Business Corporation Act, including an advance of
expenses. Generally, Gentle Dental's By-Laws provide that Gentle Dental shall
indemnify its directors, officers and employees to the fullest extent permitted
by the Washington Business Corporation Act, including indemnification of persons
seeking to enforce indemnification rights through a proceeding authorized by the
Gentle Dental Board of Directors and initiated by such person.
Under the Delaware General Corporation Law, directors and officers as well
as other employees and agents may be indemnified against expenses (including
attorneys' fees), judgments, fines and amounts paid in a settlement regarding
specified actions, suits or proceedings, which do not include derivative
actions. This indemnification is permitted, however, only if the director,
officer or employee reasonably believed his or her actions were in the best
interests of the corporation. If the matter involves a criminal action or
proceeding, this indemnification is permitted only if the director, officer or
employee had no reasonable cause to believe that his or her conduct was
unlawful. Wisdom Holdings' and Dental Care Alliance's Certificates of
Incorporation each provide for the indemnification of directors and officers to
the fullest extent authorized by Delaware General Corporation Law.
PROVISIONS AFFECTING CONTROL SHARE ACQUISITIONS AND BUSINESS COMBINATIONS
The Washington Business Corporation Act generally prohibits a "target
corporation," from engaging in certain "significant business transactions" with
a person or group of persons that beneficially owns 10% or more of the voting
securities of a target corporation for a period of five years after the
acquisition of such securities. This prohibition does not apply if the
transaction or acquisition of shares is approved by a majority of the members of
the target corporation's board of directors prior to the date of the
acquisition. Significant business transactions with an acquiring person
includes, among other things, a merger or consolidation, disposition of assets
or issuance or redemption of stock. A termination of 5% or more of the employees
of the target corporation employed in State of Washington as a result of the
acquiring person's acquisition of 10% or more of the shares allowing the
acquiring person to receive any disproportionate benefit as a shareholder would
also be a significant business transaction. Target corporations include
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domestic corporations with their principal executive offices in and either a
majority or over 1,000 of their employees residing in the State of Washington.
Gentle Dental does not believe that it currently meets these standards or that
it is subject to the statute. A corporation may not "opt out" of this statute.
Section 203 of the Delaware General Corporation Law prohibits a Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for three years following the date that such person becomes an
interested stockholder. Generally, an interested stockholder is a person or
group who owns 15% or more of the corporation's outstanding voting stock
(including any rights to acquire stock pursuant to an option, warrant,
agreement, arrangement or understanding, or upon the exercise or conversion of
exchange rights), or is an affiliate or associate of the corporation and was the
owner of 15% or more of such voting stock at any time within the previous three
years.
For purposes of Section 203, the term "business combination" is defined
broadly to include the following:
- mergers with or caused by an interested stockholder;
- sales or other dispositions to an interested stockholder (except pro rata
with the corporation's other stockholders) of assets of the corporation or
a subsidiary having 10% or more of the aggregate market value of the
corporation's consolidation assets or its outstanding stock;
- the issuance of transfer by the corporation or a subsidiary of stock of
the corporation or such subsidiary to the interested stockholder (except
for certain transfers in a conversion or exchange or a pro rata
distribution or certain other transactions, none of which increase the
interested stockholder's proportionate ownership of any class or series of
the corporation's or such subsidiary's stock); or
- receipt by the interested stockholder (except proportionately as a
stockholder), directly or indirectly, of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation
or a subsidiary.
The three-year restriction on business combinations under Section 203 does
not apply in the following circumstances:
- prior to the date at which the stockholder becomes an interested
stockholder the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested stockholder;
- the interested stockholder owns 85% of the corporation's voting stock upon
consummation of the transaction which made him or her an interested
stockholder (excluding from the 85% calculation shares owned by directors
who are also officers of the target corporation and shares held by
employee stock plans which do not permit employees to decide
confidentially whether to accept a tender or exchange offer); or
- on or after the date such person becomes an interested stockholder, the
board of directors approves the business combination and it is also
approved at a shareholder meeting by at least 66 2/3% of the voting stock
not owned by the interested stockholder.
Section 203 does not apply if the business combination is proposed prior to
the consummation or abandonment of the proposed transaction, and after the
earlier to occur of the public announcement of the proposed transaction or the
notice required under Section 203 and the proposed transaction:
- constitutes certain (x) mergers or consolidations, (y) sales or other
transfers of assets having an aggregate market value equal to 50% or more
of the aggregate market value of all of the assets of the corporation
determined on a consolidated basis or the aggregate market value of all
the outstanding stock of the corporation or (z) proposed tender or
exchange offers for 50% or more of the corporation's outstanding voting
stock;
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- is with or by a person who was either not an interested stockholder during
the last three years or who became an interested stockholder with the
approval of the corporation's board of directors; and
- is approved or not opposed by a majority of the members of the
corporation's board of directors elected prior to any person becoming an
interested stockholder during the previous three years (or their chosen
successors).
A Delaware corporation may elect to "opt out" of, and not be governed by,
Section 203 through a provision in either its original certificate of
incorporation or its bylaws, or an amendment to its original certificate of
incorporation or bylaws, which amendment must be approved by a majority vote of
the stockholders entitled to vote thereon. With a limited exception, such an
amendment would not become effective until 12 months following its adoption.
Neither Dental Care Alliance nor Wisdom Holdings has opted out of Section 203.
MERGERS, SALES OF ASSETS AND OTHER TRANSACTIONS
Under the Washington Business Corporation Act, a merger, share exchange or
dissolution of a corporation must be approved by the affirmative vote of a
majority of directors when a quorum is present, and by each group entitled to
vote separately on the plan by two-thirds of all shares of voting stock for each
group entitled to a separate vote on the plan by that voting group, unless
another proportion is specified in the articles of incorporation. The Gentle
Dental Articles of Incorporation provide for the affirmative vote of
shareholders holding a majority of the outstanding voting shares to approve such
a transaction.
The Washington Business Corporation Act also generally provides that a
corporation may sell, lease, exchange or otherwise dispose of all, or
substantially all, of its property, other than in the usual and regular course
of business, or dissolve, if the board of directors recommends the proposed
transaction to the shareholders and the shareholders approve the transaction by
the affirmative vote of the holders of at lease two-thirds of shares of each
group entitled to vote separately on such proposed transaction, unless another
proportion is specified in the articles of incorporation. The Gentle Dental
Articles of Incorporation provide for the affirmative vote of shareholders
holding a majority of the outstanding voting shares to approve such a
transaction.
Under the Delaware General Corporation Law, a merger, consolidation or sale
of all or substantially all of the assets of a corporation must be approved by
the board of directors and by a majority (unless the certificate of
incorporation requires a higher percentage) of outstanding stock of the
corporation entitled to vote. No vote of stockholders of a constituent
corporation surviving a merger is required, unless specifically required by the
certificate of incorporation if:
- the merger agreement does not amend the surviving corporation's
certificate of incorporation,
- each share of stock of the surviving corporation outstanding immediately
prior to the merger is to be an identical outstanding or treasury share of
the surviving corporation after the merger, and
- the number of shares to be issued by the surviving corporation in the
merger does not exceed twenty percent of the shares outstanding
immediately prior to the merger. Neither the Dental Care Alliance
Certificate of Incorporation nor the Wisdom Holdings Certificate of
Incorporation contains a provision requiring a higher percentage of
stockholder votes to approve such a transaction.
ACTION WITHOUT A MEETING
Under the Washington Business Corporation Act, shareholder action that may
be taken at a shareholders' meeting may be taken by a public company without a
meeting if written consents describing such action are signed by all
shareholders entitled to vote thereon. The Gentle Dental By-Laws provide for
shareholder action without a meeting and by written consent.
Under the Delaware General Corporation Law, unless otherwise provided in a
corporation's certificate of incorporation, any action that may be taken at a
meeting of stockholders may be taken without a
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meeting, without prior notice and without a vote if the holders of outstanding
capital stock, having not less than the minimum number of votes that would be
necessary to authorize such action, consent in writing. The Dental Care Alliance
By-Laws provide that stockholders may not take action by written consent. The
Wisdom Holdings By-Laws provide that its stockholders may take action by written
consent.
CLASS VOTING
Under the Washington Business Corporation Act, a corporation's articles of
incorporation may authorize one or more classes of stock to have special,
conditional or limited voting rights, including the right to vote on certain
matters as a group. The articles of incorporation may not limit the rights of
holders of a class to vote as a group with respect to certain amendments to the
articles of incorporation and certain extraordinary transactions that adversely
affect the rights of holders of that class. The Gentle Dental Articles of
Incorporation authorize the issuance of future series of Gentle Dental preferred
stock. Generally, each series is vested with class voting rights regarding (a)
the issuance or authorization of any additional class of equity stock ranking
prior to the series affected and (b) any amendment of the Gentle Dental Articles
which would adversely affect the powers, preferences or other rights or
privileges of the series. One hundred shares of Gentle Dental Series A preferred
stock, one hundred shares of Gentle Dental Series C preferred stock and
1,628,633 shares of Gentle Dental Series D preferred stock are presently issued
and outstanding and each series is entitled to such class vote to approve the
mergers.
The Delaware General Corporation Law generally does not require class
voting, except for amendments to the certificate of incorporation that change
the number of authorized shares or the par value of shares of a specific class
or that adversely affect such class of shares. In addition, the Wisdom Holdings
Series A preferred stock, Wisdom Holdings Series C preferred stock and Wisdom
Holdings Series D preferred stock that will be deemed outstanding at the
effective time of the mergers will each be entitled to a class vote regarding
(a) the authorization or issuance, or increase in the authorized amount, of any
class of stock ranking senior to such series of Wisdom Holdings preferred stock
and (b) the approval of any amendment to the Wisdom Holdings Certificate of
Incorporation that would materially and adversely change the specific terms of
such series of Wisdom Holdings preferred stock.
TRANSACTIONS WITH OFFICERS OR DIRECTORS
The Washington Business Corporation Act sets forth a safe harbor for
transactions between a corporation and one or more of its directors. A
conflicting interest transaction may not be enjoined, set aside or give rise to
damages if: (a) it is approved by a majority of qualified directors (but no
fewer than two); (b) it is approved by the affirmative vote of the majority of
all qualified shares after notice and disclosure to the shareholders; or (c) at
the time of commitment, the transaction is established to have been fair to the
corporation. For purposes of this provision, a "qualified director" is one who
does not have either a conflicting interest respecting the transaction or a
familial, financial, professional or employment relationship with a second
director who does have a conflicting interest respecting the transaction, which
relationship would, under the circumstances, reasonably be expected to exert an
influence on the first director's judgment when voting on the transaction.
"Qualified shares" are generally defined as shares other than those beneficially
owned, or the voting of which is controlled, by a director or an affiliate of
the director, who has a conflicting interest in the transaction.
Under the Delaware General Corporation Law, certain contracts or
transactions in which one or more of a corporation's directors has an interest
are not void or voidable because of such interest provided that certain
conditions, such as obtaining the required approval and fulfilling the
requirements of good faith and full disclosure, are met. Under the Delaware
General Corporation Law, either the stockholders or the board of directors must
approve any such contract or transaction after full disclosure of the material
facts or the contract or transaction must have been "fair" as to the corporation
at the time it was approved. If board approval is sought, the contract or
transaction must be approved by a majority of disinterested directors (even if
less than a majority of quorum).
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DISSENTERS' OR APPRAISAL RIGHTS
Under the Washington Business Corporation Act, a shareholder is entitled to
dissent from and, upon perfection of the shareholder's appraisal right, to
obtain the fair value of his or her shares in the event of certain corporate
actions, including certain mergers, share exchanges, sales of substantially all
assets of the corporation, and certain amendments to the corporation's articles
of incorporation that materially and adversely affect shareholder rights.
However, shareholders generally will not have such dissenters' rights if
shareholder approval is not required to effect the corporate action being taken.
Under the Delaware General Corporation Law, a stockholder of a corporation
participating in certain major corporate transactions may be entitled, under
varying circumstances, to appraisal rights pursuant to which such shareholder
may receive cash in the amount of the fair market value of his or her shares in
lieu of the consideration he or she would otherwise receive in the transaction.
Unless a corporation's certificate of incorporation provides otherwise, such
appraisal rights are not available in the following circumstances:
- with respect to the sale, lease or exchange of all or substantially all of
the assets of the corporation,
- with respect to a merger or consolidation by a corporation with shares
either listed on a national securities exchange, the Nasdaq Small Cap
Market, or the Nasdaq National Market or are held of record by more than
2,000 holders if such stockholders receive only shares of the surviving
corporation, or shares of any other corporation with similarly listed
shares or with shares which are either listed on a national securities
exchange or on Nasdaq or held of record by more than 2,000 holders, plus
cash in lieu of fractional shares, or
- to stockholders of the corporation surviving a merger if no vote of the
stockholders of the surviving corporation is required to approve the
merger because the merger agreement does not amend the existing
certificate of incorporation, each share of the surviving corporation
outstanding prior to the merger is an identical outstanding or treasury
share after the merger, and the number of shares to be issued in the
merger does not exceed 20% of the shares of the surviving corporation
outstanding immediately prior to the merger and if certain other
conditions are met.
DIVIDENDS
Under the Washington Business Corporation Act, a corporation may make a
distribution in cash or in property to its shareholders upon the authorization
of its board of directors unless, after giving effect to such distribution, (1)
the corporation would not be able to pay its debts as they become due in the
usual course of business or (2) the corporation's total assets would be less
than the sum of its total liabilities plus, unless the corporation's articles of
incorporation permit otherwise, the amount that would be needed if the
corporation were to be dissolved at the time of the distribution to satisfy the
preferential rights of shareholders whose preferential rights are superior to
those receiving the distribution.
The Delaware General Corporation Law permits a corporation to declare and
pay dividends out of statutory surplus or, if there is no surplus, out of net
profits for the fiscal year in which the dividend is declared or for the
preceding fiscal year as long as the amount of capital of the corporation
following the declaration and payment of the dividend is not less than the
aggregate amount of the capital represented by the issued and outstanding stock
of all classes having a preference upon the distribution of assets. In addition,
the Delaware General Corporation Law generally provides that a corporation may
redeem or repurchase its shares only if such redemption or repurchase would not
impair the capital of the corporation.
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ADDITIONAL INFORMATION
DISSENTERS' OR APPRAISAL RIGHTS
The merger agreement constitutes a plan of merger for which shareholder
approval is required under the Washington Business Corporation Act. Pursuant to
Section 23B.3.010 through 23B.13.310 of the Washington Business Corporation Act,
any shareholder of Gentle Dental who gives proper notice and who does not vote
in favor of the mergers will, upon proper demand, have the right under the
Washington Business Corporation Act to obtain payment of the fair value of his
or her shares of Wisdom Holdings common stock, without giving effect to the
mergers.
Any shareholder electing to exercise dissenters' rights must file a written
notice of this intent with Gentle Dental, attention of the Secretary, at 222
North Sepulveda Boulevard, Suite 740, El Segundo, California 90245, prior to the
vote, and must not vote his or her shares in favor of the merger agreement. As
provided in Section 23B.13.030, a shareholder whose shares are held in a
brokerage account or by some other nominee must either have the record holder of
the shares file the dissenters' notice on the shareholder's behalf or obtain the
written consent of the record holder and file the shareholder's dissenters'
notice. These documents must be filed with the Secretary of Wisdom Holdings
prior to the vote on the merger agreement. A beneficial shareholder of Wisdom
Holdings common stock who chooses to exercise dissenters' rights must exercise
such rights with respect to all shares of Wisdom Holdings common stock either
beneficially held by such shareholder or over which such shareholder has power
to direct the vote. A VOTE IN FAVOR OF THE MERGER AGREEMENT WILL CONSTITUTE A
WAIVER OF DISSENTERS' RIGHTS. A VOTE AGAINST THE MERGER AGREEMENT WILL NOT
SATISFY THE REQUIREMENT THAT WRITTEN NOTICE BE FILED WITH WISDOM HOLDINGS IN
ORDER TO ASSERT DISSENTERS' RIGHTS.
For the purpose of dissenters' rights, the fair value of Gentle Dental
shares will be their value immediately prior to the effectiveness of the
mergers, excluding any appreciation or depreciation in anticipation of the
mergers, if any, unless exclusion would be inequitable. Shareholders considering
exercising their dissenters' rights should recognize that the fair value of
their shares of capital stock as determined under Section 23B.13.010 through
23B.13.310 could be more than, the same as or less than the value of their
shares if they do not exercise their appraisal rights.
If the merger agreement is approved by the requisite vote of shareholders,
Wisdom Holdings will, within ten days following the effective date of the
mergers, mail a notice to each shareholder who gave Gentle Dental due notice of
his or her intention to demand payment and who did not vote in favor of the
merger agreement. The notice will provide, among other things:
- the form of payment demand (including the date of the first announcement
to the shareholders of the terms of the mergers);
- where the payment demand must be delivered;
- when and where the certificated shares must be deposited; and
- the date by which Gentle Dental must receive the payment demand.
A shareholder who fails to make a timely or proper demand for payment (including
the deposit of certificates) in accordance with the notice is not entitled to
payment under the Washington Business Corporation Act for his or her shares. A
shareholder who fails to certify that he or she acquired beneficial ownership of
the shares prior to the date of the first announcement of the terms of the
mergers to the shareholders may not receive immediate payment for his or her
shares, as described below with respect to after acquired shares (as described
below).
Except with respect to those shareholders who held after-acquired shares,
Wisdom Holdings will remit, within 30 days of the later of the date of
effectiveness of the mergers or the date the payment demand is received, to all
shareholders who made proper demand, an amount that Wisdom Holdings estimates to
be the fair value of their shares of Gentle Dental common stock, together with
any interest
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that has accrued from the effective date of the mergers until the date of
payment. The remittance will be accompanied by certain financial information of
Gentle Dental, an explanation of how the fair value of the shares was estimated
and an explanation of how the accrued interest was calculated. If Wisdom
Holdings fails so to remit or if the dissenting shareholder believes the amount
remitted is less than the fair value of his or her shares, the dissenting
shareholder may send Wisdom Holdings his or her own estimate of the fair value
of the shares and amount of accrued interest due and demand payment of the
deficiency. The dissenting shareholder must notify Wisdom Holdings in writing of
his or her estimate with 30 days after the date Wisdom Holdings mails its
remittance, if any. If Wisdom Holdings and the dissenting shareholder are unable
to agree on a fair value within 60 days after the receipt of a demand for
payment of a deficiency, Wisdom Holdings will petition that the fair value of
the shares and interest thereon be determined by an appropriate court.
If a dissenting shareholder acquired his or her shares of Capital Stock
after the date set forth in the dissenters' notice, Wisdom Holdings may elect to
withhold the payment described in the preceding paragraph and to offer to pay
fair value for said Gentle Dental after-acquired shares subject to such
dissenting shareholder's agreement to accept payment as satisfaction in full of
the dissenting claim. Wisdom Holdings will send with its offer an explanation of
how the fair value of the Gentle Dental after-acquired shares was estimated and
how the accrued interest was calculated.
If the dissenting shareholder believes that the amount offered is less than
the fair value of his or her Gentle Dental after-acquired shares, the dissenting
shareholder may send Wisdom Holdings his or her own estimate of the fair value
of the Gentle Dental after-acquired shares and amount of accrued interest due.
The dissenting shareholder must notify Wisdom Holdings in writing of his or
estimate within 30 days after the date Wisdom Holdings makes its offer. If
Wisdom Holdings and the dissenting shareholder are unable to agree on a fair
value for the Gentle Dental after-acquired shares within 60 days after the
receipt of the dissenting shareholder's estimate of the fair value of the Gentle
Dental After-Acquired Shares, Wisdom Holdings will petition that the fair value
of the Gentle Dental after-acquired shares and interest thereon be determined by
an appropriate court.
With respect to a judicial proceeding commenced by Wisdom Holdings to
determine the fair value of the shares and interest thereon with respect to any
shares of capital stock (including Gentle Dental after-acquired shares), the
court will determine the costs of such proceeding and will assess such costs
against Wisdom Holdings, except that the court may assess such costs against one
or more of the dissenting shareholders party to such proceeding, in amounts the
court finds equitable, to the extent that such court finds that the dissenting
shareholder acted arbitrarily, vexatiously or not in good faith in demanding
payment.
The foregoing summary is not, and does not purport to be, a complete
statement of dissenters' rights and is qualified in its entirety by reference to
Sections 23B.13.010 through 23B.13.310 of the Washington Business Corporation
Act, a copy of which is attached to this Joint Proxy Statement-Prospectus as
Appendix E.
LEGAL MATTERS
The validity of Wisdom Holdings capital stock to be issued in connection
with the mergers will be passed upon by McDermott, Will & Emery, Newport Beach,
California.
EXPERTS
The Consolidated Financial Statements of Gentle Dental and its subsidiaries,
as of December 31, 1997 and the year ended December 31, 1997 have been included
and incorporated by reference herein in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, included and incorporated
by reference herein, and upon the authority of said firm as experts in
accounting and auditing. KPMG Peat Marwick LLP previously audited and reported
on the consolidated balance sheet of GMS Dental Group, Inc. and subsidiaries as
of December 31, 1996 and the related consolidated
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statements of operations and shareholders' equity and cash flows for the year
ended December 31, 1996, prior to their restatement for the 1997 pooling of
interests between Gentle Dental and subsidiaries and GMS Dental Group, Inc. and
subsidiaries. The contribution of GMS Dental Group, Inc. and subsidiaries to
total assets, revenues and net loss represented 50%, 26% and 42% of the
respective restated totals. Separate financial statements of Gentle Dental
included in the 1996 restated consolidated balance sheet and statements of
operations and cash flows were audited and reported on separately by other
auditors. KPMG Peat Marwick LLP also audited the combination of the accompanying
consolidated balance sheet as of December 31, 1996 and the related consolidated
statements of operations and cash flows for the year ended December 31, 1996,
after restatement for the pooling of interests; KPMG Peat Marwick LLP's opinion
states that such consolidated statements have been properly combined on the
basis described in note three of the notes to the consolidated financial
statements.
The Consolidated Financial Statements of Gentle Dental and its subsidiaries
as of December 31, 1996 and for the year then ended have been included herein in
reliance upon the report of PricewaterhouseCoopers LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The Consolidated Financial Statements of Dental Care Alliance Inc.,
successor to Golden Care Holdings, Inc. and its subsidiaries at December 31,
1996 and 1997 and for each of the three years in the period ended December 31,
1997 have been included herein in reliance on the report of
PricewaterhouseCoopers given on the authority of said firm as experts in
accounting and auditing.
The Combined Financial Statements of Capitol Dental Care, Inc. and Dental
Maintenance of Oregon, P.C. as of December 31, 1997 and 1996 and for each of the
years in the two-year period ended December 31, 1997 have been included herein
in reliance upon the report of KPMG Peat Marwick LLP, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The Combined Financial Statements of Affordable Dental Care, Inc. and
Managed Dental Care of Oregon, Inc. as of December 31, 1997 and 1996 and for the
years ended December 31, 1997 and 1996 have been incorporated by reference
herein in reliance upon the report of KPMG Peat Marwick LLP, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing.
The Consolidated Financial Statements of Pacific Dental Services, Inc. and
consolidated partnership as of December 31, 1997 and for the year then ended
have been incorporated by reference herein in reliance upon the report of KPMG
Peat Marwick LLP, incorporated by reference herein, and upon the authority of
said firm as experts in accounting and auditing.
The Financial Statements of Dedicated Dental Systems, Inc. as of December
31, 1996, and for the year then ended, have been audited by Ernst & Young LLP,
independent auditors, and as of December 31, 1997, and for the year then ended,
by PricewaterhouseCoopers LLP, as set forth in their respective reports thereon
incorporated herein by reference in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.
STOCKHOLDER PROPOSALS
Stockholders of Wisdom Holdings may submit proposals to be considered for
stockholder action at the Wisdom 1999 Annual Meeting of Stockholders if they do
so in accordance with applicable regulations of the Securities and Exchange
Commission. Any such proposals must be submitted to the Secretary of Wisdom no
later than March 31, 1999 in order to be considered for inclusion in the
corporation's 1999 proxy materials.
As of the date of this document, the Gentle Dental and the Dental Care
Alliance Boards of Directors each know of no matters that will be represented
for consideration at the Gentle Dental special meeting of shareholders or the
Dental Care Alliance special meeting of stockholders, other than as described in
this document. If any other matters shall properly come before either of such
special meetings or any
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adjournments or postponements thereof and be voted upon, the enclosed proxies
will be deemed to confer discretionary authority on the individuals named as
proxies therein to vote the shares represented by such proxies as to any such
matters. The individuals named as proxies intend to vote or not to vote in
accordance with the recommendation of the respective managements of Gentle
Dental and Dental Care Alliance.
A stockholder of either Gentle Dental or Dental Care Alliance who intends to
present a proposal at the respective company's 1999 annual meeting must present
such proposal to such company for inclusion in that company's 1999 Proxy
Statement and Proxy Card not later than December 31, 1998. Proposals must be
mailed to the attention of the respective company's secretary at such company's
headquarters as follows:
- If to Gentle Dental:
222 North Sepulveda Boulevard, Suite 740,
El Segundo, California 90245
- If to Dental Care Alliance:
1343 Main Street, Suite 700
Sarasota, Florida 34236
WHERE YOU CAN FIND MORE INFORMATION
Wisdom Holdings has filed with the Securities and Exchange Commission a
registration statement under the Securities Act that registers the shares of
Wisdom Holdings common stock to be issued in exchange for shares of Gentle
Dental common stock and Dental Care Alliance common stock and which may be
issued upon conversion of shares of Wisdom Holdings preferred stock of
convertible debt to be issued in exchange for shares of Gentle Dental preferred
stock or convertible debt in connection with the mergers. The registration
statement, including the attached exhibits and schedules, contain additional
relevant information about Wisdom Holdings and its capital stock. The rules and
regulations of the Commission allow us to omit certain information included in
the registration statement from this document.
In addition, Gentle Dental and Dental Care Alliance file reports, proxy
statements and other information with the Commission under the Securities
Exchange Act. You may read and copy this information at the following locations
of the Commission:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N. W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, NY 10048 Suite 1400
Chicago, IL 60661-2511
</TABLE>
You may also obtain copies of this information by mail from the Public
Reference Section of the Commission, 450 Fifth Street, N.W. Room 1024,
Washington, D.C. 20549, at prescribed rates. You may obtain information on the
operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330.
The Commission also maintains an internet world wide web site that contains
reports, proxy statements and other information about issuers, like Wisdom
Holdings, Gentle Dental and Dental Care Alliance, who file electronically with
the Commission. The address of that site is http://www.sec.gov.
The Commission allows Gentle Dental to "incorporate by reference" certain
information into this document. This means that Gentle Dental can disclose
important information to you by referring you to another document filed
separately with the Commission. The information incorporated by reference is
considered to be a part of this document, except for any information that is
superseded by information that is included directly in this document.
120
<PAGE>
This document incorporates by reference the documents listed below that
Gentle Dental has previously filed with the Commission. They contain important
information about Gentle Dental and its financial condition.
<TABLE>
<S> <C>
Annual Report on Form 10-KSB................ Year ended December 31, 1997, as filed March
31, 1998, as amended by the Form 10KSB/As
filed May 29 and August 3, 1998
Quarterly Report on Form 10-QSB............. Quarter ended March 31, 1998, as filed May 15,
1998
Quarterly Report on Form 10-QSB............. Quarter ended June 30, 1998, as filed August
14, 1998
Quarterly Report on Form 10-QSB............. Quarter ended September 30, 1998, as filed
November 16, 1998
</TABLE>
The description of Gentle Dental common stock set forth in the Gentle Dental
Registration Statement filed under Section 12 of the Securities Exchange Act on
Form 8-A on May 1, 1998, including any amendment or report filed with the
Commission for the purpose of updating such description.
<TABLE>
<CAPTION>
PERIOD
------------------------------------------
<S> <C> <C>
Current Reports on Form 8-K................................ Filed:
* March 16, 1998, as amended by Form 8-K/A
filed on May 15, 1998
* July 2, 1998
* August 14, 1998, as amended by Form 8-K/A
filed on October 14, 1998
* July 15, 1998 as amended by Form 8-K/A
filed on September 14, 1998
* October 30, 1998
* November 12, 1998
</TABLE>
Gentle Dental incorporates by reference additional documents that it may
file with the Commission between the date of this document and the date of the
Gentle Dental special meeting of shareholders. These documents include periodic
reports, such as Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB
and Current Reports on Form 8-K, as well as proxy statements.
Gentle Dental has supplied all information contained or incorporated by
reference in this document relating to Gentle Dental, as well as all pro forma
financial information, and Dental Care Alliance has supplied all such
information relating to Dental Care Alliance.
You can obtain any of the documents incorporated by reference in this
document through Gentle Dental or from the Commission through its web site at
the address described above. Documents incorporated by reference are available
from Gentle Dental without charge, excluding any exhibits to those documents
unless the exhibit is specifically incorporated by reference as an exhibit in
this document. You can obtain documents incorporated by reference in this
document by requesting them in writing or by telephone from the appropriate
company at the following address:
Gentle Dental Service Corporation
222 Sepulveda Boulevard
Suite 740
El Segundo, California 90245-4340
Telephone (310) 765-2400
If you would like to request documents, please do so by , 1999
to receive them before the special meetings. If you request any incorporated
documents from us, we will mail them to you by first class mail, or another
equally prompt means, within one business day after we receive your request.
121
<PAGE>
We have not authorized anyone to give any information or make any
representation about the mergers or our companies that is different from, or in
addition to, that contained in this document or in any of the materials that
we've incorporated into this document. Therefore, if anyone goes give you
information of this sort, you should not rely on it. If you are in a
jurisdiction where offers to exchange or sell, or solicitations of offers to
exchange or purchase, the securities offered by this document or the
solicitation of proxy is unlawful, or if you are a person to whom it is unlawful
to direct these types of activities, then the offer presented in this document
does not extend to you. The information contained in this document speaks only
as of the date of this document unless the information specifically indicates
that another date applies.
FORWARD-LOOKING STATEMENTS
This document (including information included or incorporated by reference
herein) contains certain forward looking statements with respect to the
financial condition, results of operations, plans, objectives, future
performance and business of each of Wisdom Holdings, Gentle Dental and Dental
Care Alliance, as well as certain information relating to the merger, including,
without limitation (a) statements relating to the cost savings estimated to
result from the mergers, (b) statements relating to the restructuring charges
estimated to be incurred in connection with the merger and (c) statements
preceded by, followed by or that include the words "believes," "expects,"
"anticipates," "estimates," or similar expressions. These forward-looking
statements involve certain risks and uncertainties. Actual results may differ
materially from those contemplated by such forward-looking statements due to,
among others, the following factors:
- expected cost savings from the merger may not be fully realized or
realized within the expected time frame;
- revenues following the merger may be lower than expected;
- costs or difficulties related to the integration of the businesses of
Gentle Dental and Dental Care Alliance may be greater than expected;
- general economic or business conditions, either nationally or in the
states in which Gentle Dental or Dental Care Alliance are doing business,
may be less favorable than expected;
- legislative or regulatory changes may adversely affect the business in
which Gentle Dental and Dental Care Alliance are engaged;
- technological changes may be more difficult or expensive than anticipated;
and
- changes may occur in the securities markets.
122
<PAGE>
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
WISDOM HOLDINGS, INC.
Unaudited Pro Forma Combined Financial Data................................................................ F-2
GENTLE DENTAL SERVICE CORPORATION
Report of KPMG Peat Marwick LLP............................................................................ F-13
Report of PricewaterhouseCoopers LLP....................................................................... F-14
Consolidated Balance Sheets as of December 31, 1996 and 1997............................................... F-15
Consolidated Statements of Operations for the years ended December 31, 1996 and 1997....................... F-17
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996 and 1997............. F-18
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1997....................... F-20
Notes to Consolidated Financial Statements................................................................. F-22
DENTAL CARE ALLIANCE, INC.
Report of PricewaterhouseCoopers LLP....................................................................... F-42
Consolidated Balance Sheets as of December 31, 1996 and 1997............................................... F-43
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997................. F-44
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997....... F-45
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997................. F-46
Notes to Consolidated Financial Statements................................................................. F-47
Unaudited Consolidated Balance Sheets as of September 30, 1998............................................. F-69
Unaudited Consolidated Statements of Operations for the three months ended September 30, 1997 and 1998 and
for the nine months ended September 30, 1997 and 1998.................................................... F-70
Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1998...... F-71
Notes to Unaudited Interim Financial Statements............................................................ F-72
CAPITOL DENTAL CARE, INC. AND DENTAL MAINTENANCE OF OREGON, P.C.
Report of KPMG Peat Marwick LLP............................................................................ F-75
Combined Balance Sheets as of December 31, 1997 and 1996................................................... F-76
Combined Statements of Income for the years ended December 31, 1997 and 1996............................... F-77
Combined Statements of Shareholders' Equity for the years ended December 31, 1997 and 1996................. F-78
Combined Statements of Cash Flows for the years ended December 31, 1997 and 1996........................... F-79
Notes to Combined Financial Statements..................................................................... F-80
Unaudited Condensed Combined Balance Sheets as of September 30, 1998....................................... F-86
Unaudited Condensed Combined Statements of Income for the nine months ended September 30, 1998 and 1997.... F-87
Unaudited Condensed Combined Statements of Cash Flows for the nine months ended September 30, 1998 and
1997..................................................................................................... F-88
Notes to Unaudited Condensed Combined Financial Statements................................................. F-89
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The Unaudited Pro Forma Combined Balance Sheet and Pro Forma Combined
Statements of Operations Data have been prepared by Wisdom based on the Gentle
Dental and Dental Care Alliance Consolidated Financial Statements for the year
ended December 31, 1997 and the nine month period ended September 30, 1998 and
the financial statements of the entities involved in acquisitions completed
during 1997 and 1998. The Pro Forma Combined Financial Data is based on certain
assumptions and adjustments described in the notes hereto and should be read in
conjunction therewith and in conjunction with the complete Gentle Dental
Consolidated Financial Statements and the notes thereto and the Dental Care
Alliance Financial Statements and the notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The following Pro Forma Combined
Financial Data for the year ended December 31, 1997 and the nine month period
ended September 30, 1998 are unaudited and were prepared by management of the
Company on the same basis as the audited financial statements included elsewhere
herein and, in the opinion of management of the Company, include all adjustments
necessary to present fairly the information set forth herein.
The Pro Forma Combined Statement of Operations Data for the year ended
December 31, 1997 and the nine month period ended September 30, 1998 give effect
to the following, as if each had occurred on January 1, 1997: (i) the mergers
with Gental Dental, Dental Care Alliance and Wisdom; (ii) the May and June
private placement; (iii) completed acquisitions (including the effect of all
cash, common stock and debt issued or expected to be issued in connection
therewith); and (iv) the effect of the amended Management Agreements with the
Oregon and Washington Professional Corporations.
The Pro Forma Combined Statements of Operations for the years ended December
31, 1995 and 1996 reflect the mergers of Wisdom, Gentle Dental and Dental Care
Alliance, accounted for using the pooling-of-interests method. The Pro Forma
Combined Statements of Operations for the years ended December 31, 1995 and 1996
have been prepared on the basis of the audited financial statements of the
respective companies. Such 1996 financial statements for Gentle Dental and 1995
and 1996 financial statements for Dental Care Alliance are included elsewhere in
this document. The 1995 financial statements for Gentle Dental were previously
filed in its Form 10-K.
The Pro Forma Combined Financial Data does not purport to be indicative of
the combined results of operations that actually would have occurred if the
transactions described above had been effected at the dates indicated or to
project future results of operations for any period.
F-2
<PAGE>
WISDOM HOLDINGS, INC.
PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
(IN 000'S)
<TABLE>
<CAPTION>
COMPLETED
ACQUISITIONS PROFORMA
GDSC ------------- ADJUSTMENTS
--------- (A) -------------
<S> <C> <C> <C>
Cash and cash equivalents................................................................ $ 1,817 $ 3,452 $ (3,275)(b)
Accounts receivable...................................................................... 9,376 185 0
Other current assets..................................................................... 4,832 1,682 (1,631)(b)
--------- ------ -------------
Total current assets..................................................................... 16,025 5,319 (4,906)
Property and equipment................................................................... 14,850 657 (357)(c)
Intangible assets........................................................................ 72,840 19 7,872(d)
Other long-term assets................................................................... 1,209 842 (301)(e)
--------- ------ -------------
Total assets........................................................................... $ 104,924 $ 6,837 $ 2,308
--------- ------ -------------
--------- ------ -------------
Current liabilities...................................................................... $ 13,803 714 76(f)
Long-term liabilities and capital lease obligations, net................................. 45,855 91 8,264(g)
Other long-term obligations.............................................................. 132 0 0
Redeemable common stock.................................................................. 2,095 0 0
Shareholders' equity..................................................................... 43,039 6,032 (6,032)(h)
--------- ------ -------------
Total liabilities, redeemable stock and shareholders' equity........................... $ 104,924 $ 6,837 $ 2,308
--------- ------ -------------
--------- ------ -------------
<CAPTION>
GDSC POOLING
PROFORMA DCA ADJUSTMENTS
----------- --------- ---------------
<S> <C>
Cash and cash equivalents................................................................ $ 1,994 $ 7,654
Accounts receivable...................................................................... 9,561 6,951
Other current assets..................................................................... 4,883 628
----------- --------- ---
Total current assets..................................................................... 16,438 15,233 --
Property and equipment................................................................... 15,150 3,738 $ 79(i)
Intangible assets........................................................................ 80,731 13,670
Other long-term assets................................................................... 1,750 1,286
----------- --------- ---
Total assets........................................................................... $ 114,069 $ 33,927 $ 79
----------- --------- ---
----------- --------- ---
Current liabilities...................................................................... 14,593 4,338
Long-term liabilities and capital lease obligations, net................................. 54,210 1,604
Other long-term obligations.............................................................. 132 836
Redeemable common stock.................................................................. 2,095 0
Shareholders' equity..................................................................... 43,039 27,149 79(i)
----------- --------- ---
Total liabilities, redeemable stock and shareholders' equity........................... $ 114,069 $ 33,927 $ 79
----------- --------- ---
----------- --------- ---
<CAPTION>
WISDOM
PROFORMA
-----------
Cash and cash equivalents................................................................ $ 9,648
Accounts receivable...................................................................... 16,512
Other current assets..................................................................... 5,511
-----------
Total current assets..................................................................... 31,671
Property and equipment................................................................... 18,967
Intangible assets........................................................................ 94,401
Other long-term assets................................................................... 3,036
-----------
Total assets........................................................................... $ 148,075
-----------
-----------
Current liabilities...................................................................... 18,931
Long-term liabilities and capital lease obligations, net................................. 55,814
Other long-term obligations.............................................................. 968
Redeemable common stock.................................................................. 2,095
Shareholders' equity..................................................................... 70,267
-----------
Total liabilities, redeemable stock and shareholders' equity........................... $ 148,075
-----------
-----------
</TABLE>
F-3
<PAGE>
WISDOM HOLDINGS, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(IN 000'S)
<TABLE>
<CAPTION>
COMPLETED PRIVATE
ACQUISITONS PLACEMENT PROFORMA GDSC
GDSC ------------- FINANCING ADJUSTMENTS PROFORMA
--------- (J) ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Dental group net patient service revenue........................ $ 67,534 $ 32,225 $ -- $ 5,243(l) $ 105,002
Net management fees............................................. 1,408 2,915 0 (2,915)(l) 1,408
--------- ------------- ----------- ------------- -----------
Net revenues.................................................. 68,942 35,140 0 2,328 106,410
Clinical salaries and benefits.................................. 30,762 17,459 0 1,825(l) 50,046
Practice nonclinical salaries and benefits...................... 10,028 3,950 0 920(m) 14,898
Dental supplies and lab expenses................................ 8,000 2,686 0 10,686
Practice occupancy expenses..................................... 3,814 1,342 0 (26)(o) 5,130
Practice selling, general and administrative.................... 6,434 2,906 0 (554)(p) 8,786
Corporate selling, general and administrative................... 4,531 1,253 0 (1,225)(m) 4,559
Depreciation and amortization................................... 2,877 558 0 727(q) 4,162
--------- ------------- ----------- ------------- -----------
Total operating expenses...................................... 66,446 30,154 0 1,667 98,267
--------- ------------- ----------- ------------- -----------
Operating income (loss)....................................... 2,496 4,986 0 661 8,143
Interest expense, net........................................... 1,820 53 788(k) 546(r) 3,207
Other expense, net.............................................. 11 (122) 0 124(v) 13
--------- ------------- ----------- ------------- -----------
Income (loss) before income taxes............................. 665 5,055 (788) (9) 4,923
Income tax expense/(benefit).................................... 19 573 0 1,423(s) 2,015
--------- ------------- ----------- ------------- -----------
Net income (loss)............................................. 646 4,482 (788) (1,432) 2,908
Accretion of redeemable common stock............................ 15 0 0 0 15
--------- ------------- ----------- ------------- -----------
Net income (loss) attributable to common stock................ $ 631 $ 4,482 $ (788) $ (1,432) $ 2,893
--------- ------------- ----------- ------------- -----------
--------- ------------- ----------- ------------- -----------
Net income (loss) per share :
Basic........................................................... $ 0.08 $ 0.32
Diluted......................................................... $ 0.07 $ 0.26
Weighted average common shares outstanding :
Basic........................................................... 8,196 875(j) 9,071
Diluted......................................................... 9,500 875(j) 816(y) 11,191
--------- ------------- ----------- ------------- -----------
--------- ------------- ----------- ------------- -----------
<CAPTION>
COMPLETED
ACQUISITIONS PROFORMA DCA
DCA ------------- ADJUSTMENTS PROFORMA
--------- --------------- -----------
<S> <C> <C>
Dental group net patient service revenue........................ $ -- $ -- $ $ --
Net management fees............................................. 20,127 1,151 0 21,278
--------- ------ ----- -----------
Net revenues.................................................. 20,127 1,151 0 21,278
Clinical salaries and benefits.................................. 0 0 0 0
Practice nonclinical salaries and benefits...................... 5,450 412 0 5,862
Dental supplies and lab expenses................................ 3,570 223 0 3,793
Practice occupancy expenses..................................... 2,193 146 0 2,339
Practice selling, general and administrative.................... 2,123 113 0 2,236
Corporate selling, general and administrative................... 2,540 103 0 2,643
Depreciation and amortization................................... 699 28 35(q) 762
--------- ------ ----- -----------
Total operating expenses...................................... 16,575 1,025 35 17,635
--------- ------ ----- -----------
Operating income (loss)....................................... 3,552 126 (35) 3,643
Interest expense, net........................................... (514) 27 72(r) (415)
Other expense, net.............................................. 0 0 0 0
--------- ------ ----- -----------
Income (loss) before income taxes............................. 4,066 99 (107) 4,058
Income tax expense/(benefit).................................... 1,568 51 (41)(s) 1,578
--------- ------ ----- -----------
Net income (loss)............................................. 2,498 48 (66) 2,480
Accretion of redeemable common stock............................ 0 0 0 0
--------- ------ ----- -----------
Net income (loss) attributable to common stock................ $ 2,498 $ 48 $ (66) $ 2,480
--------- ------ ----- -----------
--------- ------ ----- -----------
Net income (loss) per share :
Basic........................................................... $ 0.36 $ 0.36
Diluted......................................................... $ 0.35 $ 0.35
Weighted average common shares outstanding :
Basic........................................................... 6,985 6,985(z)
Diluted......................................................... 7,085 7,085
--------- ------ ----- -----------
--------- ------ ----- -----------
<CAPTION>
POOLING WISDOM
ADJUSTMENTS PROFORMA
------------- -----------
Dental group net patient service revenue........................ $ -- $ 105,002
Net management fees............................................. 0 22,686
------ -----------
Net revenues.................................................. 0 127,688
Clinical salaries and benefits.................................. 0 50,046
Practice nonclinical salaries and benefits...................... 0 20,760
Dental supplies and lab expenses................................ 0 14,479
Practice occupancy expenses..................................... 0 7,469
Practice selling, general and administrative.................... 0 11,022
Corporate selling, general and administrative................... 0 7,202
Depreciation and amortization................................... (69)(t) 4,855
------ -----------
Total operating expenses...................................... (69) 115,833
------ -----------
Operating income (loss)....................................... 69 11,855
Interest expense, net........................................... 2,792
Other expense, net.............................................. 13
------ -----------
Income (loss) before income taxes............................. 69 9,050
Income tax expense/(benefit).................................... 28(u) 3,621
------ -----------
Net income (loss)............................................. 41 5,429
Accretion of redeemable common stock............................ 15
------ -----------
Net income (loss) attributable to common stock................ $ 41 $ 5,414
------ -----------
------ -----------
Net income (loss) per share :
Basic........................................................... $ 0.26
Diluted......................................................... $ 0.24
Weighted average common shares outstanding :
Basic........................................................... 4,682(z) 20,738
Diluted......................................................... 4,747(z) 23,022
------ -----------
------ -----------
</TABLE>
F-4
<PAGE>
WISDOM HOLDINGS, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(IN 000'S)
<TABLE>
<CAPTION>
PRIVATE
PLACEMENT
FINANCING
COMPLETED AND
ACQUISITIONS PROFORMA GDSC
GDSC ------------- ADJUSTMENTS PROFORMA
--------- (J) ------------- -----------
<S> <C> <C> <C> <C>
Dental group net patient service revenue...................................... $ 29,327 68,939 10,486(l) 132,380
23,628(n)
Net management fees........................................................... 14,076 6,438 (5,997)(l) 1,890
(12,627)(n)
--------- ------ ------------- -----------
Net revenues................................................................ 43,403 75,377 15,490 134,270
Clinical salaries and benefits................................................ 13,701 34,475 2,949(l) 61,468
10,343(n)
Practice nonclinical salaries and benefits.................................... 8,177 10,051 1,812(m) 20,040
Dental supplies and lab expenses.............................................. 6,271 6,801 13,072
Practice occupancy expenses................................................... 3,527 3,270 (46)(o) 6,751
Practice selling, general and administrative.................................. 4,912 6,901 (834)(p) 10,979
Corporate selling, general and administrative................................. 5,700 2,919 (2,919)(m) 5,700
Corporate restructure and merger costs........................................ 1,809 0 0 1,809
Depreciation and amortization................................................. 1,847 1,289 2,153(q) 5,289
--------- ------ ------------- -----------
Total operating expenses.................................................... 45,944 65,706 13,458 125,108
--------- ------ ------------- -----------
Operating income (loss)..................................................... (2,541) 9,671 2,032 9,162
Interest expense, net......................................................... 653 467 1,265(r) 4,485
2,100(k)
Other expense, net............................................................ 74 (153) 335(v) 256
--------- ------ ------------- -----------
Income (loss) before income taxes........................................... (3,268) 9,357 (1,668) 4,421
Income tax expense/(benefit).................................................. (81) 767 1,082(s) 1,768
--------- ------ ------------- -----------
Net income (loss)........................................................... (3,187) 8,590 (2,750) 2,653
Dividends on redeemable convertible preferred stock........................... 932 0 (932)(w) 0
Accretion of redeemable common stock.......................................... 34 0 0 34
--------- ------ ------------- -----------
Net income (loss) attributable to common stock.............................. $ (4,153) $ 8,590 $ (1,818) $ 2,619
--------- ------ ------------- -----------
--------- ------ ------------- -----------
Net income (loss) per share:
Basic......................................................................... $ (0.91) 0.31
Diluted....................................................................... $ (0.91) 0.24
Weighted average common shares outstanding:
Basic......................................................................... 4,559 1,464(j) 2,321(w) 8,344
Diluted....................................................................... 4,559 1,464(j) 4,721(y) 10,744
<CAPTION>
COMPLETED
ACQUISITIONS PROFORMA
DCA --------------- ADJUSTMENTS
--------- -------------
<S> <C> <C> <C>
Dental group net patient service revenue...................................... 0 0 0
Net management fees........................................................... 7,879 5,869 0
--------- ----- ------
Net revenues................................................................ 7,879 5,869 0
Clinical salaries and benefits................................................ 0 0 0
Practice nonclinical salaries and benefits.................................... 2,021 2,285 0
Dental supplies and lab expenses.............................................. 1,621 1,047 0
Practice occupancy expenses................................................... 998 810 0
Practice selling, general and administrative.................................. 1,267 591 0
Corporate selling, general and administrative................................. 1,387 636 0
Corporate restructure and merger costs........................................ 0 0 0
Depreciation and amortization................................................. 164 274 181(q)
--------- ----- ------
Total operating expenses.................................................... 7,458 5,643 181
--------- ----- ------
Operating income (loss)..................................................... 421 226 (181)
Interest expense, net......................................................... (264) 216 278(r)
Other expense, net............................................................ 0 (45) 0
--------- ----- ------
Income (loss) before income taxes........................................... 685 55 (459)
Income tax expense/(benefit).................................................. 264 25 (164)(s)
--------- ----- ------
Net income (loss)........................................................... 421 30 (295)
Dividends on redeemable convertible preferred stock........................... 100 0 0
Accretion of redeemable common stock.......................................... 11 0 0
--------- ----- ------
Net income (loss) attributable to common stock.............................. $ 310 $ 30 $ (295)
--------- ----- ------
--------- ----- ------
Net income (loss) per share:
Basic......................................................................... 0.07
Diluted....................................................................... 0.07
Weighted average common shares outstanding:
Basic......................................................................... 4,610 80 --
Diluted....................................................................... 4,698 80 --
<CAPTION>
POOLING
DCA AND OTHER WISDOM
PROFORMA ADJUSTMENTS PROFORMA
----------- ------------- -----------
Dental group net patient service revenue...................................... 0 0 $ 132,380
Net management fees........................................................... 13,748 0 15,638
----------- ------------- -----------
Net revenues................................................................ 13,748 0 148,018
Clinical salaries and benefits................................................ 0 0 61,468
Practice nonclinical salaries and benefits.................................... 4,306 0 24,346
Dental supplies and lab expenses.............................................. 2,668 0 15,740
Practice occupancy expenses................................................... 1,808 0 8,559
Practice selling, general and administrative.................................. 1,858 0 12,837
Corporate selling, general and administrative................................. 2,023 0 7,723
Corporate restructure and merger costs........................................ 0 0 1,809
Depreciation and amortization................................................. 619 (10)(x) 5,898
----------- ------------- -----------
Total operating expenses.................................................... 13,282 (10) 138,380
----------- ------------- -----------
Operating income (loss)..................................................... 466 10 9,638
Interest expense, net......................................................... 230 4,715
Other expense, net............................................................ (45) 0 211
----------- ------------- -----------
Income (loss) before income taxes........................................... 281 10 4,712
Income tax expense/(benefit).................................................. 125 4(u) 1,897
----------- ------------- -----------
Net income (loss)........................................................... 156 6 2,815
Dividends on redeemable convertible preferred stock........................... 100 0 100
Accretion of redeemable common stock.......................................... 11 0 45
----------- ------------- -----------
Net income (loss) attributable to common stock.............................. $ 45 $ 6 $ 2,670
----------- ------------- -----------
----------- ------------- -----------
Net income (loss) per share:
Basic......................................................................... 0.17
Diluted....................................................................... 0.14
Weighted average common shares outstanding:
Basic......................................................................... 4,690 3,142(z) 16,176
Diluted....................................................................... 4,778 3,201(z) 18,723
</TABLE>
F-5
<PAGE>
WISDOM HOLDINGS, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN 000'S)
<TABLE>
<CAPTION>
POOLING WISDOM
GDSC DCA ADJUSTMENTS PRO FORMA
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Dental group net patient service revenue............................ $ 3,701 $ -- $ -- $ 3,701
Net management fees................................................. 10,712 1,637 -- 12,349
--------- --------- ----------- ----------
Net revenues...................................................... 14,413 1,637 -- 16,050
Clinical salaries and benefits...................................... 1,493 224 -- 1,717
Practice nonclinical salaries and benefits.......................... 4,279 522 -- 4,801
Dental supplies and lab expenses.................................... 2,830 177 -- 3,007
Practice occupancy expenses......................................... 1,563 107 -- 1,670
Practice selling, general and administrative........................ 1,805 95 -- 1,900
Corporate selling, general and administrative....................... 2,998 261 -- 3,259
Depreciation and amortization....................................... 990 28 (1) 1,017
--------- --------- ----------- ----------
Total operating expenses.......................................... 15,958 1,414 (1) 17,371
--------- --------- ----------- ----------
Operating Income (loss)........................................... (1,545) 223 1 (1,321)
Interest income (expense), net...................................... (749) 21 -- (728)
Other expense, net.................................................. (48) -- -- (48)
--------- --------- ----------- ----------
Income (loss) before income taxes and minority interest........... (2,342) 244 1 (2,097)
Income tax expense/(benefit)........................................ (655) 36 -- (619)
Minority interest................................................... -- 8 -- 8
--------- --------- ----------- ----------
Net income (loss)................................................. (1,687) 200 1 (1,486)
Dividends on redeemable convertible preferred stock................. (240) (6) -- (246)
Accretion of redeemable common stock................................ (91) -- -- (91)
Adjustment to redemption value of common and preferred stock........ -- (191) -- (191)
--------- --------- ----------- ----------
Net income (loss) attributable to common stock...................... $ (2,018) $ 3 $ 1 $ (2,014)
--------- --------- ----------- ----------
--------- --------- ----------- ----------
Net loss per share:
Basic............................................................... $ (1.18) -- -- $ (0.25)
Diluted............................................................. $ (1.18) -- -- $ (0.25)
Weighted average common shares outstanding:
Basic............................................................... 1,707 3,829 2,565 8,101
Diluted............................................................. 1,707 3,907 2,487 8,101
</TABLE>
F-6
<PAGE>
WISDOM HOLDINGS, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN 000'S)
<TABLE>
<CAPTION>
POOLING WISDOM
GDSC DCA ADJUSTMENTS PRO FORMA
--------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Net management fees.................................................. $ 9,781 $ 776 $ -- $ 10,557
--------- --------- ------ -----------
Net revenues....................................................... 9,781 776 -- 10,557
Practice nonclinical salaries and benefits........................... 2,418 401 -- 2,819
Dental supplies and lab expenses..................................... 1,633 -- -- 1,633
Practice occupancy expenses.......................................... 911 -- -- 911
Practice selling, general and administrative expenses................ 1,311 -- -- 1,311
Corporate selling, general and administrative expenses............... 2,153 360 -- 2,513
Depreciation and amortization........................................ 482 22 (1) 503
--------- --------- ------ -----------
Total operating expenses........................................... 8,908 783 (1) 9,690
--------- --------- ------ -----------
Operating income (loss)............................................ 873 (7) 1 867
Interest income (expense), net....................................... (290) 6 -- (284)
Other expense, net................................................... (92) -- (92)
--------- --------- ------ -----------
Income (loss) before income taxes and minority interest............ 491 (1) 1 491
Income tax expense................................................... 234 -- -- 234
Minority interest.................................................... -- 9 -- 9
--------- --------- ------ -----------
Net income (loss).................................................. 257 (10) 1 248
Adjustment to redemption value of common and preferred stock......... -- 86 -- 86
--------- --------- ------ -----------
Net income attributable to common stock............................ $ 257 $ 76 $ 1 $ 334
--------- --------- ------ -----------
--------- --------- ------ -----------
Net income per share:
Basic................................................................ $ 0.19 $ 0.02 -- $ 0.04
Diluted.............................................................. $ 0.19 $ 0.02 -- $ 0.04
Weighted average common shares outstanding:
Basic................................................................ 1,380 3,792 2,541 7,713
Diluted.............................................................. 1,380 3,864 2,589 7,833
</TABLE>
F-7
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL DATA
(UNAUDITED)
The accompanying pro forma combined financial data presents the pro forma
financial position of Wisdom as of September 30, 1998 and the pro forma results
of operations for the years ended December 31, 1995, 1996, and 1997 and the nine
month period ended September 30, 1998.
The pro forma combined financial statements reflect the combination of
Gentle Dental Service Corporation and Dental Care Alliance into Wisdom in a
merger expected to be accounted for as a pooling of interests. Accordingly, the
historical amounts have been combined, with adjustments to conform the
accounting policies for depreciation and amortization.
From January 1, 1997 through December 30, 1998, Gentle Dental acquired 20
dental practices in acquisitions accounted for as purchases. The accompanying
Pro Forma Combined Balance Sheet as of September 30, 1998 includes the effect of
the significant acquisitions completed subsequent to that date and the acquired
non-professional dental practice assets and liabilities and payment of cash,
issuance of common stock and borrowings in connection with completed
affiliations by Gentle Dental, as if they had been completed at September 30,
1998. The accompanying Pro Forma Combined Statements of Operations for the nine
months ended September 30, 1998 and the year ended December 31, 1997 include the
affects of the acquisitions, including their results of operations, amortization
of intangible assets acquired and the impact of financing the acquisitions, as
if they had been completed on January 1, 1997.
From January 1, 1997 through December 30, 1998, Dental Care Alliance
acquired 2 dental practice management companies in acquisitions accounted for as
purchases.
The pro forma adjustments reflected in the Condensed Pro Forma Combined
Balance Sheet and Pro forma Combined Statements of Operations are as follows:
a) Represents the historical value of acquired assets and liabilities resulting
from the acquisitions of Capitol Dental Care, Inc. and Dental Maintenance of
Oregon, P.C. which were the only material acquisitions completed between
October 1, 1998 and December 30, 1998. See additional information at F-76.
b) Represents portion of cash and investments that were not acquired by GDSC.
c) Represents adjustments made to reflect acquired property and equipment at
its estimated fair value.
d) Represents intangible assets resulting from the excess of purchase price
over the estimated fair value of net tangible assets acquired. The following
is a summary of the purchase price allocation:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
Tangible assets acquired....................................................... $ 1,895
Liabilities assumed............................................................ (748)
------
Net tangible assets acquired................................................... 1,147
Intangible assets acquired..................................................... 7,872
------
Purchase price................................................................. $ 9,019
------
------
</TABLE>
The purchase price consists of $6,088 cash, issuance of $2,183 in promissory
notes payable and the assumption of $748 in liabilities. Addition future
consideration potentially payable to the sellers could total up to $9 million
over the next 3 years. Intangible management services agreements are
amortized over 25 years, or the term of the agreement, if shorter.
F-8
<PAGE>
Gentle Dental estimates that the total maximum earn-out to be paid on other
completed acquisitions, including $1,789 accrued at September 30, 1998, is
between $15 and $20 million over the next four years, of which up to $15
million is expected to be paid in cash.
e) Represents shareholder notes receivable and other intangible assets which
were not acquired.
f) Represents liabilities which were incurred in connection with the
transaction.
g) Represents the issuance of $2,183 of debt to the sellers and $6,081 of
proceeds from GDSC's credit facility which were used to pay for the
acquisitions.
h) Represents the elimination of shareholders' equity of the acquired entity
resulting from the use of purchase accounting to account for the
acquisition.
i) Reflects the cumulative reduction in depreciation expense and corresponding
increase in property and equipment resulting from conforming the
depreciation policies of DCA with those of GDSC. Depreciation of property
and equipment is recorded using the straight-line method over the shorter of
the related lease term or the estimated useful lives, which are as follows:
<TABLE>
<CAPTION>
RANGE OF
LIVES
-------------
<S> <C>
Dental equipment.............................................................. 3-15 years
Computer equipment............................................................ 3 years
Furniture, fixtures and equipment............................................. 3-15 years
Leasehold improvements........................................................ 3-20 years
Vehicles...................................................................... 5 years
Buildings..................................................................... 25 years
</TABLE>
j) Represents the historical statements of operations of all acquired dental
practices from the beginning of the period through the date such acquisition
was consummated (at which time its results of operations are included with
the results of operations of Gentle Dental, and the shares issued in
connection with such acquisitions as if such shares were outstanding at the
beginning of the period).
The following table presents the individual statements of operations of the
completed acquisitions for the year ended December 31, 1997 and nine months
ended September 30, 1998:
F-9
<PAGE>
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
AFFORDABLE PACIFIC DEDICATED CAPITOL
DENTAL DENTAL DENTAL DENTAL OTHER TOTAL
----------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dental group net patient service revenue........ $ 9,578 $ -- $ 17,961 $ 18,261 $ 23,139 $ 68,939
Net management fee.............................. -- 5,830 167 -- 441 6,438
----------- --------- ----------- --------- --------- ---------
Net revenues.................................... 9,578 5,830 18,128 18,261 23,580 75,377
Clinical salaries and benefits.................. 4,593 -- 6,476 13,212 10,194 34,475
Practice nonclinical salaries and benefits...... 656 3,139 1,105 951 4,200 10,051
Dental supplies and lab expenses................ 540 465 1,848 613 3,335 6,801
Practice occupancy expenses..................... 531 490 651 309 1,289 3,270
Practice selling, general and
administrative................................. 373 802 1,777 1,270 2,679 6,901
Corporate selling, general and administrative... -- -- 2,919 -- -- 2,919
Depreciation and amortization................... 130 275 345 101 438 1,289
----------- --------- ----------- --------- --------- ---------
Total operating expenses........................ 6,823 5,171 15,121 16,456 22,135 65,706
----------- --------- ----------- --------- --------- ---------
Operating income................................ 2,755 659 3,007 1,805 1,445 9,671
Interest (income) expense, net.................. (98) 192 138 (265) 500 467
Other (income) expense, net..................... (6) 91 (215) (17) (6) (153)
----------- --------- ----------- --------- --------- ---------
Income before income taxes...................... 2,859 376 3,084 2,087 951 9,357
Income tax expense.............................. -- 16 30 556 165 767
----------- --------- ----------- --------- --------- ---------
Net income...................................... $ 2,859 $ 360 $ 3,054 $ 1,531 $ 786 $ 8,590
----------- --------- ----------- --------- --------- ---------
----------- --------- ----------- --------- --------- ---------
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
AFFORDABLE PACIFIC DEDICATED CAPITOL
DENTAL DENTAL DENTAL DENTAL OTHER TOTAL
----------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dental group net patient service revenue........ $ 2,118 $ -- $ 11,584 $ 13,309 $ 5,214 $ 32,225
Net management fee.............................. -- 2,915 -- -- -- 2,915
----------- --------- ----------- --------- --------- ---------
Net revenues.................................... 2,118 2,915 11,584 13,309 5,214 35,140
Clinical salaries and benefits.................. 1,197 -- 4,758 8,742 2,762 17,459
Practice nonclinical salaries and benefits...... 111 1,570 851 713 705 3,950
Dental supplies and lab expenses................ 92 233 1,091 533 737 2,686
Practice occupancy expenses..................... 124 245 377 245 351 1,342
Practice selling, general and
administrative................................. 86 401 910 987 522 2,906
Corporate selling, general and administrative... -- -- 1,253 -- -- 1,253
Depreciation and amortization................... 24 137 218 94 85 558
----------- --------- ----------- --------- --------- ---------
Total operating expenses........................ 1,634 2,586 9,458 11,314 5,162 30,154
----------- --------- ----------- --------- --------- ---------
Operating income................................ 484 329 2,126 1,995 52 4,986
Interest expense (income), net.................. 25 96 79 (170) 23 53
Other expense (income), net..................... 1 45 (154) (15) 1 (122)
----------- --------- ----------- --------- --------- ---------
Income before income taxes...................... 458 188 2,201 2,180 28 5,055
Income tax expense.............................. -- 8 20 545 -- 573
----------- --------- ----------- --------- --------- ---------
Net income...................................... $ 458 $ 180 $ 2,181 $ 1,635 $ 28 $ 4,482
----------- --------- ----------- --------- --------- ---------
----------- --------- ----------- --------- --------- ---------
</TABLE>
F-10
<PAGE>
k) Represents the amount of additional interest expense that would have been
incurred had the private placement taken place at the beginning of the
period. The following is a summary of the convertible debt and convertible
preferred stock issued by Gentle Dental:
<TABLE>
<CAPTION>
AMOUNT
ISSUED DIVIDEND/ COMMON EQUIVALENT
(IN DATE INTEREST SHARES IF
TYPE 000'S) ISSUED RATE CONVERTED
- ------------------------------------------------------ --------- --------------- ------------- ------------------
<S> <C> <C> <C> <C>
Subordinated debt..................................... $ 25,500 May 15, 1998 7% 2,768,729
Subordinated debt..................................... $ 4,500 June 1, 1998 7% 488,599
Preferred stock....................................... $ 13,500 May 15, 1998 -- 1,465,798
Preferred stock....................................... $ 1,500 June 1, 1998 -- 152,867
</TABLE>
Proforma interest expense is calculated as follows:
<TABLE>
<CAPTION>
INTEREST EXPENSE
AVERAGE ----------------------
PRINCIPAL RATE 9-30-98 12-31-97
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Convertible subordinated debt............................................ $ 25,500 7% $ 656 $ 1,785
Convertible subordinated debt............................................ $ 4,500 7% 132 315
--
--------- --------- -----------
Total.................................................................. $ 30,000 $ 788 $ 2,100
--------- --------- -----------
--------- --------- -----------
</TABLE>
l) Represents the impact of consolidating the results of operations of acquired
dental practices in accordance with EITF 97-2. In connection with Gentle
Dental's acquisition of these dental practices, revised management service
and other agreements were entered into which required Gentle Dental to
consolidate the results of operations of these dental practices. When the
Company affiliates with dental practices, but does not control the
operations, such managed dental practices are not consolidated and Gentle
Dental reports only the management fee revenue. When Gentle Dental controls
the dental practices, such dental practices are consolidated and Gentle
Dental reports the net patient service revenue and the related clinical
salaries and benefits. Consequently, when Gentle Dental shows the impact of
consolidating dental practices, the effect is to increase revenues and also
clinical salaries and benefits.
In Gentle Dental's typical affiliation with consolidated dental practices,
Gentle Dental acquired the operating assets and assumed certain liabilities
of the dental groups and entered into long-term service agreements with the
dental groups. Because of corporate practice of medicine laws in the states
in which Gentle Dental operates, Gentle Dental does not own dental
practices, but instead enters into exclusive long-term management services
agreements with the dental groups. Gentle Dental designates a majority
shareholder or other owner of the dental group as its nominee. Additionally,
advisory boards are established which govern the activities of the dental
practices. Gentle Dental appoints a majority of the advisory board members.
Through the management services agreements and its control of the advisory
board and nominee shareholders of the dental practices, Gentle Dental has
exclusive authority over the decision making related to all major ongoing
operations of the underlying dental groups with the exception of the
professional aspects of dentistry practice as required by applicable state
law. Under the management services agreements, Gentle Dental establishes
annual operating and capital budgets for the dental groups and compensation
guidelines for the licensed dental professionals. Gentle Dental consolidates
the operating results and accounts of the dental groups in accordance with
EITF 97-2 since Gentle Dental has control over the operations of the dental
practices.
m) Represents reclassification of payroll and related expenses from Corporate
selling, general and administrative expense to Practice nonclinical salaries
and benefits. Practice nonclinical salaries and benefits have also been
partially offset by a decrease of $1,107 for the year ended December 31,
1997 and $333 for the nine months ended September 30, 1998 in costs related
to various positions which were eliminated. As part of the acquisition by
GDSC, it was agreed to either contractually or verbally with the selling
dentists, that the positions held by these employees would be eliminated.
F-11
<PAGE>
n) Represents the impact of consolidating the results of operations of the
Oregon and Washington Professional Corporations as a result of the amended
management agreements in accordance with EITF 97-2. See related discussion
at note l.
o) Represents contractually negotiated reductions in building lease expenses.
As part of the acquisition by GDSC, certain building lease agreements were
renegotiated and new or modified leases were entered into with the selling
dentists or facility owners at fair market value rates.
p) Represents reductions in legal, accounting, certain personal expenses of the
selling dentists and operating lease expenses. As part of the acquisition by
GDSC, the selling dentists have agreed to directly pay for legal and
accounting fees related to the personal matters of the selling dentists and
certain other expenses, such as automobile expenses. Prior to the
acquisition by GDSC, the selling dentists had the dental practice pay for
these expenses.
q) Represents the increase in amortization expense associated with intangible
assets of acquired dental practices as if the acquisitions had occurred at
the beginning of the period. The amortization of intangible assets of
$94,401 on a pro forma combined basis is over the lesser of the life of the
contract or 25 years, whichever is shorter. The amortization period will be
reviewed periodically to determine its appropriateness.
r) Represents the increase in interest expense that would have been incurred if
the acquisitions and related financing had occurred at the beginning of the
period.
s) Represents the increase in income taxes that would have been incurred if all
acquired dental practices that were taxed as subchapter S corporations and
partnerships prior to acquisition by GDSC or DCA had been taxed at full
corporate income tax rates, considering the effect of Gentle Dental's income
or loss before income taxes and proforma adjustments.
t) Represents the reduction in depreciation expense resulting from conforming
the depreciation policies of DCA to those of GDSC. See additional
information at note i.
u) Represents the tax effect of the reduction in depreciation expense described
in note x.
v) Represents the elimination of interest income associated with cash and
investments that were not acquired by GDSC. See additional information at
note b.
w) Represents the elimination of dividends on redeemable convertible preferred
stock which was converted into common stock in connection with the 1997
merger of Gentle Dental and GMS Dental Group as if such stock was converted
into common stock at January 1, 1997, and the related additional shares
which would have been outstanding.
x) Represents management fees and related expenses of the acquired management
agreements, based on the historical statements of operations of the
underlying dental practices, as if such acquisitions had occurred at the
beginning of the period.
y) Represents dilutive shares as a result of the private placement of
convertible preferred stock as if such shares were outstanding the entire
period.
z) Represents the number of additional shares that each DCA stockholder would
receive upon the exchange of DCA shares for Wisdom shares:
<TABLE>
<CAPTION>
1997 1998
---------------------- ----------------------
BASIC DILUTED BASIC DILUTED
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
DCA Shares................................................ 4,690 4,778 6,986 7,085
Exchange ratio less 1..................................... x.67 x.67 x.67 x.67
--------- ----- --------- -----
Wisdom shares............................................. 3,142 3,201 4,681 4,747
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
F-12
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Gentle Dental Service Corporation:
We have audited the accompanying consolidated balance sheet of Gentle Dental
Service Corporation and subsidiaries as of December 31, 1997 and the related
consolidated statements of operations and shareholders' equity and cash flows
for the year ended December 31, 1997 (as restated, see note 15). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Gentle
Dental Service Corporation and subsidiaries as of December 31, 1997 and the
results of their operations and their cash flows for the year ended December 31,
1997, in conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated balance sheet of GMS
Dental Group, Inc. and subsidiaries as of December 31, 1996 and the related
consolidated statements of operations and shareholders' equity and cash flows
for the year ended December 31, 1996, prior to their restatement for the 1997
pooling of interests between Gentle Dental Service Corporation and subsidiaries
and GMS Dental Group, Inc. and subsidiaries. The contribution of GMS Dental
Group, Inc. and subsidiaries to total assets, revenues and net loss represented
50 percent, 26 percent and 42 percent of the respective restated totals.
Separate financial statements of Gentle Dental Service Corporation included in
the 1996 restated consolidated balance sheet and statements of operations and
cash flows were audited and reported on separately by other auditors. We also
audited the combination of the accompanying consolidated balance sheet as of
December 31, 1996 and the related consolidated statements of operations and cash
flows for the year ended December 31, 1996, after restatement for the pooling of
interests; in our opinion, such consolidated statements have been properly
combined on the basis described in note 3 of the notes to the consolidated
financial statements.
/s/ KPMG PEAT MARWICK LLP
Orange County, California
February 20, 1998, except as to note 14
which is as of March 16, 1998
F-13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Gentle Dental Service Corporation
In our opinion, the balance sheet and the related statements of operations,
of redeemable common stock and nonredeemable shareholders' equity and of cash
flows, not presented separately herein, present fairly, in all material
respects, the financial position of Gentle Dental Service Corporation at
December 31, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
As disclosed in Note 10 to the financial statements, the Company has certain
related party transactions.
/s/ PRICE WATERHOUSE LLP
Portland, Oregon
February 28, 1997
F-14
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 2,220 $ 302
Accounts receivable, net of allowances of approximately $1,706 and $4,159 in 1996 and
1997, respectively...................................................................... 4,826 6,331
Receivables from affiliates............................................................... 1,197 1,731
Income taxes receivable................................................................... 169 115
Supplies.................................................................................. 554 1,109
Prepaid and other current assets.......................................................... 877 1,611
--------- ---------
Total current assets.................................................................... 9,843 11,199
--------- ---------
Property and equipment, net (notes 4 and 6)................................................. 5,766 10,084
Intangible assets, net of accumulated amortization (note 5)................................. 10,330 22,843
Other assets................................................................................ 457 282
--------- ---------
Total assets............................................................................ $ 26,396 $ 44,408
--------- ---------
--------- ---------
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED AND
COMMON STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 1,650 $ 2,452
Accrued payroll and payroll related costs................................................. 1,033 2,084
Other current liabilities................................................................. 1,667 3,174
Current portion of long-term debt and capital lease obligations (notes 6 and 10).......... 1,124 651
Short-term borrowings (note 6)............................................................ 2,097 --
--------- ---------
Total current liabilities............................................................... 7,571 8,361
--------- ---------
Long-term liabilities:
Obligations under capital leases, net of current portion (note 13)........................ 572 581
Long-term debt, net of current portion (note 6)........................................... 1,822 13,842
Other long-term liabilities............................................................... 91 115
--------- ---------
Total long-term liabilities............................................................. 2,485 14,538
--------- ---------
Total liabilities....................................................................... $ 10,056 $ 22,899
--------- ---------
</TABLE>
F-15
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Redeemable convertible preferred stock--Series B, $.001 par value, 9,270,000 shares
authorized; 6,180,000 and zero shares issued and outstanding in 1996 and 1997,
respectively (note 8)..................................................................... $ 11,055 $ --
--------- ---------
Redeemable common stock, no par value, 190,302 and 183,686 shares issued and outstanding in
1996 and 1997, respectively (note 8)...................................................... 2,199 2,130
--------- ---------
Shareholders' equity (notes 7 and 9):
Preferred stock, 30,000,000 shares authorized, no shares issued and outstanding........... -- --
Convertible preferred stock--Series A, $.001 par value; 395,000 shares authorized; 395,000
and zero shares issued and outstanding in 1996 and 1997, respectively................... 1 --
Convertible preferred stock--Series C, $.001 par value; 5,000 shares authorized; 1,777 and
zero shares issued and outstanding in 1996 and 1997, respectively....................... 1 --
Common stock, no par value, 50,000,000 shares authorized, 2,181,622 and 7,530,781 shares
issued and outstanding in 1996 and 1997, respectively................................... 2,890 21,784
Additional paid-in capital................................................................ 1,443 3,165
Shareholder notes receivable.............................................................. (136) (304)
Accumulated deficit....................................................................... (1,113) (5,266)
--------- ---------
Total shareholders' equity.............................................................. 3,086 19,379
--------- ---------
Commitments and contingencies (notes 13 and 14)
Total liabilities, redeemable convertible preferred and common stock and shareholders'
equity.................................................................................. $ 26,396 $ 44,408
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Dental practice net patient service revenue--consolidated (note 2).......................... $ 3,701 $ 29,327
Net management fees (notes 2 and 10)........................................................ 10,712 14,076
--------- ---------
Net revenues............................................................................ 14,413 43,403
Cost and expenses:
Clinical salaries and benefits............................................................ 1,493 13,701
Practice nonclinical salaries and benefits................................................ 4,279 8,177
Dental supplies and lab expenses.......................................................... 2,830 6,271
Practice occupancy expenses............................................................... 1,563 3,527
Practice selling, general and administrative expenses..................................... 1,805 4,912
Corporate selling, general and administrative expenses.................................... 2,998 5,700
Corporate restructure and merger costs (note 3)........................................... -- 1,809
Depreciation and amortization............................................................. 990 1,847
--------- ---------
Operating loss.......................................................................... (1,545) (2,541)
--------- ---------
Nonoperating income (expense):
Interest expense, net..................................................................... (749) (653)
Other expense, net........................................................................ (48) (74)
--------- ---------
(797) (727)
--------- ---------
Loss before income taxes................................................................ (2,342) (3,268)
Income tax benefit (note 11)................................................................ (655) (81)
--------- ---------
Net loss................................................................................ (1,687) (3,187)
Dividends on redeemable convertible preferred stock--Series B (note 8)...................... (240) (932)
Accretion of redeemable common stock (note 8)............................................... (91) (34)
--------- ---------
Net loss attributable to common stock................................................... $ (2,018) $ (4,153)
--------- ---------
--------- ---------
Loss per share attributable to common stock--basic and diluted--as restated (note 15)....... $ (1.18) $ (.91)
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK-- PREFERRED STOCK--
SERIES A SERIES C COMMON STOCK
---------------------- ------------------------ ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995............................. -- $ -- -- $ -- 1,366,145 $ 2,795
Redeemable convertible preferred stock--Series B
initial issuance and issuance costs................. -- -- -- -- -- --
Convertible preferred stock--Series A issued for
acquisitions........................................ 395,000 1 -- -- -- --
Convertible preferred stock--Series C issued for
acquisitions........................................ -- -- 1,777 1 -- --
Issuance of common stock in connection with:
Exchange for shareholder notes receivable........... -- -- -- -- 608,524 1
Acquisitions........................................ -- -- -- -- 226,453 68
Stock warrants issued related to debt financing....... -- -- -- -- -- --
Exercise of stock options............................. -- -- -- -- 2,000 2
Stock options granted to nonemployees................. -- -- -- -- -- --
Stock warrants issued related to line of credit
guarantees.......................................... -- -- -- -- -- --
Accretion of put rights............................... -- -- -- -- -- --
Repurchase of common stock............................ -- -- -- -- (24,000) (1)
Common stock granted to nonemployees.................. -- -- -- -- 2,500 25
Payments on shareholder notes receivable.............. -- -- -- -- -- --
Dividends on redeemable convertible preferred stock--
Series B............................................ -- -- -- -- -- --
Net loss.............................................. -- -- -- -- -- --
--------- ----- ----------- ----- --------- -----------
Balance, December 31, 1996............................ 395,000 1 1,777 1 2,181,622 2,890
--------- ----- ----------- ----- --------- -----------
--------- ----- ----------- ----- --------- -----------
<CAPTION>
ADDITIONAL SHAREHOLDER
PAID-IN NOTES ACCUMULATED
CAPITAL RECEIVABLE DEFICIT
----------- ------------- -------------
<S> <C> <C> <C>
Balance December 31, 1995............................. $ 152 $ (40) $ 905
Redeemable convertible preferred stock--Series B
initial issuance and issuance costs................. (1,266) -- --
Convertible preferred stock--Series A issued for
acquisitions........................................ 295 -- --
Convertible preferred stock--Series C issued for
acquisitions........................................ 1,733 -- --
Issuance of common stock in connection with:
Exchange for shareholder notes receivable........... 136 (136) --
Acquisitions........................................ 99 -- --
Stock warrants issued related to debt financing....... 9 -- --
Exercise of stock options............................. -- -- --
Stock options granted to nonemployees................. 52 -- --
Stock warrants issued related to line of credit
guarantees.......................................... 233 -- --
Accretion of put rights............................... -- -- (91)
Repurchase of common stock............................ -- -- --
Common stock granted to nonemployees.................. -- -- --
Payments on shareholder notes receivable.............. -- 40 --
Dividends on redeemable convertible preferred stock--
Series B............................................ -- -- (240)
Net loss.............................................. -- -- (1,687)
----------- ----- -------------
Balance, December 31, 1996............................ 1,443 (136) (1,113)
----------- ----- -------------
----------- ----- -------------
</TABLE>
F-18
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK-- PREFERRED STOCK--
SERIES A SERIES C COMMON STOCK
---------------------- ------------------------ ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996............................ 395,000 1 1,777 1 2,181,622 2,890
Convertible preferred stock--Series C issued for
acquisitions........................................ -- -- 1,156 -- -- --
Common stock issued in connection with:
Acquisitions........................................ -- -- -- -- 109,039 475
Initial public offering, net of issuance costs...... -- -- -- -- 1,500,000 6,125
Employee purchase plan.............................. -- -- -- -- 1,902 17
Pursuant to options for shareholder notes
receivable........................................ -- -- -- -- 333,816 1
Exercise of stock options............................. -- -- -- -- 20,100 100
Stock options granted to nonemployees................. -- -- -- -- -- --
Accretion of put rights............................... -- -- -- -- -- --
Interest accrued on shareholder notes receivable...... -- -- -- -- -- --
Dividends on redeemable convertible preferred stock--
Series B............................................ -- -- -- -- -- --
Issuance of common stock warrants for acquisitions.... -- -- -- -- -- --
Shares reserved for earnout -- -- -- -- -- --
Conversion of convertible preferred stock--Series A,
B, and C into common stock.......................... (395,000) (1) (2,933) (1) 3,384,302 12,176
Net loss.............................................. -- -- -- -- -- --
--------- ----- ----------- ----- --------- -----------
Balance, December 31, 1997............................ -- $ -- -- $ -- 7,530,781 $ 21,784
--------- ----- ----------- ----- --------- -----------
--------- ----- ----------- ----- --------- -----------
<CAPTION>
ADDITIONAL SHAREHOLDER
PAID-IN NOTES ACCUMULATED
CAPITAL RECEIVABLE DEFICIT
----------- ------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1996............................ 1,443 (136) (1,113)
Convertible preferred stock--Series C issued for
acquisitions........................................ 1,156 -- --
Common stock issued in connection with:
Acquisitions........................................ -- -- --
Initial public offering, net of issuance costs...... -- -- --
Employee purchase plan.............................. -- -- --
Pursuant to options for shareholder notes
receivable........................................ 150 (150) --
Exercise of stock options............................. -- -- --
Stock options granted to nonemployees................. 56 -- --
Accretion of put rights............................... -- -- (34)
Interest accrued on shareholder notes receivable...... -- (18) --
Dividends on redeemable convertible preferred stock--
Series B............................................ -- -- (932)
Issuance of common stock warrants for acquisitions.... 4 -- --
Shares reserved for earnout 356 -- --
Conversion of convertible preferred stock--Series A,
B, and C into common stock.......................... -- -- --
Net loss.............................................. -- -- (3,187)
----------- ----- -------------
Balance, December 31, 1997............................ $ 3,165 $ (304) $ (5,266)
----------- ----- -------------
----------- ----- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................................. $ (1,687) $ (3,187)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.......................................................... 990 1,847
Loss on disposal of assets............................................................. 63 31
Loss on investment in joint venture.................................................... 87 135
Stock options granted to nonemployees.................................................. 52 56
Stock issued for fees and compensation................................................. 25 --
Interest accrued on shareholder notes receivables...................................... -- (18)
Amortization of warrants............................................................... 242 --
Deferred income taxes.................................................................. (146) 14
Change in assets and liabilities, net of the effect of acquisitions:
Accounts receivable, net............................................................... (997) 47
Receivables from affiliates............................................................ (562) (621)
Income taxes receivable................................................................ 5 54
Supplies............................................................................... (48) (269)
Prepaid expenses and other current assets.............................................. 52 (1,209)
Other assets........................................................................... 46 65
Accounts payable....................................................................... 346 268
Accrued payroll and payroll related costs.............................................. 1,145 1,956
Other liabilities...................................................................... 5 (144)
--------- ----------
Net cash used in operating activities................................................ (382) (975)
--------- ----------
Cash flows from investing activities:
Purchase of property and equipment..................................................... (873) (2,822)
Proceeds from sale of property and equipment........................................... -- 22
Cash paid for investment in joint venture.............................................. (75) --
Cash paid for organizations costs...................................................... (5) --
Cash paid for acquisitions, including other direct costs, net of cash acquired......... (7,268) (9,706)
--------- ----------
Net cash used in investing activities................................................ $ (8,221) $ (12,506)
--------- ----------
Cash flows from financing activities:
Net proceeds (payments) on short-term borrowings....................................... $ 1,048 $ (2,097)
Proceeds from issuance of long-term debt............................................... 466 10,000
Payments on long-term debt and obligations under capital leases........................ (1,231) (3,122)
Payments of deferred financing costs................................................... (150) --
Proceeds from issuance of common stock and preferred stock............................. 10,551 7,703
Common stock issuance costs............................................................ (500) (918)
Payments of shareholder notes receivable............................................... 40 --
Exercise of put rights................................................................. (90) (103)
Exercise of stock options.............................................................. -- 100
--------- ----------
Net cash provided by financing activities............................................ 10,134 11,563
--------- ----------
Increase (decrease) in cash and cash equivalents..................................... 1,531 (1,918)
</TABLE>
F-20
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Cash and cash equivalents, beginning of year............................................. 689 2,220
--------- ----------
Cash and cash equivalents, end of year................................................... 2,220 302
--------- ----------
--------- ----------
Supplemental disclosure of cash flow information:
Cash paid during period:
Interest paid.......................................................................... 489 601
Income taxes paid (received)........................................................... $ (159) $ 1
--------- ----------
--------- ----------
Supplemental schedule of noncash investing and financing activities:
Purchases of property and equipment under capital lease agreements..................... $ 825 $ 278
Issuance of shareholder notes receivable for purchase of common stock.................. 136 150
Interest accrued on shareholder notes receivable....................................... -- 18
Accretion of put rights................................................................ 91 34
Issuance of common stock to founders and to purchase the predecessor companies......... 530 --
Issuance of redeemable convertible preferred stock--Series B to investment bankers for
services............................................................................. 314 --
Conversion of convertible preferred stock series A, B and C into 7,603,677 shares of
GMS common stock..................................................................... -- 12,176
Conversion of 10,218,578 shares of GMS common stock into 4,548,161 shares of the
Company's common stock............................................................... -- --
Acquisition of clinics:
Intangible assets acquired............................................................. $ 8,501 $ 13,213
Liabilities assumed or issued.......................................................... 2,921 5,762
Common and convertible preferred stock and warrants issued............................. 2,725 1,635
Tangible assets acquired............................................................... 4,413 4,246
Shares reserved for earnout agreements................................................. -- 356
Dental clinic prepayments.............................................................. $ 309 $ --
--------- ----------
--------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) ORGANIZATION
Gentle Dental Service Corporation ("GDS" or the "Company"), incorporated on
December 14, 1992, is a Washington corporation headquartered in Yorba Linda,
California. The Company, as part of a multi-specialty dental care delivery
network, provides management services to dental practices ("DPs") under
long-term management service agreements. Under the terms of the management
service agreements, the Company, among other things, bills and collects patient
receivables and provides all administrative support services to the DPs.
On February 13, 1997, the Company completed its initial public offering of
1,500,000 shares of no par value common stock (the "Offering"). The price per
share in the Offering was $5.00, resulting in gross offering proceeds of $7,500.
The Company received net proceeds of approximately $6,125 net of underwriters'
discount and offering expenses. Concurrent with the receipt of the net proceeds,
the company utilized $4,426 to repay certain outstanding principal under the
Company's various bank loan arrangements (see note 6).
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of GDS and its
subsidiaries. All significant intercompany transactions and accounts have been
eliminated. As described more fully in Note 3, on November 4, 1997, GMS Dental
Group, Inc. ("GMS") was merged with and into the Company, with former
stockholders of GMS owning 59% of the combined company upon completion of the
merger. These consolidated financial statements have been prepared following the
pooling-of-interests method of accounting and reflect the combined financial
position and operating results of GDS and GMS (and certain affiliated DPs as
discussed below) for all periods presented. GMS commenced operations on October
11, 1996. Accordingly, its results of operations for 1996 included only
approximately 2 2/3 months.
The Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board recently evaluated certain matters relating to the physician
practice management industry (EITF issue number 97-2) and reached a consensus on
the accounting for transactions between physician practice management companies
and physician practices and the financial reporting of such entities. For
financial reporting purposes, EITF 97-2 mandates the consolidation of physician
practice activities with the practice management company when certain conditions
have been met, even though the practice management company does not have an
equity investment in the physician practice. The accompanying financial
statements are prepared in conformity with the consensus reached in EITF 97-2.
Corporate practice of medicine laws in the states in which the Company
currently operates prohibit the Company from owning dental practices. In
response to these laws the Company has executed management services agreements
("MSAs") with various DPs. Based upon the terms of MSAs with certain of the DPs,
the Company has met the criteria for consolidation of those DPs with the
Company. In these circumstances, all the accounts of the DPs are included in the
accompanying consolidated financial statements. Accordingly, the consolidated
statements of operations include the net patient revenues and related expenses
of the DPs.
In addition to the MSAs discussed above, the Company has entered into MSAs
with certain DPs where the Company has not met the criteria for consolidation of
the DPs activities. In these circumstances, the Company does not consolidate the
accounts of the DPs. Accordingly, the consolidated statements of operations
exclude the net patient revenues and expenses of the DPs. Rather, the statements
of operations
F-22
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
include only the Company's net management fees revenue generated from those MSAs
and the Company's expenses associated with those MSAs. Subsequent to December
31, 1997, the Company entered into new MSAs with the Oregon and Washington DPs.
Effective January 1, 1998 the criteria has been met for consolidation of these
DPs financial statements with the Company (see note 14).
The Company has a 50% equity investment in Celebration Dental Services
L.L.C., a Florida limited liability company, which is accounted for on the
equity basis of accounting and is included in other expense, net.
NET REVENUES
Revenues consist primarily of DP net patient service revenue (net patient
revenue) and Company net management fees. Net patient revenue represents the
consolidated revenue of the DPs reported at the estimated net realizable amounts
from patients, third party payors and others for services rendered, net of
contractual adjustments. Net management fees represent amounts charged to the
unconsolidated DPs on an agreed-upon percentage of the DPs net patient service
revenue under MSAs, net of provisions for contractual adjustments and doubtful
accounts. The components of net revenues are as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
DP net patient service revenue--unconsolidated........................ $ 21,424 $ 26,289
Less amounts retained by the DPs...................................... (10,712) (12,583)
Retail sales and other................................................ -- 370
---------- ----------
Net management fees................................................... 10,712 14,076
DP net patient service revenue--consolidated.......................... 3,701 29,327
---------- ----------
Net revenues...................................................... $ 14,413 $ 43,403
---------- ----------
---------- ----------
</TABLE>
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable principally represent receivables from patients and
insurance carriers for dental services provided by the related DPs and are
recorded net of contractual adjustments and allowance for doubtful accounts.
Contractual allowances represent an estimate of the difference between the
amount billed by the Company and the amount which the patient, third party payor
or other is contractually obligated to pay the Company. An allowance for
doubtful accounts is provided based upon historical collection experience.
RECEIVABLES FROM AFFILIATES
Receivables from affiliates consist primarily of amounts owed to the Company
from unconsolidated DPs to reimburse the Company for payment of the DPs payroll
and other direct costs, net of amounts due to the DPs related to the
acquisitions and the DPs share of revenues (see notes 10 and 14)
F-23
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUPPLIES
Supplies consist primarily of disposable dental supplies and instruments
stored at the clinics. Supplies are stated at the lower of cost (first-in,
first-out basis) or market (net realizable value).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost net of accumulated depreciation
and amortization. Expenditures for maintenance and repairs are charged to
expense as incurred and expenditures for additions and betterments are
capitalized. Equipment held under capital leases is stated at the present value
of minimum lease payments at the inception of the lease. Depreciation of
property and equipment is recorded using the straight-line method over the
shorter of the related lease term or the estimated useful lives, which are as
follows:
<TABLE>
<CAPTION>
RANGE OF
LIVES
-------------
<S> <C>
Dental equipment.............................................................. 3-15 years
Computer equipment............................................................ 3 years
Furniture, fixtures and equipment............................................. 3-15 years
Leasehold improvements........................................................ 3-20 years
Vehicles...................................................................... 5 years
Buildings..................................................................... 25 years
</TABLE>
INTANGIBLE ASSETS
Intangible assets result primarily from the excess of cost over the fair
value of net tangible assets purchased. Such intangibles relate primarily to
noncompetition covenants and management services agreements. Intangibles
relating to management service agreements consist of the costs of purchasing the
rights to provide management support services to DPs over the initial
noncancelable 40-year terms of the related agreements. Under these agreements,
the DPs have agreed to provide dental services on an exclusive basis only
through facilities provided by the Company. Pursuant to the terms of the
agreements, the Company is the exclusive administrator of all non-dental aspects
of the acquired DPs, providing facilities, equipment, support staffing,
management and other ancillary services. The agreements are noncancelable except
for performance defaults.
Intangible assets are amortized on the straight-line method over their
estimated useful lives, 5 years for organizational costs, 25 years for
management services agreements and other acquired intangibles, and 40 years for
trademarks.
LONG-LIVED ASSETS
The Company reviews its assets balances for impairment at the end of each
quarter or more frequently when events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable. To perform that review,
the Company estimates the sum of expected future undiscounted net cash flows
from assets. If the estimated net cash flows are less than the carrying amount
of the asset, the Company recognizes an impairment loss in an amount necessary
to write-down the asset to a fair value as determined from expected future
discounted cash flows. No write-down of assets was recorded for the years ended
December 31, 1996 and 1997.
F-24
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL ASSETS, LIABILITIES AND REDEEMABLE COMMON STOCK
The Company estimates the fair value of its monetary assets, liabilities and
redeemable common stock based upon the existing interest rates related to such
assets, liabilities and redeemable common stock compared to current market rates
of interest for instruments with a similar nature and degree of risk. The
Company estimates that the carrying value of all of its monetary assets,
liabilities and redeemable common stock approximates fair value as of December
31, 1996 and 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NET LOSS PER SHARE
Net loss per share is computed based on the weighted average number of
shares of common stock and dilutive common stock equivalents outstanding during
the periods. Common stock equivalents consist of the number of shares issuable
upon exercise of the outstanding common stock warrants and common stock options
(using the treasury stock method). Common stock equivalents have been excluded
from the computation of loss per share as their effect is anti-dilutive. The
weighted average common shares utilized for the years ended December 31, 1996
and 1997 were 1,707,095 and 4,559,140 (as restated--see note 15), respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 Earnings Per Share. In accordance with this pronouncement, the Company
adopted the new standard for the years ended December 31, 1996 and 1997. The
adoption of this pronouncement did not have an effect on reported loss per share
information.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for
Stock-Based Compensation. Under SFAS 123, the Company may elect to recognize
stock-based compensation expense based on the fair value of the awards or
continue to account for stock-based compensation under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees' and disclose in
the financial statements the effects of SFAS 123 as if the recognition
provisions were adopted. The Company has elected to account for stock-based
compensation under Accounting Principles Board Opinion No. 25 ("APB 25").
F-25
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(3) BUSINESS COMBINATIONS AND DENTAL PRACTICE ACQUISITIONS
BUSINESS COMBINATIONS
On November 4, 1997, GMS merged into GDS. In connection with the merger
transaction, all of the issued and outstanding shares of GMS common stock were
converted into 4,548,161 shares of common stock of the Company.
The merger has been accounted for using the pooling-of-interests method of
accounting. Accordingly, the historical financial statements for the periods
prior to the completion of the combination have been restated as though the
companies had been combined. The restated financial statements have been
adjusted to conform the lives in computing depreciation of equipment and
amortization of intangible assets. Such adjustments resulted in no change in
amortization expense in 1996 and in a decrease in depreciation expense of $24 in
1996. Additionally, such adjustments resulted in a decrease in the 1996 income
tax benefit of $10.
The results of operations of GMS and GDS for 1997 through the date of the
merger are as follows:
<TABLE>
<CAPTION>
GMS GDS
--------- ---------
<S> <C> <C>
DP net patient service revenue.......................................... $ 22,683 $ --
Net management fees..................................................... -- 11,841
--------- ---------
Net income (loss)................................................... $ (1,087) $ 308
--------- ---------
--------- ---------
</TABLE>
As a result of the merger, the Company recorded direct merger expenses of
$677. These expenses consist primarily of accounting, legal and other advisory
fees. Also, the Company recorded a restructuring charge of $1,132, or $.25 per
share (as restated, see note 15), in the fourth quarter of 1997. The charge
included $289 for employee related costs, $311 for facility consolidation and
related leasehold and fixed asset write-offs and $532 for the redirection of
certain duplicative operations and programs and other costs. These charges are
scheduled to be substantially completed in 1998. At December 31, 1997, the
Company's remaining obligation related to the restructuring charges was $853 and
is included in other current liabilities in the accompanying financial
statements.
DENTAL PRACTICE ACQUISITIONS
In 1996, the Company acquired substantially all of the assets of 15 dental
office locations, including cash, accounts receivable, supplies and fixed
assets. The total price for the fair value of the assets acquired, including
intangible assets was $12,914. Approximately $8,501 of the purchase price has
been allocated to intangible assets. The total purchase consideration included
$7,268 in cash, $2,725 in redeemable and nonredeemable preferred and common
stock and $2,921 in liabilities issued or assumed.
In 1997, the Company acquired substantially all of the assets of 15 dental
office locations, including cash, accounts receivable, supplies and fixed
assets. The total price for the fair value of the assets acquired, including
intangible assets was $17,459. Approximately $13,213 of the purchase price has
been allocated to intangible assets. The total purchase consideration included
$9,706 in cash, $1,991 in nonredeemable preferred and common stock and warrants
and $5,762 in liabilities issued or assumed.
In connection with the affiliation of certain dental practices, the Company
is obligated to pay additional consideration, depending upon the achievement of
certain financial results, as defined by the
F-26
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(3) BUSINESS COMBINATIONS AND DENTAL PRACTICE ACQUISITIONS (CONTINUED)
purchase agreements. During 1997, the Company accrued $356 for the portion of
1997 earnouts which the Company expects to pay in common stock. Additional
consideration may be payable in cash or stock depending upon the performance of
certain affiliated practices. The additional consideration to be paid under
these agreements is not presently determinable. However, such additional
consideration, if any, is not expected to have a material impact on the
financial condition or on the results of operations of the Company.
The above asset purchases in 1996 and 1997 have been accounted for using the
purchase method of accounting. The excess of the total purchase price over the
fair value of the net tangible and identifiable intangible assets acquired
representing the estimated future value of the management services agreements
are being amortized over the lesser of the term of the related management
service agreements or 25 years using the straight-line method. The results of
operations for these practices have been included in the consolidated financial
statements of the Company since the dates of their affiliation.
The following unaudited pro forma information presents the condensed
consolidated results of operations as if the 1996 and 1997 affiliations
discussed above had occurred as of January 1, 1996. The pro forma results have
been prepared for comparative purposes only and are not necessarily indicative
of what the actual results of operations would have been had the practices been
affiliated as of that date, nor does it purport to represent future operations
of the Company:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Pro forma:
DP net patient service revenue--consolidated.......................... $ 31,006 $ 14,076
Net management fees................................................... 13,182 35,242
Net loss.............................................................. (1,084) (1,918)
--------- ---------
Net loss per share.................................................. $ (.40) $ (.41)
--------- ---------
--------- ---------
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Dental equipment......................................................... $ 3,328 $ 5,697
Computer equipment....................................................... 1,098 1,941
Furniture, fixtures and equipment........................................ 728 1,053
Leasehold improvements................................................... 1,681 3,576
Vehicles................................................................. 22 32
Buildings................................................................ 48 48
Land..................................................................... 10 10
--------- ---------
Total property and equipment......................................... 6,915 12,357
Less accumulated depreciation and amortization........................... (1,149) (2,273)
--------- ---------
Property and equipment, net.......................................... $ 5,766 $ 10,084
--------- ---------
--------- ---------
</TABLE>
F-27
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(4) PROPERTY AND EQUIPMENT (CONTINUED)
At December 31, 1996 and 1997, property and equipment include assets under
capital leases with an original cost of $1,262 and $1,524, respectively and
accumulated amortization of $235 and $456, respectively.
(5) INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Management services agreements.......................................... $ 10,430 $ 23,338
Trademarks.............................................................. 50 44
Organizational costs.................................................... 75 5
Other................................................................... 56 --
--------- ---------
10,611 23,387
Less accumulated amortization........................................... (281) (544)
--------- ---------
$ 10,330 $ 22,843
--------- ---------
--------- ---------
</TABLE>
(6) DEBT
SHORT-TERM BORROWINGS
At December 31, 1996, the Company had a total of $2,097 outstanding under
two bank operating lines of credit with a bank secured by substantially all
assets of the Company. In February 1997, the entire outstanding amount was fully
repaid from the net proceeds from the Offering (see note 1).
LONG-TERM DEBT
At December 31, 1997, the Company had a credit facility from a bank in the
amount of $10,000 (which was increased to a $25,000 credit facility on January
7, 1998, see note 14). The proceeds of the credit facility are available for
working capital needs and to finance dental practice asset acquisitions.
Principal amounts owed under the credit facility through December 31, 1997 bear
interest up to 1% above the prime rate or up to 3.25% above LIBOR, at the
Company's option, dependent on the Company's leverage ratio. The outstanding
balance on this facility as of December 31, 1997 was $10,000. The obligations
under this credit agreement are secured by substantially all assets of the
Company and its subsidiaries.
F-28
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(6) DEBT (CONTINUED)
Long term debt is summarized as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Note payable to bank due in monthly installments of principal and
interest at prime plus 1.25%, paid during 1997......................... $ 667 $ --
Notes payable to bank with interest-only payments for the first 12 months
at prime plus 1.5%, paid during 1997................................... 1,699 --
Secured notes payable, bearing interest at rates ranging from 9.75% to
9.99%; monthly principal and interest payments of $5; maturing at
various dates through June 2000; secured by mortgage................... 70 --
Credit facility, bearing interest at 3.25% in excess of LIBOR rate (9.1%
at December 31, 1997), unpaid balance due in equal quarterly
installments of principal and interest commencing October, 1998 through
October 2001........................................................... 48 10,000
Subordinated note payable, bearing interest at 8%, interest payable
annually beginning December 31, 1997 through January 2002; principal
due 2002............................................................... -- 742
Senior subordinated note payable, bearing interest at 8%; due in 60
monthly installments of principal and interest of $14, beginning August
1, 1997 through July 2002.............................................. -- 637
Subordinated note payable bearing interest at 8%; payable in 36 monthly
installments of $5, beginning December 1, 1997 through December 2001... -- 155
Senior subordinated note payable, face value of $500 discounted at 8%;
due in July 1999....................................................... -- 441
Senior subordinated note payable, face value of $2,083 discounted at 8%;
due in July 2002....................................................... -- 1,448
Various unsecured notes payable, due in monthly installments of principal
and interest at rates ranging from 8.25% to 10.75%, maturing through
November 2003.......................................................... 210 702
--------- ---------
2,694 14,125
Less current portion..................................................... (872) (283)
--------- ---------
$ 1,822 $ 13,842
--------- ---------
--------- ---------
</TABLE>
F-29
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(6) DEBT (CONTINUED)
At December 31, 1997, the aggregate maturities of long-term debt for each of
the next five years are as follows:
<TABLE>
<S> <C>
1998............................................... $ 283
1999............................................... 1,381
2000............................................... 3,061
2001............................................... 3,815
2002............................................... 5,564
Thereafter......................................... 21
---------
$ 14,125
---------
---------
</TABLE>
(7) SHAREHOLDERS' EQUITY
As of December 31, 1996, the Company had only common stock outstanding and
GMS had two classes of stock outstanding: common stock and preferred stock. GMS
preferred stock outstanding consisted of convertible preferred stock--Series A,
redeemable convertible preferred stock--Series B and convertible preferred
stock--Series C. The redeemable convertible preferred stock--Series B, including
dividends and the convertible preferred stock--Series A and C, were converted
into 7,603,677 shares (3,384,302 shares of GDS common stock) of GMS common stock
on November 4, 1997 prior to the GMS merger. Upon closing of the merger between
GMS and the Company, all 10,218,578 outstanding GMS common shares were converted
into 4,548,161 shares of the Company's common stock.
COMMON STOCK
An aggregate of 608,524 shares of common stock were issued in 1996 at a
purchase price of $.225 per share, which equaled the fair market value of the
stock on the date of issuance, to the founders of GMS. 269,278 of these shares
are subject to a four-year vesting schedule whereby one-quarter of the shares
vested upon issuance and one-quarter of the shares vested in October 1997. The
remaining shares vest on a monthly basis during the remaining thirty-six months.
An aggregate of 254,901 shares issued to certain other shareholders, which
were issued at a price of $.45 per share, and 339,246 shares out of the 608,524
shares issued to GMS founders, are subject to, in certain events, a right of
repurchase by the Company, at cost. One half of the shares are currently subject
to repurchase because the Company's EBITDA (excluding CEO salary and related
expenses) for 1997 did not exceed $4,724. The second half of the shares will be
subject to repurchase if, among other things, the Company's EBITDA (excluding
CEO salary and related expenses) for 1998 does not exceed $12,683, and a portion
of the second half will be subject to repurchase if such EBITDA does not exceed
$16,911.
PREFERRED STOCK
Preferred stock may be issued by the Board of Directors with preferences to
be determined at the time of issuance. Through December 31, 1997, none of the
30,000,000 authorized shares of the Company's preferred stock has been issued or
is outstanding.
F-30
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(7) SHAREHOLDERS' EQUITY (CONTINUED)
STOCK WARRANTS ISSUED IN CONJUNCTION WITH DEBT ISSUANCE AND ACQUISITIONS
In May 1996 the Company issued warrants to purchase 4,333 shares of the
Company's common stock at $7.50 per share to a lender in connection with a line
of credit agreement. The stock warrants were valued at $9 and have been recorded
as debt issuance costs and additional paid-in capital. The estimated fair value
of the stock warrants was amortized over the six-month term of the line of
credit. Such amortization expense has been included in interest expense in the
statement of operations. The stock warrants expire on May 31, 2001 and carry
certain piggyback registration rights. The stock warrants have not been
exercised to date.
In addition, in May 1996, the Company issued to certain directors, officers
and shareholders of the Company warrants to purchase 115,000 shares of the
Company's common stock at $7.50 per share in consideration for guaranteeing a
total of $1,000 of a line-of-credit which is no longer available and has been
fully repaid. The fair value of the stock warrants of $233 was amortized over
the six-month term of the line of credit. Such amortization expense has been
included in interest expense in the statement of operations. All stock warrants
expire in May 2001 and no such stock warrants have been exercised to date.
In connection with the Company's $10 million credit facility, warrants were
issued in 1996 entitling the bank to purchase up to 81,942 shares of the
Company's common stock at a price of $3.93 per share. The warrants were recorded
at their estimated fair market value of $1 which is included in interest expense
in the accompanying financial statements. These warrants expire in October 2001.
In connection with the Company's initial public offering, warrants were
issued in 1997 entitling representatives of the underwriters to purchase up to
150,000 shares of the Company's common stock at a price of $6.00 per share.
These warrants were recorded at their estimated fair value of $1.
In connection with the acquisition of the net assets of dental practices in
1997, the Company issued warrants to purchase approximately 189,160 shares of
common stock at $7.86 per share. The warrants expire in 2004; no such stock
warrants have been exercised to date. Warrants for 22,254 shares become
exercisable only if certain performance conditions are met by the acquired
dental practices. The estimated fair value of $4 was recorded as part of the
consideration for the acquisition.
F-31
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(8) REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK
The following summary presents the changes in the redeemable convertible
preferred stock--Series B and redeemable common stock:
<TABLE>
<CAPTION>
SHARES OF
REDEEMABLE REDEEMABLE
CONVERTIBLE CONVERTIBLE SHARES OF
PREFERRED PREFERRED REDEEMABLE REDEEMABLE
STOCK-- SERIES B STOCK-- SERIES B COMMON STOCK COMMON STOCK
---------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995.................. -- $ -- 57,551 $ 711
Issued in connection with private
placement................................. 6,180,000 10,815 100,000 957
Issued in connection with acquisitions...... -- -- 38,994 530
Accretion of put rights..................... -- -- -- 91
Exercise of put rights...................... -- -- (6,243) (90)
Dividends on redeemable convertible
preferred stock--Series B................. -- 240 -- --
---------------- -------- ------- ------
Balance, December 31, 1996.................. 6,180,000 11,055 190,302 2,199
---------------- -------- ------- ------
Issued in connection with private
placement................................. 107,142 188 -- --
Dividends on redeemable convertible
preferred stock--Series B................. -- 932 -- --
Accretion of put rights..................... -- -- -- 34
Exercise of put rights...................... -- -- (6,616) (103)
Conversion into common stock................ (6,287,142) (12,175) -- --
---------------- -------- ------- ------
Balance, December 31, 1997.................. -- $ -- 183,686 $ 2,130
---------------- -------- ------- ------
---------------- -------- ------- ------
</TABLE>
REDEEMABLE COMMON STOCK
In connection with certain acquisitions, the Company granted put rights to
certain shareholders that may require the Company to redeem up to 96,545 shares
of its common stock, at a redemption price ranging from $13.38 to $19.62 per
share. If all shareholders with such put rights exercise their options, the
Company would be required to repurchase the above shares of common stock for
$1,409. The redemption periods began April 1, 1996 and continue through January
4, 2003. If the shareholder does not place a redemption request during the
redemption period, the put right will expire on the stated expiration date. Put
rights for all but 20,000 shares terminate in the event of the Company
successfully completing a public offering at a price of at least $20.00 per
share. The Company redeemed 6,243 shares of redeemable common stock for $90
during 1996 and 6,616 shares for $103 during 1997.
The shares of common stock subject to the put rights are reported on the
balance sheet as redeemable common stock. Such shares have been recorded at
their fair value as of date of acquisition, inclusive of accretion during each
of the two years in the period ended December 31, 1997. The Company records
accretion on a ratable basis over the redemption period of the respective stock.
Such accretion for the years ended December 31, 1996 and 1997 was $91 and $34,
respectively.
F-32
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(8) REDEEMABLE CONVERTIBLE PREFERRED AND COMMON STOCK (CONTINUED)
Such common stock at December 31, 1997 is redeemable as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT PRICE RANGE
--------- --------- --------------
<S> <C> <C> <C>
1998...................................................... 2,974 $ 50 $16.82
1999...................................................... 2,754 50 13.38-18.16
2000...................................................... 40,849 576 13.60-19.62
2001...................................................... 29,681 438 13.60-18.80
2002...................................................... 3,714 51 13.60
Thereafter................................................ 3,714 51 13.60
--------- ---------
83,686 $ 1,216
--------- ---------
--------- ---------
</TABLE>
PRIVATE PLACEMENT OF REDEEMABLE COMMON STOCK AND WARRANTS
In June 1996, the Company completed a private placement offering (the
"Placement Offering") of 100,000 shares Company's redeemable common stock which
include warrants to purchase 100,000 additional shares of the Company's common
stock at an exercise price of $7.50 per share. Total proceeds from the Placement
Offering (net of Placement Offering costs of $43) were $957. The net proceeds
allocated to common stock aggregated $732. The stock warrants were recorded at
their estimated fair value of $225 and are entitled to certain piggyback
registration rights. The stock warrants expire on December 14, 2001; no stock
warrants have been exercised to date.
In connection with the private placement, the shareholder received certain
put rights which are exercisable after June 21, 2001 but not later than June 21,
2003 if the Company has not completed a public offering of its common stock by
June 21, 2001 at a price of at least $22.00 per share and with net proceeds to
the Company of at least $10,000. The per share price applicable to the put
rights is 20 times the Company's average adjusted net income per share for the
two most recent fiscal years preceding the exercise of the rights. As of
December 31, 1997, the Company has not recorded any accretion related to the
above put rights.
(9) STOCK OPTIONS
The Company has adopted a Stock Incentive Plan (the "Plan"). The Plan
provides for issuance of up to 1,000,000 shares of common stock in connection
with various stock grants, awards and sales granted under such plan to employees
and non-employees (primarily key dental group personnel). The Plan authorizes
the grant of incentive stock options, non-statutory stock options, stock
appreciation rights or bonus rights; award of stock bonuses; and/or sale of
restricted stock. The exercise price for incentive stock options may not be less
than fair market value of the underlying shares on the date of grant. The Plan
is administered by the Company's Board of Directors. The Board has the authority
to determine the persons to whom awards will be made, the amounts, and other
terms and conditions of the awards. Shares issued under the Plan are generally
subject to a five- year vesting schedule from the date of grant and expire ten
years from the original grant date.
F-33
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(9) STOCK OPTIONS (CONTINUED)
On February 13, 1997 (the offering date), the Company repriced all employee
stock options than outstanding to the offering price of $5.00 per share (except
for certain stock options held by a principal shareholder, which were repriced
at 110% of the offering price). All other terms with respect to such options
were maintained. The Company did not recognize compensation expense related to
the repricing of the employee stock options as the adjusted exercise price was
not below the fair value of the common stock as of the repricing date.
Prior to the merger, GMS had two stock-based option plans ("Former Plans")
which offered essentially the same awards and stock option terms as the Plan.
Upon consummation of the merger of GMS with the Company, the Former Plans were
frozen to allow no additional option grants under those plans. The number of
options and option price for the options granted under the Former Plans were
converted to the Company share and share price equivalent utilizing the same
conversion ratio of GMS common stock to Company common stock.
Stock options issued to non-employees have been recorded at their estimated
fair market value and are being expensed over their respective vesting lives of
up to five years. Total compensation expense recorded for the years ended
December 31, 1996 and 1997 was $52 and $56, respectively.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 ("SFAS 123")
The Financial Accounting Standards Board has issued SFAS 123, Accounting for
Stock Based Compensation, which defines a fair value based method of accounting
for employee stock option or similar compensation plans. However, it also allows
an entity to continue to measure compensation cost related to stock options
issued to employees under these plans using the method of accounting prescribed
by the Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting for
Stock Issued to Employees. Entities electing to remain with the accounting in
APB 25 must make pro forma disclosures of net income and earnings per share, as
if the fair value based method of accounting defined in this Statement had been
applied.
The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during the years ended December 31,
1996 and 1997. The 1996 options were valued using the minimum value pricing
model as prescribed by SFAS 123 for nonpublic companies. The options issued
subsequent to the Company's 1997 initial public offering have been valued using
the Black-Scholes pricing model as prescribed by SFAS 123. The following
weighted average assumptions have been used for grants of stock options:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Risk free interest rate.................................................. 6.5% 6.4%
Expected dividend yield.................................................. -- --
Expected lives........................................................... 5 years 5 years
Expected volatility...................................................... -- 60%
</TABLE>
F-34
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(9) STOCK OPTIONS (CONTINUED)
Options were assumed to be exercised over the five-year expected life for
the purpose of this valuation. Adjustments are made for options forfeited prior
to vesting. The total value of options granted was computed as the following
approximate amounts, which would be amortized on the straight-line basis over
the vesting period of the options:
<TABLE>
<S> <C>
Year ended December 31, 1996........................................ $ 705
Year ended December 31, 1997........................................ 1,175
</TABLE>
If the Company had accounted for stock options issued to employees in
accordance with SFAS 123, the Company's net loss attributable to common stock
and pro forma net loss per share would have been reported as follows:
Net loss attributable to common stock:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
As reported.............................................................. $ (2,018) $ (4,153)
Pro forma................................................................ (2,133) (4,523)
</TABLE>
Pro forma net loss per common and common equivalent share:
<TABLE>
<CAPTION>
1997
(AS RESTATED--
1996 SEE NOTE 15)
--------- ---------------
<S> <C> <C>
As reported--basic.................................................... $ (1.18) $ (.91)
Pro forma--basic...................................................... (1.25) (.99)
As reported--diluted.................................................. (1.18) (.91)
Pro forma--diluted.................................................... (1.25) (.99)
</TABLE>
The effects of applying SFAS 123 for providing pro forma disclosures for
1996 and 1997 are not likely to be representative of the effects on reported net
loss and net loss per common equivalent share for future years, because options
vest over several years and additional awards generally are made each year.
F-35
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(9) STOCK OPTIONS (CONTINUED)
The following summary presents the options granted and outstanding under the
Plan and Former Plans as of December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF SHARES AVERAGE
------------------------- EXERCISE
EMPLOYEE NON-EMPLOYEE TOTAL PRICE
---------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1995.............. 215,000 67,750 282,750 $ 5.47
Granted................................... 192,112 38,705 230,817 3.43
Exercised................................. (2,000) -- (2,000) --
Canceled.................................. (96,549) (5,833) (102,382) 8.19
---------- ------------- ---------- -----
Outstanding, December 31, 1996.............. 308,563 100,622 409,185 3.66
Granted................................... 746,306 1,200 747,506 3.03
Exercised................................. (353,918) -- (353,918) .71
Canceled.................................. (142,100) (1,200) (143,300) 4.78
---------- ------------- ---------- -----
Outstanding, December 31, 1997.............. 558,851 100,622 659,473 $ 4.85
---------- ------------- ---------- -----
---------- ------------- ---------- -----
</TABLE>
The following table sets forth the exercise prices, the number of options
outstanding and exercisable, and the remaining contractual lives of the
Company's stock options granted under the Plan and Former Plans at December 31,
1997:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS WEIGHTED AVERAGE
EXERCISE ------------------------ CONTRACTUAL LIFE
PRICE OUTSTANDING EXERCISABLE REMAINING
- ------------- ----------- ----------- -------------------
<S> <C> <C> <C>
$ .20 15,250 15,250 7.57years
.45 84,118 19,195 8.90
.67 15,355 -- 9.63
4.13 45,500 -- 6.76
5.00 305,250 48,170 8.45
5.50 81,000 81,000 5.83
8.02 68,000 1,000 9.64
10.00 45,000 27,672 7.35
------ ----------- ----------- ---
$ 4.85 659,473 192,287 8.02
------ ----------- ----------- ---
------ ----------- ----------- ---
</TABLE>
As of December 31, 1997, there are 354,538 options available for future
grant under the Plan.
(10) TRANSACTIONS WITH AND RECEIVABLES FROM RELATED DP'S
The Company currently derives a portion of its management fees from three
DPs with which it is related through common ownership of certain shareholders.
The Company provides management support services to these related DPs under
management agreements with forty-year terms. In 1996 and 1997, the Company
earned management fees based on
F-36
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(10) TRANSACTIONS WITH AND RECEIVABLES FROM RELATED DP'S (CONTINUED)
specified percentages of net dental practice patient revenues as defined in the
agreements. Such percentages ranged from 51% to 53% and were negotiated with the
DPs and have been developed and revised as necessary based on the Company's
services and operating needs. Subsequent to December 31, 1997, the Company and
the DPs have entered into new management services agreements (see note 14).
Affiliate receivables consist primarily of amounts owed to the Company by
the unconsolidated DPs to reimburse the Company for payment of the
unconsolidated DPs payroll and other direct costs, net of amounts due to the
unconsolidated DPs related to the asset acquisitions and the unconsolidated DPs
share of revenues. The Company also transacts various other business with the
related DPs, including short-term operating advances.
(11) INCOME TAXES
Income tax benefit consists of the following:
<TABLE>
<CAPTION>
1996
-----------------------------------
CURRENT DEFERRED TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
U.S. Federal..................................................... $ (175) $ (420) $ (595)
State and local.................................................. (6) (54) (60)
----- ----- ---------
$ (181) $ (474) $ (655)
----- ----- ---------
----- ----- ---------
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------
CURRENT DEFERRED TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
U.S. Federal..................................................... $ (123) $ 34 $ (89)
State and local.................................................. 8 -- 8
----- ----- ---------
$ (115) $ 34 $ (81)
----- ----- ---------
----- ----- ---------
</TABLE>
The effective tax rate differed from the U.S. statutory Federal rate due to
the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Statutory federal rate..................................................... $ (796) $ (1,111)
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal income tax benefit.................... (90) 3
Amortization of nondeductible goodwill and other nondeductible items..... 163 80
Valuation allowance for deferred tax assets allocated to income tax
expense................................................................ 75 691
Prior year reconciliation................................................ -- 189
Other.................................................................... (7) 67
--------- ---------
Effective tax rate......................................................... $ (655) $ (81)
--------- ---------
--------- ---------
</TABLE>
F-37
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(11) INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following components:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................................ $ 647 $ 645
Accrued payroll/bonus related.......................................... -- 85
Allowance for doubtful accounts........................................ 618 1,663
Compensated absences, principally due to accrual for financial
reporting purposes................................................... 114 146
Intangible assets, principally due to differences in amortization and
capitalized cost..................................................... -- 164
Other.................................................................. 12 38
--------- ---------
Total gross deferred tax assets.................................... 1,391 2,741
Less valuation allowance................................................. (75) (766)
--------- ---------
Deferred tax assets, net of valuation allowance.................... 1,316 1,975
--------- ---------
Deferred tax liabilities:
Accounts receivable.................................................... (759) (1,410)
Plant and equipment, principally due to differences in depreciation and
capitalized cost..................................................... (444) (525)
Intangible assets, principally due to accrual for financial reporting
purposes............................................................. (11) --
Cash versus accrual reporting for tax purposes......................... (68) (38)
Other.................................................................. -- (2)
--------- ---------
Deferred tax liabilities........................................... (1,282) (1,975)
--------- ---------
Net deferred tax asset............................................. $ 34 $ --
--------- ---------
--------- ---------
</TABLE>
(12) MALPRACTICE INSURANCE
The dental group's dentists are insured with respect to dentistry
malpractice risks on a claims-made basis. There are known claims and incidents
that may result in the assertion of additional claims, as well as claims from
unknown incidents that may be asserted arising from services provided to
patients. Management is not aware of any claims against the Company or its
affiliated groups which might have a material impact on the Company's financial
position or results of operations.
F-38
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(13) COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company has primarily entered into operating leases of commercial
property. Commercial properties under operating leases mostly include space
required to perform dental services and space for administrative facilities.
Lease expense, including month-to-month rentals, for the years ended December
31, 1996 and 1997 was $1,432 and $3,012, respectively.
The future minimum lease payments under capital leases and noncancelable
operating leases with remaining terms of one or more years consist of the
following at December 31, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
--------- -----------
<S> <C> <C>
1998..................................................................... $ 465 $ 3,246
1999..................................................................... 312 3,169
2000..................................................................... 232 2,838
2001..................................................................... 103 2,506
2002..................................................................... 36 2,029
Thereafter............................................................... -- 8,284
--------- -----------
Total minimum lease obligation....................................... 1,148 $ 22,072
-----------
-----------
Less portion attributable to interest.................................... 199
---------
Obligations under capital leases..................................... 949
Less current portion..................................................... 368
---------
$ 581
---------
---------
</TABLE>
LITIGATION
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations
(14) SUBSEQUENT EVENTS
On January 7, 1998, the Company amended its $10 million credit facility (the
"Credit Facility") to provide for a maximum credit line of $25 million, which
may be increased at the option of the Company to $30 million following
completion of an equity offering by the Company in which the Company receives at
least $20 million in net cash proceeds. The Company intends to use the Credit
Facility for working capital requirements, to purchase non-professional dental
practice assets of additional dental practices that the Company may seek to
affiliate with, and to purchase operating assets for existing affiliated dental
practices. The Credit Facility provides that the aggregate amount borrowed under
the Credit Facility for working capital purposes and letter of credit
obligations may not exceed $4 million, and that remaining amounts available
under the Credit Facility may be used by the Company for permitted acquisitions
and capital expenditures. The revolving feature of the Credit Facility expires
on September 30, 1999, at which time it will convert into a three year term loan
to be repaid in 12 equal quarterly installments. Principal
F-39
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(14) SUBSEQUENT EVENTS (CONTINUED)
amounts owed under the Credit Facility bear interest, at the Company's option
and dependent upon the Company's leverage ratio, of (i) up to 1.0% over prime or
(ii) up to 3.25% above LIBOR. The Credit Facility requires the Company to pay an
unused commitment fee based upon a range from .375-.50% of the amount by which
the bank commitment under the Credit Facility exceeds the aggregate amount of
all loans then outstanding. The Credit Facility contains several covenants
including (i) restrictions on the ability of the Company to incur indebtedness
and repurchase, or pay dividends with respect to, its capital stock; and (ii)
requirements relating to maintenance of a specific net worth and specified
ratios of current assets to current liabilities, debt to cash flow and EBITDAR
(earnings before interest expense, taxes, depreciation, amortization and
operating lease rental expense) to fixed charges. In addition, the Credit
Facility requires the Company to notify the lenders prior to making any
acquisition and to obtain the consent of the lenders prior to making (i) certain
acquisitions with purchase price exceeding $3 million, (ii) all acquisitions
with purchase prices exceeding $5 million and (iii) capital expenditures
exceeding $5 million in any fiscal year. The Credit Facility also requires the
Company to convert to a holding company that owns no assets other than the stock
of its operating subsidiaries on or before May 31, 1998. If the Company does not
attain holding company status on or before May 31, 1998, the interest rate
applicable to amounts borrowed under the Credit Facility will be increased by
0.5% and if holding company status is not obtained on or before July 31, 1998 an
event of default will exist under the terms of the Credit Facility. The
Company's obligations under the Credit Facility are guaranteed by each of the
subsidiaries of the Company. The obligations of the Company under the Credit
Facility and the subsidiaries under the guarantees are secured by a security
interest in the equipment, fixtures, inventory, receivables, subsidiary stock,
certain debt instruments, accounts and general intangibles of each of such
entities.
The Company and its related Washington and Oregon DPs entered into asset
purchase and management service agreements (collectively, the Agreements) on
January 1, 1998. The new management service agreements meet the criteria for
consolidation of the DP accounts with the Company for financial reporting
purposes as outlined in EITF 97-2.
Under the terms of the Agreements, the Company acquired all of the fixed
assets and assumed certain liabilities of the DPs. In exchange, the Company paid
consideration of $1,674, which was offset by the Company's $1,674 receivable
from the DPs. In addition, the Company issued options to purchase 110,000 shares
of Company common stock at an exercise price of $8.38 per share, subject to a
five-year vesting schedule and will pay $575 in cash over 18 equal monthly
installments. Also, the Company may pay possible minimal future consideration in
cash or options to be determined upon the achievement of certain financial
results, as defined in the Agreements.
In 1998 the Company completed the acquisitions of two DPs located in
northern California and western Oregon, representing ten clinical office
locations. The purchase price for these affiliations totalled $8,410 and
included cash and 43,077 shares of common stock. These affiliations will be
accounted for using the purchase method of accounting.
On February 28, 1998 the Company signed a definitive agreement to acquire
Managed Dental Care of Oregon, Inc. (MDC). MDC is a dental care organization
that contracts with the state of Oregon to provide care under the Oregon Health
Plan. MDC in turn contracts with dental care providers to provide dental care to
Oregon Health Plan participants. The cash purchase price is $950 and the
acquisition is subject to
F-40
<PAGE>
GENTLE DENTAL SERVICE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(14) SUBSEQUENT EVENTS (CONTINUED)
Oregon state regulatory approval. The acquisition is expected to close during
1998 and will be accounted for using the purchase method of accounting.
During September 1997, the Company entered into definitive agreements to
acquire Dedicated Dental Systems, Inc. (DDS) and the assets of certain related
practices. The acquisition includes 15 dental offices located in and around
Bakersfield, CA. On February 28, 1998 the definitive agreements were amended and
now provide for a purchase price of $16,431 in cash and 705,101 shares of common
stock valued at $5,769 plus potential future amounts based on performance. The
acquisition of DDS is expected to close during 1998 and is subject to California
state regulatory approval. The acquisition will be accounted for using the
purchase method of accounting.
During March 1998, the Company entered into an agreement to lease office
space for a period of sixty months commencing May 1998 at a monthly base rent of
$15.
(15) RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
The Company has restated its consolidated financial statements for the
correction of an error in the weighted average number of shares of common stock
outstanding for the year ended December 31, 1997. As a result of this
correction, the following amounts were restated as of and for the year ended
December 31, 1997:
<TABLE>
<CAPTION>
AS
PREVIOUSLY AS
REPORTED RESTATED
------------ ----------
<S> <C> <C>
Loss per share attributable to common stock--basic and diluted......................... $(1.17) $(.91)
Weighted average common shares utilized for the year ended December 31, 1997 (note
2)................................................................................... 3,544,149 4,559,140
Per share amount of restructuring plan charge recorded in the fourth quarter of 1997
(note 3)............................................................................. $ .32 $ .25
Pro forma net loss per common and common equivalent share:
As reported--basic and diluted......................................................... $(1.17) $(.91)
Pro forma--basic and diluted (note 9).................................................. $(1.28) $(.99)
</TABLE>
F-41
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Dental Care Alliance, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Dental Care
Alliance, Inc. (the "Company") successor to Golden Care Holdings, Inc. and its
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Tampa, Florida
March 30, 1998
F-42
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 1,253,259 $ 20,367,722
Consulting and license fees receivable............................................. 59,000 64,116
Management fee receivable from PAs................................................. 397,441 914,026
Advances to PAs, net............................................................... 16,454 483,421
Other current assets............................................................... 27,644 254,412
Current portion of long-term notes receivable from PAs............................. 68,460 83,522
------------ -------------
Total current assets............................................................. 1,822,258 22,167,219
Property and equipment, net.......................................................... 40,230 1,113,050
Intangible assets, net............................................................... 803,753 4,747,303
Long-term notes receivable from PAs, less current portion............................ 129,935 313,940
Consulting and license fees receivable, noncurrent................................... 251,925 --
Other assets......................................................................... 74,838 212,975
------------ -------------
Total assets..................................................................... $ 3,122,939 $ 28,554,487
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 491,509 $ 638,030
Accrued payroll and payroll related costs.......................................... 124,236 64,933
Other accrued liabilities.......................................................... 31,508 412,952
Acquisition and affiliation obligations payable.................................... -- 920,000
Income taxes payable............................................................... 35,500 179,367
Current portion of long-term debt and capital leases............................... 173,652 195,193
------------ -------------
Total current liabilities........................................................ 856,405 2,410,475
Deferred income taxes................................................................ -- 773,269
Long-term debt and capital leases, less current portion.............................. 40,350 816,918
------------ -------------
Total liabilities................................................................ 896,755 4,000,662
------------ -------------
Commitments and contingencies (Notes 7 and 18)....................................... -- --
Mandatorily redeemable preferred stock, $.01 par value, 15,000 shares authorized,
issued and outstanding............................................................. 1,402,562 --
Put rights associated with common stock.............................................. 191,237 --
------------ -------------
1,593,799 --
------------ -------------
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized, 3,995,460 and 6,977,700
issued and outstanding at December 31, 1996 and 1997, respectively............... 39,955 69,777
Additional paid-in capital, net of $272,268 loan receivable at December 31, 1997... 554,696 24,126,009
Retained earnings.................................................................. 37,734 358,039
------------ -------------
Total stockholders' equity....................................................... 632,385 24,553,825
------------ -------------
Total liabilities and stockholders' equity....................................... $ 3,122,939 $ 28,554,487
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Management fees......................................................... $ 513,705 $ 1,289,828 $ 7,588,193
Consulting and licensing fees........................................... 262,769 347,600 290,885
------------ ------------ ------------
Total revenues...................................................... 776,474 1,637,428 7,879,078
------------ ------------ ------------
Managed dental center expenses:
Staff salaries and benefits........................................... -- 223,657 2,021,497
Dental supplies....................................................... -- 79,448 650,444
Laboratory fees....................................................... -- 98,222 971,024
Marketing............................................................. -- 38,128 414,519
Occupancy............................................................. -- 106,501 998,141
Other................................................................. -- 57,182 851,631
------------ ------------ ------------
Total managed dental center expenses................................ -- 603,138 5,907,256
------------ ------------ ------------
Gross profit............................................................ 776,474 1,034,290 1,971,822
Salaries and benefits................................................. 400,669 521,683 786,795
General and administrative............................................ 234,577 260,558 600,657
Advisory services..................................................... 127,768 -- --
Depreciation and amortization......................................... 22,106 27,654 163,681
------------ ------------ ------------
Operating income (loss)........................................... (8,646) 224,395 420,689
Interest income, net.................................................. 6,494 20,781 263,568
------------ ------------ ------------
Income (loss) before income taxes and minority interest................. (2,152) 245,176 684,257
Provision for income taxes.............................................. -- 35,500 263,952
Minority interest....................................................... 8,654 7,674 --
------------ ------------ ------------
Net income (loss)....................................................... (10,806) 202,002 420,305
Adjustment to redemption value of common and preferred securities..... 85,709 (191,237) (10,500)
Cumulative preferred stock dividend................................... -- (6,485) (100,000)
------------ ------------ ------------
Net income applicable to common stock................................... $ 74,903 $ 4,280 $ 309,805
------------ ------------ ------------
------------ ------------ ------------
Basic net income per common share..................................... $ 0.02 -- $ 0.07
------------ ------------ ------------
------------ ------------ ------------
Diluted net income per common share................................... $ 0.02 -- $ 0.07
------------ ------------ ------------
------------ ------------ ------------
Basic weighted average common shares outstanding...................... 3,791,610 3,829,029 4,610,331
------------ ------------ ------------
------------ ------------ ------------
Diluted weighted average common shares outstanding.................... 3,864,291 3,907,492 4,697,809
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ADDITIONAL
COMMON STOCK ($.01 PAID-IN RETAINED
STOCK PAR) CAPITAL EARNINGS TOTAL
---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995..................... 3,791,610 $ 37,916 $ 12,959 $ 67,525 $ 118,400
Net loss..................................... (10,806) (10,806)
Cash contribution from stockholder........... 15,766 15,766
Common stock--accretion to put value......... 85,709 85,709
Issuance of warrants......................... 127,768 127,768
Dividends.................................... (40,000) (40,000)
---------- ----------- ------------- ----------- -------------
Balance, December 31, 1995................... 3,791,610 37,916 242,202 16,719 296,837
Net Income--January 1 to October 25, 1996.... 157,783 157,783
Purchase of minority interest................ 18,768 18,768
Reclassification of members capital upon
C-Corporation election (see Note 1)........ 174,502 (174,502) --
Issuance of common stock..................... 203,850 2,039 310,461 312,500
Common stock--accretion to put value......... (191,237) (191,237)
Accrued dividends on mandatorily redeemable
preferred stock............................ (6,485) (6,485)
Net income--October 26 to December 31,
1996....................................... -- 44,219 44,219
---------- ----------- ------------- ----------- -------------
Balance, December 31, 1996................... 3,995,460 39,955 554,696 37,734 632,385
Adjustment to redemption value of preferred
stock...................................... (10,500) (10,500)
Accrued dividends on mandatorily redeemable
preferred stock............................ (100,000) (100,000)
Issuance of common stock..................... 163,080 1,630 271,158 272,788
Issuance of common stock for marketplace
acquisition................................ 80,000 800 799,200 800,000
Exercise of warrants under advisory
agreement.................................. 84,802 848 19,152 20,000
Stock subscription receivable................ (272,768) (272,768)
Conversion of preferred stock................ 654,358 6,544 1,778,492 10,500 1,795,536
Elimination of put rights on common stock.... (191,237) (191,237)
Net proceeds from initial public
offering................................... 2,000,000 20,000 21,167,316 -- 21,187,316
Net Income................................... 420,305 420,305
---------- ----------- ------------- ----------- -------------
Balance, December 31, 1997................... 6,977,700 $ 69,777 $ 24,126,009 $ 358,039 $ 24,553,825
---------- ----------- ------------- ----------- -------------
---------- ----------- ------------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................ $ (10,806) $ 202,002 $ 420,305
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization.............................................. 22,106 27,654 163,681
Issuance of warrants for advisory services................................. 127,768 -- --
Minority interest.......................................................... 8,654 7,674 --
(Increase) decrease in:
Consulting and license fees receivable..................................... (72,765) (147,158) (53,191)
Management fee receivable from P.A.s....................................... 2,463 (353,790) (516,585)
Other current assets....................................................... (3,580) (96,147) 90,896
Increase (decrease) in:
Accounts payable........................................................... 13,324 457,038 86,126
Other accrued liabilities.................................................. 1,868 29,503 263,702
Income taxes payable....................................................... -- 35,500 104,867
Deferred income taxes...................................................... -- -- 57,269
Accrued payroll and payroll related costs.................................. (13,159) 107,845 (59,303)
--------- --------- ----------
Net cash provided by operating activities................................ 75,873 270,121 557,767
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.......................................... (4,703) (4,444) (613,006)
(Advances made) payments received on long-term notes receivable from P.A.s... 19,054 3,075 (369,957)
Purchase of intangible and other assets (Notes 4, 5 and 8)................... (20,000) (486,489) (1,032,765)
--------- --------- ----------
Net cash used in investing activities.................................... (5,649) (487,858) (2,015,728)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution from stockholder................................................ 15,766 -- --
Proceeds from issuance of mandatorily redeemable preferred stock, net........ -- 1,395,000 --
Proceeds from issuance of common stock, net.................................. -- -- 21,207,336
Payments of long-term debt................................................... (45,692) (67,257) (494,925)
Proceeds from issuance of long-term debt..................................... -- 117,514 326,980
Advances to P.A.s............................................................ -- (16,454) (466,967)
Dividends.................................................................... (40,000) -- --
--------- --------- ----------
Net cash (used in) provided by financing activities...................... (69,926) 1,428,803 20,572,424
--------- --------- ----------
Net increase in cash and cash equivalents................................ 298 1,211,066 19,114,463
Cash and cash equivalents at beginning of period............................... 41,895 42,193 1,253,259
--------- --------- ----------
Cash and cash equivalents at end of period..................................... $ 42,193 $1,253,259 $20,367,722
--------- --------- ----------
--------- --------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes................................... $ 23,903 -- $ 127,065
Cash paid during the year for interest....................................... $ 19,282 $ 13,955 $ 52,943
Issuance of common stock for noncash consideration........................... -- $ 312,500 --
Assumption of accounts payable and accrued liabilities related to revision of
management service agreements.............................................. -- $ 438,300 --
Elimination of minority interest............................................. -- $ 18,768
Elimination of put rights on common stock.................................... -- -- $ 191,237
Conversion of preferred stock................................................ -- -- $1,795,536
Intangible assets--noncash portion (Notes 4, 5 and 8)........................ -- -- $3,125,429
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND ORGANIZATION
Dental Care Alliance, Inc. ("DCA" or the "Company") was formed on October
23, 1996 with a nominal capital contribution, to effect a reorganization (the
"Reorganization") among DCA, Golden Care Holdings L.C. ("GCH"), the predecessor
entity, and its majority owned subsidiaries Golden Care Network, L.C. ("GCN"),
and Prophet Management L.C. ("PM"). DCA and GCH completed the Reorganization on
October 25, 1996 by transferring substantially all of the assets, liabilities
and operations of GCH, GCN and PM to DCA. Concurrently, shares of DCA were
issued in exactly the same proportion as the shareholders of GCH. Effective
November 4, 1997, the Company completed an Initial public offering of its stock.
All per share amounts have been adjusted retroactively to reflect the stock
split completed in anticipation of this transaction.
As the shareholders of DCA and GCH, and their related ownership percentages,
were identical at the time of the Reorganization, the Reorganization has been
accounted for in a manner similar to a pooling of interests. The effects of the
Reorganization, resulting in the recording of deferred income taxes upon
conversion to C corporation status, have been reflected in these financial
statements.
GCH was incorporated in 1993 as a Florida Limited Liability Corporation
which held 99% of GCN and 90% of PM. Concurrent with the Reorganization, the 10%
minority shareholder interest of PM transferred his ownership interest in the
assets of PM in exchange for 81,540 shares of the stock of DCA. These shares
were issued to the minority shareholder at fair market value of $1.53 per share
as determined by an independent third party appraisal of the common stock of the
Company as of this date. As a result of this transaction, $125,000 was
capitalized and is reflected as a component of intangible assets in the
underlying financial statements and is being amortized over fifteen years. No
step up in basis for the 1% minority share of GCH has been reflected, as the
stockholders and stockholders' percentages of DCA and GCH were exactly the same
on the date of the Reorganization, and the fair value of the 1% ownership
interest is not material.
The Company and its predecessor provide management, consulting and licensing
services to dental practices in Florida, Michigan and, effective in March 1998,
Georgia. The dental practices are owned by separate Professional Associations
(the "PAs"), and the Company has entered into long-term Administrative Services
Agreements ("Management Agreements") with the P.A.s to provide administrative,
financial and technical support and expertise to the P.A.s in exchange for
management, consulting and licensing fees, as described in Note 3.
Each PA employs and directs the professional dental staff, including the
dentists and hygienists, and provides all of the clinical services to the
patients. The Company employs and directs the administrative staff and manages
in collaboration with the PA owner, all of the remaining administrative,
financial, marketing and professional services of the practice. As of December
31, 1997, the Company provided these management services to 29 Managed Dental
Centers, 24 located in Florida and 5 in Michigan. As of December 31, 1995, 1996
and 1997, of the 9, 12 and 29 Managed Dental Centers, 6, 10 and 16 centers were
owned and controlled by the same individual and resulted in $288,000, $1,022,000
and $4,508,000, for each of the years then ended, of the Company's management
fees, respectively. As further described in Note 3, in 1996, the 10 Management
Agreements were modified concurrent with the Reorganization, in exchange for
81,540 shares of the Company's common stock and assumption of the existing
working capital liabilities of the PAs of $438,300. The fair value of these
shares ($125,000) and the working capital liabilities assumed have been recorded
as an intangible asset and are being amortized over the 25 year life of the
agreements.
F-47
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. OPERATIONS AND ORGANIZATION (CONTINUED)
The Company also provides consulting services to other PAs, under contracts
in which the PA employs the administrative staff. Under such agreements, the
Company reviews and consults on the financial and operational efficiencies of
the practices. These consulting agreements were originally held by an entity
which is approximately 80% controlled by the Company's President and controlling
stockholder. The 20% minority stockholder assigned his interest in these
agreements to the Company on October 25, 1996 in exchange for 40,770 shares of
the Company's common stock which was valued at $1.53 per share, as determined by
an independent third party appraisal. As a result of this transaction, $62,500
was capitalized and is reflected as a component of intangible assets in the
underlying financial statements and is being amortized over the eight year
remaining life of these agreements. As of December 31, 1996, the Company
provided these consulting services to four Managed Dental Centers, all located
in Michigan.
In July 1997, the Company acquired the Management Agreements for these four
Managed Dental Centers for $846,000, including a credit related to outstanding
receivables for consulting services of $300,000 (which is forgiven ratably over
the term of the associated Management Agreements), wherein it provides
management services to the related practices for eight years. The acquired
Management Agreements are executed under the net revenue contract (see Note 3).
Unaudited net practice revenue of the dental practice was approximately $3.4
million for the period ended December 31, 1996. The Company had previously
recognized revenue of $160,000 in 1996 and $53,000 for six months ended June 30,
1997, for consulting and licensing services. The Company has agreed to
subcontract the day to day management of these four practices for eighty percent
of the net profits of the PA, subject to certain adjustments to a Michigan based
company owned by the PA owner resulting, in effect, in the acquisition of a
twenty percent interest. Costs associated with this subcontract are included in
General and Administrative. The Company will continue to receive license fees of
$40,000 per year.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION/BASIS OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared on the
accrual basis of accounting and include only those operations which are under
the ownership and financial control of the Company. All intercompany accounts
and transactions have been eliminated in consolidation. The Company's
predecessor subsidiaries were consolidated for the year ended 1995. The Company
does not have any ownership in or exercise control over the dentistry activities
of the PAs and accordingly, the accompanying financial statements do not
consolidate the results of the PAs.
STOCK SPLIT
On October 6, 1997 the Company's Board of Directors authorized a 81.54 to 1
stock split. The increase in authorized shares and the stock split have been
retroactively reflected in these financial statements. The Company also
authorized an increase of its authorized common shares to 50 million.
REVENUE RECOGNITION
The Company records its revenue in accordance with Management Agreements and
other consulting and licensing agreements further described in Note 3.
F-48
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
The costs of advertising, promotion and marketing, aggregating $14,437,
$42,272 and $29,502 for the years ended December 31, 1995, 1996 and 1997,
respectively, are expensed when incurred and are included in general and
administrative expenses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of amounts reported in the financial statements
have been determined by using available market information and appropriate
valuation methodologies. The carrying value of all current assets and current
liabilities approximates fair value because of their short-term nature. The
carrying value of all non-current financial instruments are considered to
approximate fair value based upon current market rates and instruments with
similar risks and maturities.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
CONSULTING AND LICENSE FEES RECEIVABLE
Consulting and license fees receivable represents amounts owed to the
Company from various PAs for consulting and license fees provided under
contracts. The Company reviews the collectibility of its receivables related to
consulting and license fees. This review is based upon the cash flow of the PAs
and the fair market value of the collateral of the assets of the PAs.
MANAGEMENT FEE RECEIVABLE FROM PA
Management fee receivable from PA consists of amounts owed to the Company
related to revenue recorded in accordance with Management Agreements and is
recorded based upon the net realizable value of patient accounts receivable of
the PAs. The Company reviews the collectibility of the patient accounts
receivable of the PAs and adjusts its management fee receivable accordingly.
ADVANCES TO PAS
Advances to PAs consist of receivables from PAs in connection with working
capital advances made to affiliated practices. The Company reviews the
collectibility of its receivables related to advances to PAs. This review is
based upon the cash flow of the PAs, and the fair market value of the collateral
of the assets of the PAs. Commencing August 1997, under terms of note agreements
such advances are repayable under terms calling for interest at 8 1/2%, adjusted
for any changes in the Company's borrowing rate, and are due within 12 months of
issuance. All advances and payables between PAs under common ownership have a
right of offset included in the agreement. The Company has established a reserve
for these advances of $86,000 as of December 31, 1997.
F-49
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NOTES RECEIVABLE FROM PAS
Notes receivable from PAs relate to financing of capital additions made by
PAs covering certain medical and non-medical assets. Notes receivable from PAs
generally have terms of 2 to 10 years, are interest bearing with rates between
8 1/2% and 18 1/2%, and are secured by the assets of the Managed Dental Center
and personally guaranteed by the PA owners.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expenses as incurred and expenditures for additions and
betterments are capitalized. The cost of assets sold or otherwise disposed of
and the related accumulated depreciation are eliminated from the accounts and
any resulting gain or loss is reflected in the statement of operations.
Depreciation is computed by using the straight-line method over the
estimated useful life of the asset, ranging from 3 to 10 years. Leasehold
improvements are amortized over their estimated useful life or the remaining
lease period, whichever is less.
INTANGIBLE ASSETS
Intangible assets includes certain organizational costs associated with the
incorporation of the Company and costs related to consideration given to
entities in exchange for (i) entering into Management Agreements, (ii) waiver by
minority stockholder of any rights to receive management fees under certain
Management Agreements, (iii) revised terms to existing Management Agreements and
(iv) the purchase of minority stockholder rights in PM. Intangible assets are
being amortized over periods of 5 to 25 years.
STOCK BASED COMPENSATION
In October 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123"), which is effective for fiscal years beginning after December
15, 1995. Under SFAS No. 123, the Company may elect to recognize stock-based
compensation expense based on the fair value of the awards or continue to
account for stock-based compensation under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB No. 25") and disclose in
the financial statements the effects of SFAS No. 123 as if the recognition
provisions were adopted. The Company has elected to continue to account for its
stock based compensation for employees under APB No. 25 and adopt the disclosure
only requirements of SFAS No. 123. The Company has adopted a stock based
compensation plan for certain non-employees which are accounted for under SFAS
No. 123.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-50
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPENDENCE ON THE PAS
The Company receives fees for services provided to the PAs under Management
Agreements, and Consulting and Licensing Agreements, but does not employ
dentists or control the practices of the dentists employed by the PAs. The
Company's revenue is dependent on revenue generated by the PAs and, therefore,
effective and continued performance of the Managed Dental Centers during the
term of the Management Agreements is essential to the Company's long-term
success.
The Management Agreements are generally for a term of 25 years beginning on
the effective date of each individual agreement and renewing each and every year
on the anniversary date of the subsequent year for a period of generally 25
years and may be terminated by the PA, or the Company, under certain events of
default "with cause" as defined, including a material default by or bankruptcy
of the Company. In the event of a material default by the PA, or its owner, the
PA can sell the practice to a third party mutually agreed to or sell its assets
to the Company for a preset formula price and assign ownership interest to a PA
agreeable to all parties. In the event that the proper notification period is
given to the Company, the PA can terminate the agreement at any time without
cause if it sells the practice and assigns the agreement to another party to be
approved by the Company. The sales price in such event will be determined
through negotiations among the selling PA and the buyer. In no event can the
Company replace the PA at will or for a nominal fee, except in the event of
default. Any material loss of revenue by the PAs would have a material adverse
effect on the Company, including the PAs' ability to repay their indebtedness to
the Company.
IMPAIRMENT OF ASSETS
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of
("SFAS No. 121"), was implemented by the Company in fiscal 1996. SFAS No. 121
states that if the carrying value of a long-lived asset, including associated
intangibles, exceeds the sum of the estimated undiscounted cash flows from the
operation of the asset, an impairment loss should be recognized for the
difference between the asset's estimated fair value and carrying value. The
Company periodically analyzes its financial position with regards to the
provisions of SFAS No. 121. The Company evaluates whether events and
circumstances have occurred that indicate the carrying amount of these
long-lived assets may be impaired, by comparison of undiscounted cash flows from
operations with related carrying value of the assets. At December 31, 1997, the
unamortized balance of these assets are not considered to be impaired.
ADOPTION OF NEW ACCOUNTING STANDARDS
In February, 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share ("SFAS No. 128"), which requires companies to change
in fiscal 1997 the way that they calculate and present earnings per share. In
accordance with those requirements, the Company now presents "basic" earnings
per share, which is net income divided by weighted average shares outstanding
during the period, and "diluted" earnings per share, which considers the impact
of common stock equivalents. The Company's common stock equivalents consist of
employee and director stock options and warrants to purchase common stock.
Earnings per share presented for prior periods have been restated in accordance
with SFAS 128.
F-51
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1997, the FASB adopted two standards: SFAS Nos. 130 and 131,
Reporting Comprehensive Income and Disclosures about Segments of an Enterprise
and Related Information, respectively. Both of these new standards relate to the
presentation of financial information and do not impact the computation of net
income of earnings per share. Both will be effective for the Company beginning
with its 1998 annual financial statements. SFAS 130 requires that companies
display "comprehensive income", which in addition to the current definition of
net income includes certain amounts currently recorded directly in equity. SFAS
131 mandates the management approach to identifying business segments. Under the
management approach, segments are defined as the organizational units that have
been established for internal performance evaluation purposes. Management does
not believe that the new standard will impact its current presentation.
INCOME TAXES
Upon its incorporation on October 23, 1996, as described in Note 1, the
Company terminated its predecessor status as a Limited Liability Corporation and
is now subject to federal income taxes. Effective October 25, 1996, the Company
accounted for income taxes under the liability method in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
("SFAS No. 109").
3. REVENUE RECOGNITION
MANAGEMENT FEES
Management fees represent revenue earned from managed dental practices less
amounts retained by the practices for those PAs where the Company provides
management services.
The Company earns management fees from the PAs under two types of contracts:
net revenue and net profits. Under the net revenue contracts, management fees
are equal to 67%-74% of the patient revenues earned by the PA. Such contracts
also stipulate that the Company must pay certain expenses, as defined by the
Management Agreement. Under the net profits contracts, management fees are equal
to between 50% and 55% of the practice's net profits, as defined. Net profit is
calculated by subtracting practice expenses (which constitutes both dental and
non-dental expenses), excluding depreciation and amortization, from net
collected practice revenue. Contractual revenues and related expenses have, for
purposes of the accompanying financial statements, been reflected on an accrual
basis.
The amounts contractually retained by the practices under net revenue
contracts are intended to cover amounts incurred for (1) salary and benefits to
employ the dentists, hygienists and contracted specialists; (2) licensing fees
to be paid to the Company; (3) debt and asset carrying costs on the acquisition
of the practices; and (4) any other direct costs to the PA not covered under the
Management Agreement.
The revised structure of the PA contracts is designed to provide the PA with
the opportunity to achieve profits over the term of the contract, as well as for
incentives for the PA owners and dental professionals to increase productivity
and the number of patient encounters, to improve the documentation of their
services so that appropriate billings can be rendered and to increase the
opportunity for dental professionals other than dentists to provide services.
Effective October 1996, the Company revised the terms of all of its 12 then
existing Management Agreements such that the Company is responsible for the
payment of all non-professional expenses of the
F-52
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. REVENUE RECOGNITION (CONTINUED)
Managed Dental Centers. Ten Management Agreements were also revised to base the
Company's management fee from a percentage of net profits at each PA to a
percentage of net revenue from each PA and two Management Agreements were
modified to assign additional responsibilities to the Company. Accordingly,
prior to the revision of these 12 Management Agreements, all non-professional
expenses of the Managed Dental Centers and related revenues were reflected in
each PAs financial statements. The Company expects to primarily utilize net
revenue contracts in the future.
The PA located in Port Charlotte, Florida, has the right to terminate its
Management Agreement during a 90-day period beginning in October 1998. Such
Managed Dental Center contributed approximately 8% and 18% to the Company's
revenue in 1997 and 1996, respectively. The Management Agreement expires in
2003.
The following table sets forth the gross practice revenue earned and amounts
retained by the PAs, and the management fees earned by the Company for the
periods ended:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
COMMONLY CONTROLLED PAS--GROUP 1--NET REVENUE CONTRACTS (10/26/96 -
12/31/97) (NON-TERMINATED):
Net practice revenue................................................ $ -- $ 725,215 $ 6,098,141
Amounts contractually retained by the PAs........................... -- 188,554 1,589,760
------------ ------------ -------------
Management fees..................................................... $ -- $ 536,661 $ 4,508,381
------------ ------------ -------------
------------ ------------ -------------
COMMONLY CONTROLLED PAS--GROUP 1--NET PROFIT CONTRACTS (1/1/94 -
10/25/96) (NON-TERMINATED):
Net practice revenue................................................ $ 1,115,011 $ 3,290,171 $ --
Amounts contractually retained by the PAs........................... 983,864 2,820,871 --
------------ ------------ -------------
Management fees..................................................... $ 131,147 $ 469,300 $ --
------------ ------------ -------------
------------ ------------ -------------
COMMONLY CONTROLLED PAS--GROUP 2--NET REVENUE CONTRACTS
Net practice revenue................................................ $ -- $ -- $ 2,928,739
Amounts contractually retained by PAs............................... -- -- 758,950
------------ ------------ -------------
Management fees..................................................... $ -- $ -- $ 2,169,789
------------ ------------ -------------
------------ ------------ -------------
ALL OTHER PAS (ALL UNDER NET PROFIT CONTRACTS) (NON-TERMINATED):
Net practice revenue................................................ $ 2,454,859 $ 1,459,121 $ 1,561,314
Amounts contractually retained by the PAs........................... 2,169,545 1,178,370 651,291
------------ ------------ -------------
Management fees..................................................... $ 285,314 $ 280,751 $ 910,023
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
F-53
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. REVENUE RECOGNITION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
TERMINATED CONTRACTS (ALL UNDER NET PROFIT CONTRACTS):
Net practice revenue................................................ $ 945,149 $ 101,552 $ --
Amounts contractually retained by the PAs........................... 847,905 98,436 --
------------ ------------ -------------
Management fees..................................................... $ 97,244 $ 3,116 $ --
------------ ------------ -------------
------------ ------------ -------------
ALL PAS COMBINED:
Net practice revenue................................................ $ 4,515,019 $ 5,576,059 $ 10,588,194
Amounts contractually retained by the PAs........................... 4,001,314 4,286,231 3,000,001
------------ ------------ -------------
Management fees..................................................... $ 513,705 $ 1,289,828 $ 7,588,193
------------ ------------ -------------
------------ ------------ -------------
Managed dental center expenses...................................... -- 603,138 5,907,286
------------ ------------ -------------
Net management fees............................................... $ 513,705 $ 686,690 $ 1,680,937
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
Had the net profits method been in effect for all of fiscal 1996, management
fees would have been $708,336. Had the contracts been in effect for all of
fiscal 1996, management fees would have been as follows:
<TABLE>
<CAPTION>
<S> <C>
Management fees................................................................. $ 4,270,410
Managed dental center expenses.................................................. 3,303,710
------------
Net management fees............................................................. $ 966,700
------------
------------
</TABLE>
CONSULTING AND LICENSING FEES
Consulting fees related to training of personnel and other administrative
services were performed by the Company for four managed dental centers which
were not serviced under the Management Agreements through June 30, 1997.
Subsequent to June 30, 1997, the Company and the PA owner executed 8-year
Management Agreements for these four managed dental centers. The Management
Agreements executed are net revenue contracts.
As of December 31, 1997, the Company also provides separate licensing
services to the 32 Managed Dental Centers. The licensing agreements typically
call for a 25 year term, in exchange for an annual fee from each practice of
approximately $10,000--$12,000 per year. As part of the licensing agreements,
the Company will solicit and negotiate managed care contracts for the practice
and provide opportunities for the licensed practice to participate in group
purchasing and marketing plans.
4. AFFILIATIONS
In April 1997, the Company acquired approximately $200,000 of non-dental
assets and executed a 25-year Management Agreement with a dental practice
located in Temple Terrace, Florida. Unaudited net
F-54
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. AFFILIATIONS (CONTINUED)
practice revenue of the dental practice was approximately $950,000 for the year
ended December 31, 1996. The Management Agreement executed is a net revenue
contract.
In July 1997, the Company executed four Management Agreements for $846,000
wherein it will provide management services through a subcontractor to the PAs
for 8 years. The Seller financed $546,000 of this amount with terms of monthly
principal and interest at 8% per annum for 8 years. The PAs were previously
subject to consulting and licensing agreements. Unaudited net practice revenue
of the dental practices was approximately $3.4 million for the period ended
December 31, 1996. The Management Agreements executed are net revenue contracts.
In July 1997, the Company executed a 25-year Management Agreement with a
dental practice located in Flint, Michigan. Unaudited net practice revenue of
the dental practice was approximately $4 million for the year ended December 31,
1996. The Management Agreement executed is a net revenue contract.
In August 1997, the Company acquired approximately $175,000 of non-dental
assets and executed a 25-year Management Agreement with a dental practice
located in Tallahassee, Florida. Unaudited net practice revenue of the dental
practice was approximately $900,000 for the year ended December 31, 1996. The
Management Agreement executed is a net revenue contract.
In September 1997, the Company acquired approximately $120,000 of non-dental
assets and executed a 25-year Management Agreement with a dental practice
located in St. Petersburg, Florida. Unaudited practice revenue of the dental
practice was approximately $400,000 for the year ended December 31, 1996. The
Management Agreement executed is a net revenue contract.
In December 1997, the Company executed a 25-year Management Agreement with a
dental practice located in Tampa, Florida, and acquired non-dental equipment of
$50,000, $20,000 of which is included in acquisition and affiliated obligations
payable. Unaudited net practice revenue of the dental practice was approximately
$600,000 for the year ended December 31, 1997. The Management Agreement executed
is a net revenue contract.
In December 1997, the Company executed a 25-year Management Agreement with a
dental practice in Lakeland, Florida. The total cost to the Company was $420,000
which was allocated to Management Agreement. Unaudited net practice revenue of
the dental practice was approximately $800,000 for the year ended December 31,
1997. The Management Agreement executed is a net revenue contract.
In December 1997, the Company executed a 25-year Management Agreement with a
practice located in Rockledge, Florida. The total cost to the Company was
$1,000,000, of which $800,000 was allocated to Management Agreement and $400,000
of which is included in acquisition and affiliation obligations payable.
Unaudited net practice revenue of the dental practice was approximately $1.6
million for the year ended December 31, 1997. The Management Agreement executed
is a net revenue contract.
5. ACQUISITIONS
On December 29, 1997, the Company acquired all of the outstanding capital
stock of Marketplace Dental, Inc., a Florida corporation (Marketplace), pursuant
to the merger (Merger), of Marketplace with and into Dental Care Alliance of
Florida, Inc. (DCA Florida), a wholly-owned subsidiary of the Company.
Marketplace was the practice management company resulting from the
reorganization of Children's Dental Arcade, Inc. and Wellington Marketplace
Group, PA, on October 1, 1997. The Merger was
F-55
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS (CONTINUED)
consummated pursuant to that certain Agreement and Plan of Merger dated December
29, 1997 (Merger Agreement) among the Company, Marketplace, DCA Florida and the
Marketplace shareholders.
DCA Florida was the surviving corporation in the Merger. Marketplace was a
dental practice management company which managed six dental practices in Palm
Beach County. Pursuant to the Merger the Company acquired all of the assets and
assumed certain liabilities of Marketplace. Such assets consisted primarily of
non-dental assets (including dental equipment) and management agreements.
Pursuant to the Merger, all shares of Marketplace common stock were converted
into the right to receive, in the aggregate 80,000 shares of unregistered common
stock of the Company and an amount in cash of approximately $500,000, which is
included in acquisition and affiliation obligations payable. In addition, the
Merger Agreement calls for the issuance of additional common stock if certain
operating results are achieved.
As a result of the acquisition, the Company has recorded the following net
assets:
<TABLE>
<CAPTION>
<S> <C>
Current assets.................................................................. $ 146,774
Property and equipment.......................................................... 505,343
Intangible assets............................................................... 1,760,429
Other assets.................................................................... 21,645
Current liabilities............................................................. (57,137)
Long-term debt.................................................................. (420,054)
Deferred tax liability.......................................................... (657,000)
------------
$ 1,300,000
------------
------------
</TABLE>
The following unaudited pro forma consolidated results of operations of the
Company give effect to the Marketplace acquisition for 1996 and 1997 as if the
acquisition had occurred at the beginning of each respective period.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
1996 1997
------------ ------------
<S> <C> <C>
Total revenues.................................................... $ 2,809,458 $ 9,083,727
Net income........................................................ $ 33,140 $ 262,633
Net income per common share:
Basic........................................................... $ 0.01 $ 0.06
Diluted......................................................... $ 0.01 $ 0.06
Weighted average common shares outstanding:
Basic........................................................... 3,909,029 4,689,673
Diluted......................................................... 3,987,492 4,777,151
</TABLE>
F-56
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ------------
<S> <C> <C>
Dental and other equipment.......................................... $ 24,900 $ 911,841
Leasehold improvements.............................................. 45,027 296,437
Vehicles............................................................ 13,901 13,901
---------- ------------
83,828 1,222,179
Less accumulated depreciation....................................... (43,598) (109,129)
---------- ------------
$ 40,230 $ 1,113,050
---------- ------------
---------- ------------
</TABLE>
Depreciation expense for the periods ended December 31, 1995, 1996 and 1997
was $17,939, $15,508 and $65,529, respectively.
7. OPERATING LEASES
The Company leases office space for its corporate offices and, under the
terms of certain Management Agreements, office space and certain non-dental
assets on behalf of its Managed Dental Centers.
Future minimum lease payments under these agreements as of December 31, 1997
are:
<TABLE>
<S> <C>
1998............................................................ $1,365,240
1999............................................................ 1,224,496
2000............................................................ 949,237
2001............................................................ 838,026
2002............................................................ 685,097
Thereafter...................................................... 2,871,081
---------
$7,933,177
---------
---------
</TABLE>
Operating lease expense for the periods ended December 31, 1995, 1996 and
1997 was $48,079, $118,000 and $856,822, respectively.
8. INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ------------
<S> <C> <C>
Organizational costs................................................ $ 60,097 $ 74,963
Deferred financing costs............................................ -- 9,739
Management Agreements............................................... 750,802 4,767,897
---------- ------------
810,899 4,852,599
(7,146) (105,296)
---------- ------------
$ 803,753 $ 4,747,303
---------- ------------
---------- ------------
</TABLE>
F-57
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INTANGIBLE ASSETS (CONTINUED)
Amortization expense for the periods ended December 31, 1995, 1996 and 1997
was $4,167, $12,146 and $98,152, respectively.
9. DEBT
Long-term debt and capital leases consists of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ------------
<S> <C> <C>
Note payable to seller, interest rate at 9%, principal and interest
payable monthly, maturing in April 2005, unsecured................ $ -- $ 546,067
Capital lease obligations, secured by equipment and leasehold
improvements at specific dental practices. Various terms ranging
from five to six years with imputed interest rates of 13.6% -
17.2%............................................................. -- 348,652
Note payable to equipment finance company, secured by equipment at
specific dental practices, interest at 11.9%, maturing in 2002.... -- 117,392
Note payable to financial institution, interest at prime plus 1%
(9.5% and 9.25% at December 31, 1995 and 1996, respectively),
principal and interest payable monthly, maturing in October 1999,
secured by dental equipment and the other business assets of the
Company........................................................... 57,805 --
Note payable to financial institution, interest at prime plus 1%
(9.5% and 9.25% at December 31, 1995 and 1996, respectively),
principal and interest payable monthly, maturing in August 1999,
unsecured......................................................... 53,017 --
$60,000 line of credit to financial institution, secured principal
payable due on demand, interest paid quarterly at 9.25% per year
until first change date then rate will be prime plus 1%,
guaranteed by the Company's President and Chief Executive
Officer........................................................... 57,260 --
$40,000 line of credit to financial institution maturing March 26,
1997, secured by a money market account of the Company's President
and Chief Executive Officer, principal due on demand, interest
paid quarterly at 7.25% per year until first change date then rate
will be prime plus 1%............................................. 39,899 --
Other............................................................... 6,021 --
---------- ------------
214,002 1,012,111
Less current portion................................................ 173,652 195,193
---------- ------------
$ 40,350 $ 816,918
---------- ------------
---------- ------------
</TABLE>
F-58
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. DEBT (CONTINUED)
Future debt payments as of December 31, 1997 are:
<TABLE>
<S> <C>
1998............................................................ $ 195,193
1999............................................................ 192,392
2000............................................................ 205,366
2001............................................................ 108,499
2002............................................................ 102,854
Thereafter...................................................... 207,807
---------
$1,012,111
---------
---------
</TABLE>
The Company has two revolving lines of credit with a financial institution
which provides for an aggregate of $1.2 million. The Company may use up to
$600,000 for the purchase of non-dental assets of dental centers provided each
borrowing is repaid within 45 days of draw down. The $600,000 may be used for
general working capital needs. The revolving lines of credit bear interest at
prime plus .75% and are payable on June 1, 1998, and contain limitations on
acquisition activity without prior approval. The entire $1.2 million under the
lines were available at December 31, 1997.
10. INCOME TAXES
As described in Note 1, through October 23, 1996, the Company consisted of a
group of Limited Liability Corporations ("LLCs") with one subsidiary operating
as a C Corporation in 1994.
The provision for income tax related to the C Corporation for the period
October 23, 1996 through December 31, 1996 and the year ended December 31, 1997
consists of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Current expense (benefit):
Federal.............................................................. $ 17,000 $ 254,514
State................................................................ 2,900 51,253
Deferred expense (benefit):
Federal.............................................................. 13,600 (36,594)
State................................................................ 2,000 (5,581)
--------- ----------
Total.................................................................. $ 35,500 $ 263,952
--------- ----------
--------- ----------
</TABLE>
F-59
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
The reconciliation between the effective income tax rate and the U.S.
federal statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
U.S. federal taxes at statutory rate.................................. $ 83,360 $ 230,539
Increase (decrease).................................................
State taxes, net.................................................... 3,737 23,841
Flow through entity income.......................................... (51,597)
Amortization of intangibles......................................... 5,333
Nondeductible items................................................. 4,239
---------- ----------
Income tax provision.................................................. $ 35,500 $ 263,952
---------- ----------
---------- ----------
</TABLE>
Deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1996 1997
---------- -----------
<S> <C> <C>
Deferred taxes, current:
Reserve for bad debts.............................................. $ -- $ 33,529
---------- -----------
Net deferred tax asset current....................................... -- 33,529
---------- -----------
Deferred taxes, non-current:
Depreciation....................................................... (15,600) 4,040
Amortization of intangibles........................................ (10,272)
Book in excess of tax basis in tangible assets..................... (767,037)
---------- -----------
Net deferred tax (liability), non-current............................ (15,600) (773,269)
---------- -----------
Net deferred tax (liability)......................................... $ (15,600) $ (739,740)
---------- -----------
---------- -----------
</TABLE>
A deferred tax liability has been recorded for several intangible assets
related to management agreements entered into during 1997 for which book basis
exceeded tax basis.
11. MANDATORILY REDEEMABLE PREFERRED STOCK AND COMMON STOCK
MANDATORILY REDEEMABLE PREFERERED STOCK
On October 25, 1996, the Company executed a subscription agreement which
provided for the issuance of $1.5 million (15,000 shares at $100/share) in
mandatorily redeemable preferred stock. Under the terms of that agreement,
$500,000 of preferred stock was issued on October 25, 1996 and $1,000,000 was
issued on December 31, 1996. Proceeds of this issuance are reflected net of
$105,000 of related offering costs paid under the Advisory Agreement described
in Note 14.
F-60
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. MANDATORILY REDEEMABLE PREFERRED STOCK AND COMMON STOCK (CONTINUED)
The Company had authorized 15,000 shares of Series A Convertible Preferred
Stock with a par value of $0.01 per share. The preferred stock accrued
cumulative dividends at $8/share, had voting and preemptive rights, adjustments
for dilutive effects and liquidation preferences equal to $100/share plus
accrued unpaid dividends. Dividends were payable in cash or, at holders' option,
one-half in cash and one-half in common stock. Upon consummation of the
Company's initial public offering on November 4, 1997, the preferred stock was
converted into common stock.
COMMON STOCK WITH PUT RIGHTS
In January 1994, GCH sold to a third party an owners interest equivalent to
13%. In connection with the sale of this owners interest, the owner became a
director of the Company and the Company attached certain put rights which are
exercisable after January 1, 2001, if the Company had not completed a public
offering of its common stock by that date. The per share price applicable to the
"put rights" is 6 times pre-tax net income for the calendar year immediately
preceding the exercise of the put times the ownership percentage that will be
put back to the Company.
Concurrent with the Reorganization, this ownership interest was converted to
530,010 shares of common stock of the Company with put rights which are
equivalent to those described above. As of December 31, 1996, the redemption
value of these put rights has been reclassified to temporary equity, from
permanent equity on the Company's balance sheet. Upon consummation of the
Company's initial public offering on November 4, 1997, the put rights provisions
were eliminated.
12. EMPLOYEE BENEFITS
On January 26, 1994 and October 25, 1996, the Company issued to one of its
officers warrants to purchase 81,540 shares of stock (at each grant date), with
an exercise price at the then fair market value (aggregate value of $147,768 and
$125,000 respectively) of the stock, as determined by an independent third party
appraisal. The warrants became fully vested in January 1997. All such warrants
were exercised in February 1997, and the exercise price was funded by an
interest bearing note from the Company. This interest bearing note has been
offset against additional paid-in capital in stockholders' equity at December
31, 1997.
On January 21, 1997, the Company issued a stock option for 49,576 shares of
stock to another officer of the Company which are exercisable, in whole or in
part, immediately. Exercise price is fair market value on the grant date ($1.53
per share). In no event shall this option be exercisable after January 21, 2002.
In November 1997, the Company adopted the 1997 Executive Incentive
Compensation Plan (the "Incentive Plan") which is designed to attract and retain
employees, officers and directors. The Incentive Plan is administered by the
Stock Option and Compensation Committee of the Board of Directors and 250,000
shares of common stock have been reserved for the Incentive Plan.
Concurrent with the adoption of the Incentive Plan, the Company issued stock
options for 61,500 shares to its employees. The options vest over a period of 3
to 5 years and must be exercised by February 2003. Exercise price is fair market
value on grant debt ($12.00 per share). Currently any shares issued upon
exercise would be unregistered. The Company expects to register the shares
underlying the Incentive Plan before the shares issued in November, 1997 become
exercisable.
F-61
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFITS (CONTINUED)
The following table summarizes the Company's stock option activity under the
Incentive Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE FAIR VALUE
NUMBER OF EXERCISE OF OPTIONS
SHARES PRICE GRANTED
----------- ----------- -----------
<S> <C> <C> <C>
Granted during 1995......................................... -- $ -- $ --
Exercised during 1995....................................... -- $ -- $ --
Outstanding at December 31, 1995............................ 81,540 $ 1.81
Exercisable at December 31, 1995............................ 40,770 $ 1.81 $ 1.61
Granted during 1996......................................... 81,540 $ 1.53 $ 1.36
Exercised during 1996....................................... -- $ -- --
Outstanding at December 31, 1996............................ 163,080 $ 1.67 --
Exercisable at December 31, 1996............................ 122,310 $ 1.67 --
Granted during 1997......................................... 61,500 $ 12.00 $ 2.66
Exercised during 1997....................................... 163,080 $ 1.67 --
Outstanding at December 31, 1997............................ 61,500 $ 12.00 --
Exercisable at December 31, 1997............................ -- $ -- --
</TABLE>
The following table summarizes the stock options outstanding and exercisable
under the Incentive Plan at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
OUTSTANDING
------------------------------------ EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICE OPTIONS LIFE PRICE OPTIONS PRICE
-------------- --------- ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996...................... $1.53 - $1.81 163,080 2 months $ 1.67 122,310 $ 1.67
December 31, 1997...................... $12.00 61,500 46 months $ 12.00 -- $ --
</TABLE>
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123. The fair value of each option grant is estimated on the date of grant using
the fair value method with the following weighted average assumptions: no
dividend yield, 11% expected volatility, risk-free interest rates ranging from
5.80% and average expected lives of four years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. For purposes of pro
forma disclosures, the estimated fair value of the
F-62
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFITS (CONTINUED)
options is amortized to expense over the options' vesting period. The Company's
pro forma net earnings as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Net income................................................... $ 74,903 $ 4,280 $ 270,036
--------- --------- ----------
--------- --------- ----------
Basic net income per share................................... $ .02 $ -- $ .06
--------- --------- ----------
--------- --------- ----------
Diluted net income per share................................. $ .02 $ -- $ .06
--------- --------- ----------
--------- --------- ----------
</TABLE>
Because the SFAS No. 123 provides for pro forma amounts for options granted
beginning in 1995, the pro forma expense will likely increase in future years as
the new option grants become subject to the pricing model.
For periods prior to the registration of the Company's common stock,
independent valuations were utilized to determine the value of the common stock.
13. NON-EMPLOYEE OPTION PLAN AND WARRANTS
In November 1997, the Company adopted the 1997 Non-qualified Stock Option
Plan ("Non-employee Plan") which is designed to provide additional incentives
for the PAs with which the Company has entered into management agreements to
attract and retain qualified dentists, health care specialists and PA owners.
The Non-employee Plan is administered by the Stock Option and Compensation
Committee of the Board of Directors and 425,000 shares of Common Stock have been
reserved for the Non-employee Plan.
Concurrent with the adoption of the Non-employee Plan, the Company issued
stock options for 124,000 shares. The options vest over a period of 3 to 5 years
and must be exercised by February 2003. Exercise price is fair market value on
the grant date ($12.00 per share). Currently any shares issued would be
unregistered. The Company has not yet determined whether the shares underlying
the Non-employee Plan will be registered.
In conjunction with work performed under the Advisory Agreement (Note 14),
the Company also granted warrants to advisors.
F-63
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. NON-EMPLOYEE OPTION PLAN AND WARRANTS (CONTINUED)
The following table summarizes the Company's stock option activity under the
Non-employee Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE FAIR VALUE
NUMBER OF EXERCISE OF OPTIONS
SHARES PRICE GRANTED
----------- ----------- -----------
<S> <C> <C> <C>
Granted during 1995......................................... 137,803 $ 1.74 $ --
Exercised during 1995....................................... -- $ -- $ --
Outstanding at December 31, 1995............................ 137,803 $ 1.74
Exercisable at December 31, 1995............................ 84,802 $ 1.74 $ 1.55
Granted during 1996......................................... -- $ -- $ --
Exercised during 1996....................................... -- $ -- $ --
Outstanding at December 31, 1996............................ 137,803 $ 1.74
Exercisable at December 31, 1996............................ 84,802 $ 1.74
Granted during 1997......................................... 124,000 $ 12.00 $ 2.66
Exercised during 1997....................................... 84,802 $ 1.74
Outstanding at December 31, 1997............................ 177,001 $ 8.93
Exercisable at December 31, 1997............................ 53,001 $ 1.74
</TABLE>
The following table summarizes the stock options outstanding and exercisable
at December 31, 1996 and 1997 under the Non-employee Plan:
<TABLE>
<CAPTION>
OUTSTANDING
------------------------------------ EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICE OPTIONS LIFE PRICE OPTIONS PRICE
---------------- --------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996...................... $0.24 - $1.74 137,803 6 months $ 1.74 84,802 $ 1.74
December 31, 1997...................... $1.74 - $12.00 177,001 46 months $ 8.93 53,001 $ 1.74
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the fair value method with the following weighted average assumptions: no
dividend yield, 11% expected volatility, risk-free interest rates ranging from
5.80% and average expected lives of four years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's non-employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its non-employee stock options. For purposes
of expense recognition, the estimated fair value of the options is amortized to
expense over the options' vesting period.
The Company recorded expense associated with the grant of options and
warrants totaling $15,993, $0, and $39,769, for the years ending December 31,
1995, 1996, and 1997, respectively.
F-64
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. ADVISORY SERVICES
The Company entered into an exclusive corporate development advisory
agreement ("Advisory Agreement") in September 1995, as amended on April 25,
1996, under which the Company is committed to the following:
- A retainer each quarter equal to the greater of $4,000 or 6 percent of the
Company's quarterly income before income tax expenses in excess of $75,000
beginning February 1, 1996, through the date of the initial public
offering (November 4, 1997), which is recorded as a component of general
and administrative expenses;
- Warrants to purchase an ownership interest (84,802 shares) at an exercise
price of $20,000 for services rendered in connection with business
development and other financial management advisory services. These
warrants were exercised in June 1997;
- A fee of $105,000 with respect to the issuance of the mandatorily
redeemable preferred stock described in Note 11;
- A fee of $100,000 and a 5 year warrant to purchase 29,167 shares of common
stock at an exercise price equal to $12 per share, upon consummation of
its initial public offering on November 4, 1997; and
- Warrants to purchase 53,001 shares of common stock at an exercise price of
$92,355, which became vested upon the completion of the Company's initial
public offering for services rendered in connection with financial,
marketing and administrative support related to the initial public
offering on November 4, 1997.
15. EARNINGS PER SHARE
RECONCILIATION
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings per share computations for the indicated years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Basic earnings per share:
Numerator............................................................. $ 74,903 $ 4,280 $ 309,805
------------ ------------ ------------
Denominator:
Common shares outstanding............................................. 3,791,610 3,829,029 4,610,331
------------ ------------ ------------
Basic earnings per share.............................................. $ 0.02 $ -- $ 0.07
------------ ------------ ------------
------------ ------------ ------------
Diluted earnings per share:
Numerator............................................................. $ 74,903 $ 4,280 $ 309,805
------------ ------------ ------------
Denominator:
Common shares outstanding............................................. 3,791,610 3,829,029 4,610,331
Assumed conversion of options......................................... 72,681 78,463 87,478
------------ ------------ ------------
Total shares.......................................................... 3,864,291 3,907,492 4,697,809
------------ ------------ ------------
Diluted earnings per share............................................ $ 0.02 $ -- $ 0.07
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-65
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. EARNINGS PER SHARE (CONTINUED)
Options to purchase 81,540 shares of Common Stock at $1.81 per share, which
were outstanding since October 1994 were not included in the computation of
diluted earnings per share for 1995 or 1996 because the options' exercise price
was greater than the average market price of the common shares. These options
were exercised in 1997.
PRO FORMA
Upon its incorporation on October 23, 1996, as described in Note 1, the
Company terminated its predecessor status as a limited liability corporation and
became subject to federal and state income taxes. In addition, due to the
conversion of the preferred stock into common stock and the termination of the
common stock put rights concurrent with the closing of the initial public
offering, pro forma net income per share is computed using the pro forma net
income of the Company before deductions for the adjustment in redemption value
of the common and preferred securities and preferred stock dividends. Since the
Company has adopted Financial Accounting Standards Board Statement No. 128
"Earnings per Share" in 1997, pro forma adjustments for income taxes as if the
Company had been treated as a C corporation and the impact of the preferred
stock comversion have not been included in historical earnings per share in the
Statement of Operations. Had the Company not restated prior years' earnings per
share, the pro forma effect would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Income (loss) before income taxes and minority interest........................ $ (2,152) $ 245,176 $ 684,257
Pro forma provision for income tax............................................. -- 94,000 --
Provision for income tax (after conversion to C corporation)................... 263,952
Minority interest in consolidated subsidiaries................................. 5,343 4,739 --
--------- ---------- ----------
Pro forma net income (loss).................................................... $ (7,495) $ 146,437 $ 420,305
--------- ---------- ----------
--------- ---------- ----------
Basic earnings per share....................................................... $ -- $ 0.04 $ 0.09
--------- ---------- ----------
Diluted earnings per share..................................................... $ -- $ 0.04 $ 0.09
--------- ---------- ----------
</TABLE>
16. RELATED PARTY TRANSACTIONS
The Company's President, Chief Executive Officer and majority stockholder
owns or controls entities which do business with the Company or its Managed
Dental Centers. The Company and its Managed Dental Centers incurred rent
totaling $87,756, $108,110 and $193,900 for the years ending December 31, 1995,
1996 and 1997, respectively, payable to such entities. The Company also paid for
certain laboratory costs of a related party on behalf of the Company's President
and controlling stockholder. These amounts totaled $60,700 and $133,448 for the
years ending December 31, 1996 and 1997, respectively. The amount of $60,000,
which is personally guaranteed by the Company's President, has been reflected in
other assets as such amounts have been structured as a demand note. The Managed
Dental Centers have also incurred capital lease obligations payable to a related
entity owned 33% by the Company's President totaling approximately $119,000,
$108,000 and $102,000 as of December 31, 1995, 1996 and 1997, respectively.
Interest expense on such obligations was approximately $16,000, $21,000 and
$19,000 for the years ending December 31, 1995, 1996 and 1997, respectively.
F-66
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SIGNIFICANT CUSTOMERS
As described in Note 1, a majority of the Managed Dental Centers are owned
by PAs commonly controlled by the same individual. All PAs and the commonly
controlled PAs are indebted to the Company as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ------------
<S> <C> <C>
TOTAL ALL PAs:
Consulting and license fees receivable.................................................. $ 59,000 $ 64,116
Management fee receivable from PAs...................................................... 397,441 914,026
Advances to PAs......................................................................... 16,454 483,421
Current portion of long-term notes receivable........................................... 68,460 83,522
Long-term notes receivable from PAs, less current portion............................... 129,935 313,940
Consulting and license fees receivable, non current..................................... 251,925 --
---------- ------------
$ 923,215 $ 1,859,025
---------- ------------
---------- ------------
AMOUNT OWED BY THE COMMONLY CONTROLLED PAs:............................................. $ 647,251 $ 1,535,384
---------- ------------
</TABLE>
This individual has personally guaranteed this indebtedness in the event the
receivable cannot be paid by the PAs has pledged the ownership interest rights
of PAs subordinate to acquisition debt. This represents a concentration of
credit risk and exposes the Company to risk of loss for these amounts should the
PAs and the individual be unable to pay its debts. Relevant financial data on
this PA's practices and the Company's commitments on behalf of other PAs for
each period end are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net practice revenues................................................... $ 1,115,011 $ 4,116,938 $ 6,098,141
Amounts contractually retained by the P.A.s............................. 983,864 3,107,861 1,589,760
------------ ------------ ------------
Management fees......................................................... $ 131,147 $ 1,009,077 $ 4,508,381
------------ ------------ ------------
</TABLE>
18. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with three of its
officers, one of whom is also the majority stockholder of the Company. The terms
of the agreements are from 4 to 5 years and initially expire in 1998 and 2001.
The Company has entered into a staff leasing agreement whereby all of the
Company's corporate employees and, all of the Managed Dental Center non-medical
employees are leased.
In the ordinary course of business, the Company is party to several legal
proceedings, the outcome of which, individually or in the aggregate, is not
expected to be material to the Company's financial position, results of
operations or cash flows.
F-67
<PAGE>
DENTAL CARE ALLIANCE, INC.
(SUCCESSOR TO GOLDEN CARE HOLDINGS, L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SUBSEQUENT EVENTS
In January, 1998, the Company executed a 25-year Management Agreement with
two practices located in Bradenton, Florida. Unaudited net practice revenue of
the dental practices was $1.5 million for the year ended December 31, 1997. The
total cost to the Company was approximately $480,000 of which $225,000 is
allocated to tangible assets and $255,000 is allocated to Management Agreements.
The Management Agreements executed are net revenue contracts.
In February, 1998, the Company executed 25-year Management Agreements with
two practices located in Orlando, Florida. Unaudited net practice revenue of the
dental practices was approximately $1.3 million for the year ended December 31,
1997. The total cost to the Company is approximately $500,000 of which $195,000
is allocated to tangible assets and $305,000 is allocated to Management
Agreements. The Management Agreements executed are net revenue contracts.
In March, 1998, the Company executed a 25-year Management Agreement with a
practice in Mt. Dora, Florida. Unaudited net practice revenue of the dental
practice was approximately $1.0 million. The total cost to the Company is
approximately $349,000 of which $75,000 is allocated to tangible assets and
$274,000 is allocated to the Management Agreement. The Management Agreement
executed is a net revenue contract.
In March, 1998, the Company executed a 25-year Management Agreement with a
practice in Dalton, Georgia. Unaudited net practice revenue of the dental
practice was approximately $1.7 million. The total cost to the Company is
approximately $572,000 of which $100,000 has been allocated to tangible assets
and $472,000 to the Management Agreement. The Management Agreement executed is a
net revenue contract.
In March, 1998, the Company executed 25-year Management Agreements with four
dental practices in Detroit, Michigan. Unaudited net practice revenue of the
dental practices was approximately $4.4 million. The total cost to the Company
is approximately $2.6 million of which $400,000 has been allocated to tangible
assets and $2.2 million to the Management Agreements. The Management Agreements
executed are net revenue contracts.
F-68
<PAGE>
DENTAL CARE ALLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------- SEPTEMBER 30,
1998
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................................ $ 20,367,722 $ 7,653,597
Consulting and license fees receivable........................................... 64,116 25,282
Management fee receivable from PAs............................................... 914,026 3,808,311
Advances to PAs, net............................................................. 483,421 3,015,900
Other current assets............................................................. 254,412 627,850
Current portion of long-term notes receivable from PAs........................... 83,522 101,894
------------- -------------
TOTAL CURRENT ASSETS........................................................... 22,167,219 15,232,834
Property and equipment, net........................................................ 1,113,050 3,738,091
Intangible assets, net............................................................. 4,747,303 13,669,662
Long-term notes receivable from PAs, less current portion.......................... 313,940 660,536
Other assets....................................................................... 212,975 625,601
------------- -------------
TOTAL ASSETS................................................................... $ 28,554,487 $ 33,926,724
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 638,030 $ 1,217,948
Accrued payroll and payroll related costs........................................ 64,933 216,806
Other accrued liabilities........................................................ 412,952 518,717
Acquisition and affiliation obligations payable.................................. 920,000 451,563
Income taxes payable............................................................. 179,367 436,836
Current portion of long-term debt and capital leases............................. 195,193 1,495,800
------------- -------------
TOTAL CURRENT LIABILITIES...................................................... 2,410,475 4,337,670
Deferred income taxes.............................................................. 773,269 835,720
Long-term debt, less current portion............................................... 816,918 1,603,893
------------- -------------
TOTAL LIABILITIES.............................................................. 4,000,662 6,777,283
Commitments and contingencies...................................................... --
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized, 6,977,700 and
7,031,066 issued and outstanding, respectively................................. 69,777 70,311
Additional paid-in capital......................................................... 24,126,009 24,222,213
Retained earnings.................................................................. 358,039 2,856,917
------------- -------------
TOTAL STOCKHOLDERS' EQUITY..................................................... 24,553,825 27,149,441
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $ 28,554,487 $ 33,926,724
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE>
DENTAL CARE ALLIANCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- ---------------------------
1997 1998 1997 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Management fees......................................... $ 2,220,997 $ 7,859,224 $ 4,692,756 $ 19,661,806
Consulting and licensing fees........................... 54,399 171,182 216,284 465,315
------------ ------------ ------------ -------------
TOTAL REVENUES...................................... 2,275,396 8,030,406 4,909,040 20,127,121
Managed dental center expenses:
Staff salaries and benefits........................... 693,063 2,127,601 1,294,446 5,449,512
Dental supplies....................................... 177,981 562,703 391,315 1,393,777
Laboratory fees....................................... 254,600 864,970 627,610 2,176,457
Marketing............................................. 86,404 310,659 263,031 734,273
Occupancy............................................. 281,895 914,637 614,980 2,192,823
Other................................................. 259,127 560,785 585,621 1,389,025
------------ ------------ ------------ -------------
TOTAL MANAGED DENTAL CENTER EXPENSES................ 1,753,070 5,341,355 3,777,003 13,335,867
------------ ------------ ------------ -------------
522,326 2,689,051 1,132,037 6,791,254
Salaries and benefits................................... 184,512 436,607 557,528 1,223,020
General and administrative.............................. 177,084 496,642 313,054 1,316,869
Depreciation and amortization........................... 45,484 309,075 87,062 698,827
------------ ------------ ------------ -------------
407,080 1,242,324 957,644 3,238,716
OPERATING INCOME.................................... 115,246 1,446,727 174,393 3,552,538
Interest income, net.................................... 9,345 120,976 45,809 513,931
------------ ------------ ------------ -------------
INCOME BEFORE INCOME TAXES.............................. 124,591 1,567,703 220,202 4,066,469
Provision for income taxes.............................. 48,943 603,566 84,943 1,567,591
------------ ------------ ------------ -------------
NET INCOME.............................................. 75,648 964,137 135,259 2,498,878
Adjustment to redemption value of common and
preferred securities.............................. -- -- (10,500) --
Cumulative preferred stock dividend................... (30,000) -- (90,000) --
------------ ------------ ------------ -------------
NET INCOME APPLICABLE TO COMMON STOCK................... $ 45,648 $ 964,137 $ 34,759 $ 2,498,878
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Basic net income per common share....................... $ 0.01 $ 0.14 $ 0.01 $ 0.36
Diluted net income per common share..................... $ 0.01 $ 0.14 $ 0.01 $ 0.35
Basic weighted average common shares outstanding........ 4,243,341 6,999,957 4,169,197 6,985,295
Diluted weighted average common shares outstanding...... 4,330,810 7,071,644 4,256,666 7,084,768
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE>
DENTAL CARE ALLIANCE, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1997 1998
------------ --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 135,259 $ 2,498,878
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 87,062 698,827
Stock issued for services....................................................... -- 4,384
Deferred income taxes........................................................... -- 62,451
(Increase) decrease in:
Consulting and license fees receivable.......................................... 240,008 38,834
Management fee receivable from PAs.............................................. (255,736) (2,894,285)
Other assets.................................................................... (104,018) (786,064)
Increase in:
Accounts payable................................................................ 149,142 579,918
Other accrued liabilities....................................................... 260,597 363,234
Accrued payroll & payroll related costs......................................... 204,268 151,873
------------ --------------
Net cash provided by operating activities..................................... 716,582 718,050
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment............................................... (555,158) 2,947,386
Advances made on notes receivable from PAs........................................ (72,200) (450,000)
Payments received on notes receivable from PAs.................................... 51,758 85,032
Acquisition and affiliations obligations payable.................................. -- 468,437
Investment in servicing agreements and other assets............................... (1,058,871) (9,298,841)
------------ --------------
Net cash used in investing activities......................................... (1,634,471) (13,079,632)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock............................................ 20,000 92,534
Payments of long-term debt........................................................ (38,351) (211,510)
Proceeds from issuance of long-term debt.......................................... 926,828 2,299,092
Advances to PAs................................................................... (801,100) 2,532,479
------------ --------------
Net cash (used in) provided by financing activities . 107,377 (352,543)
Net decrease in cash and cash equivalents..................................... (810,512) (12,714,125)
Cash and cash equivalents at beginning of period.................................... 1,253,259 20,367,722
Cash and cash equivalents at end of period.......................................... $ 442,747 $ 7,653,597
------------ --------------
------------ --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes...................................... $ 67,065 $ 1,249,274
Cash paid during the period for interest.......................................... $ 14,390 $ 124,676
Increase to redemption value of preferred stock................................... $ 10,500 $ --
Increase in cumulative preferred stock dividend................................... $ 90,000 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE>
DENTAL CARE ALLIANCE, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
1. OPERATIONS AND ORGANIZATION
Dental Care Alliance, Inc. (the "Company") provides management services to
dental practices ("Managed Dental Centers") by entering into administrative
services agreements (Management Agreements) with individual dental professional
corporations or professional associations (the "PAs"). In addition, the Company
provides licensing services to Managed Dental Centers and certain non-managed
practices ("Licensed Dental Centers"). As of September 30, 1998, the Company
provided management and licensing services to 55 Managed Dental Centers.
Additionally, the Company provides only licensing services to three Licensed
Dental Centers.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION / BASIS OF CONSOLIDATION. The accompanying
consolidated interim financial statements have been prepared on the accrual
basis of accounting and include only those operations which are under the
ownership and financial control of the Company. All intercompany accounts and
transactions have been eliminated in consolidation. The Company does not have
ownership in or exercise control over the dentistry activities of the PAs and
accordingly, the accompanying interim financial statements do not consolidate
the results of the PAs.
The accompanying consolidated interim financial statements are unaudited and
should be read in conjunction with the audited financial statements of the
Company for the year ended December 31, 1997.
In the opinion of management, the accompanying interim financial statements
include all adjustments, consisting only of normal recurring adjustments, and
disclosures necessary to prevent the information presented from being
misleading. Certain prior period financial statement balances have been
reclassified to conform with the current period presentation. The results of
operations for the periods presented are not necessarily indicative of results
for the full year.
3. AFFILIATIONS
In January, 1998, the Company executed 25-year Management Agreements with
two practices located in Bradenton, Florida. Unaudited net practice revenue of
the dental practices was $1.5 million for the year ended December 31, 1997. The
total cost to the Company was approximately $480,000 of which $225,000 is
allocated to tangible assets and $255,000, is allocated to Management
Agreements. The Management Agreements executed are net revenue contracts.
In February, 1998, the Company executed 25-year Management Agreements with
two practices located in Orlando, Florida. Unaudited net practice revenue of the
dental practices was approximately $1.3 million for the year ended December 31,
1997. The total cost to the Company is approximately $500,000 of which $195,000
is allocated to tangible assets and $305,000 is allocated to Management
Agreements. The Management Agreements executed are net revenue contracts.
In March, 1998, the Company executed a 25-year Management Agreement with a
practice in Mt. Dora, Florida. Unaudited net practice revenue of the dental
practice was approximately $1.0 million. The total cost to the Company is
approximately $349,000 of which $191,000 is allocated to tangible assets and
$158,000 is allocated to the Management Agreement. The Management Agreement
executed is a net revenue contract.
In March, 1998, the Company executed a 25-year Management Agreement with a
practice in Dalton, Georgia. Unaudited net practice revenue of the dental
practice was approximately $1.7 million. The total
F-72
<PAGE>
DENTAL CARE ALLIANCE, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 (UNAUDITED)
3. AFFILIATIONS (CONTINUED)
cost to the Company is approximately $572,000 of which $100,000 has been
allocated to tangible assets and $472,000 to the Management Agreement. The
Management Agreement executed is a net revenue contract.
In March, 1998, the Company executed 25-year Management Agreements with four
dental practices in Detroit, Michigan. Unaudited net practice revenue of the
dental practices was approximately $4.4 million. The total cost to the Company
is approximately $2.6 million of which $185,000 has been allocated to tangible
assets and $2.4 million to the Management Agreements. The Management Agreements
executed are net revenue contracts.
In May, 1998, the Company executed a 25-year Management Agreement with a
practice in Savannah, Georgia. Unaudited net practice was approximately
$700,000. The total cost to the Company is approximately $170,000 of which
$2,000 has been allocated to tangible assets and $168,000 to the Management
Agreement. The Management Agreement executed is a net revenue contract.
In June, 1998, the Company executed a 25-year Management Agreement with a
dental practice in Orange City, Florida. Unaudited net practice revenue of the
dental practice was approximately $1.1 million. The total cost to the Company is
approximately $365,000 of which $77,000 has allocated to tangible assets and
$288,000 to the Management Agreement. The Management Agreement executed is a net
revenue contract.
In June, 1998, the Company executed a 25-year Management Agreement with a
practice in Tallahassee, Florida. Unaudited net practice revenue of the dental
practice was approximately $550,000. The total cost to the Company is
approximately $140,000 of which $80,000 is allocated to tangible assets and
$60,000 to the Management Agreement. The Management Agreement executed is a net
revenue contract.
In June, 1998, the Company executed 25-year Management Agreements with two
dental practices in the Atlanta, Georgia area. Unaudited net practice revenue of
the dental practices was approximately $1.5 million. The total cost to the
Company is approximately $510,000 of which $105,000 is allocated to tangible
assets and $405,000 to the Management Agreement. The Management Agreement
executed is a net revenue contract.
In August 1998, the Company executed a 25-year Management Agreement with a
dental practice in Gainesville, Florida. Unaudited net practice revenue of the
dental practice was approximately $241,000. The total cost to the Company is
approximately $30,000 of which $21,000 is allocated to tangible assets and
$9,000 to the Management Agreement. The Management Agreement executed is a net
revenue contract.
In August 1998, the Company executed a 25-year Management Agreement with
three dental practices in northwest Indiana. Unaudited net practice revenue of
the dental practices was approximately $1.5 million. The total cost to the
Company is approximately $391,000 of which $130,000 is allocated to tangible
assets and $261,000 to the Management Agreement. The Management Agreements
executed are net revenue contracts.
In September 1998, the Company executed a 25-year Management Agreement with
a dental practice in Ocala, Florida. Unaudited net practice revenue of the
dental practice was approximately $525,000. The total cost to the Company is
approximately $184,000 of which $52,000 is allocated to tangible assets and
$132,000 is allocated to the Management Agreement. The Management Agreement
executed is a net revenue contract.
F-73
<PAGE>
DENTAL CARE ALLIANCE, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998 (UNAUDITED)
3. AFFILIATIONS (CONTINUED)
In September 1998, the Company executed a 25-year Management Agreement with
a dental practice in Jacksonville, Florida. Unaudited net practice revenue of
the dental practice was approximately $1.2 million. The total cost to the
Company is approximately $365,000 of which $165,000 is allocated to tangible
assets and $200,000 to the Management Agreement. The Management Agreement
executed is a net revenue contract.
4. ACQUISITIONS
On April 1, 1998, the Company acquired all the outstanding capital stock of
Dental One Associates, Inc., a Georgia corporation ("Dental One"), pursuant to a
Stock Purchase Agreement effective March 20, 1998.
Pursuant to the Stock Purchase Agreement, the Company acquired all the
assets of Dental One. Such assets consisted primarily of non-dental assets
(including dental equipment) and management agreements. Five hundred thousand
shares (500,000) of the common stock of Dental One, representing one hundred
percent (100%) of the issued and outstanding shares were purchased by the
Company in consideration of (a) $2.4 million in cash; (b) a promissory note in
the amount of $1,047,510, bearing interest at 8.5% per annum, payable in equal
quarterly payments of principal and interest amortized over five years with a
three year balloon; and (c) a promissory note in the amount of $1.2 million
payable in monthly installments over 120 days.
5. SUBSEQUENT EVENTS
On October 15, 1998 the Company executed an Agreement and Plan of
Reorganization and Merger with Gentle Dental Service Corporation (NASDAQ: GNTL),
a dental practice management company headquartered in El Segundo, California. In
this proposed transaction, Gentle Dental Service Corporation ("Gentle") and the
Company will each become a wholly-owned subsidiary of a new corporation to be
headquartered in California. Each share of the Company's common stock will be
converted into 1.67 shares of common stock of the new corporation. This proposed
transaction is subject to, among other things, regulatory and stockholder
approval.
In November 1998, the Company executed 25-year Management Agreements with 22
dental practices in Pennsylvania. Unaudited net practice revenue of the dental
practices was approximately $8.0 million. The total cost to the Company is
approximately $2.8 million, with the allocation between tangible assets and the
Management Agreement to be determined upon completion of an appraisal. The
Management Agreements executed are net revenue contracts.
F-74
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Boards of Directors
Capitol Dental Care, Inc. and
Dental Maintenance of Oregon, P.C.:
We have audited the accompanying combined balance sheets of Capitol Dental
Care, Inc. (CDC) and Dental Maintenance of Oregon, P.C. (DMO) (the Company) as
of December 31, 1997 and 1996, and the related combined statements of income,
shareholders' equity and cash flows for each of the years in the two-year period
ended December 31, 1997. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Capitol Dental
Care, Inc. and Dental Maintenance of Oregon, P.C. as of December 31, 1997 and
1996, and the combined results of their operations and their cash flows for each
of the years in the two-year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
KPMG PEAT MARKWICK LLP
Orange County, California
October 13, 1998, except
as to note 7, which is as of
October 30, 1998
F-75
<PAGE>
CAPITOL DENTAL CARE, INC. AND
DENTAL MAINTENANCE OF OREGON, P.C.
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................................... $ 2,941 $ 4,078
Investments.................................................................................. 1,158 752
Accounts receivable.......................................................................... 139 72
Prepaid income taxes......................................................................... 420 --
Prepaid and other current assets............................................................. 48 34
--------- ---------
Total current assets....................................................................... 4,706 4,936
--------- ---------
Equipment and leasehold improvements, net (note 2)............................................. 601 444
Restricted cash................................................................................ 530 282
Notes receivable from shareholders............................................................. 215 215
Intangible assets and start-up costs, net of accumulated amortization of $14 and $7 in 1997 and
1996, respectively........................................................................... 25 32
Other assets................................................................................... 42 29
--------- ---------
Total assets............................................................................... $ 6,119 $ 5,938
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................................................ $ 183 $ 310
Accrued claims incurred but not reported..................................................... 313 435
Income taxes payable......................................................................... -- 666
Deferred income taxes........................................................................ 24 81
Current maturities of obligations under capital leases (note 4).............................. 77 35
--------- ---------
Total current liabilities.................................................................. 597 1,527
--------- ---------
Obligations under capital leases, net of current portion (note 4).............................. 65 35
--------- ---------
Shareholders' equity:
Common stock--CDC, $1 par value; 1,000 shares authorized, issued and outstanding in 1997 and
1996....................................................................................... 1 1
Common stock--DMO, no par value; 5,000 shares authorized, 1,000 shares issued and outstanding
in 1997 and 1996........................................................................... 30 30
Additional paid-in capital--DMO.............................................................. 179 179
Retained earnings............................................................................ 5,247 4,166
--------- ---------
Total shareholders' equity................................................................. 5,457 4,376
--------- ---------
Commitments and contingencies (note 4)
Subsequent event (note 7)
Total liabilities and shareholders' equity................................................. $ 6,119 $ 5,938
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-76
<PAGE>
CAPITOL DENTAL CARE, INC. AND
DENTAL MAINTENANCE OF OREGON, P.C.
COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Capitation and other revenue................................................................ $ 18,261 $ 21,711
--------- ---------
Operating expenses:
Payments to other providers............................................................... 9,923 12,755
Clinical salaries and benefits............................................................ 3,289 2,214
Practice nonclinical salaries and benefits................................................ 951 1,001
Dental supplies and lab expenses.......................................................... 613 501
Practice occupancy expenses............................................................... 309 222
Practice selling, general and administrative expenses..................................... 1,270 961
Depreciation and amortization............................................................. 101 74
--------- ---------
16,456 17,728
--------- ---------
Operating income........................................................................ 1,805 3,983
Nonoperating income:
Interest income, net...................................................................... 265 238
Other income.............................................................................. 17 23
--------- ---------
282 261
--------- ---------
Income before income taxes.............................................................. 2,087 4,244
Income tax expense (note 5)................................................................. 556 1,377
--------- ---------
Net income.............................................................................. $ 1,531 $ 2,867
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-77
<PAGE>
CAPITOL DENTAL CARE, INC. AND
DENTAL MAINTENANCE OF OREGON, P.C.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------------------
CAPITOL DENTAL CARE, DENTAL MAINTENANCE ORGANIZATION,
INC. P.C.
------------------------ ----------------------------------- RETAINED
SHARES AMOUNT SHARES AMOUNT APIC EARNINGS
----------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995.................. 1,000 $ 1 510 $ 25 $ 179 1,899
Sale of common stock........................... -- -- 490 5 -- --
Dividends paid to shareholders................. -- -- -- -- -- (600)
Net income..................................... -- -- -- -- -- 2,867
----- ----- ----- --- --------- -----
Balances at December 31, 1996.................. 1,000 1 1,000 30 179 4,166
Dividends paids to shareholders................ -- -- -- -- -- (450)
Net income..................................... -- -- -- -- -- 1,531
----- ----- ----- --- --------- -----
Balances at Decemer 31, 1997................... 1,000 $ 1 1,000 $ 30 $ 179 5,247
----- ----- ----- --- --------- -----
----- ----- ----- --- --------- -----
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balances at December 31, 1995.................. 2,104
Sale of common stock........................... 5
Dividends paid to shareholders................. (600)
Net income..................................... 2,867
------
Balances at December 31, 1996.................. 4,376
Dividends paids to shareholders................ (450)
Net income..................................... 1,531
------
Balances at Decemer 31, 1997................... 5,457
------
------
</TABLE>
See accompanying notes to combined financial statements.
F-78
<PAGE>
CAPITOL DENTAL CARE, INC. AND
DENTAL MAINTENANCE OF OREGON, P.C.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................................................. $ 1,531 $ 2,867
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................. 101 74
Deferred income taxes..................................................................... (57) (48)
Changes in assets and liabilities:
Accounts receivable..................................................................... (67) 52
Prepaid income taxes.................................................................... (420) 59
Prepaid and other current assets........................................................ (14) 128
Other assets............................................................................ (13) (8)
Accounts payable and accrued expenses................................................... (127) 139
Accrued claims incurred but not reported................................................ (122) (987)
Income taxes payable.................................................................... (666) 666
--------- ---------
Net cash provided by operating activities............................................. 146 2,942
--------- ---------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements........................................... (144) (73)
Loan to shareholders........................................................................ -- (37)
Purchases of investments available for sale and restricted cash............................. (654) (280)
--------- ---------
Net cash used in investing activities................................................. (798) (390)
--------- ---------
Cash flows from financing activities:
Repayment of obligations under capital leases............................................... (35) (40)
Proceeds from issuance of common stock...................................................... -- 5
Dividends paid to shareholders.............................................................. (450) (600)
--------- ---------
Net cash used in financing activities................................................. (485) (635)
--------- ---------
(Decrease) increase in cash and cash equivalents...................................... (1,137) 1,917
Cash and cash equivalents, beginning of period................................................ 4,078 2,161
--------- ---------
Cash and cash equivalents, end of period...................................................... $ 2,941 $ 4,078
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-79
<PAGE>
CAPITOL DENTAL CARE, INC. AND
DENTAL MAINTENANCE OF OREGON, P.C.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
(1) BUSINESS DESCRIPTION
Capitol Dental Care, Inc. (CDC), an Oregon Corporation, is a dental care
organization that contracts with the State of Oregon Office of Medical
Assistance Program (OMAP) to provide care under the Oregon Health Plan
(OHP). The combined companies derived 95% and 93% of their revenues from the
State of Oregon for the years ended December 31, 1997 and 1996,
respectively. CDC in turn contracts with dental care providers, including
Dental Maintenance of Oregon, P.C. (DMO), a subchapter S Corporation
incorporated in the state of Oregon. DMO has 9 clinics throughout Oregon and
employs approximately 15 dentists to provide dental care to OHP participants
and to non-participants in the OHP on a fee-for-service basis. CDC and DMO
are related through common ownership. Accordingly, the financial statements
of CDC and DMO are combined.
(2) SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The accompanying financial statements have been prepared on the accrual
basis of accounting and include the combined accounts of DMO and CDC
(collectively referred to as the Company).
(B) CAPITATION AND OTHER REVENUE
Capitation and other revenue represents the premiums received from OMAP
for related OHP participants and revenue from dental services provided
for commercially insured and private pay patients, reported at estimated
realizable amounts net of contractual adjustments. Capitation revenue is
recognized ratably over the period covered. Dental service revenue is
recognized as earned, as services are rendered. The combined companies
derived approximately 95% and 93% of their revenues from OMAP for the
years ended December 31, 1997 and 1996 respectively.
(C) CASH AND CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investments in debt instruments
with an original maturity of three months or less to be cash equivalents.
Investments primarily represent certificates of deposit at various
financial institutions. Cash and investment balances in excess of amounts
insured by the Federal Deposit Insurance Corporation approximate $2,748
at December 31, 1997.
(D) ACCOUNTS RECEIVABLE
Accounts receivable represent amounts due from patients and other third
party payors for dental services provided by the dental groups. Amounts
are recorded net of allowances for contractual adjustments and bad debts.
(E) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Expenditures for
maintenance and repairs are charged to expense as incurred and
expenditures for additions and betterments are capitalized. Depreciation
of equipment is recorded using the straight-line method over five to ten
years, the estimated useful lives of the assets. Leasehold improvements
are amortized on the
F-80
<PAGE>
CAPITOL DENTAL CARE, INC. AND
DENTAL MAINTENANCE OF OREGON, P.C.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
straight-line method over the shorter of the lease term or the estimated
useful life of the improvements.
Equipment under capital leases are stated at the present value of minimum
lease payments at the inception of the lease and are amortized on the
straight-line basis over the shorter of the lease term or the estimated
useful life of the asset (note 4).
Equipment and leasehold improvements is as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Equipment........................................................... $ 622 $ 395
Furniture and fixtures.............................................. 143 140
Vehicles............................................................ 53 53
Leasehold improvements.............................................. 62 41
--------- ---------
Total equipment and leasehold improvements........................ 880 629
Less accumulated depreciation....................................... 279 185
--------- ---------
Equipment and leasehold improvements, net......................... $ 601 $ 444
--------- ---------
--------- ---------
</TABLE>
(F) INTANGIBLE ASSETS AND START-UP COSTS
Intangible assets result primarily from the amount of purchase price for
dental practices in excess of the fair market value of the net assets
acquired. The amounts are amortized on the straight-line basis over
fifteen years. Amortization expense was $1 for the years ended December
31, 1997 and 1996.
Preoperating and start-up costs incurred in connection with the creation
of new dental clinics are capitalized until such facilities become
operational. These costs are then amortized on the straight-line basis
over a five-year period. Amortization expense was $6 for the years ended
December 31, 1997 and 1996.
During 1996, the Company adopted Statement of Financial Accounting
Standards Number 121 "Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed of." The Company reviews its
asset balances for impairment at the end of each year or more frequently
when events or circumstances indicate that the carrying amount of
long-lived assets may not be recoverable. To perform this review, the
Company estimates the expected future undiscounted net cash flows to be
derived from the use of the related asset. If the estimated net cash
flows are less than the carrying amount of the long-lived asset, the
Company recognizes an impairment loss in an amount necessary to write
down the long-lived asset to fair value as
F-81
<PAGE>
CAPITOL DENTAL CARE, INC. AND
DENTAL MAINTENANCE OF OREGON, P.C.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
determined from the expected future discounted cash flows. No write-down
for impairment loss was recorded for the year ended December 31, 1997.
(G) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of its monetary assets and
liabilities based upon the existing interest rates related to such assets
and liabilities compared to current market rates of interest for
instruments with a similar nature and degree of risk. The Company
estimates that the carrying value of all its monetary assets and
liabilities approximates fair value as of December 31, 1997.
(H) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
including incurred but not reported claims, disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(I) RESTRICTED CASH
The Company is contractually required to maintain a minimum of $250 in a
segregated cash account for use only in the event of insolvency. A
secondary amount is also required based on the average monthly fee for
service liability from the prior quarter, which amounted to $280 and $32
at December 31, 1997 and 1996, respectively.
(J) ACCRUED CLAIMS INCURRED BUT NOT REPORTED
The Company records an estimate for the cost of participant claims based
on historical experience.
(K) NEW PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of
Start-up Activities," which is effective for fiscal years beginning after
December 15, 1998. The SOP provides guidance on the financial reporting
of start-up activities and organizational costs. It requires costs of
start-up activities and organizational costs to be expensed when incurred
and, upon adoption, the write off as a cumulative effect of a change in
accounting principle any previously capitalized start-up or
organizational costs. The Company plans to adopt the provisions of SOP
98-5 in the first quarter of 1999. The carrying amount of such costs were
approximately $20 as of December 31, 1997.
(3) MALPRACTICE INSURANCE
The Company's dentists are insured with respect to dentistry malpractice
risks on a claims-made basis. Management is not aware of any claims or
incidents that may result in the assertion of a claim. However, there may be
claims from unknown incidents that may be asserted arising from services
provided to patients. Management is not aware of any claims against the
Company or its affiliated
F-82
<PAGE>
CAPITOL DENTAL CARE, INC. AND
DENTAL MAINTENANCE OF OREGON, P.C.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
(3) MALPRACTICE INSURANCE (CONTINUED)
groups which might have a material impact on the Company's financial
position or results or operations.
(4) COMMITMENTS AND CONTINGENCIES
(A) LEASE COMMITMENTS
The Company has entered into operating leases of commercial property.
Commercial properties under operating leases mostly include space
required to perform dental services and space for administrative
facilities. Lease expense for office space for the years ended December
31, 1997 and 1996 was $309 and $222, respectively.
The future minimum lease payments under capital leases and noncancelable
operating leases with remaining terms of one or more years consist of the
following at December 31, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
1998........................................................... $ 89 $ 328
1999........................................................... 56 321
2000........................................................... 12 272
2001........................................................... -- 170
2002........................................................... -- 89
Thereafter..................................................... -- 213
--- -----------
Total minimum lease payments................................. 157 $ 1,393
-----------
-----------
Less: amount representing interest............................. (15)
---
142
Less: current portion.......................................... 77
---
Long-term portion............................................ $ 65
---
---
</TABLE>
Included in equipment and leasehold improvements are assets under capital
leases with an original cost of $227 and accumulated amortization of $65
at December 31, 1997.
(B) LITIGATION
The Company is subject to various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
F-83
<PAGE>
CAPITOL DENTAL CARE, INC. AND
DENTAL MAINTENANCE OF OREGON, P.C.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
(5) INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
1997
-----------------------------------
CURRENT DEFERRED TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
U.S. Federal.......................................... $ 496 $ (42) $ 454
State and local....................................... 117 (15) 102
----- ----- ---------
$ 613 $ (57) $ 556
----- ----- ---------
----- ----- ---------
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------
CURRENT DEFERRED TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
U.S. Federal.......................................... $ 1,194 $ (66) $ 1,128
State and local....................................... 231 18 249
----------- ----- ---------
$ 1,425 $ (48) $ 1,377
----------- ----- ---------
----------- ----- ---------
</TABLE>
The reconciliation between the effective income tax rate and the U.S.
federal statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
U.S. Federal taxes at statutory................................. $ 468 $ 1,140
State taxes, net................................................ 91 221
Timing differences.............................................. (3) 16
--------- ---------
$ 556 $ 1,377
--------- ---------
--------- ---------
</TABLE>
Deferred income taxes reflect the tax effects of the temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities as of
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities............................................. $ -- $ 63
Other........................................................... 50 --
--- ---
Total deferred tax assets..................................... 50 63
Deferred tax liabilities:
Depreciation.................................................... 7 9
Other........................................................... 67 135
--- ---
Net deferred tax assets (liability)........................... $ (24) $ (81)
--- ---
--- ---
</TABLE>
F-84
<PAGE>
CAPITOL DENTAL CARE, INC. AND
DENTAL MAINTENANCE OF OREGON, P.C.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
(6) SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
------------- ---------------
<S> <C> <C>
Cash paid during the period for:
Interest............................................. $ 32 38
Income taxes......................................... 1,222 736
</TABLE>
Noncash investing and financing activities:
Equipment financed under capital lease arrangements totaled $107 and $58 for
the years ended December 31, 1997 and 1996, respectively.
(7) SUBSEQUENT EVENT
On October 30, 1998, Gentle Dental Service Corporation (GDSC) purchased 100%
of the stock of CDC and substantially all of the assets, management rights
and related liabilities of DMO.
As consideration for the stock in CDC and net assets in DMO, GDSC paid
$6,088 in cash, $2,183 in promissory notes and assumed $167 in liabilities
and capital lease obligations. In addition, an "earnout consideration" is to
be paid based on future earnings of the Company over the next three years.
F-85
<PAGE>
CAPITOL DENTAL CARE, INC. AND
DENTAL MAINTENANCE OF OREGON, P.C.
CONDENSED COMBINED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 3,452 2,941
Investments....................................................................... 1,573 1,158
Accounts receivable............................................................... 185 139
Prepaid income taxes.............................................................. 58 420
Prepaid and other current assets.................................................. 51 48
------ -----
Total current assets............................................................ 5,319 4,706
------ -----
Equipment and leasehold improvements, net........................................... 657 601
Restricted cash..................................................................... 477 530
Notes receivable from shareholders.................................................. 301 215
Intangible assets and start-up costs, net........................................... 19 25
Other assets........................................................................ 64 42
------ -----
Total assets.................................................................... $ 6,837 6,119
------ -----
------ -----
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............................................. $ 314 183
Accrued claims incurred but not reported.......................................... 293 313
Deferred income taxes............................................................. 24 24
Current maturities of obligations under capital leases............................ 83 77
------ -----
Total current liabilities....................................................... 714 597
------ -----
Obligations under capital leases, net of current portion............................ 91 65
------ -----
Shareholders' equity:
Common stock--CDC, $1 par value; 1,000 shares authorized, issued and outstanding
in 1998 and 1997................................................................ 1 1
Common stock--DMO, no par value; 5,000 shares authorized, 1,000 shares issued and
outstanding in 1998 and 1997.................................................... 30 30
Additional paid-in capital--DMO................................................... 179 179
Retained earnings................................................................. 5,822 5,247
------ -----
Total shareholders' equity...................................................... 6,032 5,457
------ -----
Commitments and contingencies
Subsequent event (note 3)
Total liabilities and shareholders' equity...................................... $ 6,837 6,119
------ -----
------ -----
</TABLE>
See accompanying notes to condensed combined financial statements.
F-86
<PAGE>
CAPITOL DENTAL CARE, INC. AND
DENTAL MAINTENANCE OF OREGON, P.C.
CONDENSED COMBINED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Capitation and other revenue................................................................. $ 13,309 13,778
--------- ---------
Operating expenses:
Payments to other providers................................................................ 5,752 7,434
Clinical salaries and benefits............................................................. 2,990 2,598
Practice nonclinical salaries and benefits................................................. 713 688
Dental supplies and lab expenses........................................................... 533 422
Practice occupancy expenses................................................................ 245 229
Practice selling, general and administrative expenses...................................... 987 975
Depreciation and amortization.............................................................. 94 77
--------- ---------
11,314 12,423
--------- ---------
Operating income......................................................................... 1,995 1,355
Nonoperating income (expense):
Interest income, net....................................................................... 170 204
Other income (expense)..................................................................... 15 (20)
--------- ---------
185 184
--------- ---------
Income before income taxes............................................................... 2,180 1,539
Income tax expense........................................................................... 545 492
--------- ---------
Net income............................................................................... $ 1,635 1,047
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to condensed combined financial statements.
F-87
<PAGE>
CAPITOL DENTAL CARE, INC. AND
DENTAL MAINTENANCE OF OREGON, P.C.
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................................. $ 1,635 1,047
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................ 94 77
Deferred income taxes.................................................................... -- 69
Changes in assets and liabilities:
Accounts receivable.................................................................... (46) (54)
Prepaid income taxes................................................................... 362 (525)
Prepaid and other current assets....................................................... (3) (10)
Other assets........................................................................... (22) (41)
Accounts payable and accrued expenses.................................................. 45 147
Accrued claims incurred but not reported............................................... (20) 208
Income taxes payable................................................................... -- (666)
--------- ---------
Net cash provided by operating activities............................................ 2,045 252
--------- ---------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements.......................................... (54) (114)
Purchases of investments and restricted cash............................................... (362) (314)
--------- ---------
Net cash used in investing activities................................................ (416) (428)
--------- ---------
Cash flows from financing activities:
Repayment of obligations under capital leases.............................................. (58) (26)
Dividends paid to shareholders............................................................. (1,060) (450)
--------- ---------
Net cash used in financing activities................................................ (1,118) (476)
--------- ---------
Increase (decrease) in cash and cash equivalents..................................... 511 (652)
Cash and cash equivalents, beginning of period............................................... 2,941 4,078
--------- ---------
Cash and cash equivalents, end of period..................................................... $ 3,452 3,426
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid for income taxes................................................................. $ 183 1,614
--------- ---------
--------- ---------
Supplemental disclosure of noncash investing and financing activities:
Equipment financed under capital lease arrangements........................................ $ 96 $ 107
</TABLE>
See accompanying notes to condensed combined financial statements.
F-88
<PAGE>
CAPITOL DENTAL CARE, INC. AND
DENTAL MAINTENANCE OF OREGON, P.C.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BUSINESS DESCRIPTION
Capitol Dental Care, Inc. (CDC), an Oregon Corporation, is a dental care
organization that contracts with the State of Oregon Office of Medical
Assistance Program (OMAP) to provide care under the Oregon Health Plan (OHP).
CDC in turn contracts with dental care providers, including Dental Maintenance
of Oregon, P.C. (DMO), a subchapter S Corporation incorporated in the state of
Oregon, to provide dental care to OHP participants. DMO also provides dental
care services on a fee-for-service basis. CDC and DMO are related through common
ownership. Accordingly, the financial statements of CDC and DMO are combined.
(2) SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The condensed combined financial statements have been prepared on the
accrual basis of accounting and include the combined accounts of DMO and CDC
(collectively referred to as the Company). All significant intercompany balances
and transactions have been eliminated in combination.
(B) INTERIM REPORTING
The accompanying unaudited interim condensed combined financial statements
of the Company have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in complete financial statements have been
condensed or omitted pursuant to those rules and regulations. In the opinion of
management, all adjustments, consisting only of normal, recurring adjustments
considered necessary for a fair presentation, have been included. Although
management believes that the disclosures made are adequate to insure that the
information presented is not misleading, it is suggested that these financial
statements be read in conjunction with the audited combined financial statements
and notes thereto included in the Company's combined financial statements for
the years ended December 31, 1997 and 1996. The results for the nine months
ended September 30, 1998 are not necessarily indicative of the results of
operations expected for the entire year.
(3) SUBSEQUENT EVENT
On October 30, 1998, the Company entered into agreements with Gentle Dental
Service Corporation (GDSC) and completed the sale of 100% of the stock of CDC
and substantially all of the assets, management rights and related liabilities
of DMO.
As consideration for the stock of CDC and net assets of DMO, GDSC paid the
shareholders of the Company $6,088 in cash, $2,183 in promissory notes and
assumed $167 in liabilities and capital lease obligations. In addition,
additional purchase price may be earned in an "earnout consideration" is to be
paid based on future earnings of the Company over the next three years.
F-89
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
by and between
Wisdom Holdings, Inc.
(A DELAWARE CORPORATION),
Wisdom Holdings Acquisition Corp. I,
(A DELAWARE CORPORATION),
Wisdom Holdings Acquisition Corp. II,
(A DELAWARE CORPORATION),
Gentle Dental Service Corporation,
(A WASHINGTON CORPORATION),
and
Dental Care Alliance, Inc.,
(A DELAWARE CORPORATION)
OCTOBER 15, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
ARTICLE I THE MERGER............................................................................ A-1
1.1. The Merger............................................................................ A-3
1.2. ParentCo Merger Committee............................................................. A-3
1.3. Effective Date and Effective Time..................................................... A-3
1.4. Time and Place of Closing............................................................. A-3
1.5. Stockholders' Agreements.............................................................. A-3
1.6. Combined Operations................................................................... A-3
ARTICLE II MERGER CONSIDERATION; MANNER OF CONVERTING SHARES..................................... A-4
2.1. Merger Consideration.................................................................. A-4
2.2. Dissenting Stockholders............................................................... A-4
2.3. Rights as Stockholders; Stock Transfers............................................... A-4
2.4. Fractional Shares..................................................................... A-4
2.5. Anti-Dilution Provisions.............................................................. A-5
2.6. Conversion of Rights.................................................................. A-5
ARTICLE III EXCHANGE OF SHARES.................................................................... A-6
3.1. Exchange Procedures................................................................... A-6
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF GDSC................................................ A-7
4.1. Organization, Standing and Authority.................................................. A-8
4.2. Subsidiaries.......................................................................... A-8
4.3. GDSC Capital Stock.................................................................... A-8
4.4. Corporate Power....................................................................... A-9
4.5. Corporate Authority................................................................... A-9
4.6. Consents and Approvals; No Defaults................................................... A-9
4.7. Financial Reports and Regulatory Documents............................................ A-9
4.8. Legal Proceedings..................................................................... A-10
4.9. Regulatory Matters.................................................................... A-10
4.10. Compliance with Laws.................................................................. A-11
4.11. Material Contracts; Defaults.......................................................... A-11
4.12. No Brokers............................................................................ A-11
4.13. Employee Benefit Plans................................................................ A-11
4.14. Labor Matters......................................................................... A-13
4.15. Year 2000 Compliance.................................................................. A-13
4.16. Environmental Matters................................................................. A-13
4.17. Tax Matters........................................................................... A-14
4.18. Books and Records..................................................................... A-14
4.19. Insurance............................................................................. A-14
4.20. Accounting Treatment.................................................................. A-14
4.21. Assets................................................................................ A-15
4.22. Statements True and Correct........................................................... A-15
4.23. Accounting, Tax and Regulatory........................................................ A-15
4.24. No Undisclosed Liabilities............................................................ A-15
ARTICLE V REPRESENTATIONS AND WARRANTIES OF DCA................................................. A-15
5.1. Organization, Standing and Authority.................................................. A-16
5.2. Subsidiaries.......................................................................... A-16
5.3. DCA Common Stock...................................................................... A-16
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
5.4. Corporate Power....................................................................... A-17
5.5. Corporate Authority................................................................... A-17
5.6. Consents and Approvals; No Defaults................................................... A-17
5.7. Financial Reports and Regulatory Documents............................................ A-17
5.8. Legal Proceedings..................................................................... A-18
5.9. Regulatory Matters.................................................................... A-18
5.10. Compliance with Laws.................................................................. A-18
5.11. Material Contracts; Defaults.......................................................... A-19
5.12. No Brokers............................................................................ A-19
5.13. Employee Benefit Plans................................................................ A-19
5.14. Labor Matters......................................................................... A-20
5.15. Year 2000 Compliance.................................................................. A-20
5.16. Environmental Matters................................................................. A-21
5.17. Tax Matters........................................................................... A-21
5.18. Books and Records..................................................................... A-21
5.19. Insurance............................................................................. A-21
5.20. Accounting Treatment.................................................................. A-22
5.21. Assets................................................................................ A-22
5.22. Statements True and Correct........................................................... A-22
5.23. Accounting, Tax and Regulatory........................................................ A-22
5.24. No Undisclosed Liabilities............................................................ A-22
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PARENTCO, GDSC MERGER SUB AND DCA MERGER SUB........ A-23
6.1. Organization, Standing and Authority of ParentCo...................................... A-23
6.2. ParentCo Capital Stock................................................................ A-23
6.3. ParentCo Corporate Power.............................................................. A-23
6.4. ParentCo Corporate Authority.......................................................... A-23
6.5. Organization, Standing and Authority of GDSC Merger Sub............................... A-23
6.6. GDSC Merger Sub Capital Stock......................................................... A-23
6.7. GDSC Merger Sub Corporate Power....................................................... A-23
6.8. GDSC Merger Sub Corporate Authority................................................... A-23
6.9. Organization, Standing and Authority of DCA Merger Sub................................ A-23
6.10. DCA Merger Sub Common Stock........................................................... A-24
6.11. DCA Merger Sub Corporate Power........................................................ A-24
6.12. DCA Merger Sub Corporate Authority.................................................... A-24
6.13. Continuity of Business Enterprise..................................................... A-24
ARTICLE VII CONDUCT OF BUSINESS................................................................... A-24
7.1. Forbearances of GDSC and DCA.......................................................... A-24
ARTICLE VIII ADDITIONAL COVENANTS.................................................................. A-26
8.1. Reasonable Best Efforts............................................................... A-26
8.2. Stockholder Approval.................................................................. A-26
8.3. Registration Statement................................................................ A-26
8.4. Press Releases........................................................................ A-27
8.5. Access; Information................................................................... A-27
8.6. Acquisition Proposals................................................................. A-27
8.7. Affiliate Agreements.................................................................. A-28
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
8.8. Nasdaq Listing........................................................................ A-28
8.9. Regulatory Applications............................................................... A-28
8.10. Benefit Plan.......................................................................... A-28
8.11. Accountants' Letters.................................................................. A-29
8.12. Notification of Certain Matters....................................................... A-29
8.13. Stockholder Agreements................................................................ A-29
8.14. ParentCo Capitalization; Reservation of Shares........................................ A-29
8.15. Stock Plans........................................................................... A-29
8.16. Office Locations...................................................................... A-30
8.17. Transfer of GDSC Subordinated Notes................................................... A-30
ARTICLE IX CONDITIONS PRECEDENT TO CONSUMMATION OF THE MERGER.................................... A-30
9.1. Conditions to Each Party's Obligation to Effect the Merger............................ A-30
9.2. Conditions to Obligation of GDSC...................................................... A-31
9.3. Conditions to Obligation of DCA....................................................... A-32
ARTICLE X CLOSING DELIVERIES.................................................................... A-33
10.1. Deliveries of GDSC.................................................................... A-33
10.2. Deliveries of DCA..................................................................... A-34
10.3. Deliveries of ParentCo, GDSC Merger Sub and DCA Merger Sub............................ A-35
ARTICLE XI TERMINATION........................................................................... A-36
11.1. Termination........................................................................... A-36
11.2. Effect of Termination and Abandonment................................................. A-37
11.3. Termination Fee....................................................................... A-37
ARTICLE XII MISCELLANEOUS......................................................................... A-37
12.1. Survival.............................................................................. A-37
12.2. Waiver; Amendment..................................................................... A-37
12.3. Counterparts.......................................................................... A-37
12.4. Governing Law; Waiver of Jury Trial................................................... A-37
12.5. Expenses.............................................................................. A-37
12.6. Notices............................................................................... A-38
12.7. Entire Understanding; No Third Party Beneficiaries.................................... A-38
12.8. Interpretation; Effect................................................................ A-38
ARTICLE XIII CERTAIN DEFINITIONS................................................................... A-39
13.1. Certain Definitions................................................................... A-39
</TABLE>
EXHIBITS
Exhibit A -- Form of Stockholders' Agreement
Exhibit B -- Form of Affiliate Representation Letter
Exhibit C -- Memorandum of Terms
SCHEDULES
Schedule 9.1(g) -- List of Certain GDSC and DCA Officers
Schedule 9.2(i) -- DCA Analyst Expectations
Schedule 9.3(i) -- GDSC Analyst Expectations
-iii-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
THIS AGREEMENT AND PLAN OF REORGANIZATION AND MERGER, dated as of October
15, 1998 (this "AGREEMENT"), by and among Wisdom Holdings, Inc., a Delaware
corporation ("PARENTCO"), Wisdom Holdings Acquisition Corp. I, a Delaware
corporation and wholly owned subsidiary of ParentCo ("GDSC MERGER SUB"), Wisdom
Holdings Acquisition Corp. II, a Delaware corporation and wholly owned
subsidiary of ParentCo ("DCA MERGER SUB"), Gentle Dental Service Corporation, a
Washington corporation ("GDSC"), and Dental Care Alliance, Inc., a Delaware
corporation ("DCA").
RECITALS
A. GDSC is a Washington corporation, having its principal place of business
in El Segundo, California. GDSC provides dental practice management and related
services to dental practices in the States of California, Florida, Hawaii,
Idaho, Oregon and Washington.
B. DCA is a Delaware corporation, having its principal place of business in
Sarasota, Florida. DCA provides dental practice management and related services
to dental practices in the States of Florida, Georgia, Indiana and Michigan.
C. Each of ParentCo, GDSC Merger Sub and DCA Merger Sub is a newly formed
Delaware corporation created to accomplish the business combinations by and
between GDSC and DCA as described in this Agreement. At the Effective Time of
the Merger (as each of those terms is defined below), the outstanding shares of
capital stock of GDSC and DCA, respectively, shall be converted into the right
to receive shares of capital stock of ParentCo (as provided herein). As a
result, the stockholders of GDSC and DCA, respectively, shall become the
stockholders of ParentCo and both GDSC and DCA shall become and continue to
conduct their respective businesses and operations as wholly owned subsidiaries
of ParentCo. The transactions described in this Agreement are subject to the
approval of the stockholders of GDSC and DCA, respectively, and the satisfaction
of certain other conditions described in this Agreement.
D. It is the intention of the parties to this Agreement that the business
combinations contemplated hereby be accounted for under the
"pooling-of-interests" accounting method and be treated as (i) "reorganizations"
under Section 368 of the Internal Revenue Code of 1986, as amended (the "CODE")
or (ii) a transfer to a controlled corporation qualifying under Section 351 of
the Code.
E. The respective Boards of Directors of each of GDSC and DCA have
determined that it is in the best interests of their respective companies and
their stockholders to consummate the strategic business combination transaction
provided for herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements contained herein, the
parties agree as follows. Capitalized terms used herein and not previously
defined shall have the meanings set forth in ARTICLE XIII.
ARTICLE I
THE MERGER
1.1. THE MERGER.
(a) GENERAL. Subject to the terms and conditions of this Agreement and
at the Effective Time, each of GDSC Merger Sub and DCA Merger Sub shall
merge with and into each of GDSC and DCA, respectively (collectively, the
"MERGER"), the separate corporate existence of each of GDSC Merger Sub and
DCA Merger Sub shall cease and GDSC and DCA shall survive and continue to
exist as a Washington corporation and Delaware corporation, respectively
(GDSC and DCA, as the surviving
A-1
<PAGE>
corporations in the Merger, sometimes being referred to collectively as the
"SURVIVING CORPORATIONS"). Subject to the satisfaction or waiver of the
conditions set forth in ARTICLE IX, the Merger shall become effective upon
the occurrence of the filing in the offices of the Washington Secretary and
the Delaware Secretary of an agreement of merger in accordance with the WBCA
and the DGCL or such later date and time as may be set forth in such
agreement. The Merger shall have the effects prescribed in the WBCA and the
DGCL.
(b) ARTICLES OF INCORPORATION AND BYLAWS. The articles and certificate
of incorporation and bylaws of GDSC and DCA, respectively, immediately after
the Merger including, without limitation, the name of GDSC and DCA,
respectively, shall be those of GDSC and DCA, respectively, as in effect
immediately prior to the Effective Time; except that the number of
authorized shares of capital stock of GDSC and DCA may, in the discretion of
ParentCo, be reduced.
(c) DIRECTORS AND OFFICERS. At and as of the Effective Time, the
officers and directors of ParentCo and the Surviving Corporations shall be
as follows:
(i) PARENTCO: The directors of ParentCo shall be:
Robert Finzi(1)
Michael T. Fiore
Eric Green(2)
Paul H. Keckley
Steven R. Matzkin, D.D.S.
Wayne Posey
Robert F. Raucci
Curtis L. Smith, Jr.
The directors of ParentCo shall serve for staggered terms as set forth in the
ParentCo Certificate of Incorporation, as amended, and as designated by the
Merger Committee.
The officers of ParentCo shall be:
<TABLE>
<S> <C>
Michael T. Fiore Co-Chairman and Chief Executive
Officer
Steven R. Matzkin, D.D.S. Co-Chairman, President and Chief
Dental Officer
L. Theodore Van Eerden Chief Development Officer/Executive
Vice President and Secretary
Grant Sadler Vice President/Development
Norman Huffaker Chief Financial Officer and Treasurer
Randy Henry Chief Operating Officer
David P. Nichols Vice President of Finance/East
Mitchell B. Olan Vice President of Operations/East
Kevin Webb Vice President of
Operations/Northwest
Arnold Albert Vice President of Operations/Northern
California
Kenneth Davis Vice President of
Operations/Southwest
</TABLE>
(ii) GDSC. The officers and directors of GDSC immediately prior to
the Merger shall continue to be the officers and directors of GDSC.
- ------------------------
(1)There is no designated by ParentCo Series C Preferred Stock. Mr. Finzi is a
designee of Sprout Group.
(2)Director to be designated by ParentCo Series A Stock.
A-2
<PAGE>
(iii) DCA. The officers and directors of DCA immediately prior to
the Merger shall continue to be the officers and directors of DCA.
(iv) GDSC MERGER SUB AND DCA MERGER SUB. The initial directors of
GDSC Merger Sub and DCA Merger Sub shall be Michael T. Fiore and Steven
R. Matzkin, D.D.S.
1.2. PARENTCO MERGER COMMITTEE. Effective as of the date of this
Agreement, the directors of ParentCo shall have designated the following four
individuals to serve as the members of the ParentCo Merger Committee ("PARENTCO
MERGER COMMITTEE"):
Robert Finzi
Michael T. Fiore
Steven R. Matzkin, D.D.S.
Robert F. Raucci
ParentCo Merger Committee shall be empowered to take all action on behalf of
ParentCo from the date of the execution of this Agreement through and including
the Effective Time, subject to the affirmative vote of seventy-five percent
(75%) of the members of the ParentCo Merger Committee. Following the Effective
Time, the duties and powers of the ParentCo Merger Committee shall be limited to
taking all actions on behalf of ParentCo with respect to its obligations under
Article III hereof. The ParentCo Merger Committee shall terminate as of the
earlier to occur of either (i) a termination of this Agreement pursuant to
Article XI or (ii) expiration of a six (6) month period following the Effective
Time, unless otherwise extended by the ParentCo Board. Prior to the earlier of
the Effective Time or termination of this Agreement, no action shall be taken by
ParentCo unless approved by the affirmative vote of seventy-five percent (75%)
of the members of the ParentCo Merger Committee.
1.3. EFFECTIVE DATE AND EFFECTIVE TIME. As soon as practicable following,
but not later than ten days after the last to occur of, (i) the expiration of
all applicable waiting periods in connection with approvals of Governmental
Authorities and the receipt of all approvals of Governmental Authorities, and
(ii) satisfaction or waiver of all conditions to the consummation of the Merger,
or on such earlier or later date as may be agreed in writing by the parties, an
agreement and plan of merger shall be executed in accordance with all
appropriate legal requirements and shall be filed in the offices of the Delaware
Secretary and the Washington Secretary as required by law, and the Merger
provided for herein shall become effective upon such filing or on such date as
may be specified in each such agreement and plan of merger. The date of such
filing or such later effective date is herein called the "EFFECTIVE DATE." The
"EFFECTIVE TIME" of the Merger shall be the time of such filing or as set forth
in each such agreement and plan of merger.
1.4. TIME AND PLACE OF CLOSING. The Closing will take place on the date
that the Effective Time occurs or at such other time as the parties, acting
through their chief executive officers, may mutually agree. The place of Closing
shall be at the offices of McDermott, Will & Emery, 1301 Dove Street, Suite 500,
Newport Beach, California 92660 or at such other location as the parties may
mutually agree.
1.5. STOCKHOLDERS' AGREEMENTS. A sufficient number of holders of more than
50% of the outstanding capital stock both of GDSC and DCA will execute and
deliver to ParentCo a Stockholders' Agreement, in substantially the form of
EXHIBIT A attached hereto and incorporated herein by this reference
("STOCKHOLDERS' AGREEMENT").
1.6. COMBINED OPERATIONS. Following the Effective Time, ParentCo shall use
its best efforts to publish as promptly as reasonably practicable financial
statements or reports covering at least 30 days of the combined operations of
GDSC and DCA.
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ARTICLE II
MERGER CONSIDERATION; MANNER OF CONVERTING SHARES
2.1. MERGER CONSIDERATION. Subject to the provisions of this Agreement, at
the Effective Time, automatically by virtue of the Merger and without any action
on the part of any Person, the shares of the constituent corporations shall be
converted as follows (collectively, "MERGER CONSIDERATION"):
(a) Each share of GDSC Merger Sub Common Stock issued and outstanding at the
Effective Time shall cease to be outstanding and shall be converted into one
share of GDSC Common Stock.
(b) Each share of DCA Merger Sub Common Stock issued and outstanding at the
Effective Time shall cease to be outstanding and shall be converted into one
share of DCA Common Stock.
(c) Each share of GDSC Common Stock (including any and all shares of
restricted GDSC Common Stock, Performance Shares or earnout shares, all of which
are described in the GDSC Disclosure Schedules) issued and outstanding at the
Effective Time shall cease to be outstanding and shall be converted into and
exchanged for one share of ParentCo Common Stock.
(d) Each share of DCA Common Stock issued and outstanding at the Effective
Time shall cease to be outstanding and shall be converted into and exchanged for
1.67 shares of ParentCo Common Stock.
(e) Each share of GDSC Series A Preferred Stock shall cease to be
outstanding and shall be converted into and exchanged for the right to receive
one share of ParentCo Series A Preferred Stock.
(f) Each share of GDSC Series B Preferred Stock shall cease to be
outstanding and shall be converted into and exchanged for the right to receive
one share of ParentCo Series B Preferred Stock.
(g) Each share of GDSC Series C Preferred Stock shall cease to be
outstanding and shall be converted into and exchanged for one share of ParentCo
Series C Preferred Stock.
(h) Each share of GDSC Series D Preferred Stock shall cease to be
outstanding and shall be converted into and exchanged for one share of ParentCo
Series D Preferred Stock.
2.2. DISSENTING STOCKHOLDERS. Any Dissenting Stockholder who shall be
entitled to be paid the "fair value" of his or her Dissenters' Shares shall not
be entitled to the Merger Consideration as set forth in SECTION 2.1 in respect
thereof unless and until such Dissenting Stockholder shall have failed to
perfect or shall have effectively withdrawn or lost such Dissenting
Stockholder's right to dissent from the Merger under the WBCA and shall be
entitled to receive only the payment provided for by Chapter 23B.13 of the WBCA
with respect to such Dissenters' Shares. Upon the payment by the ParentCo of the
"fair value" of any Dissenters' Shares in accordance with Chapter 23B.13 of the
WBCA, such Dissenters' Shares shall be canceled and retired and shall cease to
exist, and no exchange or further payment shall be made with
respect thereto. If any Dissenting Stockholder shall fail to perfect or shall
have effectively withdrawn or lost such right to dissent, the Dissenters' Shares
held by such Dissenting Stockholder shall thereupon be treated as though such
Dissenters' Shares had been converted into the right to receive the Merger
Consideration as set forth in the applicable provision of SECTION 2.1.
2.3. RIGHTS AS STOCKHOLDERS; STOCK TRANSFERS. At the Effective Time,
holders of GDSC Common Stock and DCA Common Stock shall cease to be, and shall
have no rights as, stockholders of GSDC or DCA, other than to receive any
dividend or other distribution with respect to such GSDC Common Stock or DCA
Common Stock with a record date occurring prior to the Effective Time and the
consideration provided under this ARTICLE II. After the Effective Time, there
shall be no transfers on the stock transfer books of GDSC, DCA or the Surviving
Corporations of shares of GDSC Common Stock or DCA Common Stock outstanding
prior to the Effective Time.
2.4. FRACTIONAL SHARES. Notwithstanding any other provision hereof, no
fractional shares of ParentCo Capital Stock and no certificates or scrip
therefor, or other evidence of ownership thereof, will
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be issued in the Merger; instead, ParentCo shall pay to each holder of either
GDSC Common Stock or DCA Common Stock who would otherwise be entitled to a
fractional share of ParentCo Capital Stock (after taking into account all Old
GDSC Certificates or Old DCA Certificates delivered by such holder) an amount in
cash (without interest) determined by multiplying the fraction of a share by the
average of the closing prices of GDSC reported on Nasdaq for the five
consecutive trading days immediately preceding the date of the Effective Time.
2.5. ANTI-DILUTION PROVISIONS. In the event either GDSC or DCA changes (or
establishes a record date for changing) the number of shares of GDSC Common
Stock or DCA Common Stock issued and outstanding prior to the Effective Date as
a result of a stock split, stock dividend, recapitalization or similar
transaction with respect to the outstanding GDSC Common Stock or DCA Common
Stock and the record date therefor shall be prior to the Effective Date, the
number of shares of ParentCo Capital Stock the holders of GDSC Common Stock and
DCA Common Stock or options exercisable for same shall be entitled to receive
under this Agreement shall be proportionately adjusted.
2.6. CONVERSION OF RIGHTS.
(a) At the Effective Time, each option or other right to purchase shares of
either GDSC Common Stock or DCA Common Stock pursuant to stock options or stock
appreciation rights ("GDSC OPTIONS" or "DCA OPTIONS") granted by GDSC under the
GDSC Stock Plans or DCA under the DCA Stock Plans and outstanding at the
Effective Time, whether or not exercisable, and all other warrants or other
rights to purchase shares of GDSC Common Stock or DCA Common Stock (together
with the GDSC Options or the DCA Options, the "GDSC RIGHTS" or the "DCA
RIGHTS"), shall be converted into and become rights with respect to ParentCo
Common Stock, and ParentCo shall assume each GDSC Right and DCA Right, in
accordance with the terms of the GDSC Stock Plan or the DCA Stock Plan or such
other agreement or arrangement pertaining to such GDSC Rights or DCA Rights (as
applicable), except that from and after the Effective Time, (i) ParentCo and its
Compensation Committee shall be substituted for the GDSC Board and the DCA Board
or the committee of the GDSC Board and the DCA Board administering the GDSC
Stock Plan or the DCA Stock Plan, (ii) each GDSC Right and DCA Right assumed by
ParentCo may be exercised only for shares of ParentCo Common Stock (or cash, in
the case of the stock appreciation rights), (iii) the number of shares of
ParentCo Common Stock subject to GDSC Rights or DCA Rights shall be equal to the
number of shares of GDSC Common Stock or DCA Common Stock subject to the GDSC
Right or the DCA Right immediately prior to the Effective Time multiplied by the
GDSC Exchange Ratio or the DCA Exchange Ratio, as the case may be, and (iv) the
per share exercise price under either the GDSC Right or the DCA Right shall be
adjusted by dividing the per share exercise price under the GDSC Right or the
DCA Right by the GDSC Exchange Ratio or the DCA Exchange Ratio, as the case may
be, and rounding up to the nearest cent. Notwithstanding the provisions of
clause (iii) of the preceding sentence, ParentCo shall not be obligated to issue
any fraction of a share of ParentCo Common Stock upon exercise of a GDSC Right
or a DCA Right. Any fraction of a share of ParentCo Common Stock that otherwise
would be subject to a converted GDSC Right or DCA Right shall represent the
right to receive cash payment upon exercise of such converted GDSC Right or DCA
Right equal to the product of such fraction and the difference between the
market value of one share of ParentCo Common Stock at the time of exercise of
such Right and the per share exercise price of such Right. The term,
exercisability, vesting schedule, status as an "Incentive Stock Option" under
Section 422 of the Code, if applicable, and all other terms and conditions of
the options or warrants, to the extent permitted by law, and otherwise
reasonably practical shall be unchanged; each option which is an Incentive Stock
Option shall be adjusted in accordance with the requirements of Section 424(a)
of the Code so as not to constitute a modification, renewal or extension of the
option within the meaning of Section 424(h) of the Code.
(b) Each of GDSC and DCA agree to take all necessary steps to effectuate the
foregoing provisions of this SECTION 2.6, including using its reasonable efforts
to obtain from each holder of a GDSC Right or DCA Right any consent or agreement
that may be deemed necessary or advisable in order to effectuate
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the transactions contemplated by this SECTION 2.6. Anything in this Agreement to
the contrary notwithstanding, ParentCo shall have the right, in its sole
discretion, not to deliver the consideration provided in this SECTION 2.6 to a
former holder of a GDSC Right or a DCA Right who has not delivered such consent
or agreement.
ARTICLE III
EXCHANGE OF SHARES
3.1. EXCHANGE PROCEDURES.
(a) At or prior to the Effective Time, ParentCo shall deposit, or shall
cause to be deposited, with such bank, trust company or transfer agent as
ParentCo shall elect (in such capacity, the "EXCHANGE AGENT"), for the benefit
of the holders of certificates formerly representing shares of either GDSC
Common Stock or GDSC Preferred Stock (collectively, "OLD GDSC CERTIFICATES") or
DCA Common Stock ("OLD DCA CERTIFICATES"), for exchange in accordance with
ARTICLE II, certificates representing the shares of ParentCo Capital Stock ("NEW
CERTIFICATES") and an estimated amount of cash (such cash and New Certificates,
together with any dividends or distributions with a record date occurring after
the Effective Date with respect thereto, without any interest on any such cash,
dividends or distributions, being hereinafter referred to as the "EXCHANGE
FUND") to be paid pursuant to ARTICLE II in exchange for outstanding shares of
GDSC Common Stock, GDSC Preferred Stock or DCA Common Stock.
(b) As soon as practicable after the Effective Date, ParentCo shall send or
cause to be sent to each former holder of record of shares of GDSC Common Stock,
GDSC Preferred Stock or DCA Common Stock immediately prior to the Effective Time
transmittal materials for use in exchanging such stockholder's Old GDSC
Certificates or Old DCA Certificates for the consideration set forth in ARTICLE
II, which transmittal materials both GDSC and DCA shall have had the opportunity
to review prior to the Effective Date. ParentCo shall cause the New Certificates
and any check in respect of any fractional share interests or dividends or
distributions which the holder of such shares shall be entitled to receive upon
delivery to the Exchange Agent of Old GDSC Certificates or Old DCA Certificates
representing such shares (or an affidavit of lost certificate and, if required
by the Exchange Agent, indemnity reasonably satisfactory to ParentCo and the
Exchange Agent, if any of such certificates are lost, stolen or destroyed) owned
by such stockholder. No interest will be paid on any such cash to be paid in
lieu of fractional share interests or in respect of dividends or distributions
which any such person shall be entitled to receive pursuant to ARTICLE II upon
such delivery. In the event of a transfer of ownership of any shares of GDSC
Common Stock, GDSC Preferred Stock or DCA Common Stock not registered in the
transfer records of either GDSC or DCA, the exchange described in this SECTION
2.1(B) may nonetheless be effected and a check for the cash to be paid in lieu
of fractional shares may be issued to the transferee if the Old GDSC Certificate
or Old DCA Certificate is presented to the Exchange Agent, accompanied by
documents sufficient, in the discretion of ParentCo and the Exchange Agent, (i)
to evidence and effect such transfer but for the provisions of SECTION 2.3
hereof and (ii) to evidence that all applicable stock transfer taxes have been
paid.
(c) If either Old GDSC Certificates or Old DCA Certificates are not
surrendered or the consideration therefor is not claimed prior to the date on
which such consideration would otherwise escheat to or become the property of
any governmental unit or agency, the unclaimed consideration shall, to the
extent permitted by abandoned property and any other applicable law, become the
property of the Surviving Corporations (and to the extent not in its possession
shall be paid over to the Surviving Corporations), free and clear of all claims
or interest of any person previously entitled to such claims. Notwithstanding
the foregoing, neither the Exchange Agent nor any party hereto shall be liable
to any former holder of either GDSC Common Stock, GDSC Preferred Stock or DCA
Common Stock for any amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
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(d) At the election of ParentCo, no dividends or other distributions with
respect to ParentCo Common Stock with a record date occurring after the
Effective Time shall be paid to the holder of any unsurrendered Old GDSC
Certificate or Old DCA Certificate or options for same converted in the Merger
into the right to receive shares of such ParentCo Common Stock until the holder
thereof shall be entitled to receive New Certificates in exchange therefor in
accordance with the procedures set forth in this SECTION 3.1. After becoming so
entitled in accordance with this SECTION 3.1, the record holder thereof also
shall be entitled to receive any such dividends or other distributions, without
any interest thereon, which theretofore had become payable with respect to
shares of ParentCo Capital Stock such holder had the right to receive upon
surrender of the Old GDSC Certificate or Old DCA Certificate.
(e) Any portion of the Exchange Fund that remains unclaimed by the
stockholders of either GDSC or DCA for six months after the Effective Time shall
be returned by the Exchange Agent to ParentCo. Any stockholders of GDSC or DCA
who have not theretofore complied with this ARTICLE III shall thereafter look
only to ParentCo for payment of the shares of ParentCo Capital Stock, cash in
lieu of any fractional shares and unpaid dividends and distributions on ParentCo
Capital Stock deliverable hereunder, in each case, without any interest thereon.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF GDSC
On or prior to the date hereof, GDSC has delivered to DCA schedules ("GDSC
DISCLOSURE SCHEDULES") setting forth, among other things, items the disclosure
of which is necessary or appropriate either in response to an express disclosure
requirement contained in a provision hereof or as an exception to one or more
representations or warranties contained in this ARTICLE IV; provided, that (i)
no such item is required to be set forth in the GDSC Disclosure Schedules as an
exception to a representation or warranty if its absence would not be reasonably
likely to result in the related representation or warranty being deemed untrue
or incorrect under the standard established in the subsequent sentence, and (ii)
the mere inclusion of an item in the GDSC Disclosure Schedules as an exception
to a representation or warranty shall not be deemed an admission by a party that
such item represents a material exception or fact, event or circumstance or that
such item is reasonably likely to result in a Material Adverse Effect. No
representation or warranty of GDSC contained in this ARTICLE IV shall be deemed
untrue or incorrect, and no party hereto shall be deemed to have breached a
representation or warranty, as a consequence of the existence of any fact, event
or circumstance unless such fact, circumstance or event, individually or taken
together with all other facts, events or circumstances inconsistent with any
representation or warranty contained in this ARTICLE IV has had or is reasonably
likely to have a Material Adverse Effect on the party making such representation
or warranty. The numbers set forth on the GDSC Disclosure Schedules correspond
to the particular Section number contained in the Agreement. Information or
disclosure provided with reference to one Section may also be responsive to
information or disclosure responsive to another Section. Therefore, if the
information or disclosure set forth in one Section can be reasonably determined
to apply to information or disclosure in another Section, such information or
disclosure shall constitute disclosure for all applicable Sections. GDSC agrees
that with respect to its representations and warranties, GDSC shall have the
right to supplement and amend the GDSC Disclosure Schedules with respect to any
events occurring after the date of this Agreement and prior to the Effective
Time which such new event or information, when scheduled, shall not constitute a
breach hereof. In the event any such supplement or amendment discloses new
events that are reasonably likely to have a Material Adverse Effect on GDSC or
on ParentCo, DCA shall have the right to terminate the Agreement pursuant to
SECTION 11.1(G).
Subject to the preceding paragraph and except as Previously Disclosed in a
paragraph of the GDSC Disclosure Schedules corresponding to the relevant
paragraph below, GDSC hereby represents and warrants to DCA:
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4.1. ORGANIZATION, STANDING AND AUTHORITY. GDSC is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Washington. GDSC is duly qualified to do business and is in good standing in the
states of the United States and any foreign jurisdictions where its ownership or
leasing of property or assets or the conduct of its business requires it to be
so qualified. The GDSC Board has received the written opinion of Salomon Smith
Barney Inc. to the effect that as of the date hereof the GDSC Exchange Ratio set
forth in SECTION 2.1 is fair to the holders of GDSC Common Stock from a
financial point of view.
4.2. SUBSIDIARIES.
(a) (i) GDSC has Previously Disclosed a list of all of its Subsidiaries
together with the jurisdiction of organization of each such Subsidiary, (ii)
GDSC owns, directly or indirectly, all the issued and outstanding equity
securities of each of its Subsidiaries, (iii) no equity securities of any of its
Subsidiaries are or may become required to be issued (other than to it or its
wholly-owned Subsidiaries) by reason of any Right or otherwise, (iv) there are
no contracts, commitments, understandings or arrangements by which any of such
Subsidiaries is or may be bound to sell or otherwise transfer any equity
securities of any such Subsidiaries (other than to it or its wholly-owned
Subsidiaries), (v) there are no contracts, commitments, understandings, or
arrangements relating to its rights to vote or to dispose of such securities,
and (vi) all the equity securities of each Subsidiary held by GDSC or its
Subsidiaries are fully paid and nonassessable and are owned by GDSC or its
Subsidiaries free and clear of any Liens.
(b) GDSC does not own beneficially, directly or indirectly, any equity
securities or similar interests of any Person, or any interest in a partnership
or joint venture of any kind, other than its Subsidiaries.
(c) Each of GDSC's Subsidiaries has been duly organized and is validly
existing in good standing under the laws of the jurisdiction of its
organization, and is duly qualified to do business and in good standing in the
jurisdictions where its ownership or leasing of property or the conduct of its
business requires it to be so qualified.
4.3. GDSC CAPITAL STOCK. As of the date hereof, the authorized capital
stock of GDSC consists solely of 50,000,000 shares of GDSC Common Stock, of
which 8,973,720 are issued and outstanding and 30,000,000 shares of GDSC
Preferred Stock of which the following series are authorized, issued and
outstanding:
<TABLE>
<CAPTION>
SHARES ISSUED AND
SERIES SHARES AUTHORIZED OUTSTANDING
- --------- ----------------- ----------------------------
<S> <C> <C>
A 100 100
B 70,000 -0-
C 100 100
D 2,000,000 1,628,663
</TABLE>
As of the date hereof, no shares of GDSC Common Stock were held in treasury
by GDSC or otherwise beneficially owned by GDSC or its Subsidiaries. The
outstanding shares of GDSC Common Stock and GDSC Preferred Stock have been duly
authorized and are validly issued and outstanding, fully paid and nonassessable,
subject to no preemptive rights and were not issued in violation of any
preemptive rights. As of the date hereof, there are 1,312,110 shares of GDSC
Common Stock authorized and reserved for issuance pursuant to outstanding
options to purchase shares of GDSC Common Stock or GDSC Preferred Stock, GDSC
does not have any other Rights issued or outstanding with respect to its capital
stock, and GDSC does not have any commitment to authorize, issue or sell any
other shares of its capital stock or any other Rights. Except as Previously
Disclosed, GDSC does not have shares subject to repurchase in the event certain
performance targets have been met (the "GDSC PERFORMANCE SHARES"). Since May 15,
1998, there has been no adjustments of the Conversion Price as set forth in
Article XII, Section 6(c) to the Amendment to the Articles of Incorporation of
GDSC and the representation set forth therein is true and correct as of and on
May 15, 1998.
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4.4. CORPORATE POWER. GDSC and each of its Subsidiaries has the corporate
power and authority to carry on its business as it is now being conducted and to
own all its properties and assets; and GDSC has the corporate power and
authority to execute, deliver and perform its obligations under this Agreement
and to consummate the transactions contemplated hereby.
4.5. CORPORATE AUTHORITY. Subject in the case of this Agreement to receipt
of the requisite approval of the agreement of merger set forth in this Agreement
by the holders of a majority of the outstanding shares of GDSC Common Stock and
GDSC Preferred Stock entitled to vote thereon, this Agreement and the
transactions contemplated hereby and thereby have been authorized by all
necessary corporate action of GDSC and the GDSC Board on or prior to the date
hereof. This Agreement is a valid and legally binding obligation of GDSC,
enforceable in accordance with its terms (except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and similar laws of general applicability relating to or
affecting creditors' rights or by general equity principles).
4.6. CONSENTS AND APPROVALS; NO DEFAULTS.
(a) No consents or approvals of, or filings or registrations with, any
Governmental Authority or with any third party are required to be made or
obtained by GDSC or any of its Subsidiaries in connection with the execution,
delivery or performance by GDSC of this Agreement or to consummate the Merger
except for (i) filings of applications, registrations, statements, reports or
notices (and expiration of any applicable notice periods) with the United States
Department of Justice, the Federal Trade Commission, NASD, the SEC and state
securities authorities (collectively the "REGULATORY AGENCIES"), (ii) the
approval of this Agreement by the stockholders of GDSC, and (iii) the filing of
an agreement of merger with the Washington Secretary and Delaware Secretary
pursuant to the DGCL and the Washington Law. As of the date hereof, GDSC is not
aware of any reason why the approvals set forth in SECTION 11.1(D) will not be
received without the imposition of a condition, restriction or requirement of
the type described in SECTION 11.1(D).
(b) Subject to receipt of the approvals referred to in the preceding
paragraph, and the expiration of related waiting periods, the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby and thereby do not and will not (i) constitute
a breach or violation of, or a default under, or give rise to any Lien, any
acceleration of remedies or any right of termination under, any law, rule or
regulation or any judgment, decree, order, governmental permit or license, or
agreement, indenture or instrument of GDSC or of any of its Subsidiaries or to
which GDSC or any of its Subsidiaries or properties is subject or bound, (ii)
constitute a breach or violation of, or a default under, the GDSC Articles or
the GDSC Bylaws, or (iii) require any consent or approval under any such law,
rule, regulation, judgment, decree, order, governmental permit or license,
agreement, indenture or instrument.
4.7. FINANCIAL REPORTS AND REGULATORY DOCUMENTS.
(a) The consolidated balance sheet of GDSC as of December 31, 1997, and the
related statements of operations, cash flow and changes in financial position of
GDSC for the year then ended, audited by KPMG Peat Marwick, LLP, the unaudited
consolidated balance sheet as of June 30, 1998 and the related unaudited
consolidated statements of operations, cash flows and changes in financial
position of GDSC for quarters ended March 31, 1998 and June 30, 1998 (each as
Previously Disclosed), fairly present the financial position of GDSC as of such
dates and the results of the operations of GDSC for the periods then ended, all
in accordance with generally accepted accounting principles ("GAAP")
consistently applied.
(b) GDSC has timely filed all reports, registrations and statements,
together with any amendments required to be made with respect thereto, that they
were required to file since February 13, 1997, the date of GDSC's initial public
offering, with the Regulatory Agencies, and all other material reports and
statements required to be filed by it with any Governmental Authority since
December 31, 1996, including, without limitation, any report or statement
required to be filed pursuant to the laws of the United States or the State of
Washington, and has paid all fees and assessments due and payable in connection
therewith.
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As of their respective dates, such reports, registrations and statements
complied in all material respects with all the laws, rules and regulations of
the applicable Governmental Authority with which they were filed. The GDSC SEC
Reports (i) at the time filed, complied in all material respects with the
applicable requirements of the Securities Act and the Exchange Act, as the case
may be, and (ii) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated in such GDSC SEC Reports or necessary in
order to make the statements in such GDSC SEC Reports, in light of the
circumstances under which they were made, not misleading. None of GDSC
Subsidiaries is required to file any forms, reports or other documents with the
SEC.
(c) Since December 31, 1997, GDSC and its Subsidiaries have not incurred any
material liability other than in the ordinary course of business consistent with
past practice.
(d) Since December 31, 1997, (i) GDSC and its Subsidiaries have conducted
their respective businesses in the ordinary and usual course consistent with
past practice (excluding the incurrence of expenses related to this Agreement
and the transactions contemplated hereby) and (ii) no event has occurred or
circumstance arisen that, individually or taken together with all other facts,
circumstances and events (described in any paragraph of this ARTICLE IV or
otherwise), is reasonably likely to have a Material Adverse Effect with respect
to GDSC.
4.8. LEGAL PROCEEDINGS. No litigation, claim or other proceeding before
any court or Governmental Authority is pending against GDSC or any of its
Subsidiaries and, to GDSC's knowledge, no such litigation, claim or other
proceeding has been threatened.
4.9. REGULATORY MATTERS.
(a) Neither GDSC nor any of its Subsidiaries or any of their properties is a
party to or is subject to any order, decree, agreement, memorandum of
understanding or similar arrangement with or a commitment letter or similar
submission to, or extraordinary supervisory letter from any Governmental
Authority.
(b) Neither GDSC nor any of its Subsidiaries has been advised by any
Governmental Authority that such Governmental Authority is contemplating issuing
or requesting (or is considering the appropriateness of issuing or requesting)
any such order, decree, agreement, memorandum of understanding, commitment
letter or similar action.
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4.10. COMPLIANCE WITH LAWS.
(a) GDSC and each of its Subsidiaries:
(i) is in material compliance with all applicable federal, state, local
and foreign statutes, laws, regulations, ordinances, rules, judgments,
orders or decrees applicable thereto or to the employees conducting such
businesses;
(ii) has all permits, licenses, authorizations, orders and approvals of,
and has made all filings, applications and registrations with, all
Governmental Authorities that are required in order to permit them to own or
lease their properties and to conduct their businesses as presently
conducted; all such permits, licenses, certificates of authority, orders and
approvals are in full force and effect and, to GDSC's knowledge, no
suspension or cancellation of any of them is threatened; and
(iii) has not received, since December 31, 1997, any notification or
communication from any Governmental Authority (a) asserting that GDSC or any
of its Subsidiaries is not in compliance with any of the statutes,
regulations or ordinances which such Governmental Authority enforces or (b)
threatening to revoke any license, franchise, permit or governmental
authorization (nor, to GDSC's knowledge, do any grounds for any of the
foregoing exist).
(b) The terms and conditions set forth in the management agreements between
GDSC or its Subsidiaries and the dental practices managed by such entities
comply in all material respects with applicable laws, rules, regulations and
other applicable authorities relating to such agreements, including but not
limited to laws, rules, regulations and other applicable authorities relating to
the corporate practice of dentistry, fee-splitting, kickbacks and patient
brokering and those relating to such practices.
4.11. MATERIAL CONTRACTS; DEFAULTS. Neither GDSC nor any of its
Subsidiaries is a party to, bound by or subject to any agreement, contract,
arrangement, commitment or understanding (whether written or oral) (i) that is a
"material contract" within the meaning of Item 601(b)(10) of SEC Regulation S-K,
or (ii) that materially restricts the conduct of business by it or any of its
Subsidiaries that has not been filed with or incorporated by reference in
reports filed under either the Securities Act or the Exchange Act. Neither GDSC
nor any of its Subsidiaries is in material default under any material contract,
agreement, commitment, arrangement, lease, insurance policy or other material
instrument to which it is a party, by which its respective assets, business, or
operations may be bound or affected, or under which it or its respective assets,
business, or operations receives benefits, and there has not occurred any event
that, with the lapse of time or the giving of notice or both, would constitute
such a default.
4.12. NO BROKERS. Except for commissions, fees and other like payments due
to Salomon Smith Barney, no action has been taken by GDSC that would give rise
to any valid claim against any party hereto for a brokerage commission, finder's
fee or other like payment with respect to the transactions contemplated by this
Agreement.
4.13. EMPLOYEE BENEFIT PLANS.
(a) All benefit and compensation plans, contracts, policies or arrangements
covering current employees or former employees of GDSC and its Subsidiaries
(collectively, the "GDSC EMPLOYEES") and current or former directors of GDSC,
including, but not limited to, "employee benefit plans" within the meaning of
Section 3(3) of ERISA, and deferred compensation, stock option, stock purchase,
stock appreciation rights, stock based, incentive and bonus plans (collectively,
the "GDSC BENEFIT PLANS"), are Previously Disclosed. True and complete copies of
all GDSC Benefit Plans, including, but not limited to, any trust instruments and
insurance contracts forming a part of any GDSC Benefit Plans, and all amendments
thereto have been provided or made available to the other parties hereto.
(b) All employee benefit plans, other than "multiemployer plans" within the
meaning of Section 3(37) of ERISA, covering GDSC Employees (the "GDSC PLANS"),
have been administered in all material respects in compliance with their terms
and with all applicable laws, [to the extent subject to
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ERISA], including without limitation, ERISA and the Code. GDSC is not a party to
any "employee pension benefit plan" within the meaning of Section 3(2) of ERISA
("GDSC PENSION PLAN") and which is a defined benefit plan as defined in Section
3(35) of ERISA. With respect to the employee benefit plan intended to qualify
under Section 401 of the Code, the Internal Revenue Service has issued a
favorable determination letter, a true and correct copy of which has been
provided to DCA, that such plan is, and each such plan in fact is, qualified and
exempt from federal income taxes. There is no pending or, to the knowledge of
GDSC, threatened litigation relating to any GDSC Plan. There are no audits,
inquiries, reviews, proceedings, claims or demands pending with any governmental
or regulatory agency, and there are no facts which could give rise to any
material liability in the event of any such investigation, claim, action, suit,
audit, review or proceeding. Neither GDSC nor any of its Subsidiaries has
engaged in a transaction with respect to any GDSC Plan that, assuming the
taxable period of such transaction expired as of the date hereof, could subject
GDSC or any of its Subsidiaries to a tax or penalty imposed by either Section
4975 of the Code or Section 502(i) of ERISA.
(c) No liability under Subtitle C or D of Title IV of ERISA has been or is
expected to be incurred by GDSC or any of its Subsidiaries with respect to any
ongoing, frozen or terminated "single-employer plan", within the meaning of
Section 4001(a)(15) of ERISA, currently or formerly maintained by any of them,
or the single-employer plan of any entity which is considered one employer with
GDSC under Section 4001 of ERISA or Section 414 of the Code (a "GDSC ERISA
AFFILIATE"). Neither GDSC, any of its Subsidiaries nor an ERISA Affiliate has
contributed to a "multiemployer plan", within the meaning of Section 3(37) of
ERISA. No notice of a "reportable event", within the meaning of Section 4043 of
ERISA for which the 30-day reporting requirement has not been waived, has been
required to be filed for any GDSC Pension Plan or by any GDSC ERISA Affiliate
within the 12-month period ending on the date hereof or will be required to be
filed in connection with the transactions contemplated by this Agreement.
(d) All contributions required to be made under the terms of any GDSC Plan
have been timely made or have been reflected on the consolidated financial
statements of GDSC included in the Regulatory Documents. Neither any GDSC
Pension Plan nor any single-employer plan of an ERISA Affiliate has an
"accumulated funding deficiency" (whether or not waived) within the meaning of
Section 412 of the Code or Section 302 of ERISA and no ERISA Affiliate has an
outstanding funding waiver. Neither GDSC nor any of its Subsidiaries has
provided, or is required to provide, security to any GDSC Pension Plan or to any
single-employer plan of a GDSC ERISA Affiliate pursuant to Section 401(a)(29) of
the Code.
(e) Under each GDSC Pension Plan which is a single-employer plan, as of the
last day of the most recent plan year ended prior to the date hereof, the
actuarially determined present value of all "benefit liabilities", within the
meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the
actuarial assumptions contained in the GDSC Plan's most recent actuarial
valuation), did not exceed the then current value of the assets of such GDSC
Plan, and there has been no material change in the financial condition of such
GDSC Plan since the last day of the most recent plan year.
(f) Neither GDSC nor any of its Subsidiaries has any obligations for retiree
health and life benefits under any GDSC Benefit Plan. GDSC or its Subsidiaries
may amend or terminate any such GDSC Benefit Plan at any time without incurring
any liability thereunder.
(g) The consummation of the transactions contemplated by this Agreement will
not (i) entitle any employees of GDSC or any of its Subsidiaries to severance
pay, (ii) accelerate the time of payment or vesting or trigger any payment of
compensation or benefits under, increase the amount payable or trigger any other
material obligation pursuant to, any of the GDSC Benefit Plans or (iii) result
in any breach or violation of, or a default under, any of the GDSC Benefit
Plans. Without limiting the foregoing, as a result of the consummation of the
transactions contemplated by this Agreement, neither GDSC nor any of its
Subsidiaries will be obligated to make a payment to an individual that would be
a "parachute payment" to a "disqualified individual" as those terms are defined
in Section 280G of the Code, without regard to
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whether such payment is reasonable compensation for personal services performed
or to be performed in the future.
4.14. LABOR MATTERS. Neither GDSC nor any of its Subsidiaries is a party
to or is bound by any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization, nor is GDSC
or any of its Subsidiaries the subject of a proceeding asserting that it or any
such Subsidiary has committed an unfair labor practice (within the meaning of
the National Labor Relations Act) or seeking to compel GDSC or any such
Subsidiary to bargain with any labor organization as to wages or conditions of
employment, nor is there any strike or other labor dispute involving it or any
of its Subsidiaries pending or, to GDSC's knowledge, threatened, nor is GDSC
aware of any activity involving its or any of its Subsidiaries' employees
seeking to certify a collective bargaining unit or engaging in other
organizational activity.
4.15. YEAR 2000 COMPLIANCE. Except as Previously Disclosed, (i) the
computer software and related hardware of GDSC and its Subsidiaries (the "GDSC
COMPUTER SYSTEM") used for the storage and processing of data are or will be
prior to the year 2000 Year 2000 Compliant; (ii) to the actual knowledge of
GDSC, all of the suppliers, customers and third party providers of GDSC are, or
will be prior to year 2000, Year 2000 Compliant; and (iii) GDSC is taking or has
taken, all commercially reasonable and appropriate action to address and remedy
any deficiencies in the GDSC Computer System which would keep it from becoming
Year 2000 Compliant. As used herein and in SECTION 5.15, "YEAR 2000 COMPLIANT"
shall mean the ability of the GDSC Computer System or the DCA Computer System,
as applicable, to provide the following functions, without human intervention,
individually and in combination with other products or systems: (i) consistently
handle, record, store, process and present dates and date-related information
before, during and after January 1, 2000, including but not limited to accepting
date input, performing calculations on dates or portion of dates, and providing
date output; (ii) function accurately in accordance with the published
specifications and without undue interruption, before, during, and after January
1, 2000 (including leap year computations) without any adverse change in
operation associated with the advent of the year 2000; (iii) respond to
two-digit or four-digit dates and date-related input in a way that resolves any
ambiguity as to the year 2000 in a disclosed, defined and predetermined manner,
and store and provide output of dates and date-related information in ways that
are unambiguous as to the year 2000; and (iv) suitably interact with other
software and related hardware in a way which does not compromise its year 2000
compliance capability.
4.16. ENVIRONMENTAL MATTERS.
(a) GDSC and each of its Subsidiaries has complied at all times with
applicable Environmental Laws; (i) no real property (including buildings or
other structures) currently or formerly owned, leased or operated by GDSC or any
of its Subsidiaries, has been contaminated with, or has had any release of, any
Hazardous Substance; (ii) neither GDSC nor any of its Subsidiaries is subject to
liability for any Hazardous Substance disposal or contamination on any third
party property; (iii) neither GDSC nor any of its Subsidiaries has received any
notice, demand letter, claim or request for information alleging any violation
of, or liability under, any Environmental Law; (iv) neither GDSC nor any of its
Subsidiaries is subject to any order, decree, injunction or other agreement with
any Governmental Authority or any third party relating to any Environmental Law;
(v) to the best of GDSC's knowledge, there are no circumstances or conditions
(including the presence of asbestos, underground storage tanks, lead products,
polychlorinated biphenyls, prior manufacturing operations, dry-cleaning, or
automotive services) involving GDSC or any of its Subsidiaries, any currently or
formerly owned or operated property, that could reasonably be expected to result
in any claims, liability or investigations against GDSC or any of its
Subsidiaries or result in any restrictions on the ownership, use, or transfer of
any property pursuant to any Environmental Law; and (vi) GDSC has delivered to
DCA copies of all environmental reports, studies, sampling data, correspondence,
filings and other environmental information in its possession or reasonably
available to it relating to GDSC, any Subsidiary of GDSC and any currently or
formerly owned, leased or operated property.
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(b) As used herein, the term "ENVIRONMENTAL LAW" means any federal, state or
local law, regulation, order, decree, permit, authorization, opinion, common law
or agency requirement relating to: (i) the protection or restoration of the
environment, health, safety, or natural resources, (ii) the handling, use,
presence, disposal, release or threatened release of any Hazardous Substance or
(iii) noise, odor, wetlands, indoor air, pollution, contamination or any injury
or threat of injury to persons or property in connection with any Hazardous
Substance and the term "HAZARDOUS SUBSTANCE" means any substance in any
concentration that is: (i) listed, classified or regulated pursuant to any
Environmental Law; (ii) any petroleum product or by-product, asbestos-containing
material, lead-containing paint or plumbing, polychlorinated biphenyls,
radioactive materials or radon; or (iii) any other substance which is or may be
the subject of regulatory action by any Governmental Authority in connection
with any Environmental Law.
4.17. TAX MATTERS.
(a)(i)All Tax Returns that are required to be filed (taking into account any
extensions of time within which to file) by or with respect to GDSC and its
Subsidiaries have been duly filed, (ii) all Taxes due have been paid in full,
(iii) all deficiencies asserted or assessments made as a result of such
examinations have been paid in full, (iv) no issues that have been raised by the
relevant taxing authority in connection with the examination of any of the Tax
Returns referred to in clause (i) are currently pending, and (v) no waivers of
statutes of limitation have been given by or requested with respect to any Taxes
of GDSC or its Subsidiaries. GDSC has made available to DCA true and correct
copies of the United States federal income Tax Returns filed by GDSC and its
Subsidiaries for each of the three most recent fiscal years ended on or before
December 31, 1997. Neither GDSC nor any of its Subsidiaries has any liability
with respect to income, franchise or similar Taxes that accrued on or before the
end of the most recent period covered by GDSC SEC Reports filed prior to the
date hereof in excess of the amounts accrued with respect thereto that are
reflected in the financial statements included in GDSC SEC Reports filed on or
prior to the date hereof. Neither GDSC nor any of its Subsidiaries is a party to
any Tax allocation or sharing agreement, is or has been a member of an
affiliated group filing consolidated or combined Tax returns (other than a group
the common parent of which is or was GDSC) or otherwise has any liability for
the Taxes of any person (other than GDSC and its Subsidiaries). As of the date
hereof, neither GDSC nor any of its Subsidiaries has any reason to believe that
any conditions exist that might prevent or impede the Merger from qualifying as
reorganizations within the meaning of Section 368 of the Code or Section 351 of
the Code.
(b) No Tax is required to be withheld pursuant to Section 1445 of the Code
as a result of the transfer contemplated by this Agreement.
4.18. BOOKS AND RECORDS. The books and records of GDSC and its
Subsidiaries have been fully, properly and accurately maintained in all material
respects, and there are no material inaccuracies or discrepancies of any kind
contained or reflected therein, and they fairly present the financial position
of GDSC and its Subsidiaries.
4.19. INSURANCE. GDSC has Previously Disclosed all of the insurance
policies, binders, or bonds maintained by GDSC or its Subsidiaries ("INSURANCE
POLICIES"). GDSC and its Subsidiaries are insured with reputable insurers
against such risks and in such amounts as the management of GDSC reasonably has
determined to be prudent for its business, operations, properties and assets.
All the Insurance Policies are in full force and effect; GDSC and its
Subsidiaries are not in material default thereunder; and all claims thereunder
have been filed in due and timely fashion.
4.20. ACCOUNTING TREATMENT. As of the date hereof, GDSC is not aware of
any reason why the Merger will fail to qualify for "pooling-of-interests"
accounting treatment. held under valid contracts enforceable in accordance with
their respective terms (except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or other laws affecting the
enforcement of creditors' rights generally and except that the availability of
the equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceedings may be brought),
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and each such contract is in full force and effect. The Assets of GDSC and its
Subsidiaries include all assets required to operate the business of GDSC and its
Subsidiaries as presently conducted.
4.22. STATEMENTS TRUE AND CORRECT. None of the information supplied or to
be supplied by GDSC or any of its Subsidiaries for inclusion in the Registration
Statement to be filed by ParentCo with the SEC will, when the Registration
Statement becomes effective, be false or misleading with respect to any material
fact, or omit to state any material fact necessary to make the statements
therein not misleading. None of the information supplied or to be supplied by
GDSC or any of its Subsidiaries for inclusion in the Proxy Statement to be
mailed to GDSC's or DCA's stockholders in connection with the GDSC Meeting or
the DCA Meeting and any other Governmental Authority in connection with the
transactions contemplated hereby, will, at the respective time such documents
are filed, and with respect to the Proxy Statement, when first mailed to GDSC's
or DCA's stockholders, be false or misleading with respect to any material fact,
or omit to state any material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, or, in
the case of the Proxy Statement or any amendment thereof or supplement thereto,
at the time of the GDSC Meeting or the DCA Meeting, be false or misleading with
respect to any material fact, or omit to state any material fact necessary to
correct any statement in any earlier communication with respect to the
solicitation of any proxy for the GDSC Meeting or the DCA Meeting. All documents
that GDSC or any Subsidiary thereof is responsible for filing with any
Regulatory Authority in connection with the transactions contemplated hereby
will comply as to form in all material respects with the provisions of
applicable law.
4.23. ACCOUNTING, TAX AND REGULATORY. Neither GDSC nor any of its
Subsidiaries has taken any action or has any knowledge of any fact or
circumstance that is reasonably likely to (a) prevent the transactions
contemplated hereby, including the Merger, from qualifying for
pooling-of-interests accounting treatment or as (i) reorganizations within the
meaning of Section 368(a) of the Code (in which ParentCo, GDSC Merger Sub, DCA
Merger Sub, GDSC and DCA is each a party to the reorganization within the
meaning of Section 368(b) of the Code) or (ii) a transfer to a controlled
corporation qualifying under Section 351 of the Code, or (b) materially impede
or delay receipt of any consents of Governmental Authority referred to in
SECTION 4.6(A) of this Agreement or result in the imposition of a condition or
restriction of the type referred to in the last sentence of such Section.
4.24. NO UNDISCLOSED LIABILITIES. Except as set forth in the financial
statements filed in connection with the GDSC SEC Reports or Previously
Disclosed, GDSC does not have any material liability or obligation accrued,
contingent or otherwise.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF DCA
On or prior to the date hereof, DCA has delivered to GDSC schedules ("DCA
DISCLOSURE SCHEDULES") setting forth, among other things, items the disclosure
of which is necessary or appropriate either in response to an express disclosure
requirement contained in a provision hereof or as an exception to one or more
representations or warranties contained in this ARTICLE V; provided, that (i) no
such item is required to be set forth in the DCA Disclosure Schedules as an
exception to a representation or warranty if its absence would not be reasonably
likely to result in the related representation or warranty being deemed untrue
or incorrect under the standard established in the subsequent sentence, and (ii)
the mere inclusion of an item in the DCA Disclosure Schedules as an exception to
a representation or warranty shall not be deemed an admission by a party that
such item represents a material exception or fact, event or circumstance or that
such item is reasonably likely to result in a Material Adverse Effect. No
representation or warranty of DCA contained in this ARTICLE V shall be deemed
untrue or incorrect, and no party hereto shall be deemed to have breached a
representation or warranty, as a consequence of the existence of any fact, event
or circumstance unless such fact, circumstance or event, individually or taken
together with all other facts, events or circumstances inconsistent with any
representation or warranty contained in this ARTICLE V has had or is reasonably
likely to have a Material Adverse Effect on the party making such representation
or
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warranty. The numbers set forth on the DCA Disclosure Schedules correspond to
the particular Section number contained in the Agreement. Information or
disclosure provided with reference to one Section may also be responsive to
information or disclosure responsive to another Section. Therefore, if the
information or disclosure set forth in one Section can be reasonably determined
to apply to information or disclosure in another Section, such information or
disclosure shall constitute disclosure for all applicable Sections. DCA agrees
that with respect to its representations and warranties, DCA shall have the
right to supplement and amend the DCA Disclosure Schedules with respect to any
events occurring after the date of this Agreement and prior to the Effective
Time which such new event or information, when scheduled, shall not constitute a
breach hereof. In the event any such supplement or amendment discloses new
events that are reasonably likely to have a Material Adverse Effect on DCA or on
ParentCo, GDSC shall have the right to terminate the Agreement pursuant to
SECTION 11.1(g).
Subject to the preceding paragraph and except as Previously Disclosed in a
paragraph of the DCA Disclosure Schedules corresponding to the relevant
paragraph below, DCA hereby represents and warrants to GDSC:
5.1. ORGANIZATION, STANDING AND AUTHORITY. DCA is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. DCA is duly qualified to do business and is in good standing in the
states of the United States and foreign jurisdictions where its ownership or
leasing of property or assets or the conduct of its business requires it to be
so qualified. The DCA Board has received the written opinion of Raymond James &
Associates, Inc. to the effect that as of the date hereof the DCA Exchange Ratio
is fair to the holders of DCA Common Stock from a financial point of view.
5.2. SUBSIDIARIES.
(a) (i) DCA has Previously Disclosed a list of all of its Subsidiaries
together with the jurisdiction of organization of each such Subsidiary, (ii) DCA
owns, directly or indirectly, all the issued and outstanding equity securities
of each of its Subsidiaries, (iii) no equity securities of any of its
Subsidiaries are or may become required to be issued (other than to it or its
wholly-owned Subsidiaries) by reason of any Right or otherwise, (iv) there are
no contracts, commitments, understandings or arrangements by which any of such
Subsidiaries is or may be bound to sell or otherwise transfer any equity
securities of any such Subsidiaries (other than to it or its wholly-owned
Subsidiaries), (v) there are no contracts, commitments, understandings, or
arrangements relating to its rights to vote or to dispose of such securities,
and (vi) all the equity securities of each Subsidiary held by DCA or its
Subsidiaries are fully paid and nonassessable and are owned by DCA or its
Subsidiaries free and clear of any Liens.
(b) DCA does not own beneficially, directly or indirectly, any equity
securities or similar interests of any Person, or any interest in a partnership
or joint venture of any kind, other than its Subsidiaries.
(c) Each of DCA's Subsidiaries has been duly organized and is validly
existing in good standing under the laws of the jurisdiction of its
organization, and is duly qualified to do business and in good standing in the
jurisdictions where its ownership or leasing of property or the conduct of its
business requires it to be so qualified.
5.3. DCA COMMON STOCK. As of the date hereof, the authorized capital stock
of DCA consists solely of 50,000,000 shares of DCA Common Stock of which
7,031,066 are issued and outstanding and 5,000,000 shares of DCA Preferred Stock
of which none are issued and outstanding. As of the date hereof, no shares of
DCA Common Stock were held in treasury by DCA or otherwise beneficially owned by
DCA or its Subsidiaries. The outstanding shares of DCA Common Stock or DCA
Preferred Stock have been duly authorized and are validly issued and
outstanding, fully paid and nonassessable, subject to no preemptive rights and
were not issued in violation of any preemptive rights. As of the date hereof,
there are 613,014 shares of DCA Common Stock authorized and reserved for
issuance pursuant to outstanding options and warrants to purchase shares of DCA
Common Stock, DCA does not have any other Rights
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issued or outstanding with respect to its capital stock, and DCA does not have
any commitment to authorize, issue or sell any other shares of its capital stock
or any other Rights.
5.4. CORPORATE POWER. DCA and each of its Subsidiaries has the corporate
power and authority to carry on its business as it is now being conducted and to
own all its properties and assets; and DCA has the corporate power and authority
to execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby.
5.5. CORPORATE AUTHORITY. Subject in the case of this Agreement to receipt
of the requisite approval of the agreement of merger set forth in this Agreement
by the holders of a majority of the outstanding shares of DCA Common Stock
entitled to vote thereon (which is the only stockholder vote required thereon),
this Agreement and the transactions contemplated hereby and thereby have been
authorized by all necessary corporate action of DCA and the DCA Board on or
prior to the date hereof. This Agreement is a valid and legally binding
obligation of DCA, enforceable in accordance with its terms (except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws of general
applicability relating to or affecting creditors' rights or by general equity
principles).
5.6. CONSENTS AND APPROVALS; NO DEFAULTS.
(a) No consents or approvals of, or filings or registrations with, any
Governmental Authority or with any third party are required to be made or
obtained by DCA or any of its Subsidiaries in connection with the execution,
delivery or performance by DCA of this Agreement or to consummate the Merger
except for (i) filings of applications, registrations, statements, reports or
notices with Regulatory Agencies, (ii) the approval of this Agreement by the
stockholders of DCA, and (iii) the filing of an agreement of merger with the
Delaware Secretary pursuant to the DGCL. As of the date hereof, DCA is not aware
of any reason why the approvals set forth in SECTION 11.1(d) will not be
received without the imposition of a condition, restriction or requirement of
the type described in SECTION 11.1(d).
(b) Subject to receipt of the approvals referred to in the preceding
paragraph, and the expiration of related waiting periods, the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby and thereby do not and will not (i) constitute
a breach or violation of, or a default under, or give rise to any Lien, any
acceleration of remedies or any right of termination under, any law, rule or
regulation or any judgment, decree, order, governmental permit or license, or
agreement, indenture or instrument of DCA or of any of its Subsidiaries or to
which DCA or any of its Subsidiaries or properties is subject or bound, (ii)
constitute a breach or violation of, or a default under, the DCA Certificate of
Incorporation or the DCA Bylaws, or (iii) require any consent or approval under
any such law, rule, regulation, judgment, decree, order, governmental permit or
license, agreement, indenture or instrument.
5.7. FINANCIAL REPORTS AND REGULATORY DOCUMENTS.
(a) The balance sheet of DCA as of December 31, 1997, and the related
statements of income, cash flow and changes in financial position of DCA for the
year then ended, audited by PricewaterhouseCoopers, the unaudited balance sheet
as of June 30, 1998, and the related unaudited statements of income, cash flows
and changes in financial position of DCA for quarters ended March 31, 1998, and
June 30, 1998, fairly present the financial position of DCA as of such dates and
the results of the operations of DCA for the periods then ended, all in
accordance with GAAP consistently applied.
(b) DCA has timely filed all reports, registrations and statements, together
with any amendments required to be made with respect thereto, that they were
required to file since November 4, 1997, the date of DCA's initial public
offering, with the Regulatory Agencies, and all other material reports and
statements required to be filed by it with any Governmental Authority since
December 31, 1996, including, without limitation, any report or statement
required to be filed pursuant to the laws of the United States or the State of
Delaware, and has paid all fees and assessments due and payable in connection
therewith. As
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of their respective dates, such reports, registrations and statements complied
in all material respects with all the laws, rules and regulations of the
applicable Governmental Authority with which they were filed. The DCA SEC
Reports (i) at the time filed, complied in all material respects with the
applicable requirements of the Securities Act and the Exchange Act, as the case
may be, and (ii) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated in such DCA SEC Reports or necessary in
order to make the statements in such DCA SEC Reports, in light of the
circumstances under which they were made, not misleading. None of DCA
Subsidiaries is required to file any forms, reports or other documents with the
SEC.
(c) Since December 31, 1997, DCA and its Subsidiaries have not incurred any
material liability other than in the ordinary course of business consistent with
past practice.
(d) Since December 31, 1997, (i) DCA and its Subsidiaries have conducted
their respective businesses in the ordinary and usual course consistent with
past practice (excluding the incurrence of expenses related to this Agreement
and the transactions contemplated hereby) and (ii) no event has occurred or
circumstance arisen that, individually or taken together with all other facts,
circumstances and events (described in any paragraph of this ARTICLE V or
otherwise), is reasonably likely to have a Material Adverse Effect with respect
to DCA.
5.8. LEGAL PROCEEDINGS. No litigation, claim or other proceeding before
any court or Governmental Authority is pending against DCA or any of its
Subsidiaries and, to DCA's knowledge, no such litigation, claim or other
proceeding has been threatened.
5.9. REGULATORY MATTERS.
(a) Neither DCA nor any of its Subsidiaries or any of their properties is a
party to or is subject to any order, decree, agreement, memorandum of
understanding or similar arrangement with or a commitment letter or similar
submission to, or extraordinary supervisory letter from any Governmental
Authority.
(b) Neither DCA nor any of its Subsidiaries has been advised by any
Governmental Authority that such Governmental Authority is contemplating issuing
or requesting (or is considering the appropriateness of issuing or requesting)
any such order, decree, agreement, memorandum of understanding, commitment
letter or similar action.
5.10. COMPLIANCE WITH LAWS.
(a) DCA and each of its Subsidiaries:
(i) is in material compliance with all applicable federal, state, local
and foreign statutes, laws, regulations, ordinances, rules, judgments,
orders or decrees applicable thereto or to the employees conducting such
businesses;
(ii) has all permits, licenses, authorizations, orders and approvals of,
and has made all filings, applications and registrations with, all
Governmental Authorities that are required in order to permit them to own or
lease their properties and to conduct their businesses as presently
conducted; all such permits, licenses, certificates of authority, orders and
approvals are in full force and effect and, to DCA's knowledge, no
suspension or cancellation of any of them is threatened; and
(iii) has not received, since December 31, 1997, any notification or
communication from any Governmental Authority (a) asserting that DCA or any
of its Subsidiaries is not in compliance with any of the statutes,
regulations or ordinances which such Governmental Authority enforces or (b)
threatening to revoke any license, franchise, permit or governmental
authorization (nor, to DCA's knowledge, do any grounds for any of the
foregoing exist).
(b) The terms and conditions set forth in the management agreements between
DCA or its Subsidiaries and the dental practices managed by such entities comply
in all material respects with
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applicable laws, rules, regulations and other applicable authorities relating to
such agreements, including but not limited to laws, rules, regulations and other
applicable authorities relating to the corporate practice of dentistry,
fee-splitting, kickbacks and patient brokering and those relating to such
practices.
5.11. MATERIAL CONTRACTS; DEFAULTS. Neither DCA nor any of its
Subsidiaries is a party to, bound by or subject to any agreement, contract,
arrangement, commitment or understanding (whether written or oral) (i) that is a
"material contract" within the meaning of Item 601(b)(10) of SEC Regulation S-K,
or (ii) that materially restricts the conduct of business by it or any of its
Subsidiaries that has not been filed with or incorporated by reference in
reports filed under either the Securities Act or the Exchange Act. Neither DCA
nor any of its Subsidiaries is in material default under any material contract,
agreement, commitment, arrangement, lease, insurance policy or other material
instrument to which it is a party, by which its respective assets, business, or
operations may be bound or affected, or under which it or its respective assets,
business, or operations receives benefits, and there has not occurred any event
that, with the lapse of time or the giving of notice or both, would constitute
such a default.
5.12. NO BROKERS. Except for commissions, fees and other like payments due
to Raymond James & Associates, Inc., no action has been taken by DCA that would
give rise to any valid claim against any party hereto for a brokerage
commission, finder's fee or other like payment with respect to the transactions
contemplated by this Agreement.
5.13. EMPLOYEE BENEFIT PLANS.
(a) All benefit and compensation plans, contracts, policies or arrangements
covering current employees or former employees of DCA and its Subsidiaries
(collectively, the "DCA EMPLOYEES") and current or former directors of DCA,
including, but not limited to, "employee benefit plans" within the meaning of
Section 3(3) of ERISA, and deferred compensation, stock option, stock purchase,
stock appreciation rights, stock based, incentive and bonus plans (collectively,
the "DCA BENEFIT PLANS"), are Previously Disclosed. True and complete copies of
all DCA Benefit Plans, including, but not limited to, any trust instruments and
insurance contracts forming a part of any DCA Benefit Plans, and all amendments
thereto have been provided or made available to the other parties hereto.
(b) All employee benefit plans, other than "multiemployer plans" within the
meaning of Section 3(37) of ERISA, covering DCA Employees (the "DCA PLANS"),
have been administered in all material respects in compliance with their terms
and with all applicable laws, [to the extent subject to ERISA], including
without limitation, ERISA and the Code. DCA is not a party to any "employee
pension benefit plan" within the meaning of Section 3(2) of ERISA ("DCA PENSION
PLAN") and which is a defined benefit plan as defined in Section 3(35) of ERISA.
With respect to the employee benefit plan intended to qualify under Section 401
of the Code, a request for a determination letter from the Internal Revenue
Service will be timely applied for to the effect that such plan is, and each
such plan in fact is, or may be timely amended to be, qualified and exempt from
federal income taxes. There is no pending or, to the knowledge of DCA,
threatened litigation relating to any DCA Plan. There are no audits, inquiries,
reviews, proceedings, claims or demands pending with any governmental or
regulatory agency, and there are no facts which could give rise to any material
liability in the event of any such investigation, claim, action, suit, audit,
review or proceeding. Neither DCA nor any of its Subsidiaries has engaged in a
transaction with respect to any DCA Plan that, assuming the taxable period of
such transaction expired as of the date hereof, could subject DCA or any of its
Subsidiaries to a tax or penalty imposed by either Section 4975 of the Code or
Section 502(i) of ERISA.
(c) No liability under Subtitle C or D of Title IV of ERISA has been or is
expected to be incurred by DCA or any of its Subsidiaries with respect to any
ongoing, frozen or terminated "single-employer plan", within the meaning of
Section 4001(a)(15) of ERISA, currently or formerly maintained by any of them,
or the single-employer plan of any entity which is considered one employer with
DCA under Section 4001 of ERISA or Section 414 of the Code (a "DCA ERISA
AFFILIATE"). Neither DCA, any of its Subsidiaries nor an ERISA Affiliate has
contributed to a "multiemployer plan", within the meaning of Section 3(37) of
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ERISA. No notice of a "reportable event", within the meaning of Section 4043 of
ERISA for which the 30-day reporting requirement has not been waived, has been
required to be filed for any DCA Pension Plan or by any DCA ERISA Affiliate
within the 12-month period ending on the date hereof or will be required to be
filed in connection with the transactions contemplated by this Agreement.
(d) All contributions required to be made under the terms of any DCA Plan
have been timely made or have been reflected on the consolidated financial
statements of DCA included in the Regulatory Documents. Neither any DCA Pension
Plan nor any single-employer plan of an ERISA Affiliate has an "accumulated
funding deficiency" (whether or not waived) within the meaning of Section 412 of
the Code or Section 302 of ERISA and no ERISA Affiliate has an outstanding
funding waiver. Neither DCA nor any of its Subsidiaries has provided, or is
required to provide, security to any DCA Pension Plan or to any single-employer
plan of a DCA ERISA Affiliate pursuant to Section 401(a)(29) of the Code.
(e) Under each DCA Pension Plan which is a single-employer plan, as of the
last day of the most recent plan year ended prior to the date hereof, the
actuarially determined present value of all "benefit liabilities", within the
meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the
actuarial assumptions contained in the DCA Plan's most recent actuarial
valuation), did not exceed the then current value of the assets of such DCA
Plan, and there has been no material change in the financial condition of such
DCA Plan since the last day of the most recent plan year.
(f) Neither DCA nor any of its Subsidiaries has any obligations for retiree
health and life benefits under any DCA Benefit Plan. DCA or its Subsidiaries may
amend or terminate any such DCA Benefit Plan at any time without incurring any
liability thereunder.
(g) The consummation of the transactions contemplated by this Agreement will
not (x) entitle any employees of DCA or any of its Subsidiaries to severance
pay, (y) accelerate the time of payment or vesting or trigger any payment of
compensation or benefits under, increase the amount payable or trigger any other
material obligation pursuant to, any of the DCA Benefit Plans or (z) result in
any breach or violation of, or a default under, any of the DCA Benefit Plans.
Without limiting the foregoing, as a result of the consummation of the
transactions contemplated by this Agreement, neither DCA nor any of its
Subsidiaries will be obligated to make a payment to an individual that would be
a "parachute payment" to a "disqualified individual" as those terms are defined
in Section 280G of the Code, without regard to whether such payment is
reasonable compensation for personal services performed or to be performed in
the future.
5.14. LABOR MATTERS. Neither DCA nor any of its Subsidiaries is a party to
or is bound by any collective bargaining agreement, contract or other agreement
or understanding with a labor union or labor organization, nor is DCA or any of
its Subsidiaries the subject of a proceeding asserting that it or any such
Subsidiary has committed an unfair labor practice (within the meaning of the
National Labor Relations Act) or seeking to compel DCA or any such Subsidiary to
bargain with any labor organization as to wages or conditions of employment, nor
is there any strike or other labor dispute involving it or any of its
Subsidiaries pending or, to DCA's knowledge, threatened, nor is DCA aware of any
activity involving its or any of its Subsidiaries' employees seeking to certify
a collective bargaining unit or engaging in other organizational activity.
5.15. YEAR 2000 COMPLIANCE. Except as Previously Disclosed, (i) the
computer software and related hardware of DCA and its Subsidiaries (the "DCA
COMPUTER SYSTEM") used for the storage and processing of data are or will be
prior to the year 2000 Year 2000 Compliant; (ii) to the actual knowledge of DCA,
all of the suppliers, customers and third party providers of DCA are, or will be
prior to year 2000, Year 2000 Compliant; and (iii) DCA is taking or has taken,
all commercially reasonable and appropriate action to address and remedy any
deficiencies in the DCA Computer System which would keep it from becoming Year
2000 Compliant.
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5.16. ENVIRONMENTAL MATTERS.
(a) DCA and each of its Subsidiaries has complied at all times with
applicable Environmental Laws; (i) no real property (including buildings or
other structures) currently or formerly owned, leased or operated by DCA or any
of its Subsidiaries, has been contaminated with, or has had any release of, any
Hazardous Substance; (ii) neither DCA nor any of its Subsidiaries is subject to
liability for any Hazardous Substance disposal or contamination on any third
party property; (iii) neither DCA nor any of its Subsidiaries has received any
notice, demand letter, claim or request for information alleging any violation
of, or liability under, any Environmental Law; (iv) neither DCA nor any of its
Subsidiaries is subject to any order, decree, injunction or other agreement with
any Governmental Authority or any third party relating to any Environmental Law;
(v) to the best of DCA's knowledge, there are no circumstances or conditions
(including the presence of asbestos, underground storage tanks, lead products,
polychlorinated biphenyls, prior manufacturing operations, dry-cleaning, or
automotive services) involving DCA or any of its Subsidiaries, any currently or
formerly owned or operated property, that could reasonably be expected to result
in any claims, liability or investigations against DCA or any of its
Subsidiaries or result in any restrictions on the ownership, use, or transfer of
any property pursuant to any Environmental Law; and (vi) DCA has delivered to
GDSC copies of all environmental reports, studies, sampling data,
correspondence, filings and other environmental information in its possession or
reasonably available to it relating to DCA and any Subsidiary of DCA, any
currently or formerly owned, leased or operated property.
5.17. TAX MATTERS.
(a)(i)All Tax Returns that are required to be filed (taking into account any
extensions of time within which to file) by or with respect to DCA and its
Subsidiaries have been duly filed, (ii) all Taxes due have been paid in full,
(iii) all deficiencies asserted or assessments made as a result of such
examinations have been paid in full, (iv) no issues that have been raised by the
relevant taxing authority in connection with the examination of any of the Tax
Returns referred to in clause (i) are currently pending, and (v) no waivers of
statutes of limitation have been given by or requested with respect to any Taxes
of DCA or its Subsidiaries. DCA has made available to GDSC true and correct
copies of the United States federal income Tax Returns filed by DCA and its
Subsidiaries for each of the three most recent fiscal years ended on or before
December 31, 1997. Neither DCA nor any of its Subsidiaries has any liability
with respect to income, franchise or similar Taxes that accrued on or before the
end of the most recent period covered by DCA's Regulatory Documents filed prior
to the date hereof in excess of the amounts accrued with respect thereto that
are reflected in the financial statements included in DCA's Regulatory Documents
filed on or prior to the date hereof. Neither DCA nor any of its Subsidiaries is
a party to any Tax allocation or sharing agreement, is or has been a member of
an affiliated group filing consolidated or combined Tax returns (other than a
group the common parent of which is or was DCA) or otherwise has any liability
for the Taxes of any person (other than DCA and its Subsidiaries). As of the
date hereof, neither DCA nor any of its Subsidiaries has any reason to believe
that any conditions exist that might prevent or impede the Merger from
qualifying as reorganizations within the meaning of Section 368 of the Code or
Section 351 of the Code.
(b) No Tax is required to be withheld pursuant to Section 1445 of the Code
as a result of the transfer contemplated by this Agreement.
5.18. BOOKS AND RECORDS. The books and records of DCA and its Subsidiaries
have been fully, properly and accurately maintained in all material respects,
and there are no material inaccuracies or discrepancies of any kind contained or
reflected therein, and they fairly present the financial position of DCA and its
Subsidiaries.
5.19. INSURANCE. DCA has Previously Disclosed all of the insurance
policies, binders, or bonds maintained by DCA or its Subsidiaries ("INSURANCE
POLICIES"). DCA and its Subsidiaries are insured with reputable insurers against
such risks and in such amounts as the management of DCA reasonably has
determined to be prudent for its business, operations, properties and assets.
All the Insurance Policies are
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in full force and effect; DCA and its Subsidiaries are not in material default
thereunder; and all claims thereunder have been filed in due and timely fashion.
5.20. ACCOUNTING TREATMENT. As of the date hereof, DCA is not aware of any
reason why the Merger will fail to qualify for "pooling-of-interests" accounting
treatment.
5.21. ASSETS. DCA and its Subsidiaries have good and marketable title,
free and clear of all Liens, to all of their respective Assets. All tangible
properties used in the businesses of DCA or its Subsidiaries are in good
condition, reasonable wear and tear excepted, and are usable in the ordinary
course of business consistent with DCA's and its Subsidiaries' past practices.
All Assets which are material to DCA's business on a consolidated basis and held
under leases or subleases by DCA or any of its Subsidiaries are held under valid
contracts enforceable in accordance with their respective terms (except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceedings may be brought), and each such
contract is in full force and effect. The Assets of DCA and its Subsidiaries
include all assets required to operate the business of DCA and its Subsidiaries
as presently conducted.
5.22. STATEMENTS TRUE AND CORRECT. None of the information supplied or to
be supplied by DCA or any of its Subsidiaries for inclusion in the Registration
Statement to be filed by ParentCo with the SEC will, when the Registration
Statement becomes effective, be false or misleading with respect to any material
fact, or omit to state any material fact necessary to make the statements
therein not misleading. None of the information supplied or to be supplied by
DCA or any of its Subsidiaries for inclusion in the Proxy Statement to be mailed
to DCA's or GDSC's stockholders in connection with the DCA Meeting or the GDSC
Meeting and any other Governmental Authority in connection with the transactions
contemplated hereby, will, at the respective time such documents are filed, and
with respect to the Proxy Statement, when first mailed to GDSC's or DCA's
stockholders, be false or misleading with respect to any material fact, or omit
to state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, or, in the case of
the Proxy Statement or any amendment thereof or supplement thereto, at the time
of the DCA Meeting or the GDSC Meeting, be false or misleading with respect to
any material fact, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the DCA Meeting or the GDSC Meeting. All documents that DCA or any
Subsidiary thereof is responsible for filing with any Regulatory Authority in
connection with the transactions contemplated hereby will comply as to form in
all material respects with the provisions of applicable law.
5.23. ACCOUNTING, TAX AND REGULATORY. Neither DCA nor any of its
Subsidiaries has taken any action or has any knowledge of any fact or
circumstance that is reasonably likely to (a) prevent the transactions
contemplated (i) hereby, including the Merger, from qualifying for
pooling-of-interests accounting treatment or as reorganizations within the
meaning of Section 368(a) of the Code (in which ParentCo, GDSC Merger Sub, DCA
Merger Sub, GDSC and DCA is each a party to the reorganization within the
meaning of Section 368(b) of the Code) or (ii) a transfer to a controlled
corporation qualifying under Section 351 of the Code, or (b) materially impede
or delay receipt of any consents of Governmental Authority referred to in
SECTION 5.6(a) of this Agreement or result in the imposition of a condition or
restriction of the type referred to in the last sentence of such Section.
5.24. NO UNDISCLOSED LIABILITIES. Except as set forth in the financial
statements filed in connection with the DCA SEC Reports or Previously Disclosed,
DCA does not have any material liability or obligation accrued, contingent or
otherwise.
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ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PARENTCO,
GDSC MERGER SUB AND DCA MERGER SUB
ParentCo, GDSC Merger Sub and DCA Merger Sub hereby represent and warrant to
GDSC and DCA as follows:
6.1. ORGANIZATION, STANDING AND AUTHORITY OF PARENTCO. ParentCo is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. ParentCo is duly qualified to do business and is in
good standing in the states of the United States and any foreign jurisdictions
where its ownership or leasing of property or assets or the conduct of its
business requires it to be so qualified.
6.2. PARENTCO CAPITAL STOCK. As of the date hereof, the authorized capital
stock of ParentCo consists solely of 50,000,000 shares of ParentCo Common Stock
and 30,000,000 of ParentCo Preferred Stock, of which none are issued and
outstanding, respectively. As of the date hereof, no shares of ParentCo common
stock were held in treasury by ParentCo or otherwise beneficially owned by
ParentCo.
6.3. PARENTCO CORPORATE POWER. ParentCo has the corporate power and
authority to carry on its business as is now being conducted and to own all its
properties and assets; and ParentCo has the corporate power and authority to
execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby.
6.4. PARENTCO CORPORATE AUTHORITY. This Agreement and the transactions
contemplated hereby and thereby have been authorized by all necessary corporate
action of ParentCo and the ParentCo Board on or prior to the date hereof. This
Agreement is a valid and legally binding obligation of ParentCo, enforceable in
accordance with its terms (except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
similar laws of general applicability relating to or affecting creditors' rights
or by general equity principles).
6.5. ORGANIZATION, STANDING AND AUTHORITY OF GDSC MERGER SUB. GDSC Merger
Sub is a corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware. GDSC Merger Sub is duly qualified to do
business and is in good standing in the states of the United States and any
foreign jurisdictions where its ownership or leasing of property or assets or
the conduct of its business requires it to be so qualified.
6.6. GDSC MERGER SUB CAPITAL STOCK. As of the date hereof, the authorized
capital stock of GSDC Sub consists solely of 100 shares of GDSC Merger Sub
Common Stock, 100 of which are issued and outstanding. As of the date hereof, no
shares of GSDC Sub Common Stock were held in treasury by GDSC Merger Sub or
otherwise beneficially owned by GDSC Merger Sub.
6.7. GDSC MERGER SUB CORPORATE POWER. GDSC Merger Sub has the corporate
power and authority to carry on its business as is now being conducted and to
own all its properties and assets; and GDSC Merger Sub has the corporate power
and authority to execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated hereby.
6.8. GDSC MERGER SUB CORPORATE AUTHORITY. This Agreement and the
transactions contemplated hereby and thereby have been authorized by all
necessary corporate action of GDSC Merger Sub and the GDSC Merger Sub Board of
Directors on or prior to the date hereof. This Agreement is a valid and legally
binding obligation of ParentCo, enforceable in accordance with its terms (except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws of general
applicability relating to or affecting creditors' rights or by general equity
principles).
6.9. ORGANIZATION, STANDING AND AUTHORITY OF DCA MERGER SUB. DCA Merger
Sub is a corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware. DCA Merger Sub is duly qualified to do
business and is in good standing in the states of the United States and any
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foreign jurisdictions where its ownership or leasing of property or assets or
the conduct of its business requires it to be so qualified.
6.10. DCA MERGER SUB COMMON STOCK. As of the date hereof, the authorized
capital stock of DCA Merger Sub consists solely of 100 shares of DCA Merger Sub
Common Stock, 100 of which are issued and outstanding. As of the date hereof, no
shares of DCA Merger Sub Common Stock were held in treasury by DCA Merger Sub or
otherwise beneficially owned by DCA Merger Sub.
6.11. DCA MERGER SUB CORPORATE POWER. DCA Merger Sub has the corporate
power and authority to carry on its business as is now being conducted and to
own all its properties and assets; and DCA Merger Sub has the corporate power
and authority to execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated hereby.
6.12. DCA MERGER SUB CORPORATE AUTHORITY. This Agreement and the
transactions contemplated hereby and thereby have been authorized by all
necessary corporate action of DCA Merger Sub and the DCA Merger Sub Board of
Directors on or prior to the date hereof. This Agreement is a valid and legally
binding obligation of ParentCo, enforceable in accordance with its terms (except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws of general
applicability relating to or affecting creditors' rights or by general equity
principles).
6.13. CONTINUITY OF BUSINESS ENTERPRISE. ParentCo will cause each of GDSC
and DCA to continue at least one significant historic business line, or to use
at least a significant portion of its historic business assets in a business, in
each case within the meaning of Treasury regulation section 1.368-1(d).
ARTICLE VII
CONDUCT OF BUSINESS
7.1. FORBEARANCES OF GDSC AND DCA. From the date hereof until the
Effective Time, except as expressly contemplated by this Agreement, without the
prior written consent of GDSC or DCA, as the case may be, each of GDSC and DCA
will not, and will cause each of its Subsidiaries not to:
(a) ORDINARY COURSE. Conduct its business and the business of its
Subsidiaries other than in the ordinary and usual course or fail to use
reasonable best efforts to preserve intact their business organizations and
assets and maintain their rights, franchises and existing relations with
customers, suppliers, employees and business associates, take any action
that would adversely affect or delay the ability of it or any of its
Subsidiaries to perform any of their obligations on a timely basis under
this Agreement, or take any action that is reasonably likely to have a
Material Adverse Effect on it or its Subsidiaries, taken as a whole.
(b) CAPITAL STOCK. Except for Previously Disclosed contractual
obligations, issue, sell or otherwise permit to become outstanding, or
authorize the creation of, any additional shares of GDSC Common Stock or
GDSC Preferred Stock or DCA Common Stock or any Rights or enter into any
agreement with respect to the foregoing.
(c) DIVIDENDS, ETC. Make, declare, pay or set aside for payment any
dividend on or in respect of, or declare or make any distribution on any
shares of GDSC Common Stock or GDSC Preferred Stock or DCA Common Stock,
directly or indirectly, adjust, split, combine, redeem, reclassify, purchase
or otherwise acquire, any shares of its capital stock.
(d) COMPENSATION; EMPLOYMENT AGREEMENTS; ETC. Enter into or amend or
renew any employment, consulting, severance or similar agreements or
arrangements with any director, officer or employee of it or its
Subsidiaries, or grant any salary or wage increase or increase any employee
benefit (including incentive or bonus payments), except (i) for normal
individual increases in compensation to employees in the ordinary course of
business consistent with past practice, (ii) for other changes that are
required by applicable law, (iii) to satisfy Previously Disclosed
contractual obligations
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existing as of the date hereof or (iv) for grants of awards to newly hired
employees consistent with past practice.
(e) BENEFIT PLANS. Enter into, establish, adopt or amend (except (i)
as may be required by applicable law or (ii) to satisfy Previously Disclosed
contractual obligations existing as of the date hereof) any pension,
retirement, stock purchase, savings, profit sharing, deferred compensation,
consulting, bonus, group insurance or other employee benefit, incentive or
welfare contract, plan or arrangement, or any trust agreement (or similar
arrangement) related thereto, in respect of any director, officer or
employee of it or its Subsidiaries, or take any action to accelerate the
vesting or exercisability of any compensation or benefits payable
thereunder.
(f) DISPOSITIONS. Except as Previously Disclosed, sell, transfer,
mortgage, encumber or otherwise dispose of or discontinue any of its assets,
deposits, business or properties, except in the ordinary course of business
and in a transaction that is not material to it and its Subsidiaries taken
as a whole.
(g) ACQUISITIONS. Except as Previously Disclosed, acquire (other than
by way of foreclosures or acquisitions of control in a bona fide fiduciary
capacity or in satisfaction of debts previously contracted in good faith, in
each case in the ordinary and usual course of business consistent with past
practice) all or any portion of, the assets, business, deposits or
properties of any other entity.
(h) CAPITAL EXPENDITURES. Except as Previously Disclosed, make any
capital expenditures other than capital expenditures in the ordinary course
of business consistent with past practice in amounts not exceeding $50,000
individually or $100,000 in the aggregate.
(i) GOVERNING DOCUMENTS. Amend its articles or certificate of
incorporation, its by-laws or the articles of incorporation or by-laws (or
similar governing documents) of any of its Subsidiaries.
(j) ACCOUNTING METHODS. Implement or adopt any change in its
accounting principles, practices or methods, other than as may be required
by generally accepted accounting principles.
(k) CONTRACTS. Except in the ordinary course of business consistent
with past practice, enter into or terminate any material contract (as
defined in SECTION 4.11) or amend or modify in any material respect any of
its existing material contracts.
(l) CLAIMS. Except in the ordinary course of business consistent with
past practice, settle any claim, action or proceeding, except for any claim,
action or proceeding involving solely money damages in an amount,
individually or in the aggregate for all such settlements, that is not
material to it and its Subsidiaries, taken as a whole.
(m) ADVERSE ACTIONS. (i) Take any action while knowing that such
action would, or is reasonably likely to, prevent or impede the Merger from
qualifying (A) for "pooling-of-interests" accounting treatment or (B) either
as (I) reorganizations within the meaning of Section 368 of the Code (in
which ParentCo, GDSC Merger Sub, DCA Merger Sub, GDSC and DCA is each a
party to the reorganization within the meaning of Section 368(b) of the
Code) or (II) as a transfer to a controlled corporation qualifying under
Section 351 of the Code; or (ii) knowingly take any action that is intended
or is reasonably likely to result in (A) any of its representations and
warranties set forth in this Agreement being or becoming untrue in any
material respect at any time at or prior to the Effective Time, (B) any of
the conditions to the Merger set forth in ARTICLE VII not being satisfied
including, but not limited to, any action which would reasonably be expected
to adversely affect or delay the ability of ParentCo, GDSC Merger Sub, DCA
Merger Sub, GDSC or DCA to obtain any necessary approvals, consents or
waivers of any Regulatory Agencies required for the transactions
contemplated by this Agreement or (C) a material violation of any provision
of this Agreement, except, in each case, as may be required by applicable
law or regulation.
(n) INDEBTEDNESS. Except as Previously Disclosed, incur any
indebtedness for borrowed money other than in the ordinary course of
business consistent with past practice.
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(o) COMMITMENTS. Agree or commit to do any of the foregoing.
ARTICLE VIII
ADDITIONAL COVENANTS
8.1. REASONABLE BEST EFFORTS. Subject to the terms and conditions of this
Agreement, each of ParentCo, GDSC Merger Sub, DCA Merger Sub, GDSC and DCA
agrees to cooperate with the other parties hereto and to use its reasonable best
efforts in good faith to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or desirable, or advisable under
applicable laws, so as to permit consummation of the Merger as promptly as
practicable and otherwise to enable consummation of the transactions
contemplated hereby and shall cooperate fully with the other party hereto to
that end.
8.2. STOCKHOLDER APPROVAL. Each of GDSC and DCA agrees to take, in
accordance with applicable law and its respective articles or certificate of
incorporation and its bylaws, all action necessary to convene an appropriate
meeting of its stockholders to consider and vote upon the approval and adoption
of this Agreement and any other matters required to be approved by GDSC's and
DCA's stockholders for consummation of the Merger (including any adjournment or
postponement, the "GDSC MEETING" and the "DCA MEETING", respectively), in each
case as promptly as practicable after the Registration Statement is declared
effective. Except to the extent legally required for the discharge by the GDSC
Board and the DCA Board of its fiduciary duties as advised by counsel to the
GDSC Board and the DCA Board, the GDSC Board and the DCA Board shall recommend
such approval, and GDSC and DCA, respectively, shall take all reasonable, lawful
action to solicit such approval by its stockholders.
8.3. REGISTRATION STATEMENT.
(a) ParentCo agrees to prepare a registration statement on Form S-4 or other
applicable form (the "REGISTRATION STATEMENT") to be filed by ParentCo with the
SEC in connection with the issuance of ParentCo Common Stock in the Merger,
including the prospectus and other proxy solicitation materials of GDSC and DCA
constituting a part thereof (the "PROXY STATEMENT") and all related documents.
Each of GDSC and DCA shall have the right to review such Registration Statement
and agrees to cooperate, and to cause its Subsidiaries to cooperate in
preparation of the Registration Statement and the Proxy Statement. Each of GDSC
and DCA agrees to file the Proxy Statement in preliminary form with such of the
Regulatory Authorities as may be required as soon as reasonably practicable, and
ParentCo agrees to file the Registration Statement with the SEC as soon as
reasonably practicable. Each of ParentCo, GDSC and DCA agrees to use all
reasonable efforts to cause the Registration Statement and any required
amendments or supplements thereto to be declared effective under the Securities
Act and distributed to GDSC's and DCA's stockholders as promptly as reasonably
practicable after filing thereof. Each of GDSC and DCA agrees to furnish to
ParentCo all information concerning GDSC, DCA and their respective Subsidiaries,
officers, directors and stockholders as may be reasonably requested in
connection with the foregoing.
(b) Each of GDSC and DCA agrees, as to itself and its Subsidiaries, that the
information supplied or to be supplied by then for inclusion or incorporation by
reference in (i) the Registration Statement will, at the time the Registration
Statement and each amendment or supplement thereto, if any, becomes effective
under the Securities Act, not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading; and (ii) the Proxy Statement and any
amendment or supplement thereto will, at the date of mailing to stockholders and
at the time of the GDSC Meeting or the DCA Meeting, not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, in
the light of the circumstances under which such statement is made, necessary to
correct any statement in any earlier statement in the Proxy Statement or any
amendment or supplement thereto. Each of GDSC and DCA further agrees, that if it
shall become aware prior to the Effective Date
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of any information furnished by it that would cause any of the statements in the
Registration Statement or the Proxy Statement to be false or misleading with
respect to any material fact, or to omit to state any material fact necessary to
make the statements therein not false or misleading, in light of the
circumstances under which such statement is made, promptly to inform the other
party thereof and to take the necessary steps to correct the Registration
Statement or the Proxy Statement.
(c) ParentCo agrees to advise both GDSC and DCA, promptly after ParentCo
receives notice thereof, of the time when the Registration Statement has become
effective or any supplement or amendment has been filed, of the issuance of any
stop order or the suspension of the qualification of ParentCo Common Stock for
offering or sale in any jurisdiction, of the initiation or threat of any
proceeding for any such purpose, or of any request by the SEC for the amendment
or supplement of the Registration Statement or for additional information.
8.4. PRESS RELEASES. Each of ParentCo, GDSC and DCA agrees that it will
not, without the prior approval of the other party, issue any press release or
written statement for general circulation relating to the transactions
contemplated hereby, except as otherwise required by applicable law or
regulation or Nasdaq rules (provided that the issuing party shall nevertheless
provide the other party with notice of, and the opportunity to review, any such
press release or written statement).
8.5. ACCESS; INFORMATION.
(a) Each of ParentCo, GDSC and DCA agrees that upon reasonable notice and
subject to applicable laws relating to the exchange of information, each party
shall afford the other party and the other party's officers, employees, counsel,
accountants and other authorized representatives, such access during normal
business hours throughout the period prior to the Effective Time to the books,
records (including, without limitation, tax returns and work papers of
independent auditors), properties, personnel and to such other information as
the requesting party may reasonably request and, during such period, the
providing party shall furnish promptly to the requesting party (i) a copy of
each material report, schedule and other document filed by it pursuant to the
requirements of federal or state securities laws, and (ii) all other information
concerning the business, properties and personnel of it as the requesting party
may reasonably request.
(b) Each party agrees that it will not, and will cause its representatives
not to, use any information obtained pursuant to this SECTION 8.5 (as well as
any other information obtained prior to the date hereof in connection with the
entering into of this Agreement) for any purpose unrelated to the consummation
of the transactions contemplated by this Agreement. Subject to the requirements
of law, each party will keep confidential, and will cause its representatives to
keep confidential, all information and documents obtained pursuant to this
SECTION 8.5 (as well as any other information obtained prior to the date hereof
in connection with the entering into of this Agreement) unless such information
(i) was already known to such party, (ii) becomes available to such party from
other sources not known by such party to be bound by a confidentiality
obligation, (iii) is disclosed with the prior written approval of the providing
party, or (iv) is or becomes readily ascertainable from published information or
trade sources. In the event that this Agreement is terminated or the
transactions contemplated by this Agreement shall otherwise fail to be
consummated, each party shall promptly cause all copies of documents or extracts
thereof containing information and data as to the other party to be returned to
the other party. No investigation by either party of the business and affairs of
the other party shall affect or be deemed to modify or waive any representation,
warranty, covenant or agreement in this Agreement, or the conditions to either
party's obligation to consummate the transactions contemplated by this
Agreement.
8.6. ACQUISITION PROPOSALS. Each of GDSC and DCA agrees that it shall not,
and shall cause its Subsidiaries and its Subsidiaries' officers, directors,
agents, advisors and affiliates not to, solicit or encourage inquiries or
proposals with respect to, or engage in any negotiations concerning, or provide
any confidential information to, or have any discussions with, any person
relating to, any Acquisition Proposal, except to the extent legally required for
the discharge by either the GDSC Board or the DCA Board, as the
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case may be, of its fiduciary duties as advised by counsel to either the GDSC
Board or the DCA Board. Each of GDSC and DCA shall immediately cease and cause
to be terminated any activities, discussions or negotiations conducted prior to
the date of this Agreement with any parties other than ParentCo with respect to
any of the foregoing and shall use its reasonable best efforts to enforce any
confidentiality or similar agreement relating to an Acquisition Proposal. Each
of GDSC and DCA shall promptly (within 24 hours) advise one another following
the receipt by either GDSC or DCA of any Acquisition Proposal and the substance
thereof (including the identity of the person making such Acquisition Proposal),
and advise one another of any developments with respect to such Acquisition
Proposal immediately upon the occurrence thereof.
8.7. AFFILIATE AGREEMENTS.
(a) Not later than the 30th day following the date of this Agreement, each
of GDSC and DCA shall deliver to ParentCo a schedule of each person that, to the
best of its knowledge, is or is reasonably likely to be, as of the date of the
GDSC Meeting or the DCA Meeting, deemed to be an "affiliate" of GDSC or DCA
(each, a "GDSC AFFILIATE" or "DCA AFFILIATE") as that term is used in Rule 145
under the Securities Act or SEC Accounting Series Releases 130 and 135.
(b) Each of GDSC and DCA shall use its reasonable best efforts to cause each
person who may be deemed to be either a GDSC Affiliate or a DCA Affiliate to
execute and deliver to ParentCo on or before the date of mailing of the Proxy
Statement an Affiliate Representation Letter in the form attached hereto as
EXHIBIT B.
8.8. NASDAQ LISTING. ParentCo agrees to use its reasonable best efforts to
list, prior to the Effective Date, on the Nasdaq, subject to official notice of
issuance, the shares of ParentCo Common Stock to be issued to the holders of
GDSC Common Stock and DCA Common Stock in the Merger.
8.9. REGULATORY APPLICATIONS.
(a) Each of GDSC and DCA and their respective Subsidiaries shall cooperate
and use their respective reasonable best efforts to prepare all documentation,
to effect all filings and to obtain all permits, consents, approvals and
authorizations of all third parties and Governmental Authorities necessary to
consummate the transactions contemplated by this Agreement. Each of GDSC and DCA
shall use their reasonable best efforts to make all appropriate filings with the
Regulatory Authorities. Each of GDSC and DCA shall have the right to review in
advance, and to the extent practicable each will consult with the other, in each
case subject to applicable laws relating to the exchange of information, with
respect to all material written information submitted to any third party or any
Governmental Authority in connection with the transactions contemplated by this
Agreement. In exercising the foregoing right, each of the parties hereto agrees
to act reasonably and as promptly as practicable. Each party hereto agrees that
it will consult with the other party hereto with respect to the obtaining of all
material permits, consents, approvals and authorizations of all third parties
and Governmental Authorities necessary or advisable to consummate the
transactions contemplated by this Agreement and each party will keep the other
party appraised of the status of material matters relating to completion of the
transactions contemplated hereby.
(b) Each party agrees, upon request, to furnish the other party with all
information concerning itself, its Subsidiaries, directors, officers and
stockholders and such other matters as may be reasonably necessary or advisable
in connection with any filing, notice or application made by or on behalf of
such other party or any of its Subsidiaries to any third party or Governmental
Authority.
8.10. BENEFIT PLAN. ParentCo shall, from and after the Effective Time, (i)
provide former employees of both GDSC and DCA who remain as employees of
ParentCo or any of its Subsidiaries with employee benefit plans no less
favorable in the aggregate than those provided to similarly situated employees
of ParentCo or its Subsidiaries, including, but not limited to, allowing such
employees to participate in ParentCo's stock option plan in accordance with the
policies of ParentCo with respect to such stock option plan, and (ii) with
respect to former employees of GDSC or DCA who remain as employees of ParentCo
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or any of its Subsidiaries, cause each employee benefit plan of ParentCo or its
Subsidiaries in which such employees are eligible to participate to take into
account for purposes of eligibility and vesting thereunder the service of such
employees with GDSC or DCA (as applicable) as if such service were with ParentCo
or its Subsidiaries, to the same extent such service was credited under a
comparable plan of GDSC or DCA (as applicable). ParentCo agrees that all accrued
bonuses for 1998 will be paid to former employees of GDSC or DCA (as applicable)
in accordance with GDSC's or DCA's past practices. Notwithstanding the
foregoing, both GDSC and DCA consent and covenant that from and after the
Effective Date, GDSC's and DCA's Benefit Plans (as applicable) will be governed,
managed and/or terminated by ParentCo, all within ParentCo's sole discretion.
8.11. ACCOUNTANTS' LETTERS. Each of GDSC and DCA shall use its reasonable
best efforts to cause to be delivered to the other party, and to ParentCo's
directors and officers who sign the Registration Statement, a letter of their
respective independent auditors, dated (i) the date on which the Registration
Statement shall become effective and (ii) a date shortly prior to the Effective
Date, and addressed to such other party, and such directors and officers, in
form and substance customary for "comfort" letters delivered by independent
accountants in accordance with Statement of Accounting Standards No. 72.
8.12. NOTIFICATION OF CERTAIN MATTERS. Each of GDSC and DCA shall give
prompt notice to the other of any fact, event or circumstance known to it that
(i) is reasonably likely, individually or taken together with all other facts,
events and circumstances known to it, to result in any Material Adverse Effect
with respect to it or (ii) would cause or constitute a material breach of any of
its representations, warranties, covenants or agreements contained herein.
8.13. STOCKHOLDER AGREEMENTS. At least fifty percent (50%) of certain
directors and certain officers who are stockholders of GDSC and DCA,
respectively, in their capacities as stockholders, have executed and delivered
to ParentCo the Stockholder Agreements, committing such persons, among other
things, (i) to vote their shares of GDSC Common Stock and DCA Common Stock in
favor of the Agreement at the GDSC Meeting or the DCA Meeting and (ii) to
certain representations concerning the ownership of GDSC Common Stock, GDSC
Preferred Stock or DCA Common Stock.
8.14. PARENTCO CAPITALIZATION; RESERVATION OF SHARES. The certificate of
incorporation of ParentCo shall be amended and restated prior to the Effective
Time in order to state the rights, preferences and privileges of ParentCo
Preferred Stock which will be substantially similar to the rights, preferences
and privileges of the GDSC Preferred Stock. ParentCo shall at all times from and
after the date of this Agreement maintain a sufficient number of duly
authorized, unissued and reserved shares of ParentCo Common Stock necessary to
permit ParentCo to satisfy its obligations under this Agreement.
8.15. STOCK PLANS.
(a) As soon as practicable after the Effective Time, ParentCo shall deliver
to the participants in the GDSC Stock Plan and the DCA Stock Plan an appropriate
notice setting forth such participant's rights pursuant thereto and the grants
pursuant to the GDSC Stock Plan and the DCA Stock Plan shall continue in effect
on the same terms and conditions (subject to the adjustments required by SECTION
2.6 after giving effect to the Merger), and ParentCo shall comply with the terms
of the GDSC Stock Plan and the DCA Stock Plan to ensure, to the extent required
by, and subject to the provisions of, the GDSC Stock Plan and the DCA Stock
Plan, that GDSC Stock Options and DCA Stock Options which qualified as incentive
stock options prior to the Effective Time continue to qualify as incentive stock
options after the Effective Date.
(b) ParentCo shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of ParentCo Common Stock for delivery
under each GDSC Stock Plan and the DCA Stock Plan assumed in accordance with
SECTION 2.6. As soon as practicable after the Effective Time, ParentCo shall
file a registration statement on Form S-3 or Form S-8, as the case may be (or
any successor or other appropriate forms), or another appropriate form with
respect to the shares of GDSC Common Stock or DCA Common Stock subject to such
options (if any) and shall use its best efforts to maintain the
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effectiveness of such registration statement or registration statements (and
maintain the current status of the prospectus or prospectuses contained therein)
for so long as such options remain outstanding. With respect to those
individuals who subsequent to the Merger will be subject to the reporting
requirements under Section 16(a) of the Exchange Act, where applicable, ParentCo
shall administer the GDSC Stock Plan and the DCA Stock Plan assumed pursuant to
SECTION 2.6 in a manner that complies with Rule 16b-3 promulgated under the
Exchange Act to the extent the GDSC Stock Plan and the DCA Stock Plan complied
with such rule prior to the Merger.
8.16. OFFICE LOCATIONS. Upon consummation of the Merger, the main
corporate office of ParentCo shall be the current corporate offices of GDSC
located in El Segundo, California. The east coast regional office shall be the
current corporate offices of DCA located in Sarasota, Florida. The west coast
regional office shall be located in Vancouver, Washington.
8.17. TRANSFER OF GDSC SUBORDINATED NOTES. The parties agree that GDSC
shall transfer the 7% Convertible Subordinated Notes issued by GDSC (and the
related covenants contained in the Securities Purchase Agreement) and such notes
and related covenants shall be assumed by ParentCo as of the Effective Time.
ARTICLE IX
CONDITIONS PRECEDENT TO CONSUMMATION OF THE MERGER
9.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each of GDSC and DCA to consummate the Merger is
subject to the fulfillment or written waiver by GDSC and DCA prior to the
Effective Time of each of the following conditions:
(a) STOCKHOLDER APPROVAL. This Agreement and the Merger shall have
been duly adopted by the requisite vote of the stockholders of GDSC and DCA.
(b) REGULATORY APPROVALS. All regulatory approvals or waivers required
to consummate the transactions contemplated hereby shall have been obtained
and shall remain in full force and effect and all statutory waiting periods
in respect thereof shall have expired and no such approvals or waivers shall
contain any conditions, restrictions or requirements which either the GDSC
Board or DCA Board, respectively, reasonably determines would (i) following
the Effective Time, have a Material Adverse Effect on the Surviving
Corporations and its Subsidiaries taken as a whole or (ii) reduce the
benefits of the transactions contemplated hereby to such a degree that
either GDSC or DCA, respectively, would not have entered into this Agreement
had such conditions, restrictions or requirements been known at the date
hereof.
(c) NO INJUNCTION. No Governmental Authority of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any statute,
rule, regulation, judgment, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in effect and prohibits
consummation of the transactions contemplated by this Agreement.
(d) REGISTRATION STATEMENT. The Registration Statement shall have
become effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the
SEC.
(e) BLUE SKY APPROVALS. All permits and other authorizations under
state securities laws necessary to consummate the transactions contemplated
hereby and to issue the shares of ParentCo Common Stock to be issued in the
Merger shall have been received and be in full force and effect.
(f) LISTING. The shares of ParentCo Common Stock to be issued in the
Merger shall have been approved for listing on the Nasdaq, subject to
official notice of issuance.
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(g) EMPLOYMENT AND OTHER AGREEMENTS. As of the Effective Time, the
employment agreements of those certain officers of GDSC and DCA as set forth
on SCHEDULE 9.1(g) shall have been terminated and new employment agreements
shall be entered into between ParentCo and such officers in a form mutually
agreed to by GDSC and DCA; provided, however, the employment agreement for
Steven R. Matzkin and certain other agreements shall contain provisions
substantially similar to the applicable provisions of the Memorandum of
Terms dated October 15, 1998, attached hereto and incorporated herein by
this reference as EXHIBIT C.
(h) POOLING-OF-INTERESTS. GDSC and DCA shall each have received a
letter from their respective independent accountants (KPMG Peat Marwick LLP
and PricewaterhouseCoopers LLP, respectively) addressed to GDSC and DCA, as
the case may be, to the effect that the Merger will qualify for
"pooling-of-interest" accounting treatments.
(i) THIRD PARTY CONSENTS. GDSC shall have received all requisite
consents to the transactions contemplated by the Merger and/or waivers to
certain redemption or conversion rights, or conversion price or redemption
price adjustments or change in control rights or acceleration rights,
reasonably satisfactory to GDSC and DCA, of (i) The Chase Manhattan Bank, as
syndication agent pursuant to the GDSC Credit Facility and (ii) the
Purchasers (as that term is defined in the Securities Purchase Agreement)
pursuant to the Securities Purchase Agreement and the Convertible
Subordinated Note. With respect to DCA's credit facility with NationsBank,
either (I) NationsBank shall consent to the transactions contemplated by the
Merger or (II) ParentCo or any of its Subsidiaries shall pay down the
outstanding balance of such credit facility as of the Effective Time.
9.2. CONDITIONS TO OBLIGATION OF GDSC. The obligation of GDSC to
consummate the Merger is also subject to the fulfillment or written waiver by
GDSC prior to the Effective Time of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of ParentCo, GDSC Merger Sub, DCA Merger Sub and DCA set forth in this
Agreement shall be true and correct as of the date of this Agreement and as
of the Effective Date as though made on and as of the Effective Date (except
that representations and warranties that by their terms speak only as of the
date of this Agreement or some other date shall be true and correct as of
such date), and GDSC shall have received a certificate, dated the Effective
Date, signed on behalf of each such party's Chief Executive Officer and the
Chief Financial Officer to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF PARENTCO, GDSC MERGER SUB, DCA MERGER
SUB AND DCA. ParentCo, GDSC Merger Sub, DCA Merger Sub and DCA shall have
performed in all material respects all obligations required to be performed
by each of them under this Agreement at or prior to the Effective Time, and
GDSC shall have received a certificate, dated the Effective Date, signed on
behalf of each such party's Chief Executive Officer and the Chief Financial
Officer to such effect.
(c) TAX OPINION. GDSC shall have received an opinion of McDermott,
Will & Emery, dated the Effective Date, in a form mutually acceptable to the
parties and their counsel, to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion, (i) the Merger
constitutes (A) a "reorganization" within the meaning of Section 368 of the
Code and ParentCo, GDSC Merger Sub and GDSC will each be a party to the
reorganization within the meaning of Section 368(b) of the Code or (B) a
transfer to a controlled corporation qualifying under Section 351 of the
Code and (ii) no gain or loss will be recognized by stockholders of GDSC who
receive shares of ParentCo Common Stock in exchange for shares of GDSC
Common Stock, except with respect to cash received in lieu of fractional
share interests. In rendering its opinion, McDermott, Will & Emery may
require and rely upon representations contained in letters from GDSC, DCA
and ParentCo, and stockholders of GDSC and DCA in a form mutually acceptable
to the parties and their counsel.
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(d) LEGAL OPINION. Counsel to DCA shall have delivered to GDSC their
opinion, dated as of the Effective Date, in a form mutually acceptable to
the parties and their counsel.
(e) ACCOUNTANTS' LETTERS. GDSC shall have received the letters
referred to in SECTION 8.11 from ParentCo's independent auditors.
(f) DIRECTORS. ParentCo, GDSC Merger Sub and DCA Merger Sub shall have
adopted all resolutions necessary and sufficient to effectuate the
appointment of directors set forth in SECTION 1.1(c) attached hereto
effective as of the Effective Time.
(g) POOLING LETTERS. GDSC shall have received (i) letters, dated as of
the date of the filing of the Registration Statement with the SEC and as of
the Effective Time, in form and substance reasonably acceptable to GDSC,
from KPMG Peat Marwick, LLP, to the effect that the Merger will qualify for
pooling-of-interests accounting treatment, and (ii) letters, dated as of a
date not later than ten days after the date of this Agreement, as of the
date of the filing of the Registration Statement with the SEC and as of the
Effective Time, in form and substance reasonably acceptable to GDSC, from
KPMG Peat Marwick to the effect that such firm is not aware of any matters
relating to GDSC, DCA or any of their respective Subsidiaries which would
preclude the Merger from qualifying for pooling-of-interests accounting
treatment.
(h) NO MATERIAL ADVERSE EFFECT. No fact, event or circumstance shall
have occurred or become known to GDSC after the date hereof that alone, or
together with all other facts, events or circumstances has had or is
reasonably likely to have a Material Adverse Effect on DCA.
(i) ANALYST EXPECTATIONS. DCA shall have achieved the analyst
financial expectations for the quarter ended September 30, 1998 set forth on
SCHEDULE 9.2(i).
(j) CLOSING DELIVERIES. GDSC shall have received the DCA Disclosure
Schedules, documents, certificates and other agreements, duly executed and
delivered in a form reasonably satisfactory to GDSC as set forth in SECTION
10.2.
9.3. CONDITIONS TO OBLIGATION OF DCA. The obligation of DCA to consummate
the Merger is also subject to the fulfillment or written waiver by DCA prior to
the Effective Time of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of ParentCo, GDSC Merger Sub, DCA Merger Sub and GDSC set forth in this
Agreement shall be true and correct as of the date of this Agreement and as
of the Effective Date as though made on and as of the Effective Date (except
that representations and warranties that by their terms speak only as of the
date of this Agreement or some other date shall be true and correct as of
such date), and DCA shall have received a certificate, dated the Effective
Date, signed on behalf of each such party's Chief Executive Officer and the
Chief Financial Officer to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF PARENTCO, GDSC MERGER SUB, DCA MERGER
SUB AND GDSC. ParentCo, GDSC Merger Sub, DCA Merger Sub and GDSC shall have
performed in all material respects all obligations required to be performed
by each of them under this Agreement at or prior to the Effective Time, and
DCA shall have received a certificate, dated the Effective Date, signed on
behalf of each such party's Chief Executive Officer and the Chief Financial
Officer to such effect.
(c) TAX OPINION. DCA shall have received an opinion of McDermott, Will
& Emery, dated the Effective Date, in a form mutually acceptable to the
parties and their counsel, to the effect that, (A) on the basis of facts,
representations and assumptions set forth in such opinion, (i) the Merger
constitutes a "reorganization" within the meaning of Section 368 of the Code
and ParentCo, GDSC Merger Sub and GDSC will each be a party to the
reorganization within the meaning of Section 368(b) of the Code or (B) a
transfer to a controlled corporation qualifying under Section 351 of the
Code and (ii) no gain or loss will be recognized by stockholders of DCA who
receive shares of
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ParentCo Common Stock in exchange for shares of DCA Common Stock, except
with respect to cash received in lieu of fractional share interests. In
rendering its opinion, McDermott, Will & Emery may require and rely upon
representations contained in letters from GDSC, DCA and ParentCo, and
stockholders of GDSC and DCA in a form mutually acceptable to the parties
and their counsel.
(d) LEGAL OPINION. Counsel to GDSC shall have delivered to DCA their
opinion, dated as of the Effective Date, in a form mutually acceptable to
the parties and their counsel.
(e) ACCOUNTANTS' LETTERS. DCA shall have received the letters referred
to in SECTION 8.11 from ParentCo's independent auditors.
(f) DIRECTORS. ParentCo, GDSC Merger Sub and DCA Merger Sub shall have
adopted all resolutions necessary and sufficient to effectuate the
appointment of directors set forth in SECTION 1.1(c) attached hereto
effective as of the Effective Time.
(g) POOLING LETTERS. DCA shall have received (i) letters, dated as of
the date of the filing of the Registration Statement with the SEC and as of
the Effective Time, in form and substance reasonably acceptable to DCA, from
PricewaterhouseCoopers LLP to the effect that the Merger will qualify for
pooling-of-interests accounting treatment, and (ii) letters, dated as of a
date not later than ten days after the date of this Agreement, as of the
date of the filing of the Registration Statement with the SEC and as of the
Effective Time, in form and substance reasonably acceptable to DCA, from
PricewaterhouseCoopers LLP to the effect that such firm is not aware of any
matters relating to GDSC, DCA or any of their respective Subsidiaries which
would preclude the Merger from qualifying for pooling-of-interests
accounting treatment.
(h) NO MATERIAL ADVERSE EFFECT. No fact, event or circumstance shall
have occurred or become known to DCA after the date hereof that alone, or
together with all other facts, events or circumstances has had or is
reasonably likely to have a Material Adverse Effect on GDSC.
(i) ANALYST EXPECTATIONS. GDSC shall have achieved the analyst
financial expectations for the quarter ended September 30, 1998 set forth on
SCHEDULE 9.3(i).
(j) CLOSING DELIVERIES. DCA shall have received the GDSC Disclosure
Schedules, documents, certificates and other agreements, duly executed and
delivered in a form reasonably satisfactory to DCA as set forth in SECTION
10.1.
ARTICLE X
CLOSING DELIVERIES
10.1. DELIVERIES OF GDSC. At or prior to the Effective Time, GDSC shall
deliver to DCA the following, all of which shall be in a form reasonably
satisfactory to DCA:
(a) a copy of the resolutions of the Board of Directors of GDSC
authorizing the execution, delivery and performance of this Agreement and
all related documents and agreements and consummation of the Merger, each
certified by the Secretary of GDSC as being true and correct copies of the
originals thereof subject to no modifications or amendments;
(b) a certificate of the President of GDSC dated the Closing Date, as to
the truth and correctness of the representations and warranties of GDSC
contained herein on and as of the Effective Date;
(c) a certificate of the President of GDSC dated the Closing Date, (i)
as to the performance of and compliance in all material respects by GDSC
with all covenants contained herein on and as of the Effective Time and (ii)
certifying that all conditions precedent required by GDSC to be satisfied
shall have been satisfied;
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(d) a certificate of the Secretary of GDSC certifying as to the
incumbency of the directors and officers of such corporation and as to the
signatures of such directors and officers who have executed documents
delivered at the Closing on behalf of that corporation;
(e) certificates, dated within ten (10) days prior to the Effective
Time, of the Secretary of State of Washington for GDSC establishing that
each such corporation is in existence, has paid all franchise or similar
taxes, if any, and, if applicable, otherwise is in good standing to transact
business in the state of Washington;
(f) certificates, dated within ten (10) days prior to the Effective Date
of the states in which GDSC is qualified to do business, to the effect that
each such corporation is qualified to do business and, if applicable, is in
good standing as a foreign corporation in each of such states;
(g) all authorizations, consents, approvals, permits and licenses
required under the Agreement;
(h) the Agreement executed by GDSC and the final GDSC Disclosure
Schedules;
(i) the Certificates of Merger executed by GDSC necessary to effect the
Merger referred to in SECTION 1.1;
(j) Stockholders' Agreement executed by GDSC stockholders as set forth
in SECTION 8.13;
(k) Affiliate Representation Letters executed by certain GDSC
affiliates;
(l) Employment Agreements executed by each of the individuals set forth
on SCHEDULE 9.1(g); and
(m) such other instrument or instruments of transfer as shall be
necessary or appropriate, as DCA or its counsel shall reasonably request, to
carry out and effect the purpose and intent of this Agreement.
10.2. DELIVERIES OF DCA. At or prior to the Effective Time, DCA shall
deliver to GDSC the following, all of which shall be in a form reasonably
satisfactory to GDSC:
(a) a copy of the resolutions of the Board of Directors of DCA
authorizing the execution, delivery and performance of this Agreement and
all related documents and agreements and consummation of the Merger, each
certified by the Secretary of DCA as being true and correct copies of the
originals thereof subject to no modifications or amendments;
(b) a certificate of the President of DCA dated the Closing Date, as to
the truth and correctness of the representations and warranties of DCA
contained herein on and as of the Effective Date;
(c) a certificate of the President of DCA dated the Closing Date, (i) as
to the performance of and compliance in all material respects by DCA with
all covenants contained herein on and as of the Effective Time and (ii)
certifying that all conditions precedent required by DCA to be satisfied
shall have been satisfied;
(d) a certificate of the Secretary of DCA certifying as to the
incumbency of the directors and officers of such corporation and as to the
signatures of such directors and officers who have executed documents
delivered at the Closing on behalf of that corporation;
(e) certificates, dated within ten (10) days prior to the Effective
Time, of the Secretary of State of Delaware for DCA establishing that each
such corporation is in existence, has paid all franchise or similar taxes,
if any, and, if applicable, otherwise is in good standing to transact
business in the state of Delaware;
(f) certificates, dated within ten (10) days prior to the Effective Date
of the states in which DCA is qualified to do business, to the effect that
each such corporation is qualified to do business and, if applicable, is in
good standing as a foreign corporation in each of such states;
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(g) all authorizations, consents, approvals, permits and licenses
required under the Agreement;
(h) the Agreement and the final DCA Disclosure Schedules executed by
DCA;
(i) the Certificates of Merger executed by DCA necessary to effect the
Merger referred to in SECTION 1.1;
(j) Stockholders' Agreement executed by DCA stockholders as set forth in
SECTION 8.13;
(k) Affiliate Representation Letters executed by certain DCA affiliates;
(l) Employment Agreements executed by each of the individuals set forth
on SCHEDULE 9.1(g); and
(m) such other instrument or instruments of transfer as shall be
necessary or appropriate, as GDSC or its counsel shall reasonably request,
to carry out and effect the purpose and intent of this Agreement.
10.3. DELIVERIES OF PARENTCO, GDSC MERGER SUB AND DCA MERGER SUB. At or
prior to the Effective Time, ParentCo, GDSC Merger Sub and DCA Merger Sub shall
deliver to each of GDSC and DCA the following, all of which shall be in a form
reasonably satisfactory to each of GDSC and DCA:
(a) a copy of the resolutions of the Board of Directors of ParentCo,
GDSC Merger Sub and DCA Merger Sub authorizing the execution, delivery and
performance of this Agreement and all related documents and agreements and
consummation of the Merger, each certified by the Secretary of ParentCo,
GDSC Merger Sub and DCA Merger Sub as being true and correct copies of the
originals thereof subject to no modifications or amendments;
(b) a certificate of the President of ParentCo, GDSC Merger Sub and DCA
Merger Sub dated the Closing Date, as to the truth and correctness of the
representations and warranties of ParentCo, GDSC Merger Sub and DCA Merger
Sub contained herein on and as of the Effective Date;
(c) a certificate of the President of ParentCo, GDSC Merger Sub and DCA
Merger Sub dated the Closing Date, (i) as to the performance of and
compliance in all material respects by ParentCo, GDSC Merger Sub and DCA
Merger Sub with all covenants contained herein on and as of the Effective
Time and (ii) certifying that all conditions precedent required by ParentCo,
GDSC Merger Sub and DCA Merger Sub to be satisfied shall have been
satisfied;
(d) a certificate of the Secretary of ParentCo, GDSC Merger Sub and DCA
Merger Sub certifying as to the incumbency of the directors and officers of
such corporation and as to the signatures of such directors and officers who
have executed documents delivered at the Closing on behalf of that
corporation;
(e) certificates, dated within ten (10) days prior to the Effective
Time, of the Secretary of State of Delaware for ParentCo, GDSC Merger Sub
and DCA Merger Sub establishing that each such corporation is in existence,
has paid all franchise or similar taxes, if any, and, if applicable,
otherwise is in good standing to transact business in the state of Delaware;
(f) certificates, dated within ten (10) days prior to the Effective Date
of the states in which each of ParentCo, GDSC Merger Sub and DCA Merger Sub
is qualified to do business, to the effect that each such corporation is
qualified to do business and, if applicable, is in good standing as a
foreign corporation in each of such states; and
(g) such other instrument or instruments of transfer as shall be
necessary or appropriate, as GDSC and DCA or its counsel shall reasonably
request, to carry out and effect the purpose and intent of this Agreement.
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ARTICLE XI
TERMINATION
11.1. TERMINATION. Notwithstanding any other provisions of this Agreement,
this Agreement may be terminated, and the Merger may be abandoned:
(a) MUTUAL CONSENT. At any time prior to the Effective Time, by the
mutual consent of GDSC and DCA, if the Board of Directors of each so
determines by vote of a majority of the members of its entire Board.
(b) BREACH. At any time prior to the Effective Time, by GDSC or DCA,
if its Board of Directors so determines by vote of a majority of the members
of its entire Board, in the event of either: (i) a breach by the other party
of any representation or warranty contained herein (subject to the standard
set forth herein), which breach cannot be or has not been cured within 30
days after the giving of written notice to the breaching party of such
breach; or (ii) a breach by the other party of any of the covenants or
agreements contained herein, which breach cannot be or has not been cured
within 30 days after the giving of written notice to the breaching party of
such breach, provided that such breach (whether under (i) or (ii)) would be
reasonably likely, individually or in the aggregate with other breaches, to
result in a Material Adverse Effect.
(c) DELAY. At any time prior to the Effective Time, by either GDSC or
DCA, if its Board of Directors so determines by vote of a majority of the
members of its entire Board, in the event that the Merger is not consummated
by March 31, 1999, except to the extent that the failure of the Merger then
to be consummated arises out of or results from the knowing action or
inaction of GDSC to the detriment of DCA or DCA to the detriment of GDSC,
except as permitted hereunder.
(d) NO APPROVAL. By GDSC or DCA, if its Board of Directors so
determines by a vote of a majority of the members of its entire Board, in
the event (i) the approval of any Governmental Authority required for
consummation of the Merger and the other transactions contemplated by this
Agreement shall have been denied by final nonappealable action of such
Governmental Authority or any Governmental Authority issues a final
nonappealable order blocking the Merger or (ii) the stockholder approval
required by SECTION 11.1(a) herein is not obtained at the GDSC Meeting or
the DCA Meeting, respectively.
(e) FAILURE TO RECOMMEND, ETC. At any time prior to the GDSC Meeting
or the DCA Meeting, by either GDSC or DCA if the Board of Directors of the
other shall have failed to make its recommendation referred to in SECTION
8.2, withdrawn such recommendation or modified or changed such
recommendation in a manner adverse in any respect to the interests of either
GDSC or DCA for any reason other than as a result of a termination of the
Agreement allowed pursuant to SECTIONS 11.1(a)-(d) and 11.1(g).
(f) ACQUISITION PROPOSAL. This Agreement may be terminated by either
GDSC or DCA by written notice to the other if either GDSC or DCA (i)
receives an Acquisition Proposal, (ii) receives the advice of its outside
counsel that to proceed with the Merger will violate the fiduciary duties of
its Board of Directors to its stockholders in light of such Acquisition
Proposal, and (iii) after receiving such advice, determines to accept such
proposal; provided, however, that neither party shall be entitled to
terminate this Agreement pursuant to this SECTION 11.1(f) unless it shall
have provided the other with written notice of such a possible determination
(which written notice will inform the other of the material terms and
conditions of the proposal, including the identity of the proponent) not
less than two business days prior to such determination.
(g) DISCLOSURE SCHEDULE AMENDMENT OR SUPPLEMENT. At any time prior to
the Effective Time by either GDSC or DCA if its board of Directors so
determines by vote of a majority of the members of its entire Board, in the
event the other party amends their Disclosure Schedule pursuant to the
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introductory paragraphs of Articles IV and V, respectively and discloses
events that would be reasonably likely to result in a Material Adverse
Effect on the other party or ParentCo.
11.2. EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination
of this Agreement and the abandonment of the Merger pursuant to this ARTICLE XI,
no party to this Agreement shall have any liability or further obligation to any
other party hereunder except (i) as set forth in SECTIONS 11.3and 12.1, and (ii)
that termination under SECTION 11.1(b) will not relieve a breaching party from
liability for any breach of this Agreement giving rise to such termination;
provided, however, in no event shall the breaching party pay to the
non-breaching party for such a breach an amount greater than the actual out-of-
pocket costs and expenses of the non-breaching party in connection with this
Agreement.
11.3. TERMINATION FEE. The parties agree and acknowledge that it is
impractical to ascertain the precise amount of damage to either GDSC or DCA as a
result of a failure to consummate the Merger and the other transactions
contemplated hereby due to a termination of this Agreement by either party
pursuant to SECTION 11.1(e) or SECTION 11.1(f) hereof. Accordingly, in the event
of such termination pursuant to SECTION 11.1(e) or SECTION 11.1(f) by either
GDSC or DCA, such non-terminating party (pursuant to SECTION 11.1(e) hereof) or
such terminating party (pursuant to SECTION 11.1(f) hereof) shall pay to such
other party the sum of One Million Five Hundred Thousand Dollars ($1,500,000)
("TERMINATION FEE") which amount shall be payable in same date funds no later
than five business days after the date of either GDSC's or DCA's request. The
Termination Fee shall be the sole and exclusive remedy of GDSC or DCA, as the
case may be, for events of termination pursuant to SECTIONS 11.1(e) and (f).
Notwithstanding the foregoing, nothing contained in this SECTION 11.3 shall
affect either GDSC's or DCA's ability to recover for damages which result from a
termination of this Agreement pursuant to SECTION 11.1(b) and SECTION 11.2.
ARTICLE XII
MISCELLANEOUS
12.1. SURVIVAL. No representations, warranties, agreements and covenants
contained in this Agreement shall survive the Effective Time (other than
SECTIONS 1.2, 1.6, 8.10, 8.15, 8.16 and this ARTICLE XII which shall survive the
Effective Time) or the termination of this Agreement if this Agreement is
terminated prior to the Effective Time (other than SECTIONS 11.2, 11.3 and this
ARTICLE XII which shall survive such termination).
12.2. WAIVER; AMENDMENT. Prior to the Effective Time, any provision of
this Agreement may be (i) waived by the party benefited by the provision, or
(ii) amended or modified at any time, by an agreement in writing between the
parties hereto executed in the same manner as this Agreement, except that after
the GDSC Meeting and the DCA Meeting, this Agreement may not be amended if it
would violate either the WBCA or DGCL or reduce the consideration to be received
by GDSC or DCA stockholders in the Merger.
12.3. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
12.4. GOVERNING LAW; WAIVER OF JURY TRIAL. This Agreement shall be
governed by, and interpreted in accordance with, the laws of the State of
Delaware applicable to contracts made and to be performed entirely within such
State (except to the extent that mandatory provisions of Federal law are
applicable). Each of the parties hereto hereby irrevocably waives any and all
right to trial by jury in any legal proceeding arising out of or related to this
Agreement or the transactions contemplated hereby.
12.5. EXPENSES. Each party hereto will bear all expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby.
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12.6. NOTICES. All notices, requests and other communications hereunder to
a party shall be in writing and shall be deemed given if personally delivered,
telecopied (with confirmation) or mailed by registered or certified mail (return
receipt requested) to such party at its address set forth below or such other
address as such party may specify by notice to the parties hereto.
<TABLE>
<S> <C>
If to GDSC, to: Gentle Dental Service Corporation
222 North Sepulveda Boulevard, Suite 740
El Segundo, California 90245-4340
Attention: Michael T. Fiore
Facsimile: (310) 765-2459
With a copy to: McDermott, Will & Emery
One Newport Place
1301 Dove Street, Suite 500
Newport Beach, California 92660
Attention: Richard J. Babcock
Facsimile: (949) 851-9348
If to DCA, to: Dental Care Alliance, Inc.
1343 Main Street, 7th Floor
Sarasota, Florida 34236
Attention: Steven R. Matzkin, D.D.S.
Facsimile: (941) 365-5839
With a copy to: Greenberg Traurig Hoffman Lipoff Rosen & Quentel,
P.A.
1221 Brickell Avenue
Miami, Florida 33131
Attention:Robert L. Grossman
Facsimile: (305) 579-0717
</TABLE>
12.7. ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES. This Agreement
represents the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and this Agreement supersedes any and all other
oral or written agreements heretofore made. Nothing in this Agreement expressed
or implied, is intended to confer upon any person, other than the parties hereto
or their respective successors, any rights, remedies, obligations or liabilities
under or by reason of this Agreement.
12.8. INTERPRETATION; EFFECT. When a reference is made in this Agreement
to Sections, Exhibits or Schedules, such reference shall be to a Section of, or
Exhibit or Schedule to, this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and are not part of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation." No provision of this Agreement shall
be construed to require GDSC, DCA or any of their respective Subsidiaries,
affiliates or directors to take any action which would violate applicable law
(whether statutory or common law), rule or regulation.
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ARTICLE XIII
CERTAIN DEFINITIONS
13.1. CERTAIN DEFINITIONS. The following terms are used in this Agreement
with the meanings set forth below:
"ACQUISITION PROPOSAL" means any tender or exchange offer, proposal for
a merger, consolidation or other business combination involving GDSC or DCA
or any of their Subsidiaries or any proposal or offer to acquire in any
manner a substantial equity interest in, or a substantial portion of the
assets or deposits of, GDSC or DCA or any of their Subsidiaries, other than
the transactions contemplated by this Agreement.
"AGREEMENT" means this Agreement, as amended or modified from time to
time in accordance with SECTION 11.2 and the exhibits and schedules attached
thereto.
"ASSETS" of a Person shall mean all of the assets, properties,
businesses and rights of such Person of every kind, nature, character and
description, whether real, personal or mixed, tangible or intangible,
accrued or contingent, or otherwise relating to or utilized in such Person's
business, directly or indirectly, in whole or in part, whether or not
carried on the books and records of such Person, and whether or not owned in
the name of such Person or any Affiliate of such Person and wherever
located.
"CODE" has the meaning set forth in the recitals.
"CONVERTIBLE SUBORDINATED NOTES" shall mean the 7% Convertible
Subordinated Notes issued by GDSC dated May 15, 1998.
"DCA" shall have the meaning set forth in the preamble to this
Agreement.
"DCA AFFILIATE" has the meaning set forth in SECTION 8.7(a).
"DCA ARTICLES" means the Articles of Incorporation of DCA, as amended.
"DCA BENEFIT PLANS" has the meaning set forth in SECTION 5.13(a).
"DCA COMMON STOCK" shall mean the $.01 par value common stock of DCA.
"DCA COMPUTER SYSTEM" has the meaning set forth in SECTION 5.15.
"DCA DISCLOSURE SCHEDULES" have the meaning set forth in the
introductory paragraph of ARTICLE V.
"DCA EMPLOYEES" has the meaning set forth in SECTION 5.13.
"DCA ERISA AFFILIATE" has the meaning set forth in SECTION 5.13.
"DCA EXCHANGE RATIO" has the meaning set forth in SECTION 2.6.
"DCA INSURANCE POLICIES" has the meaning set forth in SECTION 5.19.
"DCA MEETING" has the meaning set forth in SECTION 8.2.
"DCA MERGER SUB COMMON STOCK" shall mean the $.01 par value common stock
of DCA.
"DCA MULTIEMPLOYER PLANS" has the meaning set forth in SECTION 5.13.
"DCA OPTIONS" has the meaning set forth in SECTION 2.6.
"DCA PENSION PLAN" has the meaning set forth in SECTION 5.13.
"DCA PLANS" has the meaning set forth in SECTION 5.13.
"DCA RIGHTS" has the meaning set forth in SECTION 2.6.
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"DCA SEC REPORTS" shall mean all the forms, reports and documents
required to be filed by DCA with the SEC since November 4, 1997.
"DCA STOCK PLAN" means the Omnibus Executive Incentive Plan and the 1997
Non-Qualified Stock Option Plan of Dental Care Alliance, Inc.
"DELAWARE SECRETARY" means the Delaware Secretary of State.
"DGCL" means the Delaware General Corporation Law.
"DISSENTERS' SHARES" means shares of GDSC Common Stock with respect to
which the holder or holders thereof perfect their rights to dissent under
Chapter 23B.13 of the WBCA.
"DISSENTING STOCKHOLDERS" means holders of shares of GDSC Common Stock
who perfect their rights to dissent under Chapter 23B.13 of the WBCA.
"EFFECTIVE DATE" means the date on which the Effective Time occurs.
"EFFECTIVE TIME" means the effective time of the Merger, as provided for
in SECTION 1.3.
"ENVIRONMENTAL LAW" has the meaning set forth in SECTION 4.16(b).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder.
"EXCHANGE AGENT" has the meaning set forth in SECTION 3.1.
"EXCHANGE FUND" has the meaning set forth in SECTION 3.1.
"GAAP" has the meaning set forth in SECTION 4.7(a).
"GDSC" has the meaning set forth in the preamble to this Agreement.
"GDSC AFFILIATE" has the meaning set forth in SECTION 8.7(a).
"GDSC ARTICLES" means the Articles of Incorporation of GDSC, as amended.
"GDSC BENEFIT PLANS" has the meaning set forth in SECTION 4.13(a).
"GDSC BOARD" means the Board of Directors of GDSC.
"GDSC BYLAWS" means the Bylaws of GDSC, as amended.
"GDSC COMMON STOCK" shall mean the no par value common stock of GDSC.
"GDSC COMPUTER SYSTEM" has the meaning set forth in SECTION 4.15.
"GDSC CREDIT FACILITY" means that certain credit facility provided under
that certain Credit Agreement dated as of September 30, 1998, by and among
GDSC and the Guarantors and Lenders named therein.
"GDSC DISCLOSURE SCHEDULES" have the meaning set forth in the
introductory paragraph of ARTICLE IV.
"GDSC EMPLOYEES" has the meaning set forth in SECTION 4.13.
"GDSC ERISA AFFILIATE" has the meaning set forth in SECTION 4.13.
"GDSC EXCHANGE RATIO" has the meaning set forth in SECTION 2.6.
"GDSC INSURANCE POLICIES" has the meaning set forth in SECTION 4.19.
"GDSC MEETING" has the meaning set forth in SECTION 8.2.
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"GDSC MERGER SUB COMMON STOCK" shall mean the $.01 par value common
stock of GDSC Merger Sub.
"GDSC MULTIEMPLOYER PLANS" has the meaning set forth in SECTION 4.13.
"GDSC OPTIONS" has the meaning set forth in SECTION 2.6.
"GDSC PENSION PLAN" has the meaning set forth in SECTION 4.13.
"GDSC PERFORMANCE SHARES" shall have the meaning set forth in SECTION
4.3.
"GDSC PLANS" has the meaning set forth in SECTION 4.13.
"GDSC PREFERRED STOCK" collectively means the GDSC Series A, Series B,
Series C and Series D Preferred Stock.
"GDSC RIGHTS" has the meaning set forth in SECTION 2.6.
"GDSC SEC REPORTS" means all of the forms, reports and documents
required to be filed by GDSC with the SEC since February 13, 1997.
"GDSC STOCK PLAN" means the 1993 Stock Incentive Plan, as amended; the
1996 Stock Option Plan of GMS Dental Group, Inc. (assumed by GDSC); and the
1996 Performance Stock Option Plan of GMS Dental Group, Inc. (assumed by
GDSC).
"GOVERNMENTAL AUTHORITY" means any court, administrative agency,
department or commission or other federal, state or local governmental
authority or instrumentality, and shall include, without limitation,
Regulatory Agencies.
"HAZARDOUS SUBSTANCE" has the meaning set forth in SECTION 4.16(b).
"LIENS" means any charge, mortgage, pledge, security interest,
restriction, claim, lien or encumbrance.
"MATERIAL ADVERSE EFFECT" means, with respect to DCA or GDSC, any effect
that (i) is material and adverse to the financial position, results of
operations or business of DCA and its Subsidiaries taken as a whole or GDSC
and its Subsidiaries taken as a whole, respectively, or (ii) would
materially impair the ability of either DCA or GDSC, respectively, to
perform its obligations under this Agreement or otherwise materially
threaten or materially impede the consummation of the Merger and the other
transactions contemplated by this Agreement.
"MERGER" has the meaning set forth in SECTION 1.1.
"MERGER CONSIDERATION" has the meaning set forth in SECTION 2.1.
"NASD" means the National Association of Securities Dealers.
"NASDAQ" means The Nasdaq Stock Market, Inc.'s National Market.
"NEW CERTIFICATES" has the meaning set forth in SECTION 3.1.
"OLD DCA CERTIFICATES" has the meaning set forth in SECTION 3.1.
"OLD GDSC CERTIFICATES" has the meaning set forth in SECTION 3.1.
"PARENTCO" has the meaning set forth in the preamble to the Agreement.
"PARENTCO BOARD" means the Board of Directors of ParentCo.
"PARENTCO CAPITAL STOCK" means and includes the ParentCo Common Stock
and ParentCo Preferred Stock.
"PARENTCO COMMON STOCK" means the common stock, no par value per share,
of ParentCo.
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"PARENTCO MERGER COMMITTEE" shall have the meaning set forth in SECTION
1.2.
"PARENTCO PREFERRED STOCK" means and includes the ParentCo Series A
Preferred Stock, ParentCo Series B Preferred Stock, ParentCo Series C
Preferred Stock and ParentCo Series D Preferred Stock.
"PARENTCO SERIES A PREFERRED STOCK" means the Series A Preferred Stock,
no par value per share of ParentCo.
"PARENTCO SERIES B PREFERRED STOCK" means the Series B Preferred Stock,
no par value per share of ParentCo.
"PARENTCO SERIES C PREFERRED STOCK" means the Series C Preferred Stock,
no par value per share of ParentCo.
"PARENTCO SERIES D PREFERRED STOCK" means the Series D Preferred Stock,
no par value per share of ParentCo.
"PERSON" means any individual, bank, corporation, partnership,
association, joint-stock company, business trust or unincorporated
organization.
"PREVIOUSLY DISCLOSED" by a party shall mean information set forth in
either the GDSC Disclosure Schedules or the DCA Disclosure Schedules, as the
case may be.
"PROXY STATEMENT" has the meaning set forth in SECTION 8.3.
"REGISTRATION STATEMENT" has the meaning set forth in SECTION 8.3.
"REGULATORY AGENCIES" has the meaning set forth in SECTION 4.6.
"REPRESENTATIVES" means, with respect to any Person, such Person's
directors, officers, employees, legal or financial advisors or any
representatives of such legal or financial advisors.
"RIGHTS" means, with respect to any Person, securities or obligations
convertible into or exercisable or exchangeable for, or giving any person
any right to subscribe for or acquire, or any options, calls or commitments
relating to, or any stock appreciation right or other instrument the value
of which is determined in whole or in part by reference to the market price
or value of, shares of capital stock of such Person.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and rules
and regulations thereunder.
"SECURITIES PURCHASE AGREEMENT" means that certain Securities Purchase
Agreement dated May 12, 1998, by and among GDSC and the purchasers set forth
on SCHEDULE 1 to that agreement.
"STOCKHOLDERS' AGREEMENTS" has the meaning set forth in SECTION 1.5.
"SUBSIDIARY" has the meaning ascribed to it in Rule 1-02 of Regulation
S-X of the SEC; provided, however, each dental practice managed by either
GDSC or DCA shall not be a Subsidiary for purposes of this Agreement.
"SURVIVING CORPORATIONS" has the meaning set forth in SECTION 1.1.
"TAX" and "TAXES" means all federal, state, local or foreign taxes,
charges, fees, levies or other assessments, however denominated, including,
without limitation, all net income, gross income, gains, gross receipts,
sales, use, ad valorem, goods and services, capital, production, transfer,
franchise, windfall profits, license, withholding, payroll, employment,
disability, employer health, excise, estimated, severance, stamp,
occupation, property, environmental, unemployment or other taxes, custom
duties, fees, assessments or charges of any kind whatsoever, together with
any interest and any
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penalties, additions to tax or additional amounts imposed by any taxing
authority whether arising before, on or after the Effective Date.
"TAX RETURNS" means any return, amended return or other report
(including elections, declarations, disclosures, schedules, estimates and
information returns) required to be filed with respect to any Tax.
"TREASURY STOCK" shall mean shares of GDSC Common Stock held by GDSC or
any of its Subsidiaries or by DCA or any of its Subsidiaries, in each case
other than in a fiduciary (including custodial or agency) capacity or as a
result of debts previously contracted in good faith.
"WBCA" means the Washington Business Corporation Act.
"WASHINGTON SECRETARY" means the Washington Secretary of State.
"YEAR 2000 COMPLIANT" has the meaning set forth in SECTION 4.15.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
GENTLE DENTAL SERVICE CORPORATION
By: /s/ MICHAEL T. FIORE
-----------------------------------
Name: Michael T. Fiore
Title: President and Chief Executive
Officer
DENTAL CARE ALLIANCE, INC.
By: /s/ STEVEN R. MATZKIN, D.D.S.
-----------------------------------
Name: Steven R. Matzkin, D.D.S.
Title: President and Chief Executive
Officer
WISDOM HOLDINGS, INC.
By: /s/ MICHAEL T. FIORE
-----------------------------------
Name: Michael T. Fiore
Title: Chief Executive Officer
By: /s/ STEVEN R. MATZKIN, D.D.S.
-----------------------------------
Name: Steven R. Matzkin, D.D.S.
Title: President
WISDOM HOLDINGS ACQUISITION CORP. I
By: /s/ MICHAEL T. FIORE
-----------------------------------
Name: Michael T. Fiore
Title: Chief Executive Officer
By: /s/ STEVEN R. MATZKIN, D.D.S.
-----------------------------------
Name: Steven R. Matzkin, D.D.S.
Title: President
WISDOM HOLDINGS ACQUISITION CORP. II
By: /s/ MICHAEL T. FIORE
-----------------------------------
Name: Michael T. Fiore
Title: Chief Executive Officer
By: /s/ STEVEN R. MATZKIN, D.D.S.
-----------------------------------
Name: Steven R. Matzkin, D.D.S.
Title: President
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APPENDIX B
October 15, 1998
Board of Directors
Gentle Dental Service Corporation
222 North Sepulveda Boulevard, Suite 740
El Segundo, California 90245-4340
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, of the Exchange Ratio (as defined below) to Gentle Dental Service
Corporation (the "Company"). The Company has entered into an Agreement and Plan
of Reorganization and Merger, dated as of October 15, 1998 (the "Merger
Agreement"), with Wisdom Holdings, Inc. ("Parent"), Wisdom Acquisition Corp. I
("GDSC Merger Sub"), Wisdom Acquisition Corp. II ("DCA Merger Sub") and Dental
Care Alliance, Inc. ("DCA"), pursuant to which, among other things, GDSC Merger
Sub will be merged with and into the Company (the "Company Merger"), with the
Company continuing as the surviving corporation, and DCA Merger Sub will be
merged with and into DCA (the "DCA Merger" and, together with the Company
Merger, the "Merger"), with DCA continuing as the surviving corporation. The
Merger Agreement provides, among other things, that (i) in the Company Merger,
each outstanding share of common stock, no par value, of the Company (the
"Company Common Stock") will be converted into and exchanged for the right to
receive one share of common stock, no par value, of Parent (the "Parent Common
Stock"), and (ii) each outstanding share of common stock, par value $.01 per
share, of DCA (the "DCA Common Stock") will be converted into and exchanged for
the right to receive 1.670 shares of Parent Common Stock (the "Exchange Ratio").
In arriving at our opinion, we reviewed the Merger Agreement and held
discussions with certain senior officers and other representatives and advisors
of the Company and certain senior officers and other representatives and
advisors of DCA concerning the business, operations and prospects of the Company
and DCA. We examined certain publicly available business and financial
information relating to the Company and DCA as well as certain financial
forecasts and other data for the Company and DCA, which were provided to us by
the respective managements of the Company and DCA, including information
relating to certain strategic implications and operational benefits anticipated
from the Merger. We reviewed the financial terms of the Merger as set forth in
the Merger Agreement in relation to, among other things: current and historical
market prices and trading volumes of the Company Common Stock and DCA Common
Stock; the respective companies' historical and projected earnings; and the
capitalization and financial condition of the Company and DCA. We considered, to
the extent publicly available, the financial terms of certain other similar
recently effected transactions that we considered comparable to the Merger and
analyzed certain financial, stock market and other publicly available
information relating to the businesses of other companies whose operations we
considered relevant in evaluating those of the Company and DCA. We also
evaluated the potential pro forma financial impact of the Merger on the Company.
In addition to the foregoing, we conducted such other analyses and examinations
and considered such other financial, economic and market criteria as we deemed
appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information publicly available or furnished to or otherwise reviewed by or
discussed with us. With respect to financial forecasts and other information
provided to or otherwise reviewed by or discussed with us, we have been advised
by the managements of the Company and DCA that such forecasts and other
information were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the respective managements of the
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Board of Directors
Gentle Dental Service Corporation
October 15, 1998
Page 2
Company and DCA as to the expected future financial performance of the Company
and DCA and the strategic implications and operational benefits anticipated from
the Merger.
We have assumed, with your consent, that the Merger will be treated as a
pooling-of-interests in accordance with generally accepted accounting principles
and as a tax-free reorganization for federal income tax purposes.
Our opinion, as set forth herein, relates to the relative values of the
Company and DCA. We are not expressing any opinion as to what the value of the
Parent Common Stock actually will be when issued to stockholders pursuant to the
Merger or the price at which the Parent Common Stock will trade subsequent to
the Merger. We have not made or been provided with an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of the Company
and DCA nor have we made any physical inspection of the properties or assets of
the Company or DCA. We have not been asked to consider, and our opinion does not
address, the relative merits of the Merger as compared to any alternative
business strategies that might exist for the Company or the effect of any other
transaction in which the Company might engage. Our opinion is necessarily based
upon information available to us, and financial, stock market and other
conditions and circumstances existing and disclosed to us, as of the date
hereof.
Salomon Smith Barney Inc. has been engaged to render financial advisory
services to the Company in connection with the Merger and will receive a fee for
our services, a significant portion of which is contingent upon the consummation
of the Merger. We also will receive a fee upon the delivery of this opinion. In
the ordinary course of our business, we and our affiliates may hold or actively
trade the equity and debt securities of the Company and DCA for our own account
or for the account of our customers and, accordingly, may at any time hold a
long or short position in such securities. In addition, we and our affiliates
(including Citigroup Inc. and its affiliates) may maintain business
relationships with the Company and DCA.
Our advisory services and the opinion expressed herein are provided for the
use of the Board of Directors of the Company in its evaluation of the proposed
Merger, and our opinion is not intended to be and does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed Merger. Our opinion may not be published or otherwise used or referred
to, nor shall any public reference to Salomon Smith Barney Inc. be made, without
our prior written consent.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the Exchange Ratio is fair, from
a financial point of view, to the Company.
Very truly yours,
SALOMON SMITH BARNEY INC.
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APPENDIX C
October 15, 1998
Board of Directors
Dental Care Alliance, Inc.
1343 Main Street
7th Floor
Sarasota, FL 34236
Members of the Board:
We understand that Dental Care Alliance, Inc. ("DCA" or the "Company") is
contemplating a transaction whereby DCA and Gentle Dental Service Corporation
("Gentle") will be merged with and into a new, as yet unnamed holding company
("ParentCo") pursuant to the terms of an Agreement and Plan of Reorganization
and Merger and the exhibits and schedules thereto dated as of October 15, 1998
(the "Merger Agreement"), such that DCA becomes a wholly owned subsidiary of
ParentCo (the "Transaction"). Pursuant to the Transaction, each outstanding
share of DCA, $.01 par value (the "DCA Common Stock"), shall be converted into
shares of ParentCo common stock (the "ParentCo Common Stock"), based on an
exchange ratio (the "Exchange Ratio") as set forth in the Merger Agreement. The
terms and conditions of the Transaction are more fully set forth in the Merger
Agreement.
You have requested our opinion as to whether the Exchange Ratio is fair to
the holders of DCA Common Stock (the "Holders"), from a financial point of view.
In connection with our review of the proposed Transaction and the
preparation of our opinion herein, we have, among other things:
1. reviewed the annual report to stockholders on Form 10-K filed April 1,
1998, the quarterly reports to stockholders on Forms 10-Q filed May 14,
1998 and August 14, 1998, and other publicly available financial
information of DCA;
2. reviewed the annual report to stockholders on Form 10-K filed May 29,
1998 and amended August 3, 1998, the quarterly reports to stockholders on
Forms 10-Q filed May 15, 1998 and August 14, 1998, and other publicly
available financial information of Gentle;
3. reviewed certain non-public information prepared by the management of
DCA, including financial statements, financial projections, and other
financial and operating data concerning DCA;
4. reviewed certain non-public information prepared by the management of
Gentle, including financial statements, financial projections, and other
financial and operating data concerning Gentle;
5. discussed the past and current operations and financial condition and
the prospects of DCA and Gentle with senior executives of DCA and Gentle,
respectively;
6. reviewed publicly available financial and stock market data with respect
to certain other companies in lines of business we believe to be
generally comparable to those of DCA and Gentle;
7. considered the pro forma effects of the Transaction on DCA's financial
statements and reviewed certain estimates of synergies prepared by the
managements of DCA and Gentle;
8. reviewed the historical market prices of the DCA Common Stock and the
common stock of Gentle;
9. compared the financial terms of the Transaction with the financial terms
of certain other transactions which we believe to be generally comparable
to the Transaction;
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10. reviewed a draft of the Merger Agreement;
11. conducted other financial analyses, studies, and investigations, and
considered other information as we deemed necessary or appropriate.
In connection with our review, we have not assumed any responsibility for
independent verification for any of the information reviewed by us for the
purpose of this opinion and have relied on its being complete and accurate in
all material respects. In addition, we have not made or received any independent
evaluation or appraisal of any of the assets or liabilities (contingent or
otherwise) of DCA and Gentle, nor have we been furnished with any such
evaluation or appraisal. With respect to the financial forecasts, estimates,
projections, pro forma effects, calculations of synergies and other information
referred to above, we have assumed, at your direction, that they have been
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the management of each company, and we have relied upon each
party to advise us promptly if any such information previously provided to or
discussed with us became inaccurate or was required to be updated during the
period of our review. In addition, we have assumed the Transaction will be
consummated substantially in accordance with the terms set forth in the draft of
the Merger Agreement.
In rendering our opinion, we have assumed, with your consent, that the
Transaction will receive pooling-of-interests accounting treatment and will
qualify as a tax-free reorganization. Our opinion is necessarily based on the
economic, market financial and other circumstances and conditions in effect on
October 15, 1998, and any material change in such circumstances or conditions
would require reevaluation of this opinion, which we are under no obligation to
undertake.
We express no opinion as to the underlying business decision to effect the
Transaction, the structure or tax consequences of the Merger Agreement, or the
availability or advisability of any alternatives to the Transaction. This letter
does not express any opinion as to the likely trading range for the ParentCo
Common Stock following the consummation of the Transaction, which may vary
depending on numerous factors that generally impact the price of securities. Our
opinion is limited to the fairness, from a financial point of view, of the
Exchange Ratio to the Holders. We express no opinion with respect to any other
reasons, legal, business, or otherwise, that may support the decision of the
Board of Directors to approve, or in DCA's decision to consummate, the
Transaction.
In conducting our investigation and analyses and in arriving at our opinion
expressed herein, we have taken into account such accepted financial and
investment banking procedures and considerations as we have deemed relevant,
including the review of (i) historical and projected revenues, operating
earnings, net income and capitalization of DCA and Gentle and certain other
publicly held companies in businesses we believe to be comparable to DCA and
Gentle; (ii) the current and projected financial position and results of
operations of DCA and Gentle; (iii) the historical market prices and trading
activity of the DCA Common Stock and the common stock of Gentle; (iv) financial
and operating information concerning selected business combinations which we
deemed comparable in whole or in part; and (v) the general condition of the
securities markets.
Raymond James & Associates ("Raymond James") is actively involved in the
investment banking business and regularly undertakes the valuation of investment
securities in connection with public offerings, private placements, business
combinations and similar transactions. In the past, Raymond James has performed
certain investment banking services for DCA and has received customary fees for
such services. Raymond James has acted as financial advisor to the Board of
Directors of DCA in connection with the Transaction and will receive a fee upon
the consummation thereof, which fee is contingent upon the value of the
Transaction. In the ordinary course of business, Raymond James may trade in the
securities of DCA and Gentle for its own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
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It is understood that our advisory services and opinion expressed herein
were prepared for the use of the Board of Directors of DCA only in evaluating
the proposed Transaction and do not constitute a recommendation to any
shareholder of DCA regarding how such shareholder should vote on the proposed
Transaction, nor is this letter intended to confer rights or remedies upon
ParentCo or Gentle or the shareholders of DCA, Gentle, or ParentCo. Furthermore,
this letter should not be construed as creating any fiduciary duty on the part
of Raymond James to any such party. This opinion is not to be quoted or referred
to, in whole or in part, without the prior written consent of Raymond James,
which will not be unreasonably withheld. We have consented to the inclusion of
this letter in its entirety in the proxy statement to be filed by DCA with the
Securities and Exchange Commission in connection with the Transaction.
In arriving at this opinion, Raymond James did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, Raymond James believes that its analyses must be considered as a
whole and that selecting portions of its analyses, without considering all
analyses, would create an incomplete view of the process underlying this
opinion.
Based upon and subject to the foregoing, it is our opinion that, as of
October 15, 1998, the Exchange Ratio pursuant to the Merger Agreement is fair,
from a financial point of view, to the Holders.
Respectfully submitted,
RAYMOND JAMES & ASSOCIATES, INC.
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APPENDIX D
FORM OF STOCKHOLDERS' AGREEMENT
----------------------------------------
This Stockholder's Agreement (the "AGREEMENT"), dated as of October ,
1998, by and among (i) the undersigned Stockholders (each a "STOCKHOLDER") of
Gentle Dental Service Corporation, a Washington corporation ("GDSC"), (ii)
Wisdom Holdings, Inc. a Delaware corporation ("PARENTCO"), (iii), Wisdom
Holdings Acquisition Corp. I, a Delaware corporation ("GDSC ACQUISITION CORP.")
(iv) Wisdom Holdings Acquisition Corp. II, a Delaware corporation ("DCA
ACQUISITION CORP."), and (v) Dental Care Alliance, Inc., a Delaware corporation
("DCA"). All terms used herein and not defined herein shall have the meanings
assigned thereto in the Merger Agreement (defined below).
RECITALS
A. ParentCo, GDSC, GDSC Acquisition Corp., DCA and DCA Acquisition Corp.,
have entered into that certain Agreement and Plan of Reorganization and Merger,
dated as of the date hereof (the "MERGER AGREEMENT"), providing for the business
combination transactions (the "MERGER") contemplated therein.
B. Stockholder owns the shares of [ ] Capital Stock identified on ANNEX
I hereto (such shares, together with all shares of [ ] Capital Stock
subsequently acquired by the Stockholder during the term of this Agreement,
being referred to as the "SHARES"); and
C. In order to induce ParentCo, GDSC, GDSC Acquisition Corp., DCA and DCA
Acquisition Corp. to enter into the Merger Agreement and in consideration of the
substantial expenses incurred and to be incurred by ParentCo, GDSC, GDSC
Acquisition Corp., DCA and DCA Acquisition Corp. in connection therewith,
Stockholder, solely in such Stockholder's capacity as a Stockholder of [ ]
and not in any other capacity, has agreed to enter into and perform this
Agreement.
AGREEMENT
Now, therefore, each Stockholder (as to himself/herself/itself only) and the
other parties hereto agree as follows:
1. AGREEMENT TO VOTE SHARES. Stockholder shall vote or cause to be voted,
or execute or if written consents are solicited by the Board of Directors
then cause to be executed such written consent with respect to, the Shares in
favor of adoption and approval of the principal terms of the Merger Agreement
and all transactions contemplated thereby at every meeting of the Stockholders
of [ ] at which such matters are considered and presented for vote, if any,
and at every adjournment thereof and in connection with every proposal to take
action by written consent with respect thereto. This Agreement is intended to
bind Stockholder only with respect to the specific matters set forth herein, and
shall not prohibit Stockholder from acting in accordance with his fiduciary
duties as an officer or director of [ ]. Stockholder will retain at all
times the right to vote the Shares, in Stockholder's sole discretion, on all
matters other than those set forth in this Section 1 including, without
limitation, any other merger or transaction involving [ ], which are at any
time or from time to time presented to [ 's] Stockholders generally.
2. NO VOTING TRUSTS. Stockholder agrees that Stockholder will not, nor
will Stockholder permit any entity under Stockholder's control to, deposit any
Shares in a voting trust or subject the Shares to any agreement, arrangement or
understanding with respect to the voting of the Shares inconsistent with this
Agreement.
3. LIMITATION ON SALES. Stockholder agrees not to sell shares of [ ]
Capital Stock, or ParentCo Capital Stock once received, for a period beginning
thirty (30) days prior to consummation of the Merger and ending on the date that
financial results covering at least thirty (30) days of post Merger combined
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results of operations are published. Stockholder hereby consents to having
appropriate legends placed in the certificates representing such shares of
ParentCo Capital Stock issued in the Merger relating to such restriction or
transfer.
4. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER. Stockholder represents
and warrants to and further agrees as follows:
(a) CAPACITY. Stockholder has all requisite capacity and authority to
enter into and perform his, her or its obligations under this Agreement.
(b) BINDING AGREEMENT. This Agreement constitutes the valid and
legally binding obligation of Stockholder, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws
of general applicability relating to or affecting creditors' rights and to
general equity principles.
(c) NON-CONTRAVENTION. The execution and delivery of this Agreement by
Stockholder does not, and the performance by Stockholder of his, her or its
obligations hereunder and the consummation by Stockholder of the
transactions contemplated hereby will not, violate or conflict with, or
constitute a default under, any agreement, instrument, contract or other
obligation or any order, arbitration award, judgment or decree to which
Stockholder is a party or by which Stockholder is bound, or any statute,
rule or regulation to which Stockholder is subject or, in the event that
Stockholder is a corporation, partnership, trust or other entity, any
charter, bylaw or other organizational document of the Stockholder.
(d) OWNERSHIP OF SHARES. Stockholder has good title to all of the
Shares as of the date hereof, and, except as set forth on ANNEX I hereto,
the Shares are so owned free and clear of any liens, security interests,
charges or other encumbrances.
5. SPECIFIC PERFORMANCE AND REMEDIES. Stockholder acknowledges that it
will be impossible to measure in money the damage to ParentCo, GDSC, GDSC
Acquisition Corp., and DCA (each are an "OTHER PARTY" and collectively the
"OTHER PARTIES") if Stockholder fails to comply with the obligations imposed by
this Agreement and that, in the event of any such failure, the Other Parties
will not have an adequate remedy at law or in damages. Accordingly, Stockholder
agrees that injunctive relief or other equitable remedy, in addition to remedies
at law or in damages, is the appropriate remedy for any such failure and will
not oppose the granting of such relief on the basis that any Other Party has an
adequate remedy at law. Stockholder agrees that he/she/it will not seek, and
agrees to waive any requirement for, the securing or posting of a bond in
connection with any of the Other Parties seeking or obtaining such equitable
relief. In addition, after discussing the matter with Stockholder any Other
Party shall have the right to inform any third party that such Other Party
reasonably believes to be, or to be contemplating, participating with
Stockholder or receiving from Stockholder assistance in violation of this
Agreement, of the terms of this Agreement and of the rights of the Other Parties
hereunder, and that participation by any such persons with Stockholder in
activities in violation of Stockholder's agreement with the Other Parties set
forth in this Agreement may give rise to claims by the Other Parties against
such third party.
6. TERM OF AGREEMENT; TERMINATION.
(a) The term of this Agreement shall commence on the date hereof.
(b) This Agreement shall terminate upon the date, if any, of the
termination of the Merger Agreement prior to the Effective Time in
accordance with its terms. Upon such termination, no party shall have any
further obligations or liabilities hereunder; PROVIDED, HOWEVER, such
termination shall not relieve any party from liability for any breach of
this Agreement PRIOR to such termination.
(c) If the Merger Agreement is not terminated prior to the Effective
Time, this Agreement (except for the provisions of Sections 4, 5, 8, 10, and
11, which shall survive the Effective Time) shall terminate upon the
Effective Time. Upon termination of this Agreement, no party shall have any
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further obligations or liabilities under this Agreement: PROVIDED, HOWEVER,
such termination shall not relieve any party from liability for any breach
of any Section hereof prior to such termination.
7. ENTIRE AGREEMENT. This Agreement supersedes all prior agreements,
written or oral, among the parties hereto with respect to the subject matter
hereof and contains the entire agreement among the parties with respect to the
subject matter hereof. This Agreement may not be amended, supplemented or
modified, and no provisions hereof may be modified or waived, except by an
instrument in writing signed by each party hereto. No waiver of any provisions
hereof by either party shall be deemed a waiver of any other provisions hereof
by any such party, nor shall any such waiver be deemed a continuing waiver of
any provision hereof by such party.
8. NOTICES. All notices, requests, claims, demands or other communications
hereunder shall be in writing and shall be deemed given when delivered
personally, upon receipt of a transmission confirmation if sent by telecopy or
like transmission and on the next business day when sent by a reputable
overnight courier service to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
<TABLE>
<S> <C>
If to ParentCo or GDSC to: [ParentCo]
222 North Sepulveda Boulevard, Suite 740
El Segundo, CA 90245-4340
Attention: Michael T. Fiore
Facsimile: (310) 765-2459
With a copy to: McDermott, Will & Emery
1301 Dove Street, Suite 500
Newport Beach, CA 92660
Attention: Richard J. Babcock
Facsimile: (949) 851-9348
If to ParentCo or DCA to: Dental Care Alliance, Inc.
1343 Main Street, 7th Floor
Sarasota, FL 34236
Attention: Steven R. Matzkin, D.D.S.
Facsimile: (949) 365-5839
With a copy to: Greenberg Traurig Hoffman Lipoff
Rosen & Quentel, P.A.
1221 Brickell Avenue
Miami, FL 33131
Attention: Robert I. Grossman
Facsimile: (305) 579-0171
If to the Stockholder: To such address set forth on the signature
pages hereto
</TABLE>
9. STOP TRANSFER. GDSC agrees with, and covenants to, ParentCo and DCA
that GDSC shall not register the transfer of any certificate representing any of
the Stockholder's Shares, unless such transfer is made to PARENTCO or GDSC
Acquisition Corp. or otherwise in compliance with this Agreement.
10. FURTHER ASSURANCES. Stockholder shall, upon request of ParentCo or
DCA, execute and deliver any additional documents and take such further actions
as may reasonably be deemed by ParentCo or DCA to be necessary or desirable to
carry out the provisions hereof.
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11. MISCELLANEOUS.
(a) SEVERABILITY. If any provision of this agreement or the
application of such provision to any person or circumstances shall be held
invalid or unenforceable by a court of competent jurisdiction, such
provision or application shall be unenforceable only to the extent of such
invalidity or unenforceability, and the remainder of the provision held
invalid or unenforceable and the application of such provision to persons or
circumstances, other than the party as to which it is held invalid, and the
remainder of this Agreement, shall not be affected.
(b) CAPACITY. The covenants contained herein shall apply to
Stockholder solely in his or her capacity as a Stockholder of GDSC, and no
covenant contained herein shall apply to Stockholder in his or her capacity
as a director or officer of GDSC.
(c) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.
(d) HEADINGS. All Section headings herein are for convenience of
reference only and are not part of this Agreement, and no construction or
reference shall be derived therefrom.
(e) CHOICE OF LAW. THIS AGREEMENT SHALL BE DEEMED A CONTRACT MADE
UNDER, AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF [ ], WITHOUT REFERENCE TO ITS CONFLICT OF LAW
PRINCIPLES.
12. ATTORNEY'S FEES. The prevailing party or parties in any litigation,
arbitration, mediation, bankruptcy, insolvency or other proceeding
("Proceeding") relating to the enforcement or interpretation of this Agreement
may recover from the unsuccessful party or parties all fees and disbursements of
counsel (including expert witness and other consultants' fees and costs)
relating to or arising out of (a) the Proceeding (whether or not the Proceeding
proceeds to judgment), and (b) any post-judgment or post-award proceeding
including, without limitation, one to enforce or collect any judgment or award
resulting from the Proceeding. All such judgments and awards shall contain a
specific provision for the recovery of all such Corporation sequently incurred
costs, expenses, and fees and disbursements of counsel.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Stockholders' Agreement as of the date first written above.
WISDOM HOLDINGS, INC.
By:
--------------------------------------
Name:
Title:
GENTLE DENTAL SERVICE CORPORATION
By:
--------------------------------------
Name:
Title:
WISDOM HOLDINGS ACQUISITION CORP. I
By:
--------------------------------------
Name:
Title:
WISDOM HOLDINGS ACQUISITION CORP. II
By:
--------------------------------------
Name:
Title:
DENTAL CARE ALLIANCE, INC.
By:
--------------------------------------
Name:
Title:
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SIGNATURE PAGE
OF
STOCKHOLDER
TO STOCKHOLDER'S AGREEMENT
IN WITNESS WHEREOF, the undersigned, is a Stockholder, has executed and
delivered this Stockholder's Agreement as of the date first written above.
Stockholder:
--------------------------------------
(Insert Name)
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APPENDIX E
TITLE 23B. WASHINGTON BUSINESS CORPORATION ACT
CHAPTER 23B.13. DISSENTERS' RIGHTS
23B.13.010. DEFINITIONS
(1) "Corporation" means the issuer of the shares held by a dissenter before the
corporate action, or the surviving or acquiring corporation by merger or share
exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from corporate
action under RCW 23B.13.020 and who exercises that right when and in the manner
required by RCW 23B.13.200 through 23B.13.280.
(3) "Fair value," with respect to a dissenter's shares, means the value of the
shares immediately before the effective date of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the corporate action
until the date of payment, at the average rate currently paid by the corporation
on its principal bank loans or, if none, at a rate that is fair and equitable
under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are registered in
the records of a corporation or the beneficial owner of shares to the extent of
the rights granted by a nominee certificate on file with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial shareholder.
23B.13.020. RIGHT TO DISSENT
(1) A shareholder is entitled to dissent from, and obtain payment of the fair
value of the shareholder's shares in the event of, any of the following
corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party (i)
if shareholder approval is required for the merger by RCW 23B.11.030,
23B.11.080, or the articles of incorporation and the shareholder is entitled to
vote on the merger, or (ii) if the corporation is a subsidiary that is merged
with its parent under RCW 23B.11.040;
(b) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or substantially all, of the
property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all of
the net proceeds of the sale will be distributed to the shareholders within one
year after the date of sale;
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(d) An amendment of the articles of incorporation that materially reduces
the number of shares owned by the shareholder to a fraction of a share if the
fractional share so created is to be acquired for cash under RCW 23B.06.040; or
(e) Any corporate action taken pursuant to a shareholder vote to the extent
the articles of incorporation, bylaws, or a resolution of the board of directors
provides that voting or nonvoting shareholders are entitled to dissent and
obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for the shareholder's
shares under this chapter may not challenge the corporate action creating the
shareholder's entitlement unless the action fails to comply with the procedural
requirements imposed by this title, RCW 25.10.900 through 25.10.955, the of
incorporation, or the bylaws, or is fraudulent with respect to the shareholder
or the corporation.
(3) The right of a dissenting shareholder to obtain payment of the fair value of
the shareholder's shares shall terminate upon the occurrence of any one of the
following events:
(a) The proposed corporate action is abandoned or rescinded;
(b) A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
(c) The shareholder's demand for payment is withdrawn with the written
consent of the corporation.
23B.13.030. DISSENT BY NOMINEES AND BENEFICIAL OWNERS
(1) A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in the shareholder's name only if the shareholder dissents
with respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf
the shareholder asserts dissenters' rights. The rights of a partial dissenter
under this subsection are determined as if the shares as to which the dissenter
dissents and the dissenter's other shares were registered in the names of
different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares held on
the beneficial shareholder's behalf only if:
(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all shares of which
such shareholder is the beneficial shareholder or over which such shareholder
has power to direct the vote.
23B.13.200. NOTICE OF DISSENTERS' RIGHTS
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this chapter and be accompanied by a copy of this chapter.
(2) If corporate action creating dissenters' rights under RCW 23B.13.020 is
taken without a vote of shareholders, the corporation, within ten days after
[the] effective date of such corporate action, shall notify in writing all
shareholders entitled to assert dissenters' rights that the action was taken and
send them the dissenters' notice described in RCW 23B.13.220.
23B.13.210. NOTICE OF INTENT TO DEMAND PAYMENT
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(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights must (a) deliver to the corporation before
the vote is taken written notice of the shareholder's intent to demand payment
for the shareholder's shares if the proposed action is effected, and (b) not
vote such shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1) of
this section is not entitled to payment for the shareholder's shares under this
chapter.
23B.13.220. DISSENTERS' NOTICE
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of RCW 23B.13.210.
(2) The dissenters' notice must be sent within ten days after the effective date
of the corporate action, and must:
(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not the person acquired beneficial ownership of the shares
before that date;
(d) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty nor more than sixty days after the date
the notice in subsection (1) of this section is delivered; and
(e) Be accompanied by a copy of this chapter.
23B.13.230. DUTY TO DEMAND PAYMENT
(1) A shareholder sent a dissenters' notice described in RCW 23B.13.220 must
demand payment, certify whether the shareholder acquired beneficial ownership of
the shares before the date required to be set forth in the dissenters' notice
pursuant to RCW 23B.13.220(2)(c), and deposit the shareholder's certificates in
accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits the shareholder's share
certificates under subsection (1) of this section retains all other rights of a
shareholder until the proposed corporate action is effected.
(3) A shareholder who does not demand payment or deposit the shareholder's share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for the shareholder's shares under this chapter.
23B.13.240. SHARE RESTRICTIONS
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(1) The corporation may restrict the transfer of uncertificated shares from the
date the demand for their payment is received until the proposed corporate
action is effected or the restriction is released under RCW 23B.13.260.
(2) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until the effective date of the
proposed corporate action.
23B.13.250. PAYMENT
(1) Except as provided in RCW 23B.13.270, within thirty days of the later of the
effective date of the proposed corporate action, or the date the payment demand
is received, the corporation shall pay each dissenter who complied with RCW
23B.13.230 the amount the corporation estimates to be the fair value of the
shareholder's shares, plus accrued interest.
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year ending
not more than sixteen months before the date of payment, an income statement for
that year, a statement of changes in shareholders' equity for that year, and the
latest available interim financial statements, if any;
(b) An explanation of how the corporation estimated the fair value of the
shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under RCW
23B.13.280; and
(e) A copy of this chapter.
23B.13.260. FAILURE TO TAKE ACTION
(1) If the corporation does not effect the proposed action within sixty days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release any transfer
restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation wishes to undertake the proposed action, it must
send a new dissenters' notice under RCW 23B.13.220 and repeat the payment demand
procedure.
23B.13.270. AFTER-ACQUIRED SHARES
(1) A corporation may elect to withhold payment required by RCW 23B.13.250 from
a dissenter unless the dissenter was the beneficial owner of the shares before
the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.
(2) To the extent the corporation elects to withhold payment under subsection
(1) of this section, after taking the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and shall pay this
amount to each dissenter who agrees to accept it in full satisfaction of the
dissenter's demand. The corporation shall send with its offer an explanation of
how it estimated the fair value of the shares, an explanation of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under RCW 23B.13.280.
23B.13.280. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER
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(1) A dissenter may notify the corporation in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and amount of interest due,
and demand payment of the dissenter's estimate, less any payment under RCW
23B.13.250, or reject the corporation's offer under RCW 23B.13.270 and demand
payment of the dissenter's estimate of the fair value of the dissenter's shares
and interest due, if:
(a) The dissenter believes that the amount paid under RCW 23B.13.250 or
offered under RCW 23B.13.270 is less than the fair value of the dissenter's
shares or that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under RCW 23B.13.250 within sixty
days after the date set for demanding payment; or
(c) The corporation does not effect the proposed action and does not return
the deposited certificates or release the transfer restrictions imposed on
uncertificated shares within sixty days after the date set for demanding
payment.
(2) A dissenter waives the right to demand payment under this section unless the
dissenter notifies the corporation of the dissenter's demand in writing under
subsection (1) of this section within thirty days after the corporation made or
offered payment for the dissenter's shares.
23B.13.300. COURT ACTION
(1) If a demand for payment under RCW 23B.13.280 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the sixty-day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.
(2) The corporation shall commence the proceeding in the superior court of the
county where a corporation's principal office, or, if none in this state, its
registered office, is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.
(3) The corporation shall make all dissenters, whether or not residents of this
state, whose demands remain unsettled, parties to the proceeding as in an action
against their shares and all parties must be served with a copy of the petition.
Nonresidents may be served by registered or certified mail or by publication as
provided by law.
(4) The corporation may join as a party to the proceeding any shareholder who
claims to be a dissenter but who has not, in the opinion of the corporation,
complied with the provisions of this chapter. If the court determines that such
shareholder has not complied with the provisions of this chapter, the
shareholder shall be dismissed as a party.
(5) The jurisdiction of the court in which the proceeding is commenced under
subsection (2) of this section is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The dissenters are entitled to
the same discovery rights as parties in other civil proceedings.
(6) Each dissenter made a party to the proceeding is entitled to judgment (a)
for the amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the
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corporation, or (b) for the fair value, plus accrued interest, of the
dissenter's after-acquired shares for which the corporation elected to withhold
payment under RCW 23B.13.270.
23B.13.310. COURT COSTS AND COUNSEL FEES
(1) The court in a proceeding commenced under RCW 23B.13.300 shall determine all
costs of the proceeding, including the reasonable compensation and expenses of
appraisers appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess the costs against all or some of
the dissenters, in amounts the court finds equitable, to the extent the court
finds the dissenters acted arbitrarily, vexatiously, or not in good faith in
demanding payment under RCW 23B.13.280.
(2) The court may also assess the fees and expenses of counsel and experts for
the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the requirements
of RCW 23B.13.200 through 23B.13.280; or
(b) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by chapter 23B.13 RCW.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Wisdom Holdings is a Delaware corporation. Section 145 of the General
Corporation Law of the State of Delaware contains detailed provisions on
indemnification of directors and officers of a Delaware corporation against
expenses, judgments, fines and amounts paid in settlement, actually and
reasonably incurred in connection with litigation.
By amendment to its Certificate of Incorporation, Wisdom Holdings has
provided for indemnification of directors and officers. The provision provides
that any person shall, to the fullest extent permitted by the General
Corporation Law of the State of Delaware, be indemnified and reimbursed by
Wisdom Holdings for expenses and liabilities imposed upon the person in
connection with any action, suit or proceeding, civil or criminal, or threat
thereof, in which the person may be involved by reason of the person being or
having been a director, officer, employee or agent of Wisdom Holdings, or of any
corporation or organization which the person served in any capacity at the
request of Wisdom Holdings. Wisdom Holdings' Certificate of Incorporation also
provides that a director of Wisdom Holdings shall not be personally liable to
Wisdom Holdings or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to Wisdom Holdings or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of the
State of Delaware or (iv) for any transaction from which the director derived
any improper personal benefit. Wisdom Holdings' Certificate of Incorporation
also calls for the liability of its directors to be further limited to the full
extent permitted by Delaware law as it is amended.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following exhibits are filed herewith except those which are
incorporated herein by reference.
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2.1 Agreement and Plan of Reorganization and Merger by and among Wisdom Holdings, Inc.,
Wisdom Holdings Acquisition Corp. I, Wisdom Holdings Acquisition Corp. II, Gentle
Dental Service Corporation and Dental Care Alliance, Inc., dated October 15, 1998.
Incorporated by reference to Exhibit 2.1 of Gentle Dental's Report on 8-K filed on
October 30, 1998.
3.1 Certificate of Incorporation of Wisdom Holdings, Inc. filed October 13, 1998.*
3.2 Certificate of Amendment of Certificate of Incorporation Before Payment of Any Part
of the Capital of Wisdom Holdings, Inc., dated October 14, 1998.*
3.3 By-Laws of Wisdom Holdings, Inc.*
4.1 Form of Certificate representing shares of Wisdom Holdings, Inc. Common Stock.**
4.2 Form of Certificate representing shares of Wisdom Holdings, Inc. Series A Preferred
Stock.**
4.3 Form of Certificate representing shares of Wisdom Holdings, Inc. Series B Preferred
Stock.**
4.4 Form of Certificate representing shares of Wisdom Holdings, Inc. Series C Preferred
Stock.**
4.5 Form of Certificate representing shares of Wisdom Holdings, Inc. Series D Preferred
Stock.**
5.1 Legal Opinion of McDermott, Will & Emery with respect to the securities being
issued.**
8.1 Legal Opinion of McDermott, Will & Emery with respect to certain tax matters.**
10.1 Asset Purchase Agreement by and between Gentle Dental Service Corporation and
Affordable Dental Care, Inc., dated February 28, 1998. Incorporated by reference to
Exhibit 2.1 of Gentle Dental's Report on Form 8-K filed on March 16, 1998.
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10.2 Stock Purchase Agreement by and between Gentle Dental Service Corporation and the
sole shareholder of Managed Dental Care of Oregon, Inc., dated February 28, 1998.
Incorporated by reference to Exhibit 2.2 of Gentle Dental's Report on Form 8-K
filed on March 16, 1998.
10.3 Asset Purchase Agreement by and between Gentle Dental Service Corporation and Blue
Oak Dental Group, dated March 31, 1997. Incorporated by reference to Exhibit 2.1 of
Gentle Dental's Report on Form 8-K filed on April 15, 1997.
10.4 Asset Purchase Agreement by and among Gentle Dental Service Corporation, Gentle
Dental Management, Inc. and Pacific Dental Services, Inc., dated June 30, 1998.
Incorporated by reference to Exhibit 2.1 of Gentle Dental's Report on Form 8-K
filed on July 15, 1998.
10.5 Asset Purchase Agreement by and among Gentle Dental Service Corporation, Gentle
Dental Management, Inc. and Orange Dental Services, dated June 30, 1998.
Incorporated by reference to Exhibit 2.2 of Gentle Dental's Report on Form 8-K
filed on July 15, 1998.
10.6 Asset Purchase Agreement by and among Gentle Dental Service Corporation, Gentle
Dental Management, Inc. and TG3 Dental Services, dated June 30, 1998. Incorporated
by reference to Exhibit 2.3 of Gentle Dental's Report on Form 8-K filed on July 15,
1998.
10.7 Asset Purchase Agreement by and among Gentle Dental Service Corporation, Gentle
Dental Management, Inc. and Bryan Watanabe, D.D.S., Inc., dated June 30, 1998.
Incorporated by reference to Exhibit 2.4 of Gentle Dental's Report on Form 8-K
filed on July 15, 1998.
10.8 Asset Purchase Agreement by and among Gentle Dental Service Corporation, Arthur G.
Kaiser, D.D.S., Robert J. Newman and Clarence Au, D.D.S., dated September 21, 1997.
Incorporated by reference to Exhibit 2.3 of Gentle Dental's Report on Form 10QSB
filed on November 13, 1997.
10.9 Asset Purchase Agreement between Gentle Dental Service Corporation and Arthur G.
Kaiser, D.D.S., dated September 21, 1997. Incorporated by reference to Exhibit 2.4
of Gentle Dental's Report on Form 10QSB filed on November 13, 1997.
10.10 Amendment to Asset Purchase Agreement by and between Gentle Dental Service
Corporation and Arthur G. Kaiser, D.D.S. dated February 28, 1998. Incorporated by
reference to Exhibit 10.56 of Gentle Dental's Report on Form 10KSB filed on March
31, 1998.
10.11 Amendment to Asset Purchase Agreement, dated February 28, 1998, by and among Gentle
Dental Service Corporation, Arthur G. Kaiser, D.D.S., Robert J. Newman and Mark
Thomas, D.D.S., dated September 21, 1997. Incorporated by reference to Exhibit
10.54 of Gentle Dental's Report on Form 10KSB filed on March 31, 1998.
10.12 Amendment to Asset purchase Agreement by and among Gentle Dental Service Corporation,
Arthur Kaiser, D.D.S., Robert J. Newman and Clarence Au, D.D.S., dated February 28,
1998. Incorporated by reference to Exhibit 10.55 of Gentle Dental's Report on Form
10KSB filed on March 31, 1998.
10.13 Merger Agreement by and among Gentle Dental Service Corporation, Gentle Dental Merger
Corporation, Dedicated Dental Systems, Inc. and the Shareholders of Dedicated
Dental Systems, Inc., dated September 21, 1997. Incorporated by reference to
Exhibit 2.1 of Gentle Dental's Report on Form 10QSB filed on November 13, 1997.
10.14 Amendment to Merger Agreement by and among Gentle Dental Service Corporation, Gentle
Dental Merger Corporation, Dedicated Dental Systems, Inc., Arthur G. Kaiser,
D.D.S., and Robert J. Newman, dated February 28, 1998. Incorporated by reference to
Exhibit 10.53 of Gentle Dental's Report on Form 10KSB filed on March 31, 1998.
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10.15 Second Amendment to Merger Agreement by and among Gentle Dental Service Corporation,
Gentle Dental Merger Corporation, Dedicated Dental Systems, Inc., Arthur G. Kaiser,
D.D.S., and Robert J. Newman, dated July 31, 1998. Incorporated by reference to
Exhibit 10.53 of Gentle Dental's Report on Form 8-K filed on August 14, 1998.
10.16 Dental Group Management Agreement by and between Gentle Dental Service Corporation
and Affordable Dental Care, P.C., dated March 1, 1998. Incorporated by reference to
Exhibit 10.52 of Gentle Dental's Report on Form 10KSB filed on March 31, 1998.
10.17 Support Services Agreement by and between Gentle Dental Service Corporation and Arena
Dental Corporation, dated March 31, 1997. Incorporated by reference to Exhibit
10.36 of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.18 Dental Group Management Agreement by and between GMS Dental Group Management, Inc.
and Sam Samudio, D.D.S. dba Pleasanton Dental Care, dated July 24, 1997.
Incorporated by reference to Exhibit 10.36 of Gentle Dental's Report on Form
10KSB/A filed on May 29, 1998.
10.19 Dental Group Management Agreement by and between GMS Dental Group Management, Inc.
and Mark Armstrong, D.D.S. dba Concord Dental Care, dated July 24, 1997.
Incorporated by reference to Exhibit 10.34 of Gentle Dental's Report on Form
10KSB/A filed on May 29, 1998.
10.20 Dental Group Management Agreement by and between Warren M. Francis, Jr., D.D.S., Inc.
and Francis Dental Corporation, dated June 30, 1997. Incorporated by reference to
Exhibit 10.27 of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.21 Dental Group Management Agreement by and between Warren M. Francis, Jr., D.D.S., Inc.
and Burrell Dental Corporation, dated June 30, 1997. Incorporated by reference to
Exhibit 10.28 of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.22 Dental Group Management Agreement by and between Warren M. Francis, Jr., D.D.S., Inc.
and Ashrafi Dental Corporation, dated June 30, 1997. Incorporated by reference to
Exhibit 10.29 of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.23 Dental Group Management Agreement by and between Naismith Dental Corporation and
Burns Dental Corporation, dated February 24, 1997. Incorporated by reference to
Exhibit 10.38 of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.24 Dental Group Management Agreement by and between Naismith Dental Corporation and Yep
Dental Corporation, dated February 24, 1997. Incorporated by reference to Exhibit
10.31 of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.25 Dental Group Management Agreement by and between GMS Dental Group Management of
Hawaii, Inc. and Dental Care Centers of Hawaii, Inc., dated October 11, 1996.
Incorporated by reference to Exhibit 10.25 of Gentle Dental's Report on Form
10KSB/A filed on May 29, 1998.
10.26 Dental Group Management Agreement by and between GMS Dental Group Management of
Hawaii, Inc. and Hualalai Dental Services, Inc., dated October 11, 1996.
Incorporated by reference to Exhibit 10.30 of Gentle Dental's Report on Form
10KSB/A filed on May 29, 1998.
10.27 Dental Group Management Agreement by and between GMS Dental Group Management, Inc.
and Fremont Dental Group, dated July 24, 1997. Incorporated by reference to Exhibit
10.33 of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
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10.28 Dental Group Management Agreement by and between Henry J. Lerian, Trustee of the
Lerian Irrevocable Marital Trust, Trustee of the Lerian Revocable Survivor's Trust
and Henry J. Lerian, D.D.S., an individual, and Lerian Dental Corporation, dated
October 11, 1996. Incorporated by reference to Exhibit 10.26 of Gentle Dental's
Report on Form 10KSB/A filed on May 29, 1998.
10.29 Dental Group Management Agreement by and between GMS Dental Group Management, Inc.
and Idaho Dental Group, P.A., dated January 1, 1997. Incorporated by reference to
Exhibit 10.32 of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.30 Dental Group Management Agreement by and between Alan M. Slutsky, DMD, a professional
corporation, and Slutsky Dental Corporation dated, October 11, 1996. Incorporated
by reference to Exhibit 10.24 of Gentle Dental's Report on Form 10KSB/A filed on
May 29, 1998.
10.31 Dental Group Management Agreement by and between Premier Dental Care, Inc. and SJL,
P.A., dated October 31, 1997. Incorporated by reference to Exhibit 10.37 of Gentle
Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.32 Dental Group Management Agreement by and between GMS Dental Group, Inc. and Charles
Murillo, D.D.S., dba Community Dental Group, dated October 31, 1997. Incorporated
by reference to Exhibit 10.35 of Gentle Dental's Report on Form 10KSB/A filed on
May 29, 1998.
10.33 Dental Group Management Agreement by and between Gentle Dental Service Corporation
and Tse, Saiget, Watanabe & McClure, Inc., P.S., dated January 1, 1998.
Incorporated by reference to Exhibit 10.47 of Gentle Dental's Report on Form 10KSB
filed on March 31, 1998.
10.34 Dental Group Management Agreement by and between Gentle Dental Service Corporation
and Gentle Dental of Oregon, P.C., dated January 1, 1998. Incorporated by reference
to Exhibit 10.48 of Gentle Dental's Report on Form 10KSB filed on March 31, 1998.
10.35 Dental Group Management Agreement by and between Gentle Dental Service Corporation
and Dany Tse, P.C., dated January 1, 1998. Incorporated by reference to Exhibit
10.49 of Gentle Dental's Report on Form 10KSB filed on March 31, 1998.
10.36 Promissory Note, dated July 24, 1997, between GMS Dental Group Management, Inc. and
Fremont Dental Group in the principal amount of $6,229,174. Incorporated by
reference to Exhibit 10.41 of Gentle Dental's Report on Form 10KSB/A filed on May
29, 1998.
10.37 Guaranty, dated July 24, 1997, by GMS Dental Group, Inc. in favor of Fremont Dental
Group. Incorporated by reference to Exhibit 10.42 of Gentle Dental's Report on Form
10KSB/A filed on May 29, 1998.
10.38 Securities Purchase Agreement (the "Securities Purchase Agreement"), dated May 12,
1998, by and among Gentle Dental Service Corporation and the purchasers named
therein. Incorporated by reference to Exhibit 4.1 of Gentle Dental's Report on Form
8-K filed on July 2, 1998.
10.39 7% Convertible Subordinated Notes (the "Convertible Notes"), dated May 15, 1998, by
Gentle Dental Service Corporation in favor of the holders named therein.
Incorporated by reference to attached exhibit to Exhibit 4.1 of Gentle Dental's
Report on Form 8-K filed on July 2, 1998.
10.40 Registration Rights Agreement, dated May 18, 1998, by and among Gentle Dental Service
Corporation and the purchasers named therein. Incorporated by reference to attached
exhibit to Exhibit 4.1 of Gentle Dental's Report on Form 8-K filed on July 2, 1998.
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10.41 Trademark Assignment, dated December 30, 1992, by and between Tse, Saiget, Watanabe &
McClure, Inc., P.S., a Washington professional service corporation, and Mutual
Health Systems, Inc., a Washington corporation.*
10.42 Credit Agreement, dated September 30, 1998, by and among Gentle Dental Service
Corporation, Gentle Dental Management, Inc., the Guarantors (named therein), the
Lenders (named therein), Union Bank of California, N.A., as Administrative Agent,
and The Chase Manhattan Bank, as Syndication Agent.*
10.44 Employment Agreement of Michael T. Fiore, dated June 1, 1998. Incorporated by
reference to Exhibit 10.1 of Gentle Dental's Report on Form 10QSB filed on August
14, 1998.
10.45 Employment Agreement of Dany Y. Tse, dated July 1, 1998. Incorporated by reference to
Exhibit 10.2 of Gentle Dental's Report on Form 10QSB filed on August 14, 1998.
10.46 Employment Agreement of L. Theodore Van Eerden, dated June 1, 1998. Incorporated by
reference to Exhibit 10.3 of Gentle Dental's Report on Form 10QSB filed on August
14, 1998.
10.47 Employment Agreement of Grant M. Sadler, dated August 31, 1996. Incorporated by
reference to Exhibit 10.7 of Gentle Dental's Report on Form 10KSB/A filed on May
29, 1998.
10.48 Employment Agreement of Norman Huffaker, dated November 7, 1996. Incorporated by
reference to Exhibit 10.10.8 of Gentle Dental's Report on Form 10KSB/A filed on May
29, 1998.
10.49 NationsBank, N.A. Loan Agreement, dated May 14, 1998, by and among NationsBank, N.A.
as Lender, Dental Care Alliance, as Borrower and all present and future Dental Care
Alliance subsidiaries, as Guarantor. Incorporated by reference to Exhibit 10.28 of
DCA's Report on Form 10-Q filed on August 14, 1998.
10.50 Stock Purchase Agreement, dated March 20, 1998, by and among the shareholders of
Dental One Associates, Inc., listed on Exhibit "A" thereto, and Dental Care
Alliance. Incorporated by reference to Exhibit 2.1 of DCA's Report on Form 8-K
filed April 16, 1998.
10.51 Agreement and Plan of Merger, dated December 29, 1997, by and between DCA, Dental
Care Alliance of Florida, Inc. (a wholly-owned subsidiary of DCA), Marketplace
Dental, Inc., a Florida corporation, and the shareholders of Marketplace.
Incorporated by reference to Exhibit 2.1 of DCA's Report on Form 8-K filed on
January 13, 1998.
10.52 Form of Indemnification Agreement between DCA and each of its directors and executive
officers. Incorporated by reference to Exhibit 10.1 of DCA's Report on Form 10-K
filed on April 1, 1998.
10.53 Form of Standard Management Agreement. Incorporated by reference to Exhibit 10.2 of
DCA's Report on Form 10-K filed on April 1, 1998.
10.54 Contribution Agreement among Dental Care Alliance, Dental Care Alliance of Michigan,
Inc. and Dental Care Alliance of Florida, Inc. Incorporated by reference to Exhibit
10.3 of DCA's Report on Form 10-K filed on April 1, 1998.
10.55 Management Agreement between Dr. Joseph Gaeta and Dental Care Alliance. Incorporated
by reference to Exhibit 10.4 of DCA's Report on Form 10-K filed on April 1, 1998.
10.56 Administrative Service Subcontract Agreement between Dental Care Alliance and Johnson
Dental Development Corporation. Incorporated by reference to Exhibit 10.5 of DCA's
Report on Form 10-K filed on April 1, 1998
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10.57 Administrative Services Agreement between Dental Care Alliance and Eight Mile Dental,
P.C.; Gratiot Avenue Dental, P.C.; Wayne Road Dental, P.C. and Washington Boulevard
Dental, P.C. Incorporated by reference to Exhibit 10.6 of DCA's Report on Form 10-K
filed on April 1, 1998
10.58 Form of License Agreement. Incorporated by reference to Exhibit 10.7 of DCA's Report
on Form 10-K filed on April 1, 1998.
10.59 Employment Agreement, dated as of October 25, 1996, between Dental Care Alliance and
Dr. Steven R. Matzkin, as amended. Incorporated by reference to Exhibit 10.8 of
DCA's Report on Form 10-K filed on April 1, 1998.
10.60 Employment Agreement dated as of October 25, 1996, between Dental Care Alliance and
Mitchell B. Olan, as amended. Incorporated by reference to Exhibit 10.9 of DCA's
Report on Form 10-K filed on April 1, 1998.
10.61 Employment Agreement dated as of January 21, 1997, between Dental Care Alliance and
David Nichols, as amended. Incorporated by reference to Exhibit 10.10 of DCA's
Report on Form 10-K filed on April 1, 1998.
10.62 Equity Holders Agreement dated as of October 25, 1996, between Dental Care Alliance
and Mitchell B. Olan. Incorporated by reference to Exhibit 10.11 of DCA's Report on
Form 10-K filed on April 1, 1998.
10.63 Equity Holders Agreement dated as of April 30, 1997, between Dental Care Alliance and
J. Francis Lavelle. Incorporated by reference to Exhibit 10.12 of DCA's Report on
Form 10-K filed on April 1, 1998.
10.64 Equity Holders Agreement dated as of April 30, 1997, between Dental Care Alliance and
The Nassau Group, Inc. Incorporated by reference to Exhibit 10.13 of DCA's Report
on Form 10-K filed on April 1, 1998.
10.65 Option Agreement dated as of January 21, 1997, between Dental Care Alliance and David
P. Nichols. Incorporated by reference to Exhibit 10.14 of DCA's Report on Form 10-K
filed on April 1, 1998.
10.66 Form of Warrant between Dental Care Alliance and The Nassau Group, Inc. Incorporated
by reference to Exhibit 10.15 of DCA's Report on Form 10-K filed on April 1, 1998.
10.67 Form of IPO Warrant between Dental Care Alliance and The Nassau Group, Inc.
Incorporated by reference to Exhibit 10.16 of DCA's Report on Form 10-K filed on
April 1, 1998.
10.68 Lease Agreement dated as of April 9, 1994, between Dental Care Alliance and Charles
E. Githler, III, as managing Agent for Owner, J. Kevin Drake, as Trustee under
Trust Agreement dated April 15, 1991. Incorporated by reference to Exhibit 10.17 of
DCA's Report on Form 10-K filed on April 1, 1998.
10.69 Stockholders' Agreement dated as of October 25, 1996, among Dental Care Alliance,
Steven R. Matzkin, Curtis Lee Smith, Jr., Robert F. Raucci and Crescent
International Holdings, Limited, as amended. Incorporated by reference to Exhibit
10.18 of DCA's Report on Form 10-K filed on April 1, 1998.
10.70 Omnibus Executive Incentive Compensation Plan. Incorporated by reference to Exhibit
10.19 of DCA's Report on Form 10-K filed on April 1, 1998.
10.71 Form of 1997 Non-Qualified Stock Option Plan. Incorporated by reference to Exhibit
10.20 of DCA's Report on Form 10-K filed on April 1, 1998.
10.72 Promissory Note in the original principal amount of $147,768 dated as of February 13,
1997 from Mitchell B. Olan to DCA. Incorporated by reference to Exhibit 10.21 of
DCA's Report on Form 10-K filed on April 1, 1998.
</TABLE>
II-6
<PAGE>
<TABLE>
<C> <S>
10.73 Agreement for Services dated as of June 1, 1997, between Dental Care Alliance and
Modern Employer, Inc. Incorporated by reference to Exhibit 10.22 of DCA's Report on
Form 10-K filed on April 1, 1998.
10.74 Business Loan Agreement dated August 15, 1997, between Dental Care Alliance and
Barnett Bank. Incorporated by reference to Exhibit 10.23 of DCA's Report on Form
10-K filed on April 1, 1998.
10.75 Letter Agreement dated August 1997 between Nassau and Dental Care Alliance.
Incorporated by reference to Exhibit 10.24 of DCA's Report on Form 10-K filed on
April 1, 1998.
10.76 Acknowledgement and Option Agreement between Dennis Corona and Andrew D. Levine.
Incorporated by reference to Exhibit 10.25 of DCA's Report on Form 10-K filed on
April 1, 1998.
10.77 Acknowledgement and Option Agreement between Dennis Corona and Jay Walton.
Incorporated by reference to Exhibit 10.26 of DCA's Report on Form 10-K filed on
April 1, 1998.
10.78 Asset Purchase Agreement by and among Gentle Dental Service Corporation, Gentle
Dental Management, Inc. and Dental Maintenance of Oregon, P.C., dated October 30,
1998. Incorporated by reference to Exhibit 2.1 of Gentle Dental's Report on Form 8K
filed on November 12, 1998.
10.79 Stock Purchase Agreement by and among Gentle Dental Service Corporation and the
shareholders of Capitol Dental Care, Inc., dated October 30, 1998. Incorporated by
reference to Exhibit 2.2 of Gentle Dental's Report on Form 8K filed on November 12,
1998.
10.80 Separation Agreement and Mutual Release, dated as of December 23, 1998, by and
between Dany Y. Tse and Gentle Dental Service Corporation.
10.81 Amendment to Articles of Incorporation of Gentle Dental Service Corporation, dated
May 14, 1998, filed with the Secretary of State of the State of Washington, and
Articles of Correction related thereto, filed on May 18, 1998. Incorporated by
reference to Exhibit 3.2 of Gentle Dental's Report on Form 10QSB filed on August
14, 1998.
21.1 Subsidiaries of the Registrant.*
23.1 Consent of McDermott, Will & Emery (included in opinions filed as Exhibits 5.1 and
8.1)*
23.2 Consent of Salomon Smith Barney Inc.
23.3 Consent of Raymond James & Associates, Inc. (included in the opinion of Raymond James
& Associates, Inc. in the Joint Proxy Statement--Prospectus in this Registration
Statement).
23.4 Independent Auditors' Consent of KPMG Peat Marwick LLP.
23.5 Independent Auditors' Consent of PricewaterhouseCoopers, LLP.
23.6 Independent Auditors' Consent of PricewaterhouseCoopers, LLP.
23.7 Independent Auditors' Consent of KPMG Peat Marwick LLP.
23.8 Independent Auditors' Consent of KPMG Peat Marwick LLP.
23.9 Independent Auditors' Consent of KPMG Peat Marwick LLP.
23.10 Independent Auditors' Consent of Ernst & Young LLP.
</TABLE>
- ------------------------
* Previously filed.
** To be filed by amendment.
II-7
<PAGE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(b) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
propsectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(c) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described under Item 20 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(e) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of El Segundo,
state of California, on December 31, 1998.
<TABLE>
<S> <C> <C>
WISDOM HOLDINGS, INC.
By: [/s/] MICHAEL T. FIORE
-----------------------------------------
Michael T. Fiore
CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Co-Chairman and Chief
[/s/] MICHAEL T. FIORE Executive Officer
- ------------------------------ (principal executive December 31, 1998
Michael T. Fiore officer)
*
- ------------------------------ Co-Chairman and President December 31, 1998
Dr. Steven R. Matzkin
Chief Financial Officer
[/s/] NORMAN R. HUFFAKER and Treasurer (principal
- ------------------------------ financial and accounting December 31, 1998
Norman R. Huffaker officer)
*
- ------------------------------ Director December 31, 1998
Eric Green
*
- ------------------------------ Director December 31, 1998
Paul H. Keckley
*
- ------------------------------ Director December 31, 1998
H.Wayne Posey
*
- ------------------------------ Director December 31, 1998
Robert F. Raucci
*
- ------------------------------ Director December 31, 1998
Curtis Lee Smith
</TABLE>
*By: /s/ MICHAEL T. FIORE
-------------------------
Michael T. Fiore
ATTORNEY-IN-FACT
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ---------- ---------------------------------------------------------------------------------------------- -----
<C> <S> <C>
2.1 Agreement and Plan of Reorganization and Merger by and among Wisdom Holdings, Inc., Wisdom
Holdings Acquisition Corp. I, Wisdom Holdings Acquisition Corp. II, Gentle Dental Service
Corporation and Dental Care Alliance, Inc., dated October 15, 1998. Incorporated by
reference to Exhibit 2.1 of Gentle Dental's Report on 8-K filed on October 30, 1998.
3.1 Certificate of Incorporation of Wisdom Holdings, Inc. filed October 13, 1998.*
3.2 Certificate of Amendment of Certificate of Incorporation Before Payment of Any Part of the
Capital of Wisdom Holdings, Inc., dated October 14, 1998.*
3.3 By-Laws of Wisdom Holdings, Inc.*
4.1 Form of Certificate representing shares of Wisdom Holdings, Inc. Common Stock.**
4.2 Form of Certificate representing shares of Wisdom Holdings, Inc. Series A Preferred Stock.**
4.3 Form of Certificate representing shares of Wisdom Holdings, Inc. Series B Preferred Stock.**
4.4 Form of Certificate representing shares of Wisdom Holdings, Inc. Series C Preferred Stock.**
4.5 Form of Certificate representing shares of Wisdom Holdings, Inc. Series D Preferred Stock.**
5.1 Legal Opinion of McDermott, Will & Emery with respect to the securities being issued.**
8.1 Legal Opinion of McDermott, Will & Emery with respect to certain tax matters.**
10.1 Asset Purchase Agreement by and between Gentle Dental Service Corporation and Affordable
Dental Care, Inc., dated February 28, 1998. Incorporated by reference to Exhibit 2.1 of
Gentle Dental's Report on Form 8-K filed on March 16, 1998.
10.2 Stock Purchase Agreement by and between Gentle Dental Service Corporation and the sole
shareholder of Managed Dental Care of Oregon, Inc., dated February 28, 1998. Incorporated by
reference to Exhibit 2.2 of Gentle Dental's Report on Form 8-K filed on March 16, 1998.
10.3 Asset Purchase Agreement by and between Gentle Dental Service Corporation and Blue Oak Dental
Group, dated March 31, 1997. Incorporated by reference to Exhibit 2.1 of Gentle Dental's
Report on Form 8-K filed on April 15, 1997.
10.4 Asset Purchase Agreement by and among Gentle Dental Service Corporation, Gentle Dental
Management, Inc. and Pacific Dental Services, Inc., dated June 30, 1998. Incorporated by
reference to Exhibit 2.1 of Gentle Dental's Report on Form 8-K filed on July 15, 1998.
10.5 Asset Purchase Agreement by and among Gentle Dental Service Corporation, Gentle Dental
Management, Inc. and Orange Dental Services, dated June 30, 1998. Incorporated by reference
to Exhibit 2.2 of Gentle Dental's Report on Form 8-K filed on July 15, 1998.
10.6 Asset Purchase Agreement by and among Gentle Dental Service Corporation, Gentle Dental
Management, Inc. and TG3 Dental Services, dated June 30, 1998. Incorporated by reference to
Exhibit 2.3 of Gentle Dental's Report on Form 8-K filed on July 15, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ---------- ---------------------------------------------------------------------------------------------- -----
<C> <S> <C>
10.7 Asset Purchase Agreement by and among Gentle Dental Service Corporation, Gentle Dental
Management, Inc. and Bryan Watanabe, D.D.S., Inc., dated June 30, 1998. Incorporated by
reference to Exhibit 2.4 of Gentle Dental's Report on Form 8-K filed on July 15, 1998.
10.8 Asset Purchase Agreement by and among Gentle Dental Service Corporation, Arthur G. Kaiser,
D.D.S., Robert J. Newman and Clarence Au, D.D.S., dated September 21, 1997. Incorporated by
reference to Exhibit 2.3 of Gentle Dental's Report on Form 10QSB filed on November 13, 1997.
10.9 Asset Purchase Agreement between Gentle Dental Service Corporation and Arthur G. Kaiser,
D.D.S., dated September 21, 1997. Incorporated by reference to Exhibit 2.4 of Gentle
Dental's Report on Form 10QSB filed on November 13, 1997.
10.10 Amendment to Asset Purchase Agreement by and between Gentle Dental Service Corporation and
Arthur G. Kaiser, D.D.S. dated February 28, 1998. Incorporated by reference to Exhibit 10.56
of Gentle Dental's Report on Form 10KSB filed on March 31, 1998.
10.11 Amendment to Asset Purchase Agreement, dated February 28, 1998, by and among Gentle Dental
Service Corporation, Arthur G. Kaiser, D.D.S., Robert J. Newman and Mark Thomas, D.D.S.,
dated September 21, 1997. Incorporated by reference to Exhibit 10.54 of Gentle Dental's
Report on Form 10KSB filed on March 31, 1998.
10.12 Amendment to Asset purchase Agreement by and among Gentle Dental Service Corporation, Arthur
Kaiser, D.D.S., Robert J. Newman and Clarence Au, D.D.S., dated February 28, 1998.
Incorporated by reference to Exhibit 10.55 of Gentle Dental's Report on Form 10KSB filed on
March 31, 1998.
10.13 Merger Agreement by and among Gentle Dental Service Corporation, Gentle Dental Merger
Corporation, Dedicated Dental Systems, Inc. and the Shareholders of Dedicated Dental
Systems, Inc., dated September 21, 1997. Incorporated by reference to Exhibit 2.1 of Gentle
Dental's Report on Form 10QSB filed on November 13, 1997.
10.14 Amendment to Merger Agreement by and among Gentle Dental Service Corporation, Gentle Dental
Merger Corporation, Dedicated Dental Systems, Inc., Arthur G. Kaiser, D.D.S., and Robert J.
Newman, dated February 28, 1998. Incorporated by reference to Exhibit 10.53 of Gentle
Dental's Report on Form 10KSB filed on March 31, 1998.
10.15 Second Amendment to Merger Agreement by and among Gentle Dental Service Corporation, Gentle
Dental Merger Corporation, Dedicated Dental Systems, Inc., Arthur G. Kaiser, D.D.S., and
Robert J. Newman, dated July 31, 1998. Incorporated by reference to Exhibit 10.53 of Gentle
Dental's Report on Form 8-K filed on August 14, 1998.
10.16 Dental Group Management Agreement by and between Gentle Dental Service Corporation and
Affordable Dental Care, P.C., dated March 1, 1998. Incorporated by reference to Exhibit
10.52 of Gentle Dental's Report on Form 10KSB filed on March 31, 1998.
10.17 Support Services Agreement by and between Gentle Dental Service Corporation and Arena Dental
Corporation, dated March 31, 1997. Incorporated by reference to Exhibit 10.36 of Gentle
Dental's Report on Form 10KSB/A filed on May 29, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ---------- ---------------------------------------------------------------------------------------------- -----
<C> <S> <C>
10.18 Dental Group Management Agreement by and between GMS Dental Group Management, Inc. and Sam
Samudio, D.D.S. dba Pleasanton Dental Care, dated July 24, 1997. Incorporated by reference
to Exhibit 10.36 of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.19 Dental Group Management Agreement by and between GMS Dental Group Management, Inc. and Mark
Armstrong, D.D.S. dba Concord Dental Care, dated July 24, 1997. Incorporated by reference to
Exhibit 10.34 of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.20 Dental Group Management Agreement by and between Warren M. Francis, Jr., D.D.S., Inc. and
Francis Dental Corporation, dated June 30, 1997. Incorporated by reference to Exhibit 10.27
of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.21 Dental Group Management Agreement by and between Warren M. Francis, Jr., D.D.S., Inc. and
Burrell Dental Corporation, dated June 30, 1997. Incorporated by reference to Exhibit 10.28
of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.22 Dental Group Management Agreement by and between Warren M. Francis, Jr., D.D.S., Inc. and
Ashrafi Dental Corporation, dated June 30, 1997. Incorporated by reference to Exhibit 10.29
of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.23 Dental Group Management Agreement by and between Naismith Dental Corporation and Burns Dental
Corporation, dated February 24, 1997. Incorporated by reference to Exhibit 10.38 of Gentle
Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.24 Dental Group Management Agreement by and between Naismith Dental Corporation and Yep Dental
Corporation, dated February 24, 1997. Incorporated by reference to Exhibit 10.31 of Gentle
Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.25 Dental Group Management Agreement by and between GMS Dental Group Management of Hawaii, Inc.
and Dental Care Centers of Hawaii, Inc., dated October 11, 1996. Incorporated by reference
to Exhibit 10.25 of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.26 Dental Group Management Agreement by and between GMS Dental Group Management of Hawaii, Inc.
and Hualalai Dental Services, Inc., dated October 11, 1996. Incorporated by reference to
Exhibit 10.30 of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.27 Dental Group Management Agreement by and between GMS Dental Group Management, Inc. and Fremont
Dental Group, dated July 24, 1997. Incorporated by reference to Exhibit 10.33 of Gentle
Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.28 Dental Group Management Agreement by and between Henry J. Lerian, Trustee of the Lerian
Irrevocable Marital Trust, Trustee of the Lerian Revocable Survivor's Trust and Henry J.
Lerian, D.D.S., an individual, and Lerian Dental Corporation, dated October 11, 1996.
Incorporated by reference to Exhibit 10.26 of Gentle Dental's Report on Form 10KSB/A filed
on May 29, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ---------- ---------------------------------------------------------------------------------------------- -----
<C> <S> <C>
10.29 Dental Group Management Agreement by and between GMS Dental Group Management, Inc. and Idaho
Dental Group, P.A., dated January 1, 1997. Incorporated by reference to Exhibit 10.32 of
Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.30 Dental Group Management Agreement by and between Alan M. Slutsky, DMD, a professional
corporation, and Slutsky Dental Corporation dated, October 11, 1996. Incorporated by
reference to Exhibit 10.24 of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.31 Dental Group Management Agreement by and between Premier Dental Care, Inc. and SJL, P.A.,
dated October 31, 1997. Incorporated by reference to Exhibit 10.37 of Gentle Dental's Report
on Form 10KSB/A filed on May 29, 1998.
10.32 Dental Group Management Agreement by and between GMS Dental Group, Inc. and Charles Murillo,
D.D.S., dba Community Dental Group, dated October 31, 1997. Incorporated by reference to
Exhibit 10.35 of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.33 Dental Group Management Agreement by and between Gentle Dental Service Corporation and Tse,
Saiget, Watanabe & McClure, Inc., P.S., dated January 1, 1998. Incorporated by reference to
Exhibit 10.47 of Gentle Dental's Report on Form 10KSB filed on March 31, 1998.
10.34 Dental Group Management Agreement by and between Gentle Dental Service Corporation and Gentle
Dental of Oregon, P.C., dated January 1, 1998. Incorporated by reference to Exhibit 10.48 of
Gentle Dental's Report on Form 10KSB filed on March 31, 1998.
10.35 Dental Group Management Agreement by and between Gentle Dental Service Corporation and Dany
Tse, P.C., dated January 1, 1998. Incorporated by reference to Exhibit 10.49 of Gentle
Dental's Report on Form 10KSB filed on March 31, 1998.
10.36 Promissory Note, dated July 24, 1997, between GMS Dental Group Management, Inc. and Fremont
Dental Group in the principal amount of $6,229,174. Incorporated by reference to Exhibit
10.41 of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.37 Guaranty, dated July 24, 1997, by GMS Dental Group, Inc. in favor of Fremont Dental Group.
Incorporated by reference to Exhibit 10.42 of Gentle Dental's Report on Form 10KSB/A filed
on May 29, 1998.
10.38 Securities Purchase Agreement (the "Securities Purchase Agreement"), dated May 12, 1998, by
and among Gentle Dental Service Corporation and the purchasers named therein. Incorporated
by reference to Exhibit 4.1 of Gentle Dental's Report on Form 8-K filed on July 2, 1998.
10.39 7% Convertible Subordinated Notes (the "Convertible Notes"), dated May 15, 1998, by Gentle
Dental Service Corporation in favor of the holders named therein. Incorporated by reference
to attached exhibit to Exhibit 4.1 of Gentle Dental's Report on Form 8-K filed on July 2,
1998.
10.40 Registration Rights Agreement, dated May 18, 1998, by and among Gentle Dental Service
Corporation and the purchasers named therein. Incorporated by reference to attached exhibit
to Exhibit 4.1 of Gentle Dental's Report on Form 8-K filed on July 2, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ---------- ---------------------------------------------------------------------------------------------- -----
<C> <S> <C>
10.42 Trademark Assignment, dated December 30, 1992, by and between Tse, Saiget, Watanabe & McClure,
Inc., P.S., a Washington professional service corporation, and Mutual Health Systems, Inc.,
a Washington corporation.*
10.43 Credit Agreement, dated September 30, 1998, by and among Gentle Dental Service Corporation,
Gentle Dental Management, Inc., the Guarantors (named therein), the Lenders (named therein),
Union Bank of California, N.A., as Administrative Agent, and The Chase Manhattan Bank, as
Syndication Agent.
10.44 Employment Agreement of Michael T. Fiore, dated June 1, 1998. Incorporated by reference to
Exhibit 10.1 of Gentle Dental's Report on Form 10QSB filed on August 14, 1998.
10.45 Employment Agreement of Dany Y. Tse, dated July 1, 1998. Incorporated by reference to Exhibit
10.2 of Gentle Dental's Report on Form 10QSB filed on August 14, 1998.
10.46 Employment Agreement of L. Theodore Van Eerden, dated June 1, 1998. Incorporated by reference
to Exhibit 10.3 of Gentle Dental's Report on Form 10QSB filed on August 14, 1998.
10.47 Employment Agreement of Grant M. Sadler, dated August 31, 1996. Incorporated by reference to
Exhibit 10.7 of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.48 Employment Agreement of Norman Huffaker, dated November 7, 1996. Incorporated by reference to
Exhibit 10.10.8 of Gentle Dental's Report on Form 10KSB/A filed on May 29, 1998.
10.49 NationsBank, N.A. Loan Agreement, dated May 14, 1998, by and among NationsBank, N.A. as
Lender, Dental Care Alliance, as Borrower and all present and future Dental Care Alliance
subsidiaries, as Guarantor. Incorporated by reference to Exhibit 10.28 of DCA's Report on
Form 10-Q filed on August 14, 1998.
10.50 Stock Purchase Agreement, dated March 20, 1998, by and among the shareholders of Dental One
Associates, Inc., listed on Exhibit "A" thereto, and Dental Care Alliance. Incorporated by
reference to Exhibit 2.1 of DCA's Report on Form 8-K filed April 16, 1998.
10.51 Agreement and Plan of Merger, dated December 29, 1997, by and between DCA, Dental Care
Alliance of Florida, Inc. (a wholly-owned subsidiary of DCA), Marketplace Dental, Inc., a
Florida corporation, and the shareholders of Marketplace. Incorporated by reference to
Exhibit 2.1 of DCA's Report on Form 8-K filed on January 13, 1998.
10.52 Form of Indemnification Agreement between DCA and each of its directors and executive
officers. Incorporated by reference to Exhibit 10.1 of DCA's Report on Form 10-K filed on
April 1, 1998.
10.53 Form of Standard Management Agreement. Incorporated by reference to Exhibit 10.2 of DCA's
Report on Form 10-K filed on April 1, 1998.
10.54 Contribution Agreement among Dental Care Alliance, Dental Care Alliance of Michigan, Inc. and
Dental Care Alliance of Florida, Inc. Incorporated by reference to Exhibit 10.3 of DCA's
Report on Form 10-K filed on April 1, 1998.
10.55 Management Agreement between Dr. Joseph Gaeta and Dental Care Alliance. Incorporated by
reference to Exhibit 10.4 of DCA's Report on Form 10-K filed on April 1, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ---------- ---------------------------------------------------------------------------------------------- -----
<C> <S> <C>
10.56 Administrative Service Subcontract Agreement between Dental Care Alliance and Johnson Dental
Development Corporation. Incorporated by reference to Exhibit 10.5 of DCA's Report on Form
10-K filed on April 1, 1998
10.57 Administrative Services Agreement between Dental Care Alliance and Eight Mile Dental, P.C.;
Gratiot Avenue Dental, P.C.; Wayne Road Dental, P.C. and Washington Boulevard Dental, P.C.
Incorporated by reference to Exhibit 10.6 of DCA's Report on Form 10-K filed on April 1,
1998
10.58 Form of License Agreement. Incorporated by reference to Exhibit 10.7 of DCA's Report on Form
10-K filed on April 1, 1998.
10.59 Employment Agreement, dated as of October 25, 1996, between Dental Care Alliance and Dr.
Steven R. Matzkin, as amended. Incorporated by reference to Exhibit 10.8 of DCA's Report on
Form 10-K filed on April 1, 1998.
10.60 Employment Agreement dated as of October 25, 1996, between Dental Care Alliance and Mitchell
B. Olan, as amended. Incorporated by reference to Exhibit 10.9 of DCA's Report on Form 10-K
filed on April 1, 1998.
10.61 Employment Agreement dated as of January 21, 1997, between Dental Care Alliance and David
Nichols, as amended. Incorporated by reference to Exhibit 10.10 of DCA's Report on Form 10-K
filed on April 1, 1998.
10.62 Equity Holders Agreement dated as of October 25, 1996, between Dental Care Alliance and
Mitchell B. Olan. Incorporated by reference to Exhibit 10.11 of DCA's Report on Form 10-K
filed on April 1, 1998.
10.63 Equity Holders Agreement dated as of April 30, 1997, between Dental Care Alliance and J.
Francis Lavelle. Incorporated by reference to Exhibit 10.12 of DCA's Report on Form 10-K
filed on April 1, 1998.
10.64 Equity Holders Agreement dated as of April 30, 1997, between Dental Care Alliance and The
Nassau Group, Inc. Incorporated by reference to Exhibit 10.13 of DCA's Report on Form 10-K
filed on April 1, 1998.
10.65 Option Agreement dated as of January 21, 1997, between Dental Care Alliance and David P.
Nichols. Incorporated by reference to Exhibit 10.14 of DCA's Report on Form 10-K filed on
April 1, 1998.
10.66 Form of Warrant between Dental Care Alliance and The Nassau Group, Inc. Incorporated by
reference to Exhibit 10.15 of DCA's Report on Form 10-K filed on April 1, 1998.
10.67 Form of IPO Warrant between Dental Care Alliance and The Nassau Group, Inc. Incorporated by
reference to Exhibit 10.16 of DCA's Report on Form 10-K filed on April 1, 1998.
10.68 Lease Agreement dated as of April 9, 1994, between Dental Care Alliance and Charles E.
Githler, III, as managing Agent for Owner, J. Kevin Drake, as Trustee under Trust Agreement
dated April 15, 1991. Incorporated by reference to Exhibit 10.17 of DCA's Report on Form
10-K filed on April 1, 1998.
10.69 Stockholders' Agreement dated as of October 25, 1996, among Dental Care Alliance, Steven R.
Matzkin, Curtis Lee Smith, Jr., Robert F. Raucci and Crescent International Holdings,
Limited, as amended. Incorporated by reference to Exhibit 10.18 of DCA's Report on Form 10-K
filed on April 1, 1998.
10.70 Omnibus Executive Incentive Compensation Plan. Incorporated by reference to Exhibit 10.19 of
DCA's Report on Form 10-K filed on April 1, 1998.
</TABLE>
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<TABLE>
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<C> <S> <C>
10.71 Form of 1997 Non-Qualified Stock Option Plan. Incorporated by reference to Exhibit 10.20 of
DCA's Report on Form 10-K filed on April 1, 1998.
10.72 Promissory Note in the original principal amount of $147,768 dated as of February 13, 1997
from Mitchell B. Olan to DCA. Incorporated by reference to Exhibit 10.21 of DCA's Report on
Form 10-K filed on April 1, 1998.
10.73 Agreement for Services dated as of June 1, 1997, between Dental Care Alliance and Modern
Employer, Inc. Incorporated by reference to Exhibit 10.22 of DCA's Report on Form 10-K filed
on April 1, 1998.
10.74 Business Loan Agreement dated August 15, 1997, between Dental Care Alliance and Barnett Bank.
Incorporated by reference to Exhibit 10.23 of DCA's Report on Form 10-K filed on April 1,
1998.
10.75 Letter Agreement dated August 1997 between Nassau and Dental Care Alliance. Incorporated by
reference to Exhibit 10.24 of DCA's Report on Form 10-K filed on April 1, 1998.
10.76 Acknowledgement and Option Agreement between Dennis Corona and Andrew D. Levine. Incorporated
by reference to Exhibit 10.25 of DCA's Report on Form 10-K filed on April 1, 1998.
10.77 Acknowledgement and Option Agreement between Dennis Corona and Jay Walton. Incorporated by
reference to Exhibit 10.26 of DCA's Report on Form 10-K filed on April 1, 1998.
10.78 Asset Purchase Agreement by and among Gentle Dental Service Corporation, Gentle Dental
Management, Inc. and Dental Maintenance of Oregon, P.C., dated October 30, 1998.
Incorporated by reference to Exhibit 2.1 of Gentle Dental's Report on Form 8K filed on
November 12, 1998.
10.79 Stock Purchase Agreement by and among Gentle Dental Service Corporation and the shareholders
of Capitol Dental Care, Inc., dated October 30, 1998. Incorporated by reference to Exhibit
2.2 of Gentle Dental's Report on Form 8K filed on November 12, 1998.
10.80 Separation Agreement and Mutual Release, dated as of December 23, 1998, by and between Dany Y.
Tse and Gentle Dental Service Corporation.
10.81 Amendment to Articles of Incorporation of Gentle Dental Service Corporation, dated May 14,
1998, filed with the Secretary of State of the State of Washington, and Articles of
Correction related thereto, filed on May 18, 1998. Incorporated by reference to Exhibit 3.2
of Gentle Dental's Report on Form 10QSB filed on August 14, 1998.
21.1 Subsidiaries of the Registrant.*
23.1 Consent of McDermott, Will & Emery (included in opinions filed as Exhibits 5.1 and 8.1)*
23.2 Consent of Salomon Smith Barney Inc.
23.3 Consent of Raymond James & Associates, Inc. (included in the opinion of Raymond James &
Associates, Inc. in the Joint Proxy Statement--Prospectus in this Registration Statement).
23.4 Independent Auditors' Consent of KPMG Peat Marwick LLP.
23.5 Independent Auditors' Consent of PricewaterhouseCoopers, LLP.
23.6 Independent Auditors' Consent of PricewaterhouseCoopers, LLP.
23.7 Independent Auditors' Consent of KPMG Peat Marwick LLP.
</TABLE>
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23.8 Independent Auditors' Consent of KPMG Peat Marwick LLP.
23.9 Independent Auditors' Consent of KPMG Peat Marwick LLP.
23.10 Independent Auditors' Consent of Ernst & Young LLP.
</TABLE>
- ------------------------
* Previously filed.
** To be filed by amendment.
<PAGE>
EXHIBIT 10.80
December 23, 1998
PERSONAL AND CONFIDENTIAL
Dr. Dany Y. Tse
Co-Chairman, Founder and President
of Clinical Services Council
Gentle Dental Service Corporation
900 Washington St., Suite 1100
Vancouver, WA 98660
RE: SEPARATION AGREEMENT AND MUTUAL RELEASE
Dear Dany:
This letter, when signed by you, will constitute our Agreement regarding
your separation from Gentle Dental Service Corporation ("Gentle Dental").
The parties to this Agreement are you and Gentle Dental.
1. TERMINATION OF EMPLOYMENT. Your employment with Gentle Dental will
continue through December 31, 1998 (the "Termination Date"), when your
employment with Gentle Dental will end. By execution of this Agreement, you
will resign as an employee, officer and director of Gentle Dental effective
as of December 31, 1998. In addition, your Employment Agreement with Gentle
Dental dated July 1, 1998 (the "Employment Agreement") is hereby terminated
effective as of December 31, 1998. Any and all post-termination obligations
of either party under the Employment Agreement are superseded and replaced by
this Agreement. The Proprietary Information Agreement between you and Gentle
Dental is not terminated.
2. CONSULTING AGREEMENT. During the period from January 1, 1999 to
December 31, 2000 (the "Consulting Period"), you agree to provide consulting
services to the Company on a project basis related to your area of expertise
(i.e. Clinical Services in Dentistry) at mutually agreeable times and
completion dates. You understand that the Company will not provide office
space as part of the consulting arrangement. You will be paid the following
annual amounts during the Consulting Period:
1999: $257,580 ($243,000 increased by 6%)
2000: $273,035 ($257,580 increased by 6%)
The consulting payments shall be made in monthly installments equal to 1/12th
of the annual amount. The first monthly consulting payment is due on January
31, 1999 and subsequent payments are due on the last day of each month during
the Consulting Period. All payments will be subject to applicable income tax
and employment tax withholding.
<PAGE>
3. SEVERANCE PAYMENTS. Gentle Dental will pay you severance payments
from January 1, 2001 through June 30, 2003 (the "Severance Period"). You
will be paid the following annual amounts during the Severance Period:
2001: $289,417 ($273,035 increased by 6%)
2002: $306,782 ($289,417 increased by 6%)
2003: $162,594 (1/2 of $306,782 increased by 6%)
The severance payments shall be made in monthly installments equal to 1/12th
of the annual amount (1/6th of the annual amount in 2003). The first monthly
severance payment is due on January 31, 2001 and subsequent payments are due
on the last day of each month during the Severance Period. All payments will
be subject to applicable income tax and employment tax withholding.
4. STOCK OPTIONS. Effective on December 31, 1998, all options you
hold to purchase Gentle Dental stock will be fully vested and exercisable
consistent with the terms of the Employment Agreement. Under the terms of
the two stock options granted to you in 1998, you will be entitled to
exercise those options at any time until the expiration of three months after
the end of the Consulting Period. Under the terms of the three stock options
granted to you prior to 1998, you will be entitled to exercise those options
only until March 31, 1999.
5. COMPANY BENEFITS. Gentle Dental will request its health care
insurer that you and any dependents currently insured under its health
benefits plan (the "Plan") be continued as participants during the Consulting
and Severance Periods. If that request is allowed, Gentle Dental will pay
for the benefits or premiums on the same basis that it pays for its
employees. If you are entitled to participate in the Plan during the
Consulting and Severance Periods, to the extent permitted by the Plan, you
will be entitled to continue your group health coverage through Gentle Dental
under a federal law called COBRA after the end of the Severance Period.
Under COBRA, you may elect to purchase continued group health coverage
through Gentle Dental at the full premium rate plus an administrative fee for
up to an 18-month period.
If Gentle Dental's request to allow you and your dependents to remain on
the Plan is denied, or if the eligibility of you and your dependents to be
participants in the Plan ends before the end of the Consulting and Severance
Periods, and you elect COBRA benefits, Gentle Dental shall reimburse you for
the continuation of benefits for you and your dependents under COBRA until
the end of the Severance Period in the amount Gentle Dental would have paid
if you continued to be eligible under the Plan. If your elibility for COBRA
benefits ends before the end of the Consulting and Severance Periods, you
will arrange for your own health insurance coverage and Gentle Dental will
reimburse you on a monthly basis until the end of the Severance Period an
amount equal to the amount Gentle Dental would have paid to cover you under
the Plan if you were eligible.
Gentle Dental will also request its group life insurer that you be
continued as a participant in that plan during the Consulting and Severance
Periods. If that request is allowed, Gentle Dental will pay the premiums on
the same basis that it pays for its employees.
6. PROFESSIONAL CORPORATIONS. By execution of this Agreement, you
will resign effective as of December 31, 1998 any position you hold as an
officer or director of Dany Tse,
2
<PAGE>
P.C., Tse, Saiget, Watanabe & McClure, Inc., P.S., and Gentle Dental of
Oregon, P.C. (the "Professional Corporations"). You acknowledge that under
the terms of the Shares Acquisition Agreements between Gentle Dental, you,
and each of the Professional Corporations, Gentle Dental intends to exercise
its right to cause you to transfer your stock in each of the Professional
Corporations to one or more eligible dentists. You agree to cooperate fully
and to sign any documents necessary or appropriate to effectuate those
transfers. You also agree to execute a Mutual Release with each of the
Professional Corporations.
7. RESTRICTIVE COVENANTS.
(a) NON-SOLICITATION. You agree that during the period from January 1,
1999 to December 31, 2000, you shall not, directly or indirectly, solicit,
entice, encourage or induce any person (other than your wife) who at any time
within one month prior to your termination of employment or at any time
during the Consulting Period shall have been an employee of Gentle Dental or
any of its subsidiaries, or who is a dentist who is employed by or performing
professional services for any dental practice managed by Gentle Dental or one
of its subsidiaries, to become employed by or associated with any person,
firm or corporation other than Gentle Dental, and you shall not approach any
such employee or dentist for such purpose or encourage the taking of such
actions by any other person, firm or corporation or assist any such person,
firm or corporation in taking such action; provided, however, that this
subsection shall not prohibit you from taking any such action with respect to
any employee or other person whose employment or service relationship was
terminated by Gentle Dental prior to any such action by you.
(b) NON-COMPETE. You agree that during the period from January 1,
1999 to December 31, 2000, you shall not, directly or indirectly, within a 50
mile radius of any location where Gentle Dental or any of its subsidiaries
owns, manages, develops, or operates any dental practice or assets, engage or
participate or make any financial investments in, or become employed by, or
act as an agent or principal of, or render advisory or other services to or
for, any person, firm or corporation that is engaged, directly or indirectly,
in any line of business of Gentle Dental (a "Competing Enterprise"). A
Competing Enterprise shall not include (i) any practice of dentistry with or
consulting to a group of 10 or fewer dentists or (ii) any practice of
dentistry with a group of more than 10 dentists or consulting with such a
group on clinical matters, provided that you do not consult on or participate
in acquisitions of dental practices or recruitment of dentists. Similarly,
nothing herein contained shall restrict you from engaging in the solo
practice of dentistry. Nothing herein contained shall restrict you from
holding investments in not more than three percent of the voting securities
of any Competing Enterprise whose stock is listed on a national securities
exchange or is actively traded on the National Association of Securities
Dealers Automated Quotation System, so long as in connection with such
investments you do not render services to a Competing Enterprise.
(c) NON-DISPARAGEMENT. You will not disparage Gentle Dental, its
officers, directors, managers or employees, and you will not assist, support
or cooperate with any other person or entity in asserting any type of claim
against Gentle Dental, its officers, directors, managers or employees unless
compelled to do so by law. Gentle Dental will not authorize any disparaging
statements about you, and will not assist, support or cooperate with any
other person or entity in asserting any type of claim against you unless
compelled to do so by law.
(d) CONSEQUENCES OF BREACH. You acknowledge that damages at law would
not be an
3
<PAGE>
adequate remedy for violation of this Section 7 and you therefore agree that
the provisions of this Section 7 may be specifically enforced against you in
any court of competent jurisdiction. Gentle Dental also may seek damages for
any breach by you of this Section 7, but Gentle Dental agrees that breach of
this Section 7 by you shall not give Gentle Dental a right to stop making
consulting and severance payments to you.
8. PUBLIC ANNOUNCEMENT. Gentle Dental will release a statement that
you have resigned from Gentle Dental and entered into a consulting agreement
in order to spend more time with your family and to pursue charitable
interests. Neither you nor Gentle Dental will make any other public
announcements regarding the other without the prior review and approval of
the other, except that Gentle Dental shall not be obligated to obtain your
approval for any public announcement that Gentle Dental reasonably believes
it is obligated to make under any law or rule applicable to it.
9. TERMINATION OF AFFILIATE STATUS. For all securities law purposes,
Gentle Dental will treat you as if you ceased to be an affiliate of Gentle
Dental as of December 31, 1998, and will instruct its transfer agent
accordingly in connection with any proposed sale by you of Gentle Dental
stock or the stock of the new parent holding company resulting from Gentle
Dental's proposed merger with Dental Care Alliance, Inc.
10. MUTUAL RELEASE. Except for the rights and claims created under this
Agreement or any other agreement entered into concurrently herewith, you
hereby waive any legal rights and release and forever discharge Gentle
Dental, and Gentle Dental hereby waives any legal rights and releases and
forever discharges you from any and all liability, demands, claims, suits,
actions, charges, damages, judgments, levies or executions, whether known or
unknown, liquidated, fixed, contingent, direct or indirect, which either
party has, could have or could raise against the other.
You and Gentle Dental each acknowledge the full and final waiver and
release of all claims of every kind, nature or description whatsoever you or
Gentle Dental has or may have against the other, specifically including but
not limited to all claims for relief or remedy of any type under any state or
federal laws, including but not limited to federal and state statutes and
common law claims based on alleged breach of contract, breach of fiduciary
duty, breach of statutory duty, misrepresentation, fraud, defamation,
interference, negligence or tortious conduct of any type whatsoever, or any
other common law theories. This Mutual Release specifically includes, but is
not limited to, claims relating to civil rights, employment discrimination
(based on race, color, age, sex, national origin, marital status, handicap,
veteran status, religion, workers' compensation and family relationship),
labor, employment rights or benefits, or relating to employment or
termination of employment, wage payments, and claims for additional
compensation, back pay or benefits of any type (except in accordance with the
terms of the Agreement); and including but not limited to any claim for
attorneys' fees or costs, for reinstatement or reemployment, or for
compensatory or punitive damages under any applicable statutes or common law
theories, except to the extent that waiver or release of future claims is
specifically prohibited by law.
This Mutual Release also specifically includes, but is not limited to,
all potential claims based upon Title VII of the Civil Rights Act of 1964,
the Post-Civil War Civil Rights Act (42 USC -Section-1981-1988), the Civil
Rights Act of 1991, the Equal Pay Act, the Age Discrimination in Employment
Act, the Older Workers' Benefit Protection Act, the Worker Adjustment and
4
<PAGE>
Retraining Notification Act, the Americans with Disabilities Act, the
Rehabilitation Act of 1973, the Family and Medical Leave Act, the Vietnam Era
Veterans Readjustment Assistance Act, the Fair Labor Standards Act, Executive
Order 11246, as amended, the civil rights, employment, and labor laws of any
state or the United States, all as amended, and any regulations under such
authorities. This Release covers all claims brought in any capacity
including but not limited to that of officer, shareholder or employee.
For purposes of this Mutual Release provision, the term "Gentle Dental"
includes Gentle Dental Service Corporation, its parent, subsidiary or
affiliated companies, its present and former agents, employees, insurers,
officers, directors, shareholders and assigns, and any related or successor
corporations, subsidiaries, franchises, or businesses.
Notwithstanding the foregoing, this Mutual Release shall not apply to
your right to be paid salary and reimbursed for expenses under the Employment
Agreement through the end of your employment, and this Mutual Release does
not affect your rights to indemnity or insurance coverage for claims of third
parties arising in connection with your service as an officer or director of
Gentle Dental.
11. ADDITIONAL ACKNOWLEDGMENTS. You acknowledge that Gentle Dental
has no legal obligation to provide you with these separation/transition
benefits except as part of this Agreement. These benefits are unique to you
and your circumstances and are in lieu of any other separation or severance
benefits to which you might otherwise be entitled under any policy, plan or
practice of Gentle Dental.
You further acknowledge that this Agreement contains the entire
agreement between you and Gentle Dental regarding the terms of your
separation from employment. You acknowledge that no representations have
been made to you by Gentle Dental other than those set forth in this
Agreement.
You further acknowledge that you have been given at least 21 days to
consider this Agreement and to discuss it with financial or legal counsel of
your choice, and that you voluntarily sign it and agree to be bound by its
terms. You understand that this Agreement must be signed within 21 days
after you receive it in order for you to be entitled to the benefits given
under it. However, you may revoke this Agreement by sending me a written
statement to that effect within 7 days after you have signed it. Unless you
revoke it, the Agreement will be effective 7 days after you have signed it;
Gentle Dental will then provide you with the benefits stated in this
Agreement.
You further acknowledge that you have not filed any complaint,
criticism, claim, charge, grievance, demand or other inquiry or proceeding
against Gentle Dental (as defined for purposes of Section 10) with any
governmental agency, arbitration board or association, court, administrative
or other enforcement or adjudicative body.
12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding on and
inure to the benefit of the parties hereto and their heirs, executors, legal
representatives, successors and assigns. Neither party shall have the right
to assign its obligations, or all or any portion of their rights or interests
under this Agreement without the prior written consent of the other party
hereto, and any attempt to do so will be null and void; provided, however,
that the rights and obligations of Gentle Dental under this Agreement and the
Proprietary Information Agreement
5
<PAGE>
shall be assigned to and assumed by the new parent holding
company resulting from Gentle Dental's proposed merger with Dental Care
Alliance, Inc. at the effective time of that merger.
13. GOVERNING LAW. This Agreement is made and entered into and is to
be governed by the internal laws of the State of Washington applicable to
agreements made and to be performed entirely within such state without regard
to the conflicts of law principles of such state.
14. AGREEMENT TO ARBITRATE ANY DISPUTES. Any controversy or claim
arising out of or relating to this Agreement, or the breach thereof, shall be
settled by arbitration administered by the American Arbitration Association
in accordance with its Commercial Arbitration Rules, and judgment on the
award rendered by the arbitrators may be entered in any court having
jurisdiction thereof. The arbitration panel shall be composed of three
persons with corporate business experience in management or legal positions.
The arbitration proceedings shall be conducted in Vancouver, Washington or
Portland, Oregon. The arbitrators shall have the authority to award such
remedies or relief that a court of the state where the arbitration take place
could order or grant in an action governed by Washington law.
To execute this Agreement, please sign the enclosed copy where indicated
and return the signed copy to me.
Sincerely,
GENTLE DENTAL SERVICE CORPORATION
By: /s/ MICHAEL T. FIORE
------------------------------------
Michael T. Fiore
Co-Chairman, President and
Chief Executive Officer
ACKNOWLEDGMENT AND AGREEMENT:
I have read this entire Separation Agreement and Mutual Release. I
understand that by signing below I am entering a legal agreement and
releasing legal rights. I have chosen voluntarily to enter this Agreement
after careful consideration.
AGREED:
/s/ Dany Y. Tse
- --------------------------------- Date: December 23, 1998
Dany Y. Tse -----------------------
6
<PAGE>
EXHIBIT 23.2
CONSENT OF SALOMON SMITH BARNEY INC.
We consent to the use of our name in Wisdom Holdings, Inc.
Registration Statement on Form S-4 under the headings "SUMMARY," and "THE
MERGERS" in the Proxy Statement/Prospectus and to the filing of our opinion
as an exhibit to the Proxy Statement/Prospectus and to the Registration
Statement. In giving such consent, we do not thereby admit that we come
within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
/s/ SALOMON SMITH BARNEY INC.
--------------------------------
Salomon Smith Barney Inc.
New York, New York
December 29, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Gentle Dental Service Corporation:
We consent to the use of our report on the financial statements of Gentle
Dental Service Corporation dated February 20, 1998, except as to Note 14 which
is as of March 16, 1998, included herein and to the reference to our firm
under the heading "Experts" in Amendment No. 1 to the Registration Statement
on Form S-4. Our report refers to the report of other auditors for the
separate financial statements of Gentle Dental Service Corporation included
in the 1996 financial statements restated for the 1997 pooling of interests
between Gentle Dental Service Corporation and GMS Dental Group, Inc. and
subsidiaries.
[/s/] KPMG Peat Marwick LLP
Orange County, California
December 30, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of Amendment
No. 1 to the Registration Statement on Form S-4 of Gentle Dental Service
Corporation of our report for the year ended December 31, 1996 dated February
28, 1997 appearing on page F-14. We also consent to the incorporation by
reference in the Prospectus constituting part of Amendment No. 1 to the
Registration Statement on Form S-4 of Gentle Dental Service Corporation of
our report dated February 6, 1998, except for Note 5 which is as of February
28, 1998, relating to the balance sheet of Dedicated Dental Systems, Inc. as
of December 31, 1997 and the related statements of income and retained
earnings and cash flows for the year ended December 31, 1997, and of our
report dated February 6, 1998, except for Note 5 which is as of February 28,
1998, relating to the combined balance sheets of California Dental Practice
Management Company and Related Dental Office as of December 31, 1996 and
1997, and related combined statements of operations, changes in capital and
cash flows for the years ended December 31, 1996 and 1997, appearing on pages
F-5 and F-17, respectively, of Gentle Dental Service Corporation's Form 8-K/A
Amendment No. 1 dated October 14, 1998. We also consent to the references to
us in the headings "Experts" and "Selected Financial Data" in such
Prospectus. However, it should be noted that PricewaterhouseCoopers LLP has
not prepared or certified such "Selected Financial Data."
[/s/] PricewaterhouseCoopers LLP
Portland, Oregon
December 30, 1998
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form S-4 of our report dated March 30, 1998,
relating to the financial statements of Dental Care Alliance, Inc., which
appears in such Prospectus. We also consent to the references to us under
the headings "Experts" and "Selected Financial Data" in such Prospectus.
However, it should be noted that PricewaterhouseCoopers LLP has not
prepared or certified such "Selected Financial Data."
[/s/] PricewaterhouseCoopers LLP
Tampa, Florida
December 30, 1998
<PAGE>
EXHIBIT 23.7
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Capitol Dental Care, Inc. and
Dental Maintenance of Oregon, P.C.
We consent to the use of our report on the financial statements of Capitol
Dental Care, Inc. and Dental Maintenance of Oregon, P.C. dated October 13,
1998, included herein and to the reference to our firm under the heading
"Experts" in Amendment No. 1 to the Registration Statement on Form S-4.
[/s/] KPMG Peat Marwick LLP
Orange County, California
December 30, 1998
<PAGE>
EXHIBIT 23.8
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Affordable Dental Care, Inc. and
Managed Dental Care of Oregon, Inc.
We consent to the incorporation by reference of our report on the financial
statements of Affordable Dental Care Inc. and Managed Dental Care of Oregon,
Inc. dated February 13, 1998, and to the reference to our firm under the
heading "Experts" in Amendment No. 1 to the Registration Statement on Form
S-4.
[/s/] KPMG Peat Marwick LLP
Portland, Oregon
December 30, 1998
<PAGE>
EXHIBIT 23.9
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Pacific Dental Services, Inc. and
consolidated partnership
We consent to the incorporation by reference of our report on the financial
statements of Pacific Dental Services, Inc. and consolidated partnership dated
June 15, 1998, except as to Note 12, which is as of June 30, 1998, and to the
reference to our firm under the heading "Experts" and in Amendment No. 1 to
the Registration Statement on Form S-4.
[/s/] KPMG Peat Marwick LLP
Orange County, California
December 30, 1998
<PAGE>
EXHIBIT 23.10
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption "Experts" in
Amendment No. 1 to the Registration Statement on Form S-4 and related
Prospectus of Gentle Dental Services Corporation and to the incorporation by
reference therein of our report dated April 25, 1997, with respect to the
financial statements of Dedicated Dental Systems, Inc. included in the
Current Report on Form 8-K/A Amendment No. 1 of Gentle Dental Services
Corporation dated October 14, 1998, filed with the Securities and Exchange
Commission.
[/s/] ERNST & YOUNG LLP
Los Angeles, California
December 30, 1998
